According to Christine Lagarde, Managing Director of the IMF, the slow growth in global productivity is acting as a brake on the growth in potential income and is thus holding back the growth in living standards. In a recent speech in Washington she said that:
Over the past decade, there have been sharp slowdowns in measured output per worker and total factor productivity – which can be seen as a measure of innovation. In advanced economies, for example, productivity growth has dropped to 0.3 per cent, down from a pre-crisis average of about 1 per cent. This trend has also affected many emerging and developing countries, including China.
We estimate that, if total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today. That would be the equivalent of adding another Japan – and more – to the global economy.
So why has productivity growth slowed to well below pre-crisis rates? One reason is an ageing working population, with older workers acquiring new skills less quickly. A second is the slowdown in world trade and, with it, the competitive pressure for firms to invest in the latest technologies.
A third is the continuing effect of the financial crisis, with many highly indebted firms forced to make deep cuts in investment and many others being cautious about innovating. The crisis has dampened risk taking – a key component of innovation.
What is clear, said Lagarde, is that more innovation is needed to restore productivity growth. But markets alone cannot achieve this, as the benefits of invention and innovation are, to some extent, public goods. They have considerable positive externalities.
She thus called on governments to give high priority to stimulating productivity growth and unleashing entrepreneurial energy. There are several things governments can do. These include market-orientated supply-side policies, such as removing unnecessary barriers to competition, driving forward international free trade and cutting red tape. They also include direct intervention through greater investment in education and training, infrastructure and public-sector R&D. They also include giving subsidies and/or tax relief for private-sector R&D.
Banks too have a role in chanelling finance away from low-productivity firms and towards ‘young and vibrant companies’.
It is important to recognise, she concluded, that innovation and structural change can lead to some people losing out, with job losses, low wages and social deprivation. Support should be given to such people through better education, retraining and employment incentives.
IMF chief warns slowing productivity risks living standards drop Reuters, David Lawder (3/4/17)
Global productivity slowdown risks social turmoil, IMF warns Financial Times, Shawn Donnan (3/4/17)
Global productivity slowdown risks creating instability, warns IMF The Guardian, Katie Allen (3/4/17)
The Guardian view on productivity: Britain must solve the puzzle The Guardian (9/4/17)
Reinvigorating Productivity Growth IMF Speeches, Christine Lagarde, Managing Director, IMF(3/4/17)
Gone with the Headwinds: Global Productivity IMF Staff Discussion Note, Gustavo Adler, Romain Duval, Davide Furceri, Sinem Kiliç Çelik, Ksenia Koloskova and Marcos Poplawski-Ribeiro (April 2017)
- What is the relationship between actual and potential economic growth?
- Distinguish between labour productivity and total factor productivity.
- Why has total factor productivity growth been considerably slower since the financial crisis than before?
- Is sustained productivity growth (a) a necessary and/or (b) a sufficient condition for a sustained growth in living standards?
- Give some examples of technological developments that could feed through into significant growth in productivity.
- What is the relationship between immigration and productivity growth?
- What policies would you advocate for increasing productivity? Explain why.
Cloud computing is growing rapidly and has started to dominate many parts of the IT market. Cloud revenues are rising at around 25% per year and, according to Jeremy Duke of Synergy Research Group:
“Major barriers to cloud adoption are now almost a thing of the past, especially on the public-cloud side. Cloud technologies are now generating massive revenues for technology vendors and cloud service providers, and yet there are still many years of strong growth ahead.”
The market leader in cloud services (as opposed to cloud hardware) is Amazon Web Services (AWS), a subsidiary of Amazon. At the end of 2016, it had a market share of around 40%, larger than the next three competitors (Microsoft, Google and IBM), combined. AWS originated cloud computing some 10 years ago. It is set to have generated revenue of $13 billion in 2016.
The cloud computing services market is an oligopoly, with a significant market leader, AWS. But is the competition from other players in the market, including IT giants, such as Google, Microsoft, IBM and Oracle, enough to guarantee that the market stays competitive and that prices will fall as technology improves and costs fall?
Certainly all the major players are investing heavily in new services, better infrastructure and marketing. And they are already established suppliers in other sectors of the IT market. Microsoft and Google, in particular, are strong contenders to AWS. Nevertheless, as the first article states:
Neither Google nor Microsoft have an easy task since AWS will continue to be an innovation machine with a widely recognized brand among the all-important developer community. Both Amazon’s major competitors have an opportunity to solidify themselves as strong alternatives in what is turning into a public cloud oligopoly.
