The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability
368
The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability
368Paperback
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Overview
For decades, a vast array of international institutions has pumped billions of dollars into these nations in an attempt to remedy their ills through the development of technological infrastructures, educational systems, and health care programs. Yet despite this infusion of capital and attention, roughly five billion of the world's six billion people continue to live in poverty. What isn't working? And how can we fix it?
The Power of Productivity provides powerful and controversial answers to these questions. William Lewis, director emeritus of the McKinsey Global Institute, draws on extensive microeconomic studies of thirteen nations—conducted over twelve years by the Institute itself—to counter virtually all prevailing wisdom about how best to ameliorate economic disparity. The key to reducing economic inequalities between rich and poor countries, argues Lewis, is productivity and its links to competition and consumption. Diagnosing problems and offering solutions, The Power of Productivity will inform political and economic debate throughout the world for years to come.
"Lewis . . . offers a detailed look at the local economies in several parts of the world including the U.S., Japan, India and Brazil. . . . This is an insightful treatment of a complex issue that deserves a wide readership."—Publishers Weekly
Product Details
| ISBN-13: | 9780226476988 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 10/01/2005 |
| Pages: | 368 |
| Product dimensions: | 6.00(w) x 9.00(h) x 1.00(d) |
About the Author
Read an Excerpt
The Power of Productivity
Wealth, Poverty, and the Threat to Global StabilityBy William W. Lewis
The University of Chicago Press
Copyright © 2004 William W. LewisAll right reserved.
ISBN: 0-226-47676-6
Prologue
For the purpose of helping you decide whether you want to read more than the first page of this book, I am listing here my ten main conclusions.One, many people look for the causes of poor economic performance primarily in macroeconomics. An evaluation of economic performance requires an analysis at the level of individual industries, such as automotive, steel, banking, and retailing. This is the "sector" level. You must also look at the sector level for causal factors for economic performance.
Two, beyond macroeconomic policies, economic analysis usually ends up attributing most of the differences in economic performance to differences in labor and capital markets. This conclusion is incorrect. Differences in competition in product markets are much more important. Policies governing competition in the product markets are as important as macroeconomic policies.
Three, the Washington Consensus of the 1990s argued that such elements as flexible exchange rates, low inflation, and government solvency are the critical factors in economic health. One factor that was profoundly underestimated was the importance of a level playing field for competition in a country.
Four, many people believe that the educational attainment of a nation's current labor force is responsible for the success or failure of its economy. The importance of the education of the workforce has been taken way too far. In other words, education is not the way out of the poverty trap. A high education level is no guarantee of high productivity. The truth of the matter is that regardless of institutional educational level, workers around the world can be adequately trained on the job for high productivity.
Five, many people see access to capital as the determining factor between a productive growing economy and one that is not. Therefore, they feel that if rich countries sent capital pouring into poor countries, the poor countries would become richer. The solution does not start with more capital. The solution, rather, is in the country's productivity or the way it organizes and deploys both its labor and its capital. If poor countries improved productivity and balanced their budgets, they would have plenty of capital for growth from domestic savers and foreign investors.
Six, most people consider "social objectives" to be "good." Import tariffs, subsidized loans for small businesses, government disallowance of layoffs, and high minimum wages are all examples of economic policies designed to achieve social objectives. We can't have it both ways. These measures distort markets severely and limit productivity growth, slow overall economic growth, and cause unemployment. Rather than support these measures, it is better to level the playing field, create a bigger economic pie, and manage the distribution of that pie through the tax code for individuals.
Seven, most people don't recognize the destructive power of big government on economic development. Big governments demand big taxation. When part of the economy is informal, and untaxed, the burden falls heavily on legitimate businesses. This is a burden today's rich countries did not have when they were poor.
Eight, many people think the salvation is in the elites, the educated technocratic, political, business, and intellectual groups, who cooperate to manage economies through government. The elites are responsible for big government. Particularly in the poorer countries, the elites license business activity, control international financial and material goods flows, promote unaffordable social welfare systems, and favor government-owned businesses. Too often, the elites reward themselves richly.
Nine, some people think that nations should protect their own industries but also ask outside nations for capital. This is wrong. Direct investments by the more productive companies from the rich countries would raise the poor countries' productivity and growth rates far more effectively than sending them money. Poor countries have the potential to grow much faster than most people realize.
