Productivity slowdown: Is this time different? · Samantha Amerasinghe +44 20 7885 6625...

l Global Research l

Important disclosures can be found in the Disclosures Appendix

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Madhur Jha +44 20 7885 6530

[email protected]

Head, Thematic Research

Standard Chartered Bank

Samantha Amerasinghe +44 20 7885 6625

[email protected]

Economist, Thematic Research


Special Report – Economics

Productivity slowdown: Is this time different?

Highlights

The ongoing productivity slump is puzzling given rapid technological

innovation. This period is not unique, however. Similar slumps were

seen when structural technological changes such as electrification

occurred.

Technology pessimists argue that digital technology is just not as

useful as older technologies. We disagree. We believe digital

technologies are transformative. We also think that productivity

discussions are wrongly focused on the manufacturing sector. The

focus should be on services as it is now the dominant sector globally.

We believe that digital technologies are making the services sector

more tradable, competitive and productive. Already frontier firms in

services are much more productive than those in manufacturing. The

problem of low productivity stems from weak investment and poor

diffusion of new digital technology.

We focus on services productivity to see which countries should

outperform. We combine our Services Potential Index with investment

trends and progress on reforms. Topping the list are China, Malaysia,

Vietnam, Indonesia and India. At the bottom are the UK, Spain, South

Africa and Brazil.

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Special Report – Economics: Productivity slowdown: Is this time different?

31 October 2017 2

Contents

Overview 3

Infographic – Productivity prospects 6

Productivity: Importance and trends 7

The importance of productivity 8

Causes of productivity slowdown 13

Innovation is everywhere except in productivity 14

Productivity outlook – Is this time different? 17

Digital technologies are GPTs 18

Implications – Winners and losers 26

Focusing on the services sector 27

References 32

Global Research Team 33



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Overview

Weak productivity can lead to political and socio-economic stresses

Productivity is a measure of the total amount of output that can be generated with a

certain quantity of input. Policy makers globally use various measures of productivity

as yardsticks to gauge improvements in living standards over the more medium term.

Weak productivity growth is a worry as it usually implies stagnating living standards

and can result in rising income inequality, socio-economic and political stresses.

Weak productivity growth is particularly problematic as ageing populations are

leading to shrinking labour pools in major economies.

Productivity growth has fallen significantly on all measures across both emerging and

developed economies since the global financial crisis (GFC). This has puzzled policy

makers and academics given evidence of strong technological innovation, especially

in the digital technology space. Progress in technological innovation is best captured

by total factor productivity (TFP). But recent data shows that it is actually a collapse

in TFP growth that is pulling down economic growth overall.

Current weakness in productivity growth is not unique historically

The productivity paradox has led some observers to believe that the global economy

has entered an era of secular stagnation or sub-par growth unlike what we have seen

historically. However, this is not supported by historical evidence. Average UK TFP

productivity growth is 0.8% per year since 1750, but growth has been far from even

over the entire period. While innovation was high during the three industrial revolutions

– the industrial revolution (1750-1830), mass industrialisation (1870-1900) and the IT

revolution (1995-2004) – the impact on productivity was felt with a lag in the economy.

Similarly, in the US there was a lag in the productivity boom associated with the

successful peacetime exploitation of electricity, the internal combustion engine and the

telephone. These suggest that the speed of diffusion of new technologies before they

find widespread use has an impact on productivity growth.

Techno-pessimists argue that digital technology is not good enough

Some experts argue that the productivity slump this time is different and is likely to be

sustained. They argue that digital technology will not have as much impact as

electricity, especially since electricity coincided with other technologies which likely

qualify as general purpose technologies (GPTs), including the internal combustion

engine and mass production. Experts such as Robert Gordon argue that slow growth

is the result of new innovations not being as transformative as old ones and that the

digital technology boom pales in comparison with the great innovations of the first

and second industrial revolutions.

In addition, it is also argued that the rise of the services sector, which now accounts

for nearly 70% of the global economy, is likely to keep productivity weak as it is

inherently less productive than the manufacturing sector.

We disagree; digital technology is transformative

In our view, it is unlikely that innovation and digital technology are less transformative

than the older innovations, such as electricity and the steam engine. In fact, the 3Ts

– namely growing tradability, sophisticated technology and lower transport costs –

are possible due to digital technology and are helping to elevate services productivity

in many services sectors. The internet has allowed previously non-tradable services

to become tradable through integration into global supply chains. As the price of

Techno-pessimists argue that this

time is different; we disagree

Productivity growth has fallen

significantly in both developed and

emerging markets



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digital technology has fallen, this has helped lower the cost of transporting these

services as well. In addition, many services do not face the customs and logistics

barriers that manufactured goods do, which also lowers their costs.

Sectors such as retail and wholesale trade, finance and information technology can

have productivity levels higher than those seen in the manufacturing sector.

Improvements in these sectors can also help to raise productivity levels in more

‘traditional’ services sectors, such as health and education, utilities and social and

personal services. Moreover, new technologies such as artificial intelligence (AI) and

service robots have the potential to drive faster productivity, even in these more

traditional services.

In fact, a major OECD study found that global ‘frontier’ firms (i.e., the most

productive) in services achieved productivity growth of 5.0% p.a. while non-frontier

firms saw productivity fall 0.1% p.a in the 2000s. The productivity growth of frontier

firms in services was even higher than that of frontier firms in manufacturing (3.5%

p.a.) during the same period.

Weak investment and poor technology diffusion are hurting productivity

We believe that weak investment in the developed world and poor technology

diffusion in emerging markets (largely on account of slowing reforms) has led to weak

productivity growth in the global economy. In the US and Europe this seems to be

due to a combination of weak demand, increased taxes and regulations, volatile oil

prices (which also damaged productivity growth in the 1970s) and the anti-

competitive effects of zombie companies following the GFC.

Emerging markets are experiencing slower diffusion of technology and processes,

partly due to slower growth following the commodity slump and China’s slowdown.

But we also identify a major slackening in the economic reform effort after a golden

age of reform in the 1990s.

Revisiting the Services Potential Index

To gauge which countries are likely to improve their productivity dynamics, we focus

on investment trends and reforms across countries. In addition, the growing

importance of the services sector even in the developing world implies that for

productivity gains to be realised on an economy-wide basis, productivity in the

services sector overall has to start to catch up with productivity rates for frontier firms

within the sector. We revisit our Services Potential Index to measure how countries

are doing in terms of services productivity.

The US, Hong Kong and Singapore top the list of countries with the highest services

potential. This reflects not just the importance of the services sector for these

economies and the high tradability of services but also their solid performance on

indicators such as technology transfer, education and labour-market efficiency.

Among emerging markets, Malaysia, India, South Africa and Kenya are the better

performers. Malaysia does particularly well on indicators such as government and

labour-market efficiency, business sophistication and financial-market development.

India benefits from a small government sector, a relatively high share of marketable

services to overall services and relatively favourable services-sector productivity to

overall productivity. Kenya also benefits from a favourable services productivity

performance and a high share of services exports in overall exports.