While Amazon dominates cloud infrastructure, an oligopoly is emerging. Which will buyers bet on? diginomica, Kurt Marko (16/2/17)
Study: AWS has 45% share of public cloud infrastructure market — more than Microsoft, Google, IBM combined GeekWire, Dan Richman (31/10/16)
Cloud computing revenues jumped 25% in 2016, with strong growth ahead, researcher says GeekWire, Dan Richman (4/1/17)
Press releases Synergy Research Group
- Distinguish the different segments of the cloud computing market.
- What competitive advantages does AWS have over its major rivals?
- What specific advantages does Microsoft have in the cloud computing market?
- Is the amount of competition in the cloud computing market enough to prevent the firms from charging excessive prices to their customers? How might you assess what is ‘excessive’?
- What barriers to entry are there in the cloud computing market? Should they be a worry for competition authorities?
- Are the any network economies in cloud computing? What might they be?
- Cloud computing is a rapidly developing industry (for example, the relatively recent development of cloud containers). How does the speed of development impact on competition?
- How would market saturation affect competition and the behaviour of the major players?
In the blog post, Global warning, we looked at the use of unconventional macroeconomic policies to deal with the slow pace of economic growth around the world. One of the articles was by Nouriel Roubini. In the linked article below, he argues that slow economic growth may be the new global norm.
At the centre of the problem is a fall in the rate of potential economic growth. This has been caused by a lack of investment, which has slowed the pace of innovation and the growth in labour productivity.
The lack of investment, in turn, has been caused by a lack of spending by both households and governments. What is the point in investing in new capacity, argue firms, if they already have spare capacity?
Low consumer spending is partly the result of a redistribution of income from low- and middle-income households (who have a high marginal propensity to consume) to high-income households and corporations (who have a low mpc). Low spending is also the result of both consumers and governments attempting to reduce their levels of debt by cutting back spending.
Low growth leads to hysteresis – the process whereby low actual growth leads to low potential growth. The reason is that the unemployed become deskilled and the lack of investment by firms reduces the innovation that is necessary to embed new technologies.
Read Roubini’s analysis and consider the policy implications.
Has the global economic growth malaise become the ‘new normal’? The Guardian, Nouriel Roubini (2/5/16)
- Explain what is meant by ‘hysteresis’ and how the concept is relevant in explaining low global economic growth.
- Why has there been a reduction in the marginal propensity to consume in recent years? What is the implication of this for the multiplier and economic recovery?
- Explain what Roubini means by ‘a painful de-leveraging process’. What are the implications of this process?
- How important are structural reforms and what forms could these take? Why has there been a reluctance for governments to institute such reforms?
- ‘Asymmetric adjustment between debtor and creditor economies has also undermined growth.’ Explain what Roubini means by this.
- Why are governments reluctant to use fiscal policy to boost both actual and potential economic growth?
- What feasible policy measures could be taken to boost actual and potential economic growth?
GDP figures are often a poor measure of a country’s economic well-being. By focusing on production, they may not capture the contribution of a range of social and environmental factors to people’s living standards, including the various negative and positive externalities from production and consumption themselves. A case in point is internet innovation: an issue considered in the first linked article below by the eminent economist, Joseph Stiglitz.
The effects of innovations that directly lead to an increase in output are relatively easy to measure. Many innovations, however, may allow those with power to consolidate that power, resulting in less competition and a possible decline in welfare. If, for example, companies such as Amazon, invest in online retailing and gain a first-mover advantage, they may be able to use this power to drive out competitors. In other words, innovations may not simply lower the cost of production and hence prices: they may even lead to an increase in prices.
Then there are innovations, such as faster broadband, that result in higher quality. While higher quality in one sphere may lead to higher output elsewhere, in many cases it is just improving the experience of consumers without being reflected in a way that can be easily measured.
Some innovations may be judged as socially harmful. Thus improved gaming functionality and realism may encourage people to spend more time online. The social and health implications of this may be considered as undesirable and resulting in a reduction in well-being. Of course, many gamers would disagree!
The point is that technological innovations often result in a change in tastes. These changes in tastes may involve negative externalities, themselves very hard to quantify. Consequently, resulting changes to GDP may be a very poor indicator of changes in social well-being.
The articles below consider some of these issues. The Stiglitz article gives an example of innovation in financial services. Although highly profitable for many working in the sector – at least until the crash of 2008/9 – according to the author, these innovations led to both lower GDP growth and a net contribution to social welfare that was negative.
