Robert J. GordonRobert J. Gordon

Presentation at Presentation at Sixth Annual NBER-NCAERSixth Annual NBER-NCAER

Neemrana Conference,Neemrana Conference,January 17, 2005January 17, 2005

Productivity Growth Productivity Growth in the US and EU: in the US and EU:

Possible Lessons for India?Possible Lessons for India?

Income per Capita: Income per Capita: Ultimate Measure of Ultimate Measure of

Economic SuccessEconomic SuccessPower of Compounding: The “Rule of 70”Power of Compounding: The “Rule of 70”

– 1.3% growth, doubles every 53 years (Philippines)1.3% growth, doubles every 53 years (Philippines)– 5.8% growth, doubles every 12 years (Korea)5.8% growth, doubles every 12 years (Korea)

For very long-term growth or comparing rich For very long-term growth or comparing rich and poor nations, Income per capita and and poor nations, Income per capita and productivity are the same thingproductivity are the same thing

Not the same thing for short-term changes or Not the same thing for short-term changes or comparisons among rich nationscomparisons among rich nations– Even in an application to poor nations the Even in an application to poor nations the

distinction between consumption welfare and distinction between consumption welfare and productivity matters productivity matters

(Rob Feenstra on the terms of trade)(Rob Feenstra on the terms of trade)

Income per Capita vs. Income per Capita vs. Productivity: Central to Productivity: Central to

Understanding the US vs. Understanding the US vs. EUEU

The ultimate goal of economic The ultimate goal of economic policy is growth in output per policy is growth in output per capita (Q/N)capita (Q/N)

Productivity is output per Productivity is output per aggregate hour worked (Q/A)aggregate hour worked (Q/A)

Growth in output per capita Growth in output per capita differs from productivity when differs from productivity when hours per capita (A/N) changehours per capita (A/N) change

How Could Europe be So Productive Yet So Poor?

Output per Capita (Q/N)In Europe 75% of U. S.

(failure to converge)Productivity 95% of U. S.The Difference:

Hours per Employee (A/E) Employment Rate (E/L) Labor-force Participation

Rate (L/N)

N

L

L

E

E

A

A

Q

N

Q

Rich vs. Poor Nations:Rich vs. Poor Nations:Solow Model Predicts Solow Model Predicts

ConvergenceConvergence

Technology is Freely AvailableTechnology is Freely Available All that Holds Back Poor Nations is All that Holds Back Poor Nations is

Low Capital-Labor RatioLow Capital-Labor Ratio Marginal Product of Capital is Marginal Product of Capital is

MUCH higher in Poor CountriesMUCH higher in Poor Countries Implies Universal ConvergenceImplies Universal Convergence

Cross-Country Data: Cross-Country Data: Solow Model Makes a Solow Model Makes a

Strong Graphical Strong Graphical PredictionPrediction Convergence Implies the Poorest Nations Convergence Implies the Poorest Nations

Grow FastestGrow Fastest Look at data over a long period, 1960-2000Look at data over a long period, 1960-2000 Plot Initial Q/N on the horizontal axis (as a Plot Initial Q/N on the horizontal axis (as a

percent of the U. S.)percent of the U. S.) Plot Subsequent growth on the vertical axisPlot Subsequent growth on the vertical axis Strong prediction that the plotted points Strong prediction that the plotted points

across all countries should have a negative across all countries should have a negative slopeslope

The Failure of Convergence, 1960-2000 (PWT6 data)

Fig. 11-3

-2

-1

0

1

2

3

4

5

6

0 20 40 60 80 100 120 140

Output per capita as % of US level

Convergence in LargeConvergence in LargeAsian Nations, 1960-Asian Nations, 1960-

20002000Average Growth, 1960-2000

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

1

U.S.

South Korea

China

Japan

Indonesia

Pakistan

India

Bangladesh

1960-80 vs. 1980-1960-80 vs. 1980-2000:2000:

India Does Much India Does Much BetterBetterAverage Growth, 1960-1980 and 1980-2000

-0.01 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07

U.S.

