Monday, January 25, 2010

Total factor productivity in developing countries 

One thing economists think about growth theory is that poor countries, once believed to converge towards rich countries in per capita GDP, don't seem to do so. And yet productivity gains in the latter half of the decade were much stronger than we thought.
The Conference Board compared productivity trends across 111 countries and found an upsurge in output per worker in developing economies while developed country productivity slows. Between 2005 and 2009, for instance, the research group finds output per worker in emerging economies grew at a 5.9% annual rate. In the U.S. it grew at a 1.5% annual rate during the same period, while it grew 0.8% in Japan and 0.5% in the Euro area. In each of the developed markets, worker productivity slowed while it sped up in developing economies.

Emerging economies are charging ahead on one especially important measure of worker productivity called �total factor productivity,� which teases out productivity improvements that come from firms investing in new technology or hiring better-educated workers. What�s left is a pure measure of workers and firms learning to operate more efficiently. In emerging economies, TFP rose at an annual rate of 2.4% from 2005 to 2008, compared to 0.2% in advanced economies.

Bart van Ark, the Conference Board�s chief economist, sees two reasons for the productivity gains. First, he says, poorly run firms in emerging markets are shutting down and being replaced by more efficient firms. Second, many firms are opening up with capacity to produce on a large scale and as these economies grow swiftly firms are reaping benefits from these �economies of scale.�
One reason for conditional convergence would be the adoption by developing countries of better institutions. Could this have happened in the developing world, at a time when industrialized countries were failing to contain the excesses of the real estate bubble and banks were too close to their governments?