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Productivity paradox suggests inadequate measurement and curbed growth potential

DAI XIAOYONG | 2020-09-02
(Chinese Social Sciences Today)

Against the backdrop of the digital economic transformation powered by the boom of the new generation of information technology, a worldwide productivity slowdown has drawn wide attention in recent years. Photo: FILE


The rapid development of a new generation of information technology is driving an all-around digital transformation of the economy. However, productivity growth which should reflect technological progress and economic potential has been declining. This phenomenon has been dubbed as the “productivity paradox.”
 
The worldwide productivity slowdown not only indicates imperfect methods of measurement in the digital economy era, but also suggests that the potential for digitalization and information technology to increase productivity has been suppressed.
 
Therefore, how to accurately measure the digital economy and productivity and how to understand and capitalize on new driving forces for productivity growth will be important topics for future economic studies and policy making. 
 
Reasons for productivity slowdown
Throughout human history, the economy has never grown at a constant rate or in a steady process. Productivity growth, promoted by innovation and technological advance, is crucial to sustained economic development and the rise of per capita income. 
 
Prior to the 1770s, the global economy showed little growth. Not until the advent of the Industrial Revolution featuring mechanization, electrification and automation did innovation and technological reforms substantively boost labor productivity and major economies around the world embrace remarkable growth.  
 
Against the backdrop of the digital economic transformation powered by the boom of the new generation of information technology, the worldwide productivity slowdown has drawn broad attention in recent years. 
 
According to the McKinsey Global Institute, the United Kingdom saw its productivity grow 2% annually on average from 2000 to 2005, but the growth decreased to 0.2% during the period 2010–2015. After 2004, the growth rate of productivity also dropped in the United States, down to 0.57% between 2010 and 2015. Similarly, Australia, Japan and some European Union countries are experiencing varying degrees of productivity slowdown.
 
Although China achieved miraculous growth in the past two decades, the total factor productivity has fallen sharply in recent years, particularly after 2008. The Chinese economy has now entered a new normal of medium-low growth. 
 
There are mainly two explanations for why productivity has been declining on a global scale. Some scholars maintain that global productivity decline reflects the real productivity situation in these economies. Today’s innovation and technological progress are far less revolutionary than technological reforms in the Industrial Revolution age. The potential and impact of digital technologies have yet to present themselves fully. 
 
Meanwhile, production efficiency loss caused by such issues as decreasing investment rate, resource misallocation between enterprises, and zombie enterprises also offers a principal reason for the productivity decrease in these economies. 
 
Some other scholars argue that the global productivity slowdown concerns an underestimation of the contribution made by the digital economy. Productivity slowdowns observed by existing studies might be attributed to estimation errors due to difficulties in measuring the input and output of the digital economy. Thus there would not be a real change in productivity. Hence adequate measurement of productivity in the digital economy era has become foundational to making sense of the current global productivity slowdown. 
 
Challenges facing measurement 
Productivity refers to the ratio between factor input and output in the process of production, so the accurate calculation of input and output of production factors is the premise of productivity estimation. 
 
In the traditional industrial economy age, factor input and output in the production process are quite clear. Among others, capital, labor and land are the factor input, while final products produced by enterprises are the output. The total factor productivity measures exactly the final output level realized by factor input per unit. Be it parameter estimation or non-parametric estimation, a production function or frontier needs to be built on the basis of factor input and output, thereby tracking productivity. 
 
In the digital economy era, digitalized knowledge and information have become important production factors, and it is usually hard to measure digitalized output. The blending of digital technologies and the real economy has even changed the traditional form of production function, posing great challenges to the measurement of productivity under the digital economy. 
 
The calculation of the real output is most challenging to productivity measurement, but the statistics of the digital economy lag far behind its development. In 1987, renowned American economist Robert Solow famously said that the computer age was everywhere except for the productivity statistics.
 
The digital economy has created many new products, new services and new forms of consumption such as the sharing economy, reducing search and trading costs and strengthening the role of intangible assets in the economy. Nonetheless, the newly created value has never fully manifested in corporate financial statements or government statistics. 
 
