Productivity and Technology

There’s an interesting piece in the Star today by Prof Nazari Ismail of University Malaya:

Is productivity, superior technology the panacea for economic ills?

"MALAYSIA’S current economic problems have spurred arguments both by experts and non-experts alike on how best the country could overcome these challenges in the years ahead. One of the most common arguments revolves around the need to enhance the country’s productivity and competitiveness.

Solutions on how productivity and competitiveness could be enhanced range from revamping the nation’s educational system at all levels to harnessing the latest technologies and upgrading workers’ skills both in the public and private sectors. At a glance, these solutions appear to be the ultimate panacea to the country’s economic woes. However, nothing can be further from the truth.

It is unfortunate that policymakers and economic advisers continue to turn to Japan as the economic model for recovery. While it is true that Japan has a highly productive, skilled, and disciplined workforce supported by a technologically advanced manufacturing sector, these factors have not offered it immunity from rising unemployment, soaring debts and a deteriorating fiscal health.

…

According to a recent article on Japan by The Economist, the coming decade is going to be worse for the younger generations of Japanese compared with their predecessors in the previous two decades. The question is how could such a technologically advanced and productive nation sink into such an economic misery?

The answer is deceptively simple. It is the system. To be more precise, it is the finance industry, which encourages massive amount of loans be given out to Japanese firms and individuals. The lenders, which are the Japanese financial institutions, had massive amounts of money to lend due to Japan’s export successes during the previous two decades.

I think he is wrong on a few points. Were there policy missteps? Oh my, yes, big ones. But he is ignoring a few structural factors that really underlie the Japan story and colour its prospects for the future.

First is that we probably have true crowding out in the Japanese financial system, as 20 years of misdirected and ineffective fiscal stimulus has the banks awash with government securities. In 1990, holdings of govt securities were just 6.7% of the level of total loans. In 2009, that ratio had risen to 28.0%, while the amount of total loans actually fell in the interim.

Note that Japan bit the bullet in 2001-02 and recapitalised the banks, so there isn’t much of an issue with bad corporate loans anymore. And I’ve never heard of a lending-supported consumption bubble in Japan – on the contrary, the Japanese have if anything been known for over-saving.

Second and more important is the demographic story. Japan has a shrinking, ageing population who are fearful for their savings, and prefer risk free investment instruments – i.e. government bonds – to fund their retirement.

Neither of these factors are an issue (yet) in Malaysia. And the second explains how a country with a highly productive work force and superior technology can fail to progress – a shrinking work force means less bodies adding value, which means less ability to generate growth. That does not mean their business practices, systems and work culture are not worthy of examination or emulation.

I’ll add one more – countries on the edge of the growth envelope will tend to grow slower, because increasing amounts of investment are required for capital replacement; because they probably already have the optimum level of capital relative to their work force; and because as technology leaders they depend on the development of new technology, rather than playing catch-up like the rest of us.

Blaming everything on a financial system gone wild is the kind of argument I would expect of a politician, not a respected academic.