Arnold Kling  

Power of Productivity

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I strongly recommend an interview with William Lewis, author of The Power of Productivity. Lewis discusses how the McKinsey Global Institute set about examining productivity across countries. They wound up looking at what I call the new paradigm in economics.

Japan had the highest productivity in the traded goods manufacturing sectors. In the rest, the productivity was very low.

...all the so-called Washington consensus factors are the same for these sectors -- the same exchange rate policy, same monetary policy, same rule of law, same set of governing institutions, same high quality education system, same infrastructure, same availability of capital...the macro conditions -- the macro economic stability factors, the budget deficits -- all of those factors are the same for these sectors in Japan. get into a huge area of micro rules and regulations and incentives on managers so that basically they end up doing different things...In terms of the big operations, they have great difficulty in Japan getting hold of land. The local zoning authorities for a long time just outright banned big box stores, stores of over something like 10,000 square feet. That ban was put in place at the political influence of the small shopkeepers and others. The US objected to that and finally got that overturned, but it just got overturned into something almost equally ineffective which setup a lot of environmental and traffic and other kinds of potential obstacles, with the board determining whether to go forward dominated by local interest, local producer interest, local retailing interest.

Another topic where Lewis confronts conventional wisdom is education. He says that there is evidence against the view of education as a panacea for productivity.

The great bulk of the evidence about education came from competent multinational corporations of any nationality. Showing they could go virtually anywhere in the world and take the local workforce and train it to come close to home country productivity.

The interview is long and fascinating.

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The author at Edge Perspectives with John Hagel in a related article titled The Power of Productivity writes:
    EconLog pointed me to an extended interview with my old friend, William Lewis, the director emeritus of the McKinsey Global Institute. [Tracked on June 18, 2005 2:13 PM]
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Tom Kaminski writes:

Most of Mr. Lewis's comments about Japan were no surprise, although his work has apparently added a lot of micro data. It is common knowledge that Japan gives favorable treatment to mom and pop businesses, which strikes me as fine. It's their culture, and they are free to protect such enterprises and to sacrifice lower consumer prices. If you believe in free markets (as I do), you will expect this sort of arrangement to come under pressure over time, but that again is for the Japanese to think about. They may very well be a happier people by following their rules rather than ours, just as we overall are probably a happier people by following our rules.

I have always suspected that his comments on education would prove true. The kinds of skills needed for most industrial jobs probably don't require much general education. And you can take intelligent though uneducated workers and teach them almost anything on the job.

Lewis's discussion of poorer countries is perhaps the most important aspect of the interview. He suggests that government interference, the amount of GDP dependent on the "informal" economy, and the political power of domestic producers (a wealthy elite with influence on public policy) keep out more efficient producers and keep the people poor. This all makes sense. But then we should know that aid should not be given to countries that follow these policies.

Finally, I had to laugh when he identified himself as a Democrat--the piece reads like a policy paper for Steve Forbes put out by the American Enterprise Institute. Does the term "cognitive dissonance" come to mind here?

DS writes:

In general he hits the nail on the head.

I can remember when Japan was going to destroy America economically and rule the world, and that we should start emulating them immediately or we would become a third world country. What a difference 15 years makes. For many of the reasons Mr. Lewis sites and a few others, the fundamental problem with Japan's model is that nobody in Japan actually makes money. That's why the Nikkei lost 70% of its value in 1989 and never recovered it. Its stock market's value was based on the false assumption that if you are running a trade surplus with everybody you must be making huge profits. Of course the easiest way to run a trade surplus with the rest of the world is to sell all exports at break even or a loss. Beware, China is following the Japanese economic model to the letter and is headed for the same result.

Where Lewis shows his Democrat stripes is in his belief in the various anti-trust laws. To the contrary, Sherman amd the like are some of the most consumer-unfriendly pieces of legislation in our history, designed by politicians to help prop up politically connected businesses who were getting beaten in the marketplace. Nobody benefitted more from the existence of the "Robber Barons" than consumers. (I exclude some of the railroad magnates who secured government enforced monopolies through graft from this list).

Roger McKinney writes:

While the is a welcome contribution to development literature, Lewis might have saved himself some time and effort had he read up on the existing literature on development, especially the work of Peter Bauer. Bauer wrote pretty much the same thing decades ago. Several development economists have argued for years that education and trade are the products of development, not the cause. The technological advances in the Dutch Republic and England before and during the "industrial revolution" resulted from mechanics and tinkerers, not highly educated individuals or even scientists. Trade helps development by spreading knowledge and innovation, not by making people wealthier by itself.

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