Productivity: building the new competitive growth agenda (Part II)
DURING THE ECONOMIC DIFFICULTIES of the 1990s, Government placed productivity at the forefront of its recovery path. Policies pursued were geared towards promoting and increasing the productivity growth required.
Productivity growth can generate higher incomes and increase government revenues needed to raise living standards and rectify disadvantages.
Labour unions and businesses established stronger partnerships, and although some job cuts and reductions in wages resulted, changes in conditions of work and subsequent re-establishment of, and increases in, the national wage was directly linked to productivity gains.
It appeared then as though a new productivity-centred attitude had emerged which would drive competitiveness and growth towards creating improved sustainable standards of living. Market liberalisation and other microeconomic reforms such as capital investment, the adoption of more efficient production methods within firms, and better allocation of resources across industries, became the prescriptive means of transforming the Barbadian economic and social landscape. However, we have continued to focus more on measures such as economic growth, the number of jobs in the economy, increased job participation rates and falling unemployment rates.
Productivity’s real contribution
Over the past ten years, productivity growth for Barbados has remained generally flat. Economic growth prior to 2008 grew by an annual average rate of 2.6 per cent reaching as high as four per cent in 2005 and 5.7 per cent in 2006. Since 2008, economic growth has remained relatively flat and been largely driven by increased employment. Most of the discussion surrounding low productivity often treats the issue of productivity growth as though it were a policy objective that only relates to the worker, when in fact there are myriad factors which affect productivity. Conceptually, productivity is simply a measure of the relationship between outputs and inputs.
At a national level, labour productivity can be computed as national output divided by the total number of hours worked by the employed labour force. This, however, provides a skewed impression of what really drives productivity, as it is not solely dependent on the output/labour cost (input) relationship, but in fact hinges largely on the skills of labour, and more importantly, where and how well these are being put to use (and combined with capital) in enterprises and industries throughout the country.
There are essentially only two ways of increasing the per capita income of a society over time and that is by producing more output per person or by getting higher world prices for what is produced. Over the past 15 years, Barbados’ failure to do any of the above has led to the decline in our productivity performance and the reduction in our terms of trade. Our recent decline places the spotlight back on productivity growth as the main conduit to achieving higher incomes into the future. While labour force employment is important, it is to productivity growth that we must primarily look if we are to meet the ongoing challenges of a rapidly ageing society. And it is to productivity growth that we must look if we are to succeed in making the necessary fiscal repairs in the wake of the global financial crisis, while addressing important social needs.
The end of the sugar industry, the rebirth of tourism, the emergence of alternative energy and the cultural industries, coupled with innovation and creativity, will bring about part of the productivity improvement we need. While the low growth in productivity has had more to do with market size, cyclical conditions and attitude, it has also been impacted by the quality of leadership and management.
The ability of productivity to drive a growth agenda must be initiated by a sharp rebound for tourism, in association with improvements in the agriculture sector, alternative energy and the cultural industries. With the transmission of the tourism boom to other parts of the economy and, most directly, to those industries supporting tourism activities, some firms are likely to have tolerated cost increases and inefficiencies in the rush to capture higher prices (and profits). Focusing on performance that includes productivity growth, total quality, unit labour cost optimisation, employee motivation and reduction in absenteeism could address some of this fallout while furthering economic recovery, as new investments increase and higher output associated with previously “unrequited” input growth comes on stream.
Any significant improvements in productivity will be realised only with the full understanding and treatment of the key drivers of productivity at both the micro and macro levels. These include:
Capabilities – the human resources and knowledge systems, the institutions and infrastructure, needed to devise productivity-enhancing changes and support them effectively.
Incentives – these are integral to increasing motivation and driving a high performance culture.
Flexibility – functions as the productivity ‘enabler’ and provides the scope and capacity to bring about the necessary changes.
Innovation – whether through doing new things or doing old things better, change is necessary for growth. In this sense, productivity is virtually synonymous with innovation.
Policy – significant gains in productivity will be largely determined by the policy framework implemented to address the greatest challenges.
The policy framework
In recent times, a number of significant policy initiatives have been established to improve productivity. However, that there is still much work to be done in the area of policy if productivity improvement is to be addressed holistically. The extent to which any policy framework is successful will be highly dependent on a number of critical factors, which include:
Environment – the essential insight underlying this consideration is that productivity begins in workplaces; therefore the contents of any policy framework should be reflective of this.
Accountability and responsibility – decisions that shape the productivity landscape are ultimately the responsibility of leaders and policymakers.
Communication – this is important as it shares important information regarding the way in which policies can foster or hinder productivity growth, and provides a basis for support.
What is needed is an approach to “productivity policy” and application that brings together a set of drivers and enablers for improved enterprise performance. It will also require effective policymaking processes that can provide clarity about problems, facilitate consensus and ensure the timely implementation of proposed solutions.