Ten, many people think that production is all that is needed to create economic value. This is why government sometimes protects businesses, regardless of their performance. They fail to make the link between production and consumption. The goods produced have value only because consumers want them. If they don't want them for some reason (such as high price), the business producing them needs to die. Only one force can stand up to producer special interests-consumer interests. Most poor countries are a long way from a consumption mindset and consumer rights. As a result, they are poor.
These conclusions come from the studies conducted by the McKinsey Global Institute over the past twelve years. This work is based on how individual businesses-from state-of-the-art auto plants to black-market street vendors and everything in between-actually behave and perform on a daily basis. The understanding of an economy comes from the ground up rather than the top down; a grassroots view versus a bird's-eye view. This book is going to provide the evidence and the arguments for my conclusions listed above.
How Did I Get Here?
In August 1990, I flew from Washington D.C. to Bangor, Maine, and drove a rented car to Bar Harbor. Meeting me there in his boat was Marvin Harris. I had run Marvin down a couple of weeks earlier through the University of Florida, where he was a partially retired research professor. Marvin had formerly been chairman of anthropology at Columbia and was a past president of the American Anthropological Association.
I had wanted to see Marvin because, by chance, one of the first things I did after learning that I would be the founding director of the McKinsey Global Institute was to read Marvin's recently released book, Our Kind. I had read the book while holed up in a cabin in the West Virginia Mountains over a rainy three-day Memorial weekend. Our Kind was a marvelous anthropological history of our species. It convinced me that Marvin's approach might help me some in setting direction for the McKinsey Global Institute.
McKinsey had created the McKinsey Global Institute in June 1990 to develop a better understanding of where the world was going. The specific issue on the minds of many was a phenomenon coming to be called "globalization." Globalization seemed to be so powerful that it could affect the evolution of human society. Thus, it was potentially of anthropological scale.
I had gotten all sorts of advice from many quarters about the factors that were causing and constraining globalization. Culture, religion, ethnicity, climate, and politics were all thought to matter. I needed help in sorting out the relative importance of these factors. I thought Marvin could do it. I was right.
Marvin and I spent several hours sitting in the sun at his summer house on one of the islands in the waters off Bar Harbor talking about my problem. Over a wonderful cold salmon lunch, Marvin and I agreed on the outline of a research project to sort out these factors. What I did not know at the time was that Marvin's lifetime research had already worked out the answer I needed.
During the course of the next six months, Marvin educated me about his theory of Cultural Materialism. Cultural Materialism says that there is a direction in the evolution of our species. That direction is that societies with higher productivity inevitably replace societies with lower productivity. Marvin validates his theory with a large number of case examples. In these case examples, Marvin digs down deeply to the productivity roots of things. The examples range from sacred cows in India to prohibitions against pork in Muslim countries. These case examples explain why many aspects of human behavior considered to be cultural or ethnic or even religious have been adopted because they make societies have higher productivity.
Societies with higher productivity have overcome to a greater degree whatever cultural, religious, ethnic, climatic, and political barriers have constrained productivity. These higher productivity societies have been successful in competition with lower productivity societies. They have been successful either through conquest or through simply surviving the hardships of nature.
In more recent times, this competition has often been commercial. This competition has led to the adoption of higher productivity practices by lower productivity societies. Globalization, through the transfer of higher productivity practices, might be the current method through which lower productivity societies achieve higher productivity. Thus, understanding productivity differences around the world and barriers to the transfer of higher productivity practices might reveal how globalization would proceed.
Initially, I had no appreciation of the huge differences in productivity around the world today. These differences mean that more productive societies have replaced less productive societies to a much greater degree in some parts of the world than in others. I had no idea that understanding the reasons for these differences in productivity would be the central theme of a twelve-year research program. Such a program held the potential for revealing how less productive societies could accelerate the process of becoming more productive. I, of course, did not see this potential then. However, Marvin Harris's research got me started off in that direction.
I could get started because I could connect productivity to the business world in which my colleagues in McKinsey and I had significant experience. If the most important factors in the evolution of societies were cultural or religious, then neither McKinsey nor I would have much basis for understanding where the world was going.
