Book Review
The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability
by William W. Lewis (Chicago, IL; The University of Chicago Press, 2004),
Reviewed by Donald Calvert*
Few would question the importance productivity plays in economic performance, or the dangers of large populations living conditions the poverty line with jobs nowhere in sight. Given this, it was easy to be somewhat skeptical when reviewing a book entitled, The Power of Productivity: Wealth, Poverty, and the Threat to Global Stability. After all, although the book was written by the highly-respected Dr. William W. Lewis, founder of the McKinsey Global Institute (www.mckinsey.com), I wondered whether it offered a new, incisive look at these pressing issues, or, as certain other works have done, extolled the virtues of free markets without offering real roadmaps to navigating their inevitable hurdles.
Fortunately, The Power of Productivity distinguishes itself from the pack—and ultimately proves to be an engaging, valuable resource for students and practitioners of international economic policy alike. Lewis' book essentially explores how some economies have achieved high-incomes while others have not, and how both rich and poor economies alike can move forward on a balanced, long-term, upward trajectory.
The Book’s Central Findings: At the book’s outset, Lewis presents his ten basic findings, the evidence and arguments for which he determines to advance in the book. The data behind the conclusions represents “ground up” research from McKinsey analysts in the various countries studied. Lewis’ conclusions include: microeconomics can be as important as macroeconomics in gaging economic performance; strong policies encouraging competition and innovation in product markets are essential; and, workers can learn critical job skills without formal educations. The book then proceeds into its three parts: Rich and Middle-Income Countries; Poor Countries; and Causes and Implications.
Rich and Middle-Income Countries: The first section, “Rich and Middle Income” countries, examines Japan, the European Union, the United States, and South Korea.
Japan: Lewis’ first chapter suggests that Japan is a prime example of an economy that can have an ideal set of macroeconomic conditions in place and still fall behind. Some twenty years ago, Japan had an impressive macroeconomic report card that included: an educated workforce; large savings levels (and low public debt); a strong labor market; low interest rates and inflation; and, high-levels of employment. Added to this was the success of the formidable Japanese automotive and electronics sectors. Two decades later, Japan faces a stagnating economy with an aging population that has little access to the world’s top medications and basic healthcare.
In looking for causes for Japan’s decline, Lewis concludes that the successes of the Hondas, Toyotas, and Sonys were overshadowed by a hidden—and quite different-looking—Japanese retail industry whose productivity levels are half those of the U.S. retail industry. Lewis believes that the importance of service industries¾especially retail¾in modern economies is often greatly underestimated. Japan’s retail sector, he contends, consists of tiny, fragmented mom-and-pop shops that dot the Japanese retail landscape. The lack of larger retail players (e.g. Wal-Marts) in Japan means that there is little product standardization, attention to consumer needs, and product quality assurance. Instead, consumers there have little choice but to consume goods wherever they may exist, even if their quality is rock bottom and prices are sky high.
The European Union: In Lewis' chapter on the European Union, he looks for reasons why, he believes, the EU has fallen behind the United States on the world economic stage. He contends that the paradigmatic German economic model in Europe, based heavily on strong manufacturing, has failed to see the importance, as did Japan, of service industries. Further, Lewis believes that the EU’s attempts to fuse economic and social policies have limited EU Member States’ growth. While not opposed to the EU’s social ideals, Lewis believes that the quasi-market, quasi-social framework of EU economic policies has led to: high unemployment; lower per capita GDP; little standardization across the EU; burdensome regulations and restrictions; and, high prices. He further contends that the EU’s attempts to protect its citizens from the rigors of globalization ultimately have resulted in a smaller overall economic pie and quality of life for its citizens.
The United States: Lewis then looks at the U.S. economy, which has grown steadily over the last 30 years. The key to the United States’ economic success, he contends, stems from the fact that it enjoys high productivity across nearly all sectors relative to other countries. If there is one lesson in the U.S. economic success, Lewis suggests, it is that consumers—rather than the government or hand-picked industry players¾determine the success of companies.