South Korea

China

Japan

Indonesia

Pakistan

India

Bangladesh

Level Relative to U. S., Level Relative to U. S., 1960 and 20001960 and 2000

0 10 20 30 40 50 60 70 80

South Korea

China

Japan

Indonesia

Pakistan

India

Bangladesh

How Can Europe be So How Can Europe be So Productive Yet So PoorProductive Yet So Poor

The History: Europe falls back 1870-The History: Europe falls back 1870-1950 and then catches up1950 and then catches up

The catch-up, at least until 1995, was The catch-up, at least until 1995, was almost complete in productivity (Q/A)almost complete in productivity (Q/A)

The catch-up petered out in output per The catch-up petered out in output per capita (Q/N)capita (Q/N)

Why?Why?– Must be that Europe’s A/N is lowerMust be that Europe’s A/N is lower– When did Europe’s A/N decline?When did Europe’s A/N decline?– How is it decomposed, A/E vs. E/N?How is it decomposed, A/E vs. E/N?

The Following Graphs The Following Graphs are Based on a NBER are Based on a NBER

WPWP ““Two Centuries of Economic Growth: Two Centuries of Economic Growth:

Europe Chasing the American Frontier”Europe Chasing the American Frontier”

How to Find this and other of my papers How to Find this and other of my papers and conference presentations:and conference presentations:

Just type “Robert J. Gordon” into GoogleJust type “Robert J. Gordon” into Google Don’t type “Robert Gordon” which will Don’t type “Robert Gordon” which will

give you Robert Gordon University in give you Robert Gordon University in ScotlandScotland

Per Capita Real GDP: Per Capita Real GDP: Another Failure of Another Failure of

ConvergenceConvergenceper Capita Real GDP, Europe and the United States,

Selected Years, 1820-2000

1000

10000

100000

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Co

ns

tan

t 1

99

0 G

ea

ry-K

ha

mis

Do

lla

rs

United States

Europe

Real GDP per HourReal GDP per HourReal GDP per Hour, Europe and the United States,

Selected Years, 1870-2000

1

10

100

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Co

nst

ant

1990

Gea

ry-K

ham

is D

olla

rs p

er H

ou

r

United States

Europe

Output per CapitaOutput per Capitaand Output per Hourand Output per Hour

Ratio of Europe to the United States, Output per Capita and Output per Hour,

selected years, 1820-2000

40

50

60

70

80

90

100

110

1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Per

cen

t

Output per Capita

Output/Hour

Decomposing the Decomposing the Decline in A/N into A/E Decline in A/N into A/E

and E/Nand E/NRatio of Europe to the United States, Ratio of Output per Capita to Output per Hour,

Decomposed into Hours/ Employee and Employee/Population Ratios, selected years, 1870-2000

80

90

100

110

120

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Pe

rce

nt

Output PC/Output PH

Hours/Employee

Employees/Population

The Basic Irony: Europe The Basic Irony: Europe Catches Up in Catches Up in ProductivityProductivityby Cutting Hours per by Cutting Hours per CapitaCapita Making Labor Expensive to Hire with Making Labor Expensive to Hire with

High Minimum Wage and High Payroll High Minimum Wage and High Payroll and Social Taxes on Laborand Social Taxes on Labor

Pushes Firms Back up the Labor Pushes Firms Back up the Labor Demand CurveDemand Curve– Hours are CutHours are Cut– Marginal and Average Product of Labor are Marginal and Average Product of Labor are

RaisedRaised– Shortage of jobs, esp. low-skilled jobShortage of jobs, esp. low-skilled job

Standard of living: Standard of living: held down by held down by vacations (H/E)vacations (H/E) Have citizens chosen to use their Have citizens chosen to use their

prosperity to take longer vacations prosperity to take longer vacations in contrast to Americans? in contrast to Americans?

Have Europeans been forced to Have Europeans been forced to take vacations because of union or take vacations because of union or parlimentary politics?parlimentary politics?

