Tuesday 19 February 2013

Is productivity really a guarantee of growth?

By Sundaram Janakiramanan, Published TODAY, 18 Feb 2013

The Singapore Government is pushing for increased productivity in businesses in order to drive economic growth and has designed various schemes to do so.

But would trying to boost productivity really increase the competitiveness of companies, and what would need to be in place first? And can this strategy of productivity increase to grow the economy be sustained over a long period? I argue that the productivity push may well succeed in the short run if it is conceived properly. However, it cannot be sustained over the long term, mainly because of the inherent limits to which productivity can be raised.

The idea of growing productivity to grow the economy is based on the premise that for the same input, the output will be larger and hence, total output in the economy will increase, which would, in turn, lead to a growth in the economy.

However, some conceptual issues need to be considered here.


First of all, productivity is a multi-faceted concept that includes productivity of capital, labour, equipment and management, between which there is interplay. This means the productivity of a business can increase only if there is a subsequent increase in each of these components.

There needs to be sufficient capital to purchase equipment using the latest technology, with a trained workforce that is able to use the equipment efficiently and with the full support of management. Only then we can talk about increased productivity.

If any one of these is lacking in an organisation, total productivity will not increase.

Secondly, it is difficult to measure productivity.

In the case of the manufacturing industry, it may be possible to come up with a measure of productivity as the ratio of total units produced and the number of man hours expended. But even in this situation, there is an interplay between production equipment and labour.

Should there be improper maintenance of equipment or any unexpected malfunction, production may slow down, even if the workers are doing their job efficiently.

Thus, labour productivity also depends on the ability of the maintenance people to keep the equipment running without problems.

In service industries, it is almost impossible to set a standard of performance. Consider the case of a bank teller, who is responsible for processing customers. How do we measure her productivity? Is it by the number of customers processed in a day? Probably not, because each customer has different needs and it may take a longer time to process some customers and a very short time to process others. The same applies in the case of restaurants and retail shops.

Management also plays an important role in the service industry. How much authority do frontline personnel have in processing customer requests? Do they need to keep getting the approval of their supervisor for most requests? The interplay between management and labour, hence, has a bearing on productivity.

Another important aspect management should consider is how to reward well-performing workers. And unless such a reward scheme is equitable, it could lead to trained workers switching jobs, which would require hiring new employees and having to train them all over again.

get CONDITIONS right

In other words, businesses can improve productivity only if all of the following are in place.

Firstly, companies need to introduce equipment with the latest technological advances. While the Government, under its Productivity and Innovation Credit scheme, offers tax write-offs for the acquisition of prescribed automation equipment, among other things, it could provide more subsidies for cutting-edge equipment. Such investments require that companies have additional capital available.

Secondly, businesses need to hire and retain employees who possess knowledge of the operations with the appropriate salary package and performance bonuses.

Thirdly, to have a better pool of knowledgeable employees in the first place, the tertiary educational system should be modified so that it becomes a requirement for polytechnics and universities to establish direct and strong links with the industry. This will ensure that students are provided an education that includes both academic and practical education. This is one area the Ministry of Education could look into.

Next, there is a need to provide context-appropriate training to workers in order that assigned tasks can be completed more efficiently. The Government can incentivise this is by providing subsidies to companies for organisation-specific training.

Currently, training programmes are organised on a more general level applicable to all organisations within the industry. But equipment and management practices differ across organisations.

Lastly, management policies need to be formulated such that they allow workers more autonomy when it comes to decision-making.

offer something new

When all these measures are instituted, the idea of enhancing economic growth through increased productivity would be a viable option.

However, even so, this would only be effective as a growth strategy for the short term, until all businesses are operating at maximum efficiency.

In the long run, there is a limit to which productivity can be increased.

Once the labour force is producing the maximum amount of units working at the maximum operational hours, production cannot be increased any further unless more employees are hired.

So, if all companies are operating at maximum efficiency, there can be no increase in productivity.

The only avenue, then, in which businesses can truly grow in the long run will be through innovation — that is, with the introduction of new product and service offerings.

Professor Sundaram Janakiramanan is Professor of Finance at SIM University’s School of Business. This is the second in a three-part series on producivity.


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