Productivity, on the other hand, is the most important objective that businesses and their management try to improve all around the world. The reason, of course, is that productivity is very closely connected to profitability. Productivity is simply the ratio of the value of goods and services provided consumers to the amount of time worked and capital used to produce the goods and services. If a firm produces more goods and services for the same effort or it produces the same goods and services for less effort, its profitability increases. Such a firm is likely to invest the funds from its increased profits in building a bigger business. The firm then makes even more profits. This process continues until other firms note the success of the more productive firm and copy its more productive ways. The profitability of the innovative firm returns to normal. However, the productivity of all firms is increased. Since the productivity of a society is simply the average (weighted) of the productivity of all the firms operating within it, understanding the productivity of firms around the world must be important. Why are firms in some societies more productive than firms in other societies? The answer has got to help us understand where the world is going.
Buried Statistics
Back in 1990, the most important question about where the world was going was whether the U.S. economy was going down the drain. Conventional wisdom both in the United States and abroad held that Germany and Japan had emerged from World War II with a superior economic model. The United States was either going to have to copy that model or fall behind. In fact many people assumed that Germany and Japan had already passed the United States in economic performance. At that time the most widely used measure of economic performance, GDP per capita, was calculated using market foreign exchange rates to convert GDP from one currency to another. At the market exchange rates prevailing at the time, it was true that the GDPs per capita of Germany and Japan exceeded that of the United States.
Shortly after visiting Marvin Harris, I picked up that week's Economist one Saturday just before going to play tennis. After a quick reading, I glanced briefly at the economic statistics buried at the back of the magazine. There I saw the current Organization for Economic Cooperation and Development (OECD) statistics for GDP per capita using purchasing power parity (PPP) exchange rates. By this measure, the GDP per capita of the United States was still some 20 percentage points above that of Germany and Japan. Purchasing power parity exchange rates, although subject to data gathering and statistical analysis difficulties, are conceptually the right way to convert GDPs from one currency to another for comparison purposes. I thought immediately that if this result is right, then conventional wisdom is wrong. Moreover, if the result is right, why is it right? Conventional wisdom included many explanations of why economic policies and practices in Germany and Japan were superior.
In October of 1990, I convened a meeting of five people including Marvin Harris and Tom Shelling, formerly chairman of economics at Harvard and then at the University of Maryland. The meeting was to discuss what topics the McKinsey Global Institute should study to contribute to an understanding of where the world was going. At that meeting, I showed the latest OECD statistics based on purchasing power parity exchange rates. I had found that the OECD buries these statistics in an appendix of their international comparisons report.
Tom confirmed that using purchasing power parity exchange rates was the right way to do the comparisons. I allowed that if these numbers were right, then most of the assertions in the debate in the United States about economic performance were wrong. To Tom's credit, he reflected and said, "I don't think my colleagues and I have a good handle on the health of the U.S. economy." I said, "Tom, what do we do about that?" Tom responded that we should get a group of his friends together and talk about it. I asked him who his friends were. He said Bob Solow, Francis Bator, and a couple of others. Bob is a highly regarded Nobel Laureate and Francis is one of the leading macro economists. Tom then helped me organize a meeting that included Bob and Francis to discuss the health of the U.S. economy. That meeting took place in February 1991.
Research Strategy
That February 1991 meeting ended with the idea that shaped the work of the Global Institute over the next ten years. The idea was to do case studies of a sample of economic sectors to determine differences in productivity across countries and the reasons for those differences. We got to that idea by first confirming the importance of resolving the apparent contradiction with conventional wisdom in the OECD statistics. Clive Crook, economics editor of the Economist, and Bob Bartley, editor of the editorial page of the Wall Street Journal, were in the meeting and helped us to reach this conclusion.
Continues...
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Table of Contents
AcknowledgmentsPrologue
1. Findings: The Global Economic Landscape
Part 1 - Rich and Middle-Income Countries
2. Japan: A Dual Economy
3. Europe: Falling Behind
4. The United States: Consumer Is King
5. Korea: Following Japans Path
Part 2 - Poor Countries
6. Brazil: Big Government Is Big Problem
7. Russia: Distorted Market Economy
8. India: Bad Economic Management from Democratic Government
Part 3 - Causes and Implications
9. Patterns: Clear and Strong
10. Why Bad Economic Policy around the World?
11. New Approaches
12. So What?
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