Weak investment in developing

markets and poor tech diffusion in

emerging markets has led to weak

productivity growth

The US, Hong Kong and Singapore

have the highest services potential;

among EM countries, India and

Kenya are strong performers



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Winners and losers

To obtain an overall picture of which countries are likely to perform well over the

medium term in improving productivity, we bring together five key productivity drivers

– namely, our Services Potential Index, investment ratios, progress on reforms,

incremental capital output ratios (ICORs) and recent productivity performance. The

investment ratio is particularly important, in our view.

1. Best prospects – Asian emerging countries lead

We find eight countries that both score well on our five drivers and have a relatively

high investment ratio: China, Malaysia, Vietnam, Indonesia, India, Singapore, South

Korea and Hong Kong.

2. Good prospects but need higher investment

Another group of countries also has good prospects for productivity growth but needs

higher investment rates to do really well; this group includes the Philippines, Turkey,

Kenya and Taiwan. Germany and Italy also make this list.

3. High investment, disappointing performance

The third group of countries has reasonably strong investment but ranks poorly on

our other measures. It includes Thailand, where past productivity growth has been

solid but there has been little progress on reforms or making the services sector

more dynamic in recent years. Ghana also makes this list; the high investment levels

there reflect the recent oil exploration boom that is unlikely to be sustained. France,

Mexico and Australia are also in this group. Mexico probably has the best chance of

moving up in coming years if the current reform programme continues.

4. The laggards – Weak investment and low productivity potential

Countries at the bottom of the table are mostly the old developed countries with

recent weak performance in terms of productivity and investment, together with little

reform. That said, if the economic upswing continues we should eventually see a

cyclical pick-up in investment. But structural factors could keep productivity growth

low, at least in the near term. Brazil and South Africa fall into this group.

Asian countries dominate the list of

those with the best prospects


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Infographics

Infographic – Productivity prospects

Source: Standard Chartered Research


Productivity: Importance and trends



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The importance of productivity

Focusing on total factor productivity

The definition of productivity – as a measure of the amount of output generated

through the use of a certain amount of input – is very broad; consequently there is

no single unique measure of it. Tools used can be either single-factor productivity

measures such as output per worker (labour productivity) or multi-factor

productivity measures which look at the total output produced by a combination of

inputs such as labour and capital. In a way, multi-factor productivity or total factor

productivity (TFP) is a measure of the efficiency with which inputs are combined to

produce output. TFP is widely accepted as the best measure of the impact of

technological changes on output.

Productivity slowdown can result in socio-economic stresses

Despite the lack of a unique measure of productivity, as well as concerns about how

well existing measures capture the relationship between inputs and output,

understanding productivity trends remains a major concern for policy makers

globally. Policy makers and markets care about productivity growth for several

reasons. Productivity, whatever the measure used, is an important determinant of a

country’s living standards. Higher productivity means that countries should be able to

raise the standard of living by producing more goods and services with less capital

and fewer hours of work.

Improved living standards in a country encourage greater spending and investment,

which, in turn, can be used to improve education and health standards. As a result,

besides the immediate economic benefits of higher productivity, there are socio-

economic benefits such as a reduction in income inequality. The opposite is true

when productivity slows.

This has become increasingly evident since the GFC. Productivity growth (on all

measures) has slowed sharply since then. This has been a major contributory factor

to stagnating living standards in the developed world in particular. Stagnation in turn

is having socio-political ramifications, with rising nationalism, a backlash against

globalisation and growing protectionism.

Policy makers and academics worry that this stagnation could be a long-term

phenomenon and the global economy could be affected by secular stagnation.

Secular stagnation could also be triggered by structural factors, such as ageing

populations and high levels of sovereign indebtedness. However, a pick-up in

productivity growth would help offset some of these structural factors, which is why

policy makers are keen to boost it.

The slowdown in productivity growth remains one of the most puzzling aspects of the

global economy, especially as there is anecdotal evidence almost every day of rapid

digital and technological progress, including nanotechnology, biomechanics and AI.

As technological change is most aptly captured by TFP, we predominantly use this

measure of productivity in this report. However, various measures of productivity

are not mutually exclusive and can have a bearing on each other. Technological

change that raises TFP would also increase the ability of a worker to raise his/her

own output (labour productivity) so we also consider labour productivity indicators

at points in the report.

As technological change is most

aptly captured by TFP, we mainly

use this measure of productivity



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Productivity – Trends, past and present

Productivity has been very weak globally in recent years

Most measures of productivity growth show a marked slowdown in productivity globally

after the GFC (Figure 1). According to Conference Board data, TFP grew by 0.9% p.a.

during 1999-2006 for the global economy but collapsed abruptly after the GFC to -0.1%

p.a. from 2007-14. Since then TFP growth has turned even more negative for the

global economy, and stood at -0.5% in 2016.

Developed economies have led the slowdown in productivity growth

Productivity performance has differed widely across regions, with most of the slowdown

in TFP attributable to developed market (DM) economies that saw TFP growth drop

from 0.6% p.a. during 1999-2006 to -0.3% p.a. in 2007-14 (Figure 2).

The US saw a large drop in productivity growth from 0.9% in 1999-2006 to -0.1% in

2007-14. Euro-area productivity growth was already weak but slumped further into

negative territory post-crisis. However, euro-area productivity trends have turned mildly

positive over the last two years aided by the cyclical improvement in growth and fading

debt-crisis concerns. The UK and Japan are experiencing productivity improvements

that are more strongly based on jobless productivity growth as both economies face

tightening labour markets in 2017. Some of the newly advanced economies in Asia

including South Korea, Taiwan and Australia continue to enjoy robust productivity

growth rates.

Productivity trends are more robust in emerging markets

Emerging market (EM) economies also saw a slowdown but TFP growth was stronger

both in the 1999-2006 period (1.3% p.a.) and in 2007-14 (0.1% p.a.) than it was for

developed markets. A sharp rise in TFP levels in emerging countries was evident

from the mid-1990s (Figure 3). TFP surged as economies opened up and became

more integrated with global supply chains, imported, adopted and competed with

better foreign technology. China and India continued to witness strong productivity

growth momentum even after the GFC, with India’s productivity growth actually

accelerating in recent years. Productivity gains were also very strong in other parts of

emerging Asia in countries such as Bangladesh and the Philippines. Productivity

growth, however, took a hit in the post-GFC period in Latin America and Africa as

commodity prices tumbled, resulting sharp growth slowdowns in these economies.

Figure 1: Low productivity growth over the past decade

Total factor productivity growth, %, IMF forecasts after 2016

Source: IMF, Standard Chartered Research

Advanced economies

EM and developing economies

-2

-1

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Global financial crisis

US tech boom

Tech bubble burst

Since the GFC, TFP growth has

turned negative; it stood at -0.5%

in 2016



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More recently, productivity growth has been weak even in emerging markets, with TFP

growth at -0.9% in 2016. This fall in TFP is largely a reflection of weakness in China

and Sub-Saharan Africa over the last few years. However, unlike for the advanced

economies, productivity performance for emerging markets is much more mixed, with

pockets of strong growth. India has one of the highest productivity growth rates

among emerging markets (Figure 5).

