Productivity and the impact of the digital revolution – who is right who is wrong?

by Marco Tapia

in management-it-consulting,

August 18, 2015

Much has been said about the power of technology to improve productivity. It appears obvious to most that when a new technological innovation, system or fancy gadget is introduced some positive impact on productivity is expected. I wrote in May this year how you can achieve productivity using Predictive Analytics.

In January 2012 I wrote an article about a new survey by the Australian Industry Group and Deloitte has found that “by far and away the most common reason for business investing in new technologies over the past three years has been to increase productivity levels”. The article indicated that 71.6% of respondents to the study indicated that the main reason to invest in technology was to increase productivity.

John Edwards, the Reserve Bank of Australia board member said in a paper published by the RBA, that economic reforms would enhance productivity and stressed that in the long run, productivity will come down to technology and innovation.

A number of real life examples of how technology can improve productivity are depicted in my blog article of May 2012 however this is just a very short sample of what could be done. Much more is available on a day today basis, from buying shares online (where before was all paper based and slow process) to buying global shares through ETF global investments on your local exchange. Using smart phone apps has revolutionised the GPS industry, the banking industry, the taxi industry, the dating sector, the travelling and tourism industry. We could spend the next two pages listing the areas of everyday life that have been disrupted. Additional technologies and innovations can be found in Technologies and skills that can enhance or diminish productivity.

The above mentioned article also indicated what could diminish productivity and list a number of innovations that have disrupted a number of sectors but at the same time, have the potential to diminish productivity.

Because of all of the above and more, it is interesting as well to read how some well-known experts are beginning to questioning the calculation and process involved in determining productivity.

For instance, John Kehoe has observed that perhaps weak productivity figures ignoring Silicon Valley gadgets. He goes on saying that “Washington observed Global productivity growth looks feeble. But is that because traditional measures have failed to pick up the digital revolution in our lives?. Official measures of productivity may be understating significant efficiency benefits of the technological innovation boom.” He indicates that “Productivity growth appears to be sinking across most of the developed world, from Australia to the United States and beyond. If true, we will all pay the price through lower wage rises, poorer living standards and possibly higher interest rates over the economic cycle.”

I encourage you to read his well-documented and powerful article that seems to conclude that “we either have a serious productivity problem, or a problem measuring it.”

Another judgement of process of determining and calculating productivity is presented by Ross Gittins - The Sydney Morning Herald’s Economics Editor in two articles published in March and July this year (2015).

In March, Ross Gittins indicates that “We’re not taking productivity seriously”. He question the Australian government intergenerational report and says “the intergenerational report’s consideration of the topic is quite inadequate.” On his article, Ross Gittins argues that the report question the impact of the digital revolution and he found that hard to believe. He questions the report approach and focus in traditional micro economic reform against other important productivity enhancing strategies such as infrastructure, education, impact of immigration, etc.

In his July article, Ross Gittins challenges the Australian Productivity Commission annual update and again question he process and finding of this report. Ross Gittins says that “the Productivity Commission’s preference is for brushing aside the labour productivity figures and getting us to focus on the figures for “multi-factor productivity”, which show an improvement of just 0.4 per cent in 2013-14 and 0.4 per cent the year before. This compares with the 40-year average of 0.8 per cent a year.” He stresses the fact that the commission focuses again in micro-economic reform as the answer rather than seeing the important good news on the productivity numbers.

It is concerning that Ross Gittins questions the measurement of multi-factor productivity. He says, “A much more serious problem is that the measurement of multi-factor productivity is quite dodgy. It’s measured as a residual, meaning that any error in measuring the three other items in the sum will (and does) make the measurement of multi-factor productivity wrong.” He also questions the commission’s inclusion of some but not all industries sectors, quote: “The market sector covers the financial services, mining, construction, manufacturing, transport, retail trade, wholesale trade, information media and telecommunications, electricity gas and water, agriculture, accommodation and food services, arts and recreation services, rental hiring and real estate services, professional scientific services, administrative support services, and “other” services industries. That’s 16 industries – though, for reasons it doesn’t explain, the commission’s 12-industry measure of market sector productivity doesn’t include the last four industries on that list. Even so, the 12 industries accounted for 65 per cent of gross domestic product.”

So in summary, the productivity commission challenges the level of productivity we have and the intergenerational report does same. Experts such as Ross Gittins challenge both reports and approaches and the lack of emphasis on the impact of new disruptive technologies. John Kehoe also question the way we are calculating productivity and again highlight the lack of emphasis given to digital technology.

My personal view is that Ross Gittins and John Kehoe are much closer to the mark than the ACT based experts that produced the reports and are using old methodologies and approaches. My argument is supported by the fact that Ross and John are much closer to industry and real life situations and like myself, get to see in real examples of the massive positive transformation that digital disruption is causing on productivity, social and economic well being.

Marco A. Tapia

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