The benefits of internet innovation are hard to spot in GDP statistics The Guardian, Joseph Stiglitz (10/3/14)
Economist argues for happiness over GDP Yale Daily News, Joyce Guo (19/2/14)
‘GDP: A Brief But Affectionate History’ by Diane Coyle and ‘The Leading Indicators: A Short History of the Numbers That Rule Our World’ by Zachary Karabell Washington Post, Tyler Cowen (21/2/14)
Emerging Markets: Income Returns To Innovation (GDP Per Capita Vs. Innovation Index) Seeking Alphz, Jon Harrison (4/3/14)
- What does GDP measure?
- What factors affecting the welfare of society are not measured in GDP?
- What alternative indicators are there to GDP as a measure of living standards?
- How would you set about measuring the effects on living standards of a technological revolution, such as the ability to access 4G on the move on laptops and smartphones (e.g. on trains)?
- How should the net benefits of installing more ATMs (cash machines) be calculated?
- Revisit the blog Time to leave GDP behind? and answer question 8.
- Referring to the Jon Harrison article, how would you construct an innovation index? How is innovation related too GDP per capita?
The technology sector is highly complex and is led by Apple. However, as the tablet market is continuing to grow, it is becoming increasingly competitive with other firms such as Samsung gaining market share. Although both firms sell many products, it is the growing tablet market which is one of the keys to their continued growth.
Tablet PCs have seen a growth in the final quarter of 2012 to a high of 52.5 million units, according to IDC. Although Apple, leading the market, has seen a growth in its sales, its market share has declined to 43.6%. Over the same period, Samsung has increased its market share from 7.3% to 15.1%. While it is still a huge margin behind Apple in the tablet PC market, Samsung’s increase in sales from 2.2 million to 7.9 million is impressive and if such a trend were to continue, it would certainly cause Apple to take note.
It’s not just these two firms trying to take advantage of this growing industry. Microsoft has recently launched a new tablet PC and although its reception was less than spectacular, it is expected that Microsoft will become a key competitor in the long run. There are many factors driving the growth in this market and the war over market share is surely only just beginning. The chart shows the 75.3% growth in sales in just one year. (Click here for a PowerPoint of the chart.)
A Research Director at IDC said:
We expected a very strong fourth quarter, and the market didn’t disappoint…New product launches from the category’s top vendors, as well as new entrant Microsoft, led to a surge in consumer interest and very robust shipments totals during the holiday season’
Apple has been so dominant in this sector that other companies until recently have had little success in gaining market share. However, with companies such as Samsung and ASUS now making in-roads, competition is likely to become fierce. There are already concerns that Apple’s best days are behind it and its share price reflects this. People are now less willing to pay a premium price for an Apple product, as the innovations of its competitors have now caught up with those of the leading brand name. The following articles consider this growing market.
Samsung gain tablet market share as Apple lead narrows BBC News (1/2/13)
Apple snatches US lead from Samsung Financial Times, Tim Bradshaw (1/2/13)
Apple revenues miss expectations despite high sales figures BBC News (24/1/13)
Samsung eats into Apple sales in the tablet market Mirror, Ruki Sayid (1/2/13)
MacWorld’s Apple celebration opens amid fears of tech giant’s decline Guardian, Rory Carroll (31/1/13)
Samsung’s tablet sales soar as Apple’s grip on market loosens Daily News and Analysis, Richard Blagden (2/2/13)
Samsung takes a nibble out of Apple’s tablet lead InfoWorld, Ted Samson(31/1/13)
Tablet Sales up 75% as Samsung and Asus Gain on Apple Interational Business Times, Edward Smith (31/1/13)
- Which factors are behind this exceptional growth in the tablet PC market?
- Using the Boston matrix, where do you think tablet PCs fit in terms of market size and market growth?
- Where would you place this market in terms of the product life cycle?
- What does the product life cycle say about the degree of competition, the impact on pricing on profits etc. in the phase that you placed the tablet PC market in your answer to question 3?
- Why have Apple’s shares fallen recently? Do you think this will be the new trend?
- Microsoft’s new tablet didn’t attract huge sales. What explanation was given for this? Use a diagram to help answer this question.
- Tablet PCs are relatively expensive, yet sales of them have increased significantly over the past few years. What explanation is there for this, given that we have been (and still are) in tough financial times?