Productivity gains were a prominent contributor to worldwide episodes of rapid growth and poverty reduction. But since the global financial crisis, this expansion has been slowing in Asia and other regions of the world.
This is evidenced by a decline in indicators of productivity growth over the past several years, including total factor productivity growth, measuring how efficiently and intensely the main inputs in production, labour and capital are being used. The implications are worrying.
Investment and productivity growth go hand in hand as the two sources for generating growth. At this juncture in Asia, it will pay to strive for higher productivity — that is, getting more value from investment — for two reasons.
First, productivity improvements can pick up the slack in growth when investment by governments and the private sector face constraints. And second, getting more mileage from existing investments will help improve the quality of growth that is more socially inclusive and environmentally sustainable, which is now the goal of many governments.
A big part of Asia's growth has been down to the scale of investment, from government infrastructure drives and companies expanding, with investment rising at an average annual rate of 8% in the 2000s. The volume of investment will still count for a lot going forward — with the Asian Development Bank (ADB) and the entry of the Asian Infrastructure Investment Bank and the New Development Bank of the Brics nations providing important sources of infrastructure finance for the region.
At the same time, improvements in productivity will have to take up more of the reins of growth alongside investment-driven patterns of growth. The most high-profile example of why this is so is the People's Republic of China rebalancing its economy towards consumption rather than investment.
For robust growth to continue, its quality needs to improve by being more inclusive and environmentally sustainable. Growing income inequality can slow economies by limiting the contribution of all the people, as well as generating social instability. Environmental destruction, resulting climate change and its calamitous impacts is the other big obstacle to sustaining strong growth on Asia.
Consider the link between productivity and the inclusion of all people in the growth process. Human development is driven by commitments to programmes for education, training, health care as well as water and sanitation. Making these investments will lift the participation and productivity of workers, and help reduce income inequality. The need to do this is acute in Asia, where income inequality has risen over the past decade in countries that are home to 80% of the region's population. Among the reasons for this are inequalities in the provision of education.
The other connection is between productivity and environmental sustainability. In agriculture, for example, making more intensive rather than extensive use of land will contribute to its more sustainable use. In China and India, growth in agriculture output now has to come mostly through productivity gains, as very little can from the expansion of farmland.
In Thailand, productivity gains accounted for three quarters of the growth in agriculture output over the past 40 years, indicating that there is still considerable room for gains in land use, as there is in many other countries in Southeast Asia.
The message of a just-released report by Independent Evaluation at the ADB of projects supported by the institution is the value to countries in getting more out of resources being invested. This is a compelling agenda: an improvement in productivity of physical investments by just two-tenths of 1% in Asia is like adding $10 billion (328 billion baht) to those investments.
The economy-wide case for achieving better productivity breaks down into actions at the project level. ADB's 50 years of experience with financing infrastructure and other projects highlights two essential dimensions for project success.
One is improved efficiency in implementation; for example, getting projects done on time and without big cost overruns, ensuring social and environmental safeguards and due diligence. The other is greater sustainability in project results through providing adequate budget allocations, and ensuring operations and maintenance, for example in transport.
At both the project-level and the economy-level, the benefits of attending to efficiency and sustainability and improving the productivity of investment will outweigh the upfront costs of making those improvements, promising payoffs for the well-being of people and the environment.
Vinod Thomas is director-general of Independent Evaluation at the Asian Development Bank.