Productivity: an ingredient of economic growth
“Productivity and the growth of productivity must be the first economic consideration at all times, not the last. That is the source of technological innovation, jobs, and wealth.”- William E Simon (former secretary of Treasury in the US)A country does not just exhibit economic growth based on its population growth. It can also grow by increasing the output of its workers over time. This helps determine what each worker earns, and creates economic wealth. In the past fourteen years of statistical data available (1996-2010) Bermuda’s annualised productivity growth was about 1.4 percent per annum, essentially identical to that of the G7 countries average more recent ten-year average.While annual fluctuation is less important than long-term trends, in recent years, productivity has begun to decline. The current five-year productivity rate has dropped to 0.6 percent and over the past ten years productivity per annum has actually turned negative at a minus 1.2% annualized rate. Prior surges in productivity appear to be associated with waves of new international business expansion post 9-11 and the Katrina/Rita/Wilma hurricane disasters.Future rates of productivity will depend on investment capital and innovation. A major source of investment is savings. A country with a higher savings rate has the ability to invest more in new productive endeavours. The more a company, individual or country saves the more capital they accumulate to provide for future productive investment. We have calculated an estimated Gross National Savings Rate of Bermuda to get an indication of its future productive investment potential.The 2010 rate of 40 percent compares to a rate of 11 percent in the US, and is in line with the IMF’s estimated 2010 figure of about 32 percent for the developing and emerging nations. This large pool of savings does provide a source of future investment potential. It is likely that this high gross national savings ratio will continue to fall as Bermuda’s dependency ratio rises over time.It is important to also note that a high national savings rate does not necessarily equate to a higher potential productivity rate as attractive avenues and opportunities for investment are required within the nation.Future innovation is, of course, impossible to predict. As an example, one of Bermuda’s greatest “ideas” over the past ten years was the formation of its large offshore reinsurance market. It is difficult to predict new future products or services that Bermuda will offer but it is fair to say that industrious entrepreneurs will create some and spawn future job growth.Future innovation can also help transform the Island’s economic production by combining the capital and labour that it has in different ways. If resources are shifted effectively, the island could produce different or better products at lower costs.Countries at the leading edge of technological adoption tend to exhibit slower future productivity gains while late adopters can copy other countries technological advancement and see future benefits.Because many industries in Bermuda would not be considered a technological leader or innovator, it is fair to assume that it does have some ability to copy other countries more extensive adoption of newer telecommunications technologies and business processes to enhance future productivity.Given the aspects discussed above it would seem reasonable to assume Bermuda’s future productivity growth in the long term will be similar to that of its past or about of 1.4 percent per year. This assumes a rebound from its lower ten-year and five-year average and more in line with it recent one year figure of 1.4 percent.Bermuda’s Long-term Potential Growth (doing the math)If we take our assumptions as discussed above and plug the constituents in the simple formula we realise Bermuda’s long-term potential GDP growth rate is effectively zero.Population +Productivity = GDP-1.4% + 1.4% = 0%Effect on BermudaAs indicated above, Bermuda’s future long-term growth is determined by the change in size of its labour force and the productivity of its workers. The contracting population and minimal productivity gains will prolong Bermuda’s current economic malaise, in effect creating a lower equilibrium for the economy.As Japan has amply demonstrated, the worst possible time to come up against a demographic crisis is immediately after an economic bust. The implications of this lower level of potential economic growth for the island are many:1. The unemployment situation will likely become structural in nature and not merely cyclical. No or low economic growth provides little opportunity for job creation and the absorption of the unemployed.2. A lower level of economic activity (especially one associated with anemic population growth or lack thereof) lowers the total aggregate demand in the economy. This essentially forces a rationalisation of the country’s assets, both capital and labour. Domestic companies will either need to adjust to a new, lower or stagnant demand level by focusing on efficiencies or suffer through profitability declines or the potential closure of business. As a result it is typical to see a reduction in businesses as fierce competition pursues a shrinking share of business.3. Government debt left unchecked can rapidly become a problem as its value as a percentage of GDP could escalate. Servicing the debt also becomes more difficult, as a lower or flat economic prospect essentially reduces the tax base used to pay interest and principal. If fiscal deficits get too large they will crowd out private investment.Policy and Ideas to Support GrowthSupporting and fostering long-term growth requires an environment that addresses both demographic change and productivity issues.Unfortunately, the long run effects of demographics are essentially not reversible. Bermuda has already received a large share of its “demographic dividend”: a rise in the rate of economic growth due to a rising share of working age people in the population.This is a one-time benefit and as the dependency ratio increases the island will receive less and less benefit from its size of labour force. The only way to counteract this drag is to foster an immigration policy to offset the decline.To simply stem the total potential decline in the labour force over the next ten years, immigration policies should target a roughly 1.4 percent annual net migration ratio roughly over 500 people per year.This accommodative immigration policy should be focused on promoting new business formation. Without a pro-immigration policy, it is very unlikely that Bermuda will be able to grow economically.A nation’s productivity can be assisted and enhanced by corporate leaders and policy makers in the following ways:1. Embracing Creative Destruction and Free Markets. Ironically, a positive aspect of capitalism is failure. The term “creative destruction” was coined by Austrian-born economist Joseph Schumpeter and refers to the process where “bad companies or ideas” fail and free up that unproductive capital for good companies and ideas. Nations where government policy hopes to defend weaker industries or companies by artificially assisting them with uncompetitive policies actually holds capital hostage. Without failure, capital and labor cannot be released to find more productive and effective endeavors. They essentially get stranded in a low productivity area which ultimately hampers future economic growth. Policies that encourage competition should be adopted. All policies which restrict foreign investment and companies from entering the market should be relaxed. Policies that protect monopolies or duopolies should also be removed as well as any restrictive labour laws.2. Education and Labour Training. The training and advancement of the island’s labour force is critical for future economic productivity enhancement. Governments and corporations should continue encouraging education and continuing professional development to ensure the work force does not fall behind or made irrelevant in today’s globally competitive landscape. A concerted effort should be made to ensure Bermuda’s youth have unfettered access to the best educational standards and vocational training opportunities.3. “Private Capital & Labour Friendly” Rule of Law. Capital flows to where it is treated best. Today even labour is fungible and lucid. Laws and regulations need to be transparent and “business friendly”. In order to commit sizeable capital investments, foreign investors need to know they are investing in something that is not subject to various forms of appropriation or “rule change”. Government processes and regulation need to be efficient and transparent. In general, less government means more economic growth potential. Empirical evidence and academic studies suggest that private companies are much better at increasing productivity and creating jobs than government.