The paradox is that productivity growth in both developed and developing countries is

relatively weak despite rapid and ongoing advancements in digital technology. Figure 6

breaks down growth into the contribution from inputs to the production process of

labour, capital and TFP. It shows that it is TFP that has collapsed in many countries

(including the US, Europe and Japan), not labour or capital, and has been responsible

for sub-par growth.

Figure 2: DMs have led the productivity slowdown

TFP growth, %

Figure 3: TFP growth picked up sharply in the 1990s

Trend growth, %

Source: The Conference Board, Standard Chartered Research Source: The Conference Board, Standard Chartered Research

JP

US

UK

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Advanced economies

World

Emerging and developing

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1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

Figure 4: Weak productivity growth in China since GFC

TFP growth, ICT capital contribution (LHS), %

Figure 5: India, one of highest productivity growth rates

among EMs (TFP growth, %)

Source: The Conference Board, Standard Chartered Research Source: The Conference Board, Standard Chartered Research

TFP

ICT capital contribution

0.0

0.1

0.2

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0.5

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1.0

1990 1993 1996 1999 2002 2005 2008 2011 2014

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The paradox: TFP growth in both

developing and emerging markets

is weak despite rapid advancements

in digital technology



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High innovation, low productivity – The historical context

Productivity growth was weak in the UK in the industrial revolution

The productivity paradox has led some observers to believe that the global economy

has entered an era of secular stagnation or sub-par growth. Others argue that new

digital technologies could spur the next wave of productivity growth in the coming

years. However, the current period of weak TFP growth is not unique. There are

other historical instances when TFP growth has collapsed despite advancements in

technological progress.

UK TFP productivity growth has averaged 0.8% per year since 1750. It has picked up

since the Industrial Revolution but has been far from constant (Figure 7). During

periods of low innovation TFP has averaged little more than zero, while it has

averaged close to 2% (so still quite low) during periods of rapid technological change,

as after the three industrial revolutions (Figure 8). Haldane (2017) argues that there

is a significant lag between the emergence of new technologies and their impact on

productivity. This suggests that the speed of diffusion of new technologies before

they find widespread use and become GPTs has an impact on productivity growth.

Other evidence suggests that the initial effect of new GPTs is lower productivity

growth. It seems that periods of high innovation coincide with low productivity growth

only in the diffusion phase of new technologies.

Slow productivity growth in the US during periods of change

The long-term picture for the US is summarised by John Fernald, a productivity

expert at the San Francisco Fed. After a long period of stellar productivity growth

from 1945-73, driven by both strong investment and strong TFP, productivity growth

slowed until 1995 then picked up again for nearly a decade before slowing from 2004

(Figure 9).

Fernald argues that the US has oscillated between two phases of productivity growth,

fast and slow. In the fast phases (1945-73, 1995-04 and briefly 2007-10) productivity

grew at around 3% p.a.

Figure 6: Drivers of growth since 1990

Contribution of production factors to GDP growth

Source: OECD, The Future of Productivity Tables

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US Europe UK Japan Korea China

Labour composition Labour quantity TFP Capital intensity

A significant lag between the

emergence of new technologies and

their impact on productivity



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In the slow phases (1973-95 and 2004-07) it grew at only about 1.25%. The fast

phases are related to reaping the benefits of technological changes that came about

previously. The 1945-73 period is explained as the successful peacetime exploitation

of electricity, the internal combustion engine and the telephone, while the 1995-04

period saw the exploitation of the personal computer and better inventory

management.

The intuition here is that the fast phases are periods where a confluence of new

technologies combines with strong investment to create a virtuous circle of

productivity and GDP growth. These periods of high innovation and low productivity

are increasingly associated with GPTs, comparable with steam power or electricity.

Figure 7: Breakdown of long-run UK GDP growth

Annual growth, five-year moving average

Figure 8: The three industrial revolutions

% y/y

Source: Hills, Thomas and Dimsdale (2016) “Three Centuries of Data – Version 2.3” Source: Hills, Thomas and Dimsdale (2016) “Three Centuries of Data – Version 2.3”

TFP growth

Capital Labour

GDP -6

-4

-2

0

2

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1761 1781 1801 1821 1841 1861 1881 1901 1921 1941 1961 1981 2001

TFP growth Trend (HP filter)

-2

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1

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3

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1761 1781 1801 1821 1841 1861 1881 1901 1921 1941 1961 1981 2001

Industrial revolution (1750-1830)

Mass industrialisation (1870-1900)

IT revolution (1995-2004)

Figure 9: US productivity – More investment needed

Contributions to growth in US output per hour, business sector, % chg, annual rate

Source: Source: Fernald (2014). Quarterly samples end in Q4 of years shown except 1973 (end Q1) and 2016 (end Q2). Capital

deepening is contribution of capital relative to quality-adjusted hours. TFP measured as a residual.

TFP

Capital deepening

Labour quality

-0.5

0.0

0.5

1.0

1.5

2.0

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3.0

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1945-73 1973-95 1995-04 2004-07 2007-10 2010-16

Fast phases are periods where a

confluence of new technologies

combines with strong investment


Causes of productivity slowdown



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Innovation is everywhere except in productivity The productivity slump has puzzled economists in light of rapid technological change

and innovation over the past few decades. Such large shifts in technology should

lead to stronger productivity growth. However, several headwinds, both cyclical and

structural – including the GFC, demographics and educational attainment – have

played a role in the productivity slowdown.

Cyclical drivers

Falling wages and low capacity utilisation

Cyclical factors, such as low capacity utilisation, weak investment or falling wages,

which discourage labour-saving innovation, are partly to blame for weak productivity

in the developed world. These cyclical factors were exacerbated by the GFC that led

to sharp declines in aggregate demand and capital accumulation. Companies are

investing less in new technologies and processes than 10-15 years ago. In the US

and Europe this seems to be due to a combination of weak demand, increased taxes

and regulations, volatile oil prices (which also damaged productivity growth in the

1970s) and the anti-competitive effects of zombie companies following the GFC.

Weak bank lending and fiscal tightening

Developed countries have also faced headwinds since the GFC from weak bank

lending and fiscal tightening. Accommodative monetary policy led to relatively low

returns on investments, and low interest rates have done little to accelerate

investment. Some of these headwinds should become less powerful as the economic

recovery takes hold, particularly in the US and UK where labour markets have fully

returned to normal. However, until recently, there has been very little sign of

productivity growth turning a corner. Ultimately, faster growth and a return to

normalised monetary policies may change that dynamic.

Structural drivers

However, the slowdown in US productivity dates to around 2004, before the GFC,

and in Europe even long before that. This strongly suggests that there are structural

forces at play too. Structural forces such as slower rates of technological progress,

ageing populations and slower advances in education have been reducing

productivity growth since the 1960s, and seem to be getting worse.

The growing dominance of the services sector

One structural explanation put forward for the lack of productivity growth despite

digital innovation is the growing importance of services in the global economy. The

issues with measuring productivity in the services sector are particularly relevant, as

services now account for nearly 70% of global output, reflecting their growing

importance in the developed world, but also in emerging markets such as India,

Indonesia, Kenya and even traditionally manufacturing-led economies such as China,

which is trying to reorient towards services (Figure 10). In fact, many emerging

economies seem to have bypassed the manufacturing growth stage, with the share

of manufacturing actually declining in these economies.