South Korea: Lewis proceeds to South Korea, which, he believes, represents a middle-income country that has come far, but has stopped short of its potential. Central to Korea’s success has been its favorable macroeconomic conditions, as was seen in Japan. In contrast to Japan, however, South Korea chose to protect “strategic” industries (manufacturing, semiconductors) that could have gone farther had they been allowed to benefit from foreign investment. South Korea’s biggest stumbling blocks, Lewis maintains, are its low labor productivity and return on investment.
Poor Countries: In the second section on Poor Countries, Lewis points out that 80 percent of the world’s population lives in low income/poverty conditions. In this section, he examines Brazil, Russia, and India.
Brazil: Lewis believes that Brazil has a strong formal economy nearly on par with Korea’s. Unfortunately, the prominence of Brazil’s informal economy undermines the success of the formal economy. Brazil’s main problems, in addition to the black market, are the government’s restrictions on international competition and ownership of major sectors. Brazil also suffers from poor retailing and housing sectors.
Russia: Lewis devotes a lengthy chapter on Russia; and the findings are striking. Russia has moved from a poor, centrally-planned economy to an even poorer, market-based one. Some progress has been made: productive assets have been privatized; prices controls, for the most part, have been lifted; and imports have been allowed to enter the Russian market. But for all of these advances, the Russian economy, Lewis believes, is performing worse than it did under communism. Russia’s per capita GDP, for example, has dropped by 40 percent since becoming a market economy. The reasons—he suggests—are numerous, but the most central is the array of market distortions created by the government subsidizing and giving breaks to pre-picked firms and industries. Lewis believes that Russia has a tremendous amount of untapped potential, but offers few incentives for consumer-driven firms to invest there who stand little chance to succeed against the chosen favorites.
India: Lewis sees India as a critical country to understand in the global economic landscape given that it may eventually surpass China as the world’s most populous country. Although India is trying to modernize its economy, Lewis believes its government limits foreign direct investment, owns large portions of the economy, and subsidizes a highly inefficient agricultural sector. Lewis believes India has more barriers to productivity than any other country in the McKinsey studies.
Patterns & Implications: The Power of Productivity’s final section looks at patterns he sees across industries and countries. One conclusion he draws is that the governments of poor countries, at some level, contribute to their economic situation through policies that fail to encourage investment, competition, a level playing field, and placement of workers in service-based industries. He underscores the importance of fair competition in product markets and the centrality of economies having a consumer, market orientation.
Concluding Thoughts: How The Power of Productivity Stacks Up: The sheer scope of The Power of Productivity and its foundational research are both impressive and convincing. Bill Lewis, by training, is a Ph.D. in theoretical physics from Oxford, and the scientific method of his academic years shapes the writing style of the book. Certain findings were quite interesting: in the Russia chapter, for example, Lewis concludes that, without the requisite infrastructure investments, Russia could, within ten years, become a net importer of oil. In this example alone, Lewis illustrates that productivity cannot be taken for granted. One also leaves the book with a heightened appreciation for the retail sector’s importance to a successful economy. In the Japan chapter, for example, Lewis demonstrates that a retail sector’s failure can contribute to the underperformance of related sectors—namely housing and construction—with profound repercussions on the overall economy.
Another striking finding is Lewis’ optimism about the élan with which countries can change their economic plight. In one sense, Lewis' book is a cautionary tale; in another, it is one of tremendous optimism. Lewis believes that people are highly-adaptable and can learn new skills on the job without university degrees. In essence, his ultimate message is that countries need not wait to change their situations—they have the power to change their lot through productivity; hence the book’s aptly-named title.
In the end, The Power of Productivity is an engaging work that is highly instructional for students and practitioners of economic policy alike.
_______________
*Donald Calvert holds degrees from the University of Virginia and George Mason University. He works on international trade issues at the U.S. Commerce Department. The views expressed herein and any errors are his alone. Suggestions can be forwarded to him at doncalvert2@msn.com.