For example, suppliers of digital products sell digital content to consumers, but to consumers, profit made by selling digital products or posting online commercials via third parties simply involves time. If digital products are free, the value created will be difficult to measure. 
 
Under the digital economy, new products are continuously being created and replacing old counterparts. Changes in their prices might stem from quality upgrading, not merely inflation. Overlooking product quality upgrades might also lead to underestimates of real output and productivity. 
 
Building the Digital Economy Satellite Account (DESA) is a useful attempt by many countries around the world to cope with statistical challenges in the digital economy. Satellite accounts are traditional ancillary statistical accounts for national economy accounting, and DESA can be used to manage and make statistics of digital economic activities by all authorities and departments. It takes into account the value of products and services provided by digital intermediaries and the use of digital tools in the production link, while evaluating the value of free services and data provided for the digital economy. 
 
In addition, given challenges facing productivity measurement, some studies have shifted focus to the measurement of benefits from the digital economy. For instance, the simulation of consumer surplus measurement and demand models through online choice experiments can help measure the improvement of benefits from digital technologies, products and service for consumers. 
 
The digital transformation of the economy is inadequate to explain the global economic slowdown, but after errors in digital economy and productivity measurement are counted, the real productivity growth of some economies might be higher than the observed growth rate. 
 
New driving forces
Understanding new driving forces and potential for productivity growth in the digital economy era is vital to policy design and optimization for boosting productivity. Productivity in the digital economy contains not only the growth of digital technology departments, but also the gains brought by the integrated development of digital technologies and traditional sectors.
 
According to the definition given by the China Academy of Information and Communications Technology, the digital economy can be divided into digital industrialization and industrial digitalization. Digital industrialization refers to the narrow digital economy constituted by information industries. In the national economy, industries include electronic and communication equipment manufacturing; telecommunication, radio, TV and satellite transmission services; the internet and related services; and software and information technology services. 
 
Industrial digitalization represents the broad digital economy, encompassing digital economic activities carried out by traditional departments during the integration of information technology and traditional sectors. 
 
Facilitating the supply, adoption and diffusion of digital and information technologies is key to improving productivity in the digital economy era. The new generation of information technology represented by big data, cloud computing, block chain and artificial intelligence has the typical attributes of general technology. This means technological progress made by information technology departments will promote the innovation of products and processes as well as organizational innovation in departments that use information technology and thus cause technological spillover between and inside the departments. 
 
As information technology has lowered the cost of digital storage, computing and transmission, the cost of searching, copying, transportation, tracking and verification in the digital economy have been reduced significantly. This will profoundly impact corporate operation, innovation, and management practices, and eventually extend to the productivity and operational performance of the enterprises. 
 
The global productivity slowdown meanwhile indicates that there are many barriers hindering the digital transformation of the economy and restricting the role of information technology in boosting productivity. 
 
Digital transformation is not merely the diffusion and penetration of information technology. Successful technological adoption and application are normally processes of trial and error, requiring enterprises to have complementary abilities and assets regarding skill, organizational reform, process innovation and business models. The lack of complementary abilities and assets might be the reason why the potential for productivity growth is suppressed. 
 
As a contributing technology, information technology challenges the ownership of traditional business models and complementary assets. Complementary assets are no longer the mechanism for value creation, but serve as a condition for information technology to function. The difficulty of value capture has become a major challenge for innovative activities in the digital economy. 
 
At the same time, digital transformation and innovation have increased the share of intangible assets, intensified information asymmetry between the two parties of financing, and aggravated financing restrictions for innovative enterprises, thus inhibiting innovation in digitalization and the adoption and diffusion of information technology. 
 
Even if errors for productivity measurement are allowed for, it can be conjectured that the impact of the digital technology revolution has not shown itself fully and is lagging to a certain extent. To fully stimulate productivity growth in the digital economy era, efforts are much needed to innovate with policy optimization, design and management, thereby removing barriers in the process of digital transformation. 
 
Dai Xiaoyong is an associate professor from the School of Economics and Finance at Xi’an Jiaotong University.
 
edited by CHEN MIRONG