Services and Baumol’s disease

Services-sector productivity is traditionally expected to be lower than manufacturing-

sector productivity, a condition known as Baumol’s disease. William Baumol

theorised in the 1960s that most parts of the services sector would suffer from low

productivity growth as it is more difficult to automate production in services than in

Several headwinds – both cyclical

and structural – have played a role

in the slowdown

Structural forces at play include

ageing populations and the growing

importance of services



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manufacturing. For example, it would be hard to conceive of a technology that would

allow one hairdresser to cut two people’s hair at the same time. With the share of

services continuing to rise in the global economy, this is mooted as a potential cause

for slower productivity growth worldwide.

Mis-measurement of productivity

Not only is services productivity growth expected to be lower than manufacturing due

to fewer opportunities of automation, there is also greater scope for error in

measuring services-sector productivity as it is more difficult to determine whether one

hairdresser or doctor is more productive than another, as so much depends on the

quality of the service, not just the quantum.

Factors underpinning slower productivity in EM

The services sector has also grown in importance in emerging markets, with many

countries, including some in Africa, now having larger services sectors than their

manufacturing sectors (Figure 11). However, this is not the only reason being put

forward for the recent slowdown in productivity growth in emerging markets. Slower

diffusion of technology is also a significant factor.

While there is limited hard evidence and the story likely varies between countries, we

think the most plausible reasons for slower diffusion are:

New reform has slowed in recent years. The benefits from the golden period of

reforms in the 1990s – which included controlling inflation, privatisation, freeing

product markets and, above all, opening up to more trade and FDI – have run

their course.

Increased product and environmental regulation has raised barriers to new

entrants and to the growth of SMEs. Complex regulations often favour existing

large companies and may be written to favour domestic firms or state

enterprises, even when they are worse performers than international

businesses.

Restrictive labour-market laws make hiring and firing difficult, discouraging

expansion of successful firms and movement of people to more dynamic

companies, as well as the introduction of new business models. In emerging

Figure 10: Services is now the dominant sector

Services as % of world GDP

Figure 11: Many EMs see manufacturing share of GDP

dropping from low levels

Manufacturing as % of GDP

Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research

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1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

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Slower diffusion is a significant

cause of the productivity slowdown

in emerging markets



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markets such restrictions leave many people stranded in the informal sector

where lack of financial and other support keeps productivity low. This constraint

is not new but may be more important in the context of disruptive technologies

and slow overall growth.

As outlined above, while frontier firms in the services sector have high

productivity levels, non-frontier firms perform poorly, especially as competition

in the services sector tends to be lower than in manufacturing, in particular in

areas where there is little international trade. As the services sector increases

relative to manufacturing, this could lower overall diffusion.

Increased protectionism. Fears of blanket protectionism after 2008 in a repeat

of the 1930s have proved unfounded but there have been many more cases of

administrative measures, subsidies and other constraints since then. Moreover,

only a portion is unwound over time, according to the Global Trade Alert.

The efficiency of investment in many EM countries has declined, reflected in

higher ICORs. In China, the ICOR has risen, particularly in the state sector.

Digital technology requires a more skilled and educated workforce than was

needed for the manufacturing sector. Several emerging markets still face

challenges, not only in secondary and higher education attainment levels but

also in the quality of that education.

As the services sector increases

relative to manufacturing this could

lower overall diffusion


Productivity outlook – Is this time different?



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Digital technologies are GPTs

New technologies will boost growth – The optimists

Techno-optimists see the new digital technologies of AI, big data, mobile, the cloud,

the ‘internet of things’, 3D printing and robotics as heralding a new technological

revolution; by some accounts as profound as the adoption of electricity at the turn of

the 19th century or even the industrial revolution itself. As a result, digital technology

or information and communication technology (ICT) is widely seen as a ‘general

purpose technology’ (GPT) comparable with steam power or electricity (Figure 12).

GPTs do not simply provide new products, but change virtually everything: the types

of goods produced and also how production is organised and managed, where it is

produced, the infrastructure that is needed to support it, the laws and regulations

needed to allow and encourage it, and the nature of work and leisure.

For example, the impact of electricity was not simply the reduced cost of electric

power in place of steam, or electric lighting in place of gas lighting. It brought a whole

host of new products: kitchen appliances; new entertainment and information

products such as cinema, radio and TV; electric starting motors and control systems

for machines and vehicles; and portable power tools. It also transformed the layout of

factories by facilitating assembly lines and of offices through the use of lifts, electric

lighting and later air-conditioning.

Digital technologies, which have already given us new machines in the form of the

laptop, tablet, smartphone, digital camera and GPS system, promise smart AI, virtual

reality and 3D printing, among other things, in the next few years. They have also

brought new processes (software and apps) that enhance work and play and connect

and communicate across distances as never before. These technologies have

transformed factories, offices and homes, with more to come.

Techno-optimists believe the new technologies will stimulate productivity growth.

Brynjolfsson and McAfee in their book The Second Machine Age, forecast that the

new technologies are about to take off in a very big way (Brynjolfsson, 2014). They

emphasise the exponential nature of improvement in digital technologies, as

computer power doubles every 18 months or so and reproduction costs of digital

information and software are essentially zero.

Figure 12: Selected general purpose technologies

Approximate time period

Source: Lipsey 2005, Standard Chartered Research

1400 1600 1800 20001200

Techno-optimists believe new

technologies will stimulate

productivity growth



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The US enjoyed a wave of strong productivity growth from about 1995-2004, driven by

IT gains, including the spread of personal computers and better inventory

management. The slowdown in productivity growth since then to just above 1% may

reflect a slowdown in IT gains (Figure 14). Most people in developed countries were

already using a connected computer for work by the early 2000s and the big

innovations in technology since then have been in mobile and in consumer products.

Optimists expect productivity gains from digital technology to

come waves

Optimists point out that, in the past, the gains from technology sometimes came in

waves. In our view, a new wave could be around the corner driven by big data,

robotics, the internet of things and 3D printing (Special Report, 19 January 2015,

‘Technology: Reshaping the global economy’). However, the impact on productivity is

unlikely to be significant in the next year or two. It could emerge within three to five

years but is probably likely to unfold over the next several decades.

Productivity improvement in waves was also seen during earlier periods. Labour

productivity growth during the electrification era shares a common pattern with the IT

era (Figure 13). In both cases, sluggish growth at the beginning of the diffusion

phase of the GPTs is evident.

Slow labour productivity growth during the initial period of the IT era from 1970-95

parallels that of the electrification era. Both the electrification and IT eras saw

productivity growth accelerate for about a decade, followed by a slowdown. In the

electrification era the slowdown was followed by a further acceleration in productivity

growth from 1932-40. This highlights that productivity growth driven by GPTs can

occur in multiple waves over several decades (Syverson, 2013). Therefore, it seems

likely that some of the new technologies could spur a new wave of ICT innovation in

coming years. But since 2010, weak investment means that productivity growth has

been below even the ‘slow productivity growth’ regime.

