New perspectives on productivity

Which region will become the next global factory? As the work force ages and labor costs rise in China and other East Asian countries, many eyes turn to South Asia. It is a region that is still largely rural, where agriculture accounts for a large share of employment and a substantial fraction of GDP, and it has not been particularly successful in integrating within itself and with the rest of the world. Yet, education levels are on the rise, and more than one million young workers enter the labor market each year, by 2030, 26 percent of the world’s working adults will live in South Asia. This is the region’s greatest opportunity and greatest challenge. What will determine South Asia’s ability to take advantage of the demographic transition to unlock its potential and accelerate growth, create jobs, reduce poverty, and boost shared prosperity? One of the answers lies in improving the region’s competitiveness. While different authors have proposed different definitions for the concept, this report chooses a simple approach by defining competitiveness as productivity (a la Porter, 1990). Despite relatively rapid economic growth, the contribution of total factor productivity (TFP) to the region’s growth has been low and factors subject to diminishing returns, quantity rather than quality of labor and non-ICT capital, have been the main drivers of growth. This calls for greater focus on improving productivity.