Not Just Vacations, Short Work Not Just Vacations, Short Work WeeksWeeks– The French Hours PoliceThe French Hours Police

Europe’s Low E/N Europe’s Low E/N Matters as much as Low Matters as much as Low H/EH/E High UnemploymentHigh Unemployment

– High Youth UnemploymentHigh Youth Unemployment– High long-term UnemploymentHigh long-term Unemployment

Low Labor-force ParticipationLow Labor-force Participation– Of YouthOf Youth– Of ElderlyOf Elderly– Average retirement age in France is Average retirement age in France is

5858

Social Consequences Social Consequences of Low E/Nof Low E/N

Lack of Job Opportunities for Youth:Lack of Job Opportunities for Youth:– Late Development of IndependenceLate Development of Independence

U. S. Youths working in High School and U. S. Youths working in High School and CollegeCollege

Consequences for AdultsConsequences for Adults– Late Marriage AgesLate Marriage Ages– Low Fertility RatesLow Fertility Rates– Italy: Living at Home with MamaItaly: Living at Home with Mama

Phelps: Corporatism in Phelps: Corporatism in EU,EU,

Competition in U. S.Competition in U. S. Corporatism: “penalties, impediments, Corporatism: “penalties, impediments,

prohibitions, mandates” that dampen prohibitions, mandates” that dampen “creative destruction”“creative destruction”– Does this sound familiar, Indians?Does this sound familiar, Indians?

Youth in Europe, culture of “dependency”Youth in Europe, culture of “dependency” European youth expect college education European youth expect college education

for freefor free American teens develop independence at American teens develop independence at

age 16 by working at McDonaldsage 16 by working at McDonalds American college students work and American college students work and

borrow to pay part of their college borrow to pay part of their college expensesexpenses

Arc de Triomphe in everyArc de Triomphe in everyU. S. City?U. S. City?

Is Q/N Exaggerated?Is Q/N Exaggerated? Three categories of reasonsThree categories of reasons

– Excess Energy UseExcess Energy Use Harsh Climate, Air conditioningHarsh Climate, Air conditioning Low petrol taxes, high petrol useLow petrol taxes, high petrol use Overly dispersed metro areas, more energy useOverly dispersed metro areas, more energy use

– Low density means commuting congestionLow density means commuting congestion– 2m people in prisons, wasted lives and resources2m people in prisons, wasted lives and resources

U. S. Medical Care InefficiencyU. S. Medical Care Inefficiency– Medicare Financing CrisisMedicare Financing Crisis– Lack of universal health insuranceLack of universal health insurance– Defined benefit pension plans and retiree Defined benefit pension plans and retiree

medical costs hurt “legacy” firmsmedical costs hurt “legacy” firms General Motors vs. ToyotaGeneral Motors vs. Toyota

Summarizing Welfare Summarizing Welfare ComparisonComparison

Started with Europe/ US RatiosStarted with Europe/ US RatiosQ/N 77Q/N 77 Q/A 93Q/A 93

One-third of A/N difference is voluntaryOne-third of A/N difference is voluntary

Q/N 82Q/N 82 Q/A 93Q/A 93 One-half of remaining YPC difference One-half of remaining YPC difference

disappears because U. S. GDP is disappears because U. S. GDP is overstatedoverstated

Q/N 91Q/N 91 Q/A 102Q/A 102

The New Productivity The New Productivity Growth Divergence:Growth Divergence:

1995-2003 1995-2003

Growth rates of GDP per Hour Growth rates of GDP per Hour WorkedWorked– U. S. 2.3U. S. 2.3– Europe 1.2Europe 1.2– Difference 1.1Difference 1.1

Over eight years, causes Over eight years, causes Europe/US productivity ratio to fall Europe/US productivity ratio to fall back from 94 to 85 percentback from 94 to 85 percent

The U. S. Productivity The U. S. Productivity Growth “Explosion”Growth “Explosion”

LP Actual vs Trend

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

Basic Paradox about ITBasic Paradox about IT

Both Europe and U. S. Rapidly Adopted Both Europe and U. S. Rapidly Adopted New Economy Technology in late New Economy Technology in late 1990s1990s– Personal ComputersPersonal Computers– Web AccessWeb Access– Mobile PhonesMobile Phones

But Europe hasn’t taken offBut Europe hasn’t taken off Conclusion: Role of IT in U. S. revival Conclusion: Role of IT in U. S. revival

must have been exaggeratedmust have been exaggerated

Output per Hour by Industry Group, EU and US, 1990-2003

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1990-1995 1995-2001

US ICT Pro

EU ICT Pro

US ICT Using

EU ICT Using

US Non-ICT

EU Non-ICT

Finding the Culprit Industries

Where is the Difference? Where is the Difference?