Figure 13: Parallels between electrification (1890-1940) and the IT eras (1970-2012)

US labour productivity growth

Source: Kendrick (1961); Byrne, Oliner and Sichel (2013)

Information technology

Electrification

1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940

40

60

80

100

120

140

160

180

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

In our view a new wave of gains

from technology could be around

the corner


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This time is different

New technologies are just not good enough – The pessimists

Some experts argue that the productivity slump this time is different and is likely to be

sustained. They argue that digital technology will not have as much impact as

electricity, especially since electricity coincided with other technologies that likely

qualify as GPTs, including the internal combustion engine and mass production.

Robert Gordon, probably the most prominent sceptic, argues that slow growth is the

result of major innovations not being as transformative as they once were (Gordon,

2012). He argues that the digital technology boom pales in comparison with the great

innovations of the first and second industrial revolutions. He notes that the US enjoyed

much faster productivity growth from about the 1920s to the mid-1970s and that

productivity growth was slower both before and afterwards. Gordon sees the post-1970

period as a return to ‘normality’ after extraordinary gains from steam power, electricity,

the internal combustion engine and, most recently, digital technology.

Most important technological innovations have already happened

Gordon recognises there will be gains from the new technologies but doubts that they

can compare with 20th century technologies in their impact. In his view the

technologies invented around the turn of the 20th century and exploited to their full

potential after the Second World War are non-repeatable (Gordon, 2015).

Moreover, the gains from digital technology have already meant an extraordinary

transformation of life brought about by the personal computer and internet since the

1980s, which still did not lift US productivity growth as high as it was before 1973

(Figure 15). Gordon’s view is that productivity growth may pick up from its extremely

low levels since 2008, but we should expect only incremental changes and therefore

slow productivity growth in the future. Gordon also argues that the slower impact of

technological progress on potential growth in developed economies will be reinforced

by headwinds including population ageing, a plateau in education levels, rising income

inequality, globalisation and the debt overhang.

Gordon’s work emphasises that the economic effects of new technologies can last for

decades. The impact of the first industrial revolution, which began around 1780, was

still working through in Britain during the middle of the 19th century and took longer still

to permeate Europe and the US. Electricity and the internal combustion engine,

invented well before the end of the 19th century, were driving growth in the US and

Europe right through to the 1970s and are still at the core of China’s growth today.

Figure 14: Productivity impact of tech developments fading

Avg. growth rates of US labour productivity, %

Figure 15: Improvements in living standards

1870 to 2010

Period

TFP (average annual

growth rate) Main sources of growth

1870-1900 c.1.5% to 2% Transportation, communications, trade, business organisation

1900-1920 c. 1%

1920s c.2% Electricity, internal combustion engines, chemicals, telecommunications

1930s c.3%

1940s c.2.5%

1950-1973 c.2%

1973-1990 < 1%

1990s > 1% Personal computers, internet

2000s c.1.5%

1870-2010 c.1.6-1.8%

1950-2010 c.1.2-1.5%

Source: National Bureau of Economic Research Source: Shackleton 2013, Standard Chartered Research

2.33

1.38

2.46

1.33

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1891-1972 1972-1996 1996-2004 2004-2012

Robert Gordon argues that slow

growth is the result of major

innovations not being as

transformative



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New technologies are not powerful job creators

Gordon argues that innovations during the 1870-1970 period were powerful job

creators, thereby distributing income to the bulk of the population. The rise of the

automotive industry created many solid, middle-class jobs in manufacturing, driving,

repairing and insuring cars and trucks. Gordon believes that innovations of the future –

regardless of how dramatic and broad-based they may be – are very unlikely to create

a large number of jobs. Moreover, he thinks the jobs new innovations do create may

well require skills and education beyond the capability of the average worker.

This precedent has been seized upon to explain weak productivity growth in the initial

development of IT during the 1980s when personal computers first came into the work

place, followed by a surge in 1995-2005 as they finally took off; and again the recent

slowdown in productivity, despite the introduction of mobile technology. Proponents

suggest that it takes time for people to learn how to effectively use the new

technologies and they may not be effective or trouble-free at first.

Our view

Mis-measurement is only part of the problem

Some experts argue that the reason productivity growth is not as high as we expect

is due to mis-measurement of output. In our view, mis-measurement of the value of

new digital technologies, the Solow paradox, accounts for only part of the productivity

slowdown. Techno-optimist Andrew McAfee, co-author of the book The Second

Machine Age, argues that even during periods of strong technological progress, we

do not need mis-measurement to get low productivity growth, provided that two

conditions are met: weak demand growth in high-productivity industries and

employment growth in low-productivity ones. Hence, it seems plausible that low

productivity growth is compatible with strong technological progress given that these

two conditions are prevalent in the current economic environment.

Services sector is not necessarily less productive

We have outlined arguments above that suggest that the rise of the services sector is

the reason for the decline in productivity growth, as services are inherently less

productive than manufacturing. In our view, however, it is unlikely that innovation and

digital technology are less helpful for services sector productivity than for

manufacturing. In fact, Ghani et al argue that the 3Ts – namely growing tradability,

sophisticated technology and lower transport costs – are helping to elevate

productivity in many services sectors (Ghani, 2010). The internet has allowed

previously non-tradable services to become tradable through integration into global

supply chains. As the price of digital technology has fallen, this has helped lower the

cost of transporting these services as well. In addition, many services are not subject

to the customs and logistics barriers faced by manufactured goods, which also

lowers their costs.

Digital technologies are making services more tradable and competitive

Sectors such as retail and wholesale trade, finance and information technology can

have productivity levels higher than those seen in the manufacturing sector.

Improvements in these sectors can also help to raise the productivity levels in more

traditional services sectors, such as health and education, utilities and social and

personal services. Moreover, new technologies such as AI and service robots have

the potential to drive faster productivity even in these more traditional services.

Higher tradability, new technology

and lower transport costs are

boosting services productivity

Gordon believes future innovations

are unlikely to create a large

number of jobs



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Historically, services productivity has been lower than manufacturing-sector

productivity. It grew by only 0.3% y/y during 2001-09 for OECD countries compared

with 1.7% p.a. growth in manufacturing productivity. And while manufacturing

productivity growth has slowed in most countries since the GFC, services productivity

growth remains lower (Figures 16 and 17).

However, digital technology is clearly helping to raise services-sector productivity.

According to the latest data for OECD countries, modern services productivity growth

still lags manufacturing productivity growth in general. However, labour productivity

growth in the most productive (frontier) firms in modern services averaged 5.0% p.a.

over 2001-09; that of frontier firms in the manufacturing sector averaged only 3.5%

p.a. (OECD 2015) (Figure 18). This suggests that greater competition through trade,

lower transport costs and especially the use of modern technology is enabling

services-sector firms to raise productivity levels.

Frontier firms in services are more productive than in manufacturing

Across the OECD area the average gap in labour productivity between global frontier

and non-frontier firms is 10 times, of which about half is due to less capital and half to

lower TFP. Global frontier firms tend to be larger, more capital- and patent-intensive,

more global (and more integrated in global value chains) and often younger. They

also tend to spend more on R&D, rely more on equity than debt financing and have

often experienced considerable M&A activity in the past. Access to finance and talent

are important.

This suggests to us that the underlying cause of weak productivity growth is more

likely a lack of diffusion of the new digital technology/innovation than the unsuitability

of innovation to a rapidly service-oriented world. In addition, the disparity between

frontier and non-frontier firms also showcases the importance of investment in human

capital-management and specialised skills as likely key factors behind the weakness

in productivity growth.

Figure 16: Services lagged manufacturing in 2001-07

Real value added per hour, % change y/y

Figure 17: Services productivity stayed lower in 2009-14

Real value added per hour, % change y/y

Source: OECD, Standard Chartered Research Source: OECD, Standard Chartered Research

Business services excl.

real estate

Manufacturing

-2

0

2

4

6

8

10

12

GB IT AU FR DE EA19 EU28 ES IR KR

Business services excl

real estate

Manufacturing

0

2

4

6

GB IT AU FR DE EA19 EU28 ES IR KR

Historically services productivity

lags manufacturing productivity

Global frontier firms are on average

10 times more productive than non-

frontier firms



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Weak investment is holding back TFP growth in developed markets

Investment spending has been weak across large parts of the world (Figure 19).

There is also concern that much of the investment currently being undertaken is

replacement investment. One reason for weak investment is lower government

investment in infrastructure to try to meet fiscal targets. But private-sector investment

has also declined. The decline in investment is more visible in DM countries that bore

the brunt of the GFC and European debt crisis, such as Spain, the US and the UK.

This fall in investment could explain the decline in productivity growth in the

developed world as the latest digital technologies are slow to be adopted even in

countries at the technology frontier.

Higher ICORs

As well as lower investment, many countries show declining efficiency of investment,

as measured by the ICOR (the ratio of investment as a percentage of GDP to the

GDP growth rate). A lower ICOR reading is better because it means more growth is

being generated for each percentage point of investment. Note that because of the

difficulty of separating replacement investment from new investment the ICOR uses

gross investment as the top line. In developed countries, where the majority of

investment is for replacement, ICORs are naturally higher than in emerging countries

(Figure 20).

We find that ICORs either rose in the 2000s or were already high in many countries,

given their stage of development. The main exceptions (good performers) are mostly

in Asia: the Philippines, India, Indonesia, Malaysia, Singapore and Hong Kong; plus

Nigeria in Africa (Figures 21-23). In China, the ICOR has risen, particularly in the

state sector.

Figure 18: Higher productivity growth in service frontier firms than in

manufacturing (Labour productivity; Index 2001=0)

Source: OECD, Standard Chartered Research

Note: ‘Frontier firms’ corresponds to the average labour productivity of the 100 globally most productive firms in each 2-digit

sector in ORBIS

Frontier firms (Mfg)

Frontier firms (Svs)

All firms (Mfg)

All firms (Svs)

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

2001 2002 2003 2004 2005 2006 2007 2008 2009

The exceptions (good performers)

are mostly in Asia

The decline in investment is more

visible in DM countries

ICORs are naturally higher in

developed than emerging markets;

a lower ICOR reading is better



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Lower investment in knowledge-based skills

Investment in so-called knowledge-based skills (also called intangibles) slowed in

Europe and the US in the 2000s (OECD 2015). It was at its highest in the late 1990s,

then slowed in the early 2000s and further still after 2007. Knowledge-based skills

include investment in research and development, company-specific skills,

organisational know-how, databases, design and intellectual property. US and UK

studies have found this cut in investment to be a significant contributory factor to

slower productivity growth (Fernald 2014, Goodridge 2013).

What is not clear is why this investment slowed, starting well before the 2008 crisis.

One possibility is that firms felt the need to invest heavily in the 1990s, with the initial

explosion of the internet, the threat from Y2K (the feared Millennium Bug) and the

increased recognition in those years of the value of brand. Another view is that weak

macroeconomic conditions have had an impact; e.g., the OECD suggests that the

slowdown in new business formation, especially after 2007, could be a factor.

Poor technology diffusion is hurting emerging markets

The slowdown in TFP is evident not just in developed countries but also emerging

economies. In developed countries it began before the GFC, while for emerging

countries it is more recent, closely linked to China’s transition and the collapse of

investment in commodity-producing countries and the slower diffusion of technology.

While debate about the likelihood of digital technologies being less productivity

enhancing than previous GPTs is likely to continue for some time in academic circles,

what has been equally puzzling is the decline in productivity growth in emerging

markets over the last decade.

We believe this is more a cyclical than a structural story. Strong growth and easy

liquidity during this period meant there was less pressure on emerging markets to

continue with structural reforms that help boost productivity. Globalisation and ageing

populations may also be partly responsible for weak productivity growth in emerging

countries, but a lack of adequate capital stock as well as still-poor technology levels

remain the big constraints on growth.

In addition, emerging countries are still struggling to catch up with developed

countries on existing technologies. Emerging markets are not at the technology

Figure 19: Change in investment-to-GDP ratio since 2007

% change, 2012-16 vs 1990-2007 average

Source: WDI, Standard Chartered Research

-8

-6

-4

-2

0

2

4

6

8

10

12

CN ID SA NG TR GH IN KE ZA MX AU RU FR BR PH GB US DE HK VN KR MY SG JP TH ES

Emerging markets are still

struggling to catch up with

developed markets on existing

technologies



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frontier so they should still benefit from productivity gains from old technologies such

as electrification. The creation of new technology remains a limited source of growth

and productivity for emerging markets.

For emerging markets, adoption of existing technologies, not invention, will be

important. EM economies are adopting new technologies such as ICT faster than

some of the older technologies such as electricity, though penetration rates remain

low. The existence of old technologies makes it easier to introduce new technologies.

For example, electrification has made it easier to adopt personal computers and the

internet. Also, newer technologies are much cheaper and are being introduced by the

private sector.

New technologies offer opportunities but also potential challenges. India and the

Philippines have benefited considerably from developing services exports around

digital technology. However, barriers to foreign investment or labour and product

regulations often get in the way of this. Another challenge for emerging markets is

that new technologies such as robotics might replace low-skilled labour and make it

more difficult to generate jobs.

Figure 20: ICORs are higher in DMs compared to EMs

ICOR

Figure 21: Singapore bucks the trend of rising ICORs in

Asia (ICOR)

Source: World Bank, Standard Chartered Research Source: World Bank, Taiwan National Statistics, Standard Chartered Research

Figure 22: ICOR has improved for Philippines

ICOR

Figure 23: ICORs are generally higher in non-Asia EMs

ICOR

Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research

1990s

2000s

2010-2016

0

5

10

15

20

25

AU DE GB US

1990s

2000s

2010-2016

0

1

2

3

4

5

6

7

8

9

HK KR SG TW

1990s

2000s

2010-2016

0

2

4

6

8

10

12

CN IN ID PH

1990s

2000s

2010-2016

0

2

4

6

8

10

12

14

16

BR MX NG ZA

For emerging markets, adoption of

existing technologies, not

invention, will be important


Implications – Winners and losers



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Focusing on the services sector We believe that weak investment in the developed world and poor technology

diffusion in emerging markets (largely on account of slowing reforms) has led to weak

productivity growth in the global economy. To gauge which countries are likely to

improve their productivity dynamics, we focus on reforms that would encourage the

adoption of new technology.

In addition, the growing importance of the services sector even in the developing

world implies that for productivity gains to be realised on an economy-wide basis,

overall services-sector productivity has to catch up with productivity rates for frontier

firms within the sector.

Regulatory reforms – Mixed progress

Our regulatory change heatmap gauges the changes in scores since 2007 (provided by

the Fraser Institute) across four important areas: freedom to trade internationally, credit-

market regulations, labour-market regulations and business regulations (Figure 24).

Figure 24: Regulatory change indicators heatmap

Change 2014-15 vs 2007-08 in index (Index from 0-10; 10 being best)

Germany -0.04 0.04 2.72 1.43 1.04

Taiwan 0.05 0.32 1.59 1.67 0.91

Malaysia 0.26 0.11 0.40 1.85 0.66

Italy 0.42 0.79 0.43 0.52 0.54

China 0.09 0.31 0.77 0.87 0.51

Philippines 0.54 0.08 0.82 0.49 0.48

Mexico 0.52 0.34 -0.11 0.90 0.41

Korea, South 0.03 -0.01 0.56 0.97 0.39

Turkey -0.12 0.54 0.34 0.54 0.33

Hong Kong -0.23 0.00 0.22 1.13 0.28

Singapore -0.03 0.00 -0.08 1.17 0.26

Vietnam 0.09 -0.39 0.10 1.07 0.21

France 0.17 -0.26 0.00 0.94 0.21

Spain 0.28 -0.83 0.59 0.81 0.21

Australia 0.15 -0.46 -0.76 1.39 0.08

Japan 0.35 -0.92 -0.36 1.24 0.08

United States -0.50 -0.03 0.03 0.76 0.06

United Kingdom -0.20 -1.24 0.35 1.26 0.04

Thailand 0.02 -0.10 -0.76 0.93 0.02

Indonesia 0.18 0.01 -0.51 0.38 0.01

Ghana -0.66 -0.30 0.33 0.54 -0.02

Nigeria -0.58 -0.70 0.43 0.11 -0.19

South Africa -0.12 -0.40 0.12 -0.39 -0.19

Kenya -0.17 -0.99 0.07 0.29 -0.20

India -0.63 -0.51 -0.92 1.24 -0.21

Brazil -0.25 -0.91 0.21 -0.05 -0.25

Source: Fraser Institute, Standard Chartered Research

Freedom to trade internationally

Credit market regulations

Labour market regulations

Business regulations

Overall score

Productivity in the services sector

has to catch up with productivity

rates for frontier firms



31 October 2017 28

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Overall top performers – Germany, Taiwan and Malaysia

Averaged across our four measures Germany comes first, with significant gains in

labour-market and business regulations. Taiwan is second, with a substantial rise in

its labour-market regulations score, as well as positive changes across the board.

Malaysia and Italy are third and fourth, with gains in labour-market and business

regulations in the former and, in the case of Italy, significant improvement in the

freedom to trade internationally. African countries dominate the bottom of the table

but India and Brazil also perform poorly, though India has seen a substantial

improvement in business regulations.

Revisiting the Services Potential Index

To understand which countries have the best potential for a rise in services-sector

productivity, we introduced our Services Potential Index (SPI) in our (Special Report,

14 September 2016, Escaping the productivity slump). The index comprises 13

indicators chosen to capture the current state of the services sector and the potential

for services productivity to accelerate (Figure 25). Several indicators show the size

and importance of the services sector currently. Others focus on technological

readiness and measures of educational attainment, innovation and sophistication.

Another set measures some of the key environmental factors that influence services,

including openness to FDI, government efficiency, financial-sector development and

the extent of labour-market regulation.

Malaysia, India, South Africa and Kenya perform well among EMs

The US, Hong Kong and Singapore top the list of countries with the highest services

potential. This reflects not just the importance of the services sector for these

economies and the high tradability of services but also their solid performance on

indicators such as technology transfer, education and labour-market efficiency.

Among emerging markets, Malaysia, India, South Africa and Kenya are the better

performers. Malaysia does particularly well on indicators such as government and

labour-market efficiency, business sophistication and financial-market development.

India benefits from a small government sector, a relatively high share of marketable

services to overall services and relatively favourable services-sector productivity to

overall productivity. Kenya also benefits from a favourable services productivity

performance and a high share of services exports in overall exports.

We look at 13 indicators to develop

a Services Potential Index

Malaysia and India are the best

performers in emerging markets

Taiwan and Germany have made

most progress overall; African

countries dominate the bottom of

the table


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31 O

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Implications –Winners and losers

Figure 25: Our Services Potential Index

Rank (unless specified)

Country Services as

% of GDP

Svs prody/mfg

prody

Marketable services/GDP

(%)

Services exports/total

exports (%)

Technological readiness

Business sophistication

Innovation FDI and

technology

transfer

Higher education

and training

Labour market

efficiency

Financial market

development

Govt sector Govt

efficiency Average rank

US 78.9 0.8 58.4 50.4 4 2 1 5 2 3 2 9 5 4.4

HK 92.7 2.1 74.1 19.0 2 5 11 4 4 2 3 10 2 4.8

SG 73.8 0.8 60.4 45.3 5 7 4 1 1 1 1 17 1 5.3

GB 80.2 0.7 45.3 79.1 1 4 6 2 7 4 5 11 6 5.5

DE 68.9 0.8 46.1 20.0 3 3 2 6 5 5 7 7 3 6.2

AU 73.1 0.7 49.0 27.9 8 12 10 11 3 9 4 5 10 8.8

JP 72.0 0.6 40.7 26.2 7 1 3 8 9 6 9 13 7 8.8

FR 79.2 0.8 34.4 47.0 6 6 7 9 8 13 11 16 14 10.0

TW 62.0 1.1 43.6 14.7 10 9 5 12 6 7 8 18 12 10.5

MY 55.7 0.5 35.7 17.9 13 8 9 3 13 8 6 22 4 12.4

ES 74.1 0.7 35.6 44.1 9 13 18 10 11 17 19 6 21 13.0

IN 53.8 1.3 38.6 61.1 26 17 13 19 19 19 15 14 8 14.7

KR 59.2 0.5 28.0 18.5 11 10 8 17 10 18 21 3 18 15.2

ZA 68.1 0.9 40.3 18.6 14 14 17 18 21 21 10 24 13 15.5

IT 73.8 0.8 32.0 21.8 12 11 15 26 12 25 26 4 26 15.8

KE 45.4 1.8 34.9 55.4 23 19 16 14 24 10 18 19 15 15.8

PH 59.5 0.4 41.7 55.7 21 21 21 21 16 20 16 1 22 16.4

MX 63.5 0.8 42.3 6.4 18 20 20 7 22 23 12 8 23 16.5

TR 60.7 1.0 44.0 26.0 17 24 23 22 14 26 22 15 19 17.2

TH 55.8 0.4 29.6 30.7 16 18 19 13 17 16 14 21 17 17.3

CN 51.6 0.6 28.8 9.9 19 15 12 16 15 12 17 26 9 17.5

ID 43.7 0.5 25.7 16.2 22 16 14 15 18 22 13 12 11 18.2

GH 52.2 1.7 27.0 52.8 24 23 22 24 25 15 23 20 16 18.8

BR 73.3 0.7 38.6 17.6 15 22 25 20 20 24 25 23 25 19.8

VN 45.5 3.4 0.0 6.9 20 25 24 25 23 14 20 2 20 20.5

NG 60.4 1.6 19.2 9.8 25 26 26 23 26 11 24 25 24 21.5

Source: GCI, EFI, National Statistical Sources, Standard Chartered Research



31 October 2017 30

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Winners and losers over the next three to five years

