When East Asian countries grew at record rates, some articles attributed this to factor accumulation (eg Krugman 1994). Indeed, Japan and South Korea reinvested a lot of their output and also benefited from the growing working-age population. The data showed that factor accumulation actually went along with productivity growth, so these economies did have “genuine” improvements in the end.
Now, twenty years later, the same can be said about the United States. But this time, instead of capital, labor input drives economic growth. In 1950, the countries that would be called G7 looked this way (all data from PWT8, OECD):
US workers had relatively short working hours and much more equipment than their colleagues in other countries. In 2010, the picture looks different:
Hours declined rapidly in all countries but the United States. To feel the difference:
With the typical disclaimer about comparing hours across economies, I’d rather emphasize the dynamics of changes, instead of comparing countries directly. The growth paths for regional leaders:
These lines just smooth annual observations along 1950–2011. I also added GDP per worker under the markers.
Overall, if German firms cut hours by 40% since 1950, US firms cut only by 10%. Working hours stopped declining in the US around 1980 (perhaps to offset stagnating real incomes). Regardless of which counterfactual you like more (the US trend before 1980 or Germany’s), it implies a substantial difference in output — fueled by labor input, just as capital input helped East Asian economies decades ago.
Thirty years ago the entire Russian economy was managed by the state. Some estimates of the current state presence reach 50% of GDP, and this makes the current market structure a likely source of inefficiencies. Let’s see if it is.
Over the last 15 years, Russia transformed several state-owned industries according to a simple rule: take an industry and separate it into a natural monopoly and firms that will compete with each other. After the separation, the state retains control over the natural monopoly and privatizes the rest. This was done for electricity, railroads, utilities, and oil. Maybe not so competitive in details, newly created firms are separate business entities and have to think about profit.
The state retained control over certain industries. The Russian government is a monopolist in banking and gas production, although this doesn’t imply the textbook behavior with prices above and supply below competitive equilibrium. I already discussed banking in the post on finance and just restate here that the industry is open for new competitors, including foreign banks.
The third interesting part is the industries where the state consolidated assets, instead of privatizing them. The newly created “state corporations” manage state assets in the defense industry, nuclear energy, and hi-tech. They don’t have many competitors in these markets.
Regional economies may lack local competition. This includes company towns with a single major employer, former state enterprises that have been privatized by geographical clusters, and other peculiarities of an economy in transition.
Government procurement is the last suspect for distorted competition. Technically, it should be the most efficient market, where each pen is bought from an auction. In practice, this system involves collusions and incentives to spend more. Still, it’s difficult to separate trivial corruption from attempts to overcome formalism. Though the price isn’t the only criterion in procurement auctions, ex ante requirements to the bidders are incomplete and leave space for price dumping by incompetent firms. Is this procurement system a constraint in general? Yes, in the sense that private firms would be better at picking suppliers.
I haven’t discussed privately owned sectors, like retail and cellular, but they would benefit from the same things the state sector would. Namely, an independent and powerful agency that protects competition on the ongoing basis, not just at the moment when the state privatizes assets. Secondly, government price setting, including price ceilings for natural monopolies, is based on some arbitrary factors, rather than economic principles. Of course, government uses some ad-hoc models, but until these models remain secret, government pricing casts doubts.
By “industrial policy” I mean incentives for reallocating resources to productive industries. This smells anti-market sentiments, but it isn’t. Many markets have already been distorted (not just by government), and these distortions are costly. Hsieh and Klenow (2011) estimate a 50% productivity gain for China and India if these countries moved resources into more productive industries.
An overview of Russian productivity growth from Kaitila (2015):
The total factor productivity (TFP) depends on the economy-wide factors and allocation of inputs across firms. The economy-wide factors are all those things I discussed in the previous posts. Here I take on the distribution of inputs, mostly physical capital and labor.
McKinsey (2009) review productivity in Russia from a business perspective. Academic sources are listed in the table above, and I also recommend Bessonova (2007, in Russian). Most sources reach a similar conclusion: high dispersion of productivity within industries, which means that unproductive firms survive. In a hypothetical market economy, unproductive firms don’t live long before they lose capital and employees. Something keeps them afloat in Russia, and it retards TFP growth.
Variety, Complexity, and Innovations
This section is due to HRV’s discussion of product diversification in economic development. Hausmann and Hidalgo (2011) and Klinger and Lederman (2006) use trade data for tests. Trade data underestimates the diversification of the Russian economy because Russia is a big domestic market and its export mostly consists of commodities. Anyway, here’re the numbers:
The primary industries dominate export, but implications are unclear. First, there’re currency appreciation and other distortions caused by high commodity prices. Second, productivity of the entire economy may be insufficient to compete under current exchange rates. It means that developing new industries wouldn’t diversify export.
Does the economy need some domestic diversification? If the economy desperately needed some intermediate inputs, it would exhaust the trade surplus. But the trade balance is positive, and import consists mostly of consumer goods, not of important or innovative capital goods.
Overall, creating new productive industries is a good idea, but it’s called venture investing. And few investors are good at this trade.
Industrial policy and competition restrain growth. But they are the free lunch: an opportunity to get more output using the same inputs. Meanwhile, the inputs, capital and labor, won’t come to Russia in the nearest future. So this lunch is more desirable than policies aimed at investments and labor participation.
A famous quote attributed to Mark Twain advises, “Buy land, they’re not making it anymore.” That’s how executives think about employees.
Talent shortage tops other strategic issues in executive surveys. When a TV remote starts looking like an airplane cockpit, employees need skills to do their jobs. Companies go to the job market after these employees and find the shortage instead. It’s easy to find this shortage. Just offer a salary low enough.
Another shortage is the real one, when companies pay high wages to folks with skills. Who has this shortage number two? The US does:
Since the 80s, college grads got paid more for their skills, compared to those without degrees. The recent decade looks kind of flat, and filling positions should be nothing new to managers. (And, no, the college premium isn’t about entry positions alone. It also indicates what’s happening with top job openings.)
Other countries, though, should experience problems with finding the shortage, not with finding employees:
Premia are flat everywhere, but in the UK and Germany, for 15 years. Latin America:
Brazil does have a skill deficit and high returns to schooling, which mean the economy really needs more educated workers and firms are ready to pay for them. The rest of the countries have other problems to solve before setting to with skills.
The talent shortage seems serious when productivity differences within countries are high. A firm knows that competitors have skilled workers and succeed, while its own resources and performance are depressing. Since all other important factors, like management, are unobserved, it’s tempting to conclude that best workers create great performance. Partly they do, but this thinking solves nothing. A poorly performing company can overpay for talents, but under weak management, increasing costs offset the small gain in labor force quality.
Money and people are in deficit because of the steam engine thinking: the more coal you throw into a furnace, the faster you go. Though that’s technically true, replacing the engine is a better idea.