The Van-Ark The Van-Ark DecomposionDecomposion 55% retail trade55% retail trade 24% wholesale trade24% wholesale trade 20% securities20% securities Rest of the economy: ZERORest of the economy: ZERO U. S. negative in telecom, U. S. negative in telecom,

backwardness of mobile phonesbackwardness of mobile phones

Europe in RetailingEurope in Retailing

Not uniform – Carrefour, IkeaNot uniform – Carrefour, Ikea U. S. “Big Boxes” (Wal-Mart, Home U. S. “Big Boxes” (Wal-Mart, Home

Depot, Best Buy, Target)Depot, Best Buy, Target) Europe: Europe:

– Land-use regulation, planning approvalLand-use regulation, planning approval– Shop-closing restrictionsShop-closing restrictions– Protection of central-city shopping precinctsProtection of central-city shopping precincts– The MIX of retailing heavily skewed to old-The MIX of retailing heavily skewed to old-

fashioned small retail unitsfashioned small retail units Paris drug stores vs. WalgreensParis drug stores vs. Walgreens

Explanations of Rapid U. Explanations of Rapid U. S. Productivity Growth: S. Productivity Growth:

2000-20032000-2003 Unusual degree of downward pressure on Unusual degree of downward pressure on

profitsprofits Intangible capital became important after Intangible capital became important after

ICT boomICT boom– Productivity benefits of ICT investment could Productivity benefits of ICT investment could

have been delayedhave been delayed– Mismeasurement of timing of productivity Mismeasurement of timing of productivity

growthgrowth Questions: Profits are now booming, Questions: Profits are now booming,

shouldn’t productivity effect go away?shouldn’t productivity effect go away? Productivity growth <2.0% 04:Q3 + 04:Q4Productivity growth <2.0% 04:Q3 + 04:Q4

Lessons for India from Lessons for India from Comparing EU and USComparing EU and US

First, We Must Qualify This HeavilyFirst, We Must Qualify This Heavily– Nothing in EU or US remotely comparable to the Nothing in EU or US remotely comparable to the

poverty population in India. poverty population in India. – Indians on their own in policies to reach that “last Indians on their own in policies to reach that “last

mile” into the rural villagesmile” into the rural villages Corporatism vs. Competition: India is the Corporatism vs. Competition: India is the

Expert on CorporatismExpert on Corporatism– India also knows about small traditional retailingIndia also knows about small traditional retailing– India is an expert on land-use planning, a key India is an expert on land-use planning, a key

explanation of why Europe has lagged behind US in explanation of why Europe has lagged behind US in retail productivity growthretail productivity growth

– Encourage Development of Large-Format RetailingEncourage Development of Large-Format Retailing

Lessons, Part IILessons, Part II

A Subtle Conclusion about InfrastructureA Subtle Conclusion about Infrastructure– France Has Better Infrastructure than USFrance Has Better Infrastructure than US

Freeways = US Interstate HighwaysFreeways = US Interstate Highways TGVTGV Paris: metro, RER, busses (with electronic signs)Paris: metro, RER, busses (with electronic signs)

But France has slow Economic GrowthBut France has slow Economic Growth Conclusion: Infrastructure is neither Conclusion: Infrastructure is neither

necessary nor sufficient for econ growthnecessary nor sufficient for econ growth

More Thoughts More Thoughts About IndiaAbout India

““India is Long on Engineering India is Long on Engineering Graduates and Short on Roads”Graduates and Short on Roads”

Divert Resources by developing Divert Resources by developing an educational opportunity bank, an educational opportunity bank, make ugrads borrow, then repay make ugrads borrow, then repay contingent on future incomecontingent on future income

Put freed resources into primary, Put freed resources into primary, secondary educationsecondary education

Final ThoughtsFinal ThoughtsAbout InfrastructureAbout Infrastructure

Why Should the Government Raise its Why Should the Government Raise its Fiscal Deficit to Finance an Airport?Fiscal Deficit to Finance an Airport?

The World is Waiting to Develop India’s The World is Waiting to Develop India’s AirportsAirports– The Big 3: BAA, Schipol, and FRAPORTThe Big 3: BAA, Schipol, and FRAPORT– Paraphrasing Churchill 1941 (“give us the Paraphrasing Churchill 1941 (“give us the

tools and we will finish the job”)tools and we will finish the job”)– Give us the land and we will build your Give us the land and we will build your

airportsairports