Four groups of countries

To obtain an overall picture of which countries are likely to improve productivity in the

medium term, we bring together five key productivity drivers – namely, our Services

Potential Index, investment ratios, progress on reforms, ICORs and recent

productivity performance (Figure 26). The investment ratio is particularly important, in

our view. Countries with a high ratio will nearly always show solid growth in labour

productivity, even if they over-invest as China does. Equipping workers with more

machines and/or building infrastructure will bring results. We therefore use two

components – overall productivity strength and the investment ratio – to divide

countries into four groups.

1. Best prospects – Asian emerging countries lead

We find eight countries that both score well on our five drivers and have a relatively

high investment ratio: China, Malaysia, Vietnam, Indonesia, India, Singapore, Korea

and Hong Kong. China is top, though we expect its productivity growth to continue to

slow because the efficiency of investment has declined and the ratio of investment to

GDP is also set to decline.

India and Indonesia are beginning to reap the benefits of improving investment,

with a strong performance in terms of productivity drivers. Singapore and Hong

Kong have good scores overall and relatively high investment ratios, even though

it will always be harder for developed countries to grow as rapidly as emerging

countries.

2. Good prospects but need higher investment

Another group of countries also has good prospects for productivity growth but needs

higher investment rates to do really well; this group includes the Philippines, Turkey,

Kenya and Taiwan. Germany and Italy also make this list. If the Philippines, which is

top in this group, could raise its investment/GDP ratio to 25-30%, from c.20%

currently, it could deliver very strong productivity and GDP growth. The Philippines,

like Kenya, achieves reasonable productivity growth, reflecting the fact that these

countries have very little capital currently and so most of their gross investment is

new investment. That said, both could potentially grow at 8-10% p.a. if they could

also mobilise higher investment.

3. High investment, disappointing performance

The third group of countries has reasonably strong investment but ranks poorly on

our other measures. This includes Thailand, where past productivity growth has been

solid but there has been little progress on reforms or making the services sector

more dynamic in recent years. Ghana makes this list and the high investment levels

there reflect the recent oil exploration boom which is unlikely to be sustained. France,

Mexico and Australia are also in this group. Australia’s investment is falling back

because of the commodity slump and it is at risk of transitioning into the laggards

group before long. Mexico probably has the best chance of moving up in coming

years if the current reform programme continues.

Asian countries dominate the list of

countries with the best prospects



31 October 2017 31

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4. The laggards – Weak investment and low productivity potential

Countries at the bottom of the table are mostly the old developed countries that have

experienced weak productivity and investment recently, together with little reform.

That said, if the economic upswing continues we should eventually see a cyclical

pick-up in investment. But structural factors could keep productivity growth low, at

least in the near term.

Brazil, Nigeria and South Africa also fall into this group.

Figure 26: Productivity drivers

Rank

Rank TFP growth %

Regulatory

reforms change Services potential Investment/GDP ICOR

Hong Kong 1 8 10 2 11 13

Taiwan 2 5 2 9 13 15

Philippines 3 2 6 17 19 2

Korea 4 4 8 13 4 18

China 5 10 5 21 1 11

India 6 1 25 12 3 8

Malaysia 7 18 3 10 10 9

Singapore 8 21 11 3 6 10

Germany 9 11 1 5 23 21

Indonesia 10 7 20 22 2 12

Australia 11 15 15 6 7 22

Vietnam 12 14 12 25 8 7

Italy 13 22 4 16 24 1

Kenya 14 9 24 15 17 3

Thailand 15 6 19 20 9 14

United States 16 13 17 1 21 19

Turkey 17 20 9 19 18 6

Japan 18 12 16 7 16 24

France 19 19 13 8 12 25

Ghana 20 24 21 23 5 5

Mexico 21 25 7 18 14 16

Nigeria 22 3 22 26 26 4

United Kingdom 23 17 18 4 26 17

Spain 24 16 14 11 20 26

South Africa 25 23 23 14 22 20

Brazil 26 26 26 24 15 23

Source: WEF GCI, IMF, World Bank, Standard Chartered Research

Old developed countries are the

laggards



31 October 2017 32

Refe

ren

ces

References Andrews, D, Criscuolo, C, and Gal P, ‘Frontier Firms, Technology diffusion and public

policy: Micro evidence from OECD countries’, OECD 2015

Brynjolfsson, Erik and Oh, JooHee, ‘The Attention Economy: Measuring the Value of

Free Digital Services on the Internet’, AIS Electronic Library.

Byrne, David M, Fernald, John G, and Reinsdorf, Marshall B, ‘Does the United States

have a Productivity Slowdown or a Measurement Problem’, Finance and Economics

Discussion Series 2016-17, Washington: Board of Governors of the Federal Reserve

System.

Dabla-Norris E, Giang Ho and Annette Kyobe, IMF Working Paper, ‘ Structural

Reforms and Productivity Growth in Emerging Market and Developing Economies,

February 2016.

Evenett, Simon and Fritz, Johannes, ‘The Tide Turns? Trade, Protectionism and

Slowing Global Growth’, CEPR 2015

Fernald, J, ‘Productivity and Potential Output Before, During and After the Great

Recession’. NBER Macroeconomics Annual 2014.

Ghani E and Kharas H, ‘The Service Revolution’, World Bank, May 2010

Goodridge, Peter, Haskel, Jonathan and Wallis, Gavin, ‘Can Intangible Investment

explain the UK Productivity Puzzle’, NIESR No 224 May 2013.

Gordon, Robert, The Rise and Fall of American Growth. Princeton, 2015

Haldane, Andrew G, Productivity puzzles, Speech given by Andrew G Haldane, Chief

Economist, Bank of England, London School of Economics, 20 March 2017

OECD, The Future of Productivity, Paris 2015

Syverson, Chad, ‘What determines productivity’, JEL, June 2011

Syverson, Chad, Challenges to Mismeasurement Explanations for the US

Productivity Slowdown, NBER WP, No 21974, February 2016.



31 October 2017 33

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Global Research Team

Management Team Dave Murray, CFA +65 6645 6358

Head, Global Research

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31 October 2017 34

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31 October 2017 35

Disclosures appendix

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31 October 2017 36

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Document approved by

Marios Maratheftis Chief Economist

Document is released at

10:40 GMT 31 October 2017


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