“Productivity is never an accident. It is always the result of commitment to excellence, intelligent planning and focussed efforts” Paul J. Meyer

Recent years have seen widespread discussions about productivity, and for good reasons. Productivity indices have been used as a benchmark to assess the capacity of firms or countries to generate output more efficiently from given inputs. In fact, in many countries, and especially in the United States, it appears that labour productivity has improved significantly over the past few decades. However, in the case of Mauritius, statistics seem to show that although there have been constant improvements, the overall results remain somewhat modest.

We broadly define the notion of productivity as a “supply side” measure, capturing technical production relationships between inputs and outputs. Productivity is the amount of output produced per unit of inputs efficiently used, therefore indicating the capacity of a nation to harness its physical and human resources to generate higher standards of living, income creation and economic growth. We tend to assign productivity with some connotations of minimising the use of inputs, reflecting efficient production processes that minimize wastes. Equally, productivity can have connotations of maximising output – reflecting the use of resources in the production of goods and services that add the most value.

High productivity growth is therefore seen as a sign of good economic health and efficient production. As techniques of production improve and become more sophisticated, figures are expected to reflect higher performance. In many countries, including Mauritius, statistics did not capture increasing productivity although it is generally accepted that factor inputs incorporate a relatively high degree of sophistication. This apparent paradox has a rational explanation.

Over the past 25 years, Mauritius benefited from a relatively protected and guaranteed market access for its main exports, and in particular for textile and clothing, especially within the framework of the Multi Fibre Agreement (MFA). This has historically given Mauritius a relative preferential competitive advantage over other large scale producers who were constrained by the quota system. But the world does not stand still: the end of the MFA on January 1st, 2005 has unshackled the world markets, so that large, low cost manufacturing countries are now challenging our positions given that the markets for textile and clothing have been liberalised. Furthermore, in the mean time, our manufacturing industries have been subject to rising costs of production, especially the rising labour costs, which were not sufficiently absorbed by higher factor productivities. In fact, productivity trends for the past two decades showed that unit labour costs, defined as the remuneration of labour to produce one unit of output, increased at a much faster rate than both real output and labour input. This has inevitably resulted in the crawling erosion of our competitive edge, so that today, in the face of rising competition, Mauritian companies find it difficult to match the challenges.

■ <B>Productivity trends in Mauritius</B>

A look at the Central statistics office recently published productivity and competitiveness indicators gives us a glimpse of productivity trends for the Mauritian economy, the manufacturing sector and the Export processing zone (EPZ) sub-sector.

In fact, over the past two decades, although real output grew by an average of 5.5 %, productivity trends have been quite modest. Labour productivity, defined as the ratio of real output to labour inputs, grew by an average of 2.7 %. Much higher growth rates were however recorded for average compensation to employees and unit labour costs, which went up by an average of 9.7 % and 6.7 % respectively. Labour productivity should however be interpreted with caution if used as a measure of efficiency. In fact, it reflects more than just efficiency of workers and is influenced by many factors outside workers influence, including the nature and amount of capital equipment available and the use and type of technology in production. Capital productivity, defined as the net stock of investment in reproducible assets, is the measure of how well physical capital is used in providing goods and services. Productive use of capital is an important source of a nation’s material standard of living. Figures for the last two decades indicate a negative growth rate on average – in fact, it is estimated that capital productivity grew negatively by 0.6 % on account of higher growth in inputs than in output. Multifactor productivity, which includes qualitative factors such as better management and improved quality inputs through training and technology, improved by a modest 0.6 % during the past 20 years.

Similar trends were observed in the manufacturing sector, where growth rates of inputs, both labour and capital, exceeded the improvements in productivity rates in the past 20 years. Statistics show that during that period, real output for the