The Dilemmas of Productivity



Luis Rubio

In the book “The Power of Productivity”, William Lewis compares the construction industry in Brazil, the U.S., and Mexico. His conclusion is very simple: the Mexican worker without much education or many skills can be as productive as the most qualified German worker. What differentiates countries like Mexico and Brazil from the U.S. and other wealthy countries, says Lewis, is the within context in which enterprises operate and that create conditions for the economy to prosper a little or a great deal. The key to growth lies in productivity and everything that contributes to increasing it favors growth and, vice versa, everything that impedes it reduces it.

This is the reason that the government’s decision to convert productivity into the axis of its economic strategy is so transcendental. “Productivity”, says Krugman, isn’t everything, but in the long term it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”. Productivity is that which results from everything that takes place in the economy, thus constituting a crucial means for the performance of the former. When the government adopts this indicator as the axis, it is declaring to us with full clarity that it is disposed to attack the causes of the very poor levels of the growth of productivity that the country has evidenced in recent decades.

If one observes the Mexican economy, the first thing that will be obvious is that there are enormous differences among the productivity levels of the millions of enterprises that constitute it. While there are companies that successfully compete with the world’s best, there are others that would be unable to compete with even the most unproductive in their vicinity. These differences in performance illustrate the complexity of the challenge facing the government and the country. Why the differences? Lewis’s argument is quite simple: part of the challenge of productivity lies in the enterprises themselves, but one huge component is found in the environment in which these operate.

The previously cited example, in reference to the housing industry, reveals that a company with good production techniques, intelligent use of the technology and a strategy of project administration can attain a worker with the least qualifications who ends up as productive as the most experienced and qualified. What the company does in terms of quality and production techniques constitutes the essence of the increase in productivity. In this the government affects it relatively little.

Where the government’s intervention is crucial is in the environment in which the enterprises operate and this incidence, states Lewis, is nearly always negative. A very cumbersome and poorly efficient government implies additional costs for the companies (more taxes) without the benefit of better services. Worse yet, the more productive the enterprise the more taxes it pays, a factor that distorts the economy. Protection of particular interests –unions, governmental monopolies, enterprises and favorite entrepreneurs, private monopolistic practices, insecurity, the lack of functionality of the judiciary, high tariff rates, subsidies- implies the discrimination against the rest of these but, in particular, the permanent distortion of the markets in which the enterprises operate. In a word, governmental actions directly impact productivity.  As a result, the government’s challenge is monumental and, fundamentally, internal: all of these interests that benefit from the distortions that the government causes are found in its bosom, within its party or in close proximity to these.

The dilemma is not difficult to visualize. Let’s imagine that a productive company competes successfully in its market niche. It receives raw materials and other goods in the morning and issues finished products in the afternoon. For purposes of this example, what is under its responsibility works well. Its headaches (usually) are not in this area but rather in all of the others: the inconstancy and price of electricity, gas and other sources of energy; the infrastructure (the streets, the traffic, the drainage, the water supply); communications costs; the assaults on their delivery trucks; the years it takes to resolve contract non-compliance; the complexity and costs of obtaining credit; and the monopolistic prices that innumerable suppliers –large and small- impose upon it. All of these factors are the responsibility of the government. There’s no way around it.

The government is facing two enormous challenges. On the one hand we find the quintessential challenge, which consists of attacking the sources and the causes of all of these distortions. Some of these have a bearing on the priorities that, historically, Mexican governments have thrown to the winds and that now have become monumental challenges: among these the most obvious are the entire justice system (from the office of the prosecutors to the courts), public (in)security, and the tolerance of abuse that the energy monopolies impose on the society and the economy. Others are the product of incomplete reforms, of new realities and of problems unattended to. From whichever angle that one contemplates it, the challenge is titanic.

The other challenge is perhaps simpler in concept, but similarly burdensome in practice. The country’s industrial sector is divided into two groups: one that is hypercompetitive and the other that depends on governmental protection. In round numbers, the former represents 80% of the production and employs up to 20% of the manpower; the latter represents 80% of the enterprises and the same proportion of jobs, but produces less than 20% of the total. The problem is not the proportions but, returning to the core problem, that these non-competitive companies (equally large and small) subtract productivity from the economy, thus they penalize growth. Instead of contributing to the development of the country, they limit it. No one in the government is ignorant of this and their dilemma is obvious: eliminating protection would contribute to accelerating growth but would generate a problem of bankruptcy and unemployment. The contradiction is crystal-clear: the very government that makes productivity its own has just raised the protection and subsidies of this very industrial sector.

The only possible solution resides in resolving the problems caused by the government -security, infrastructure, contracts, competence, effectiveness in expenditure and more rational taxes as well as the energy monsters- with the purpose of enticing many more enterprises to want to invest in the country that would allow absorbing the manpower that would result in eliminating the protection. It doesn’t get better than that and there’s no solution without risk: either the government takes the plunge or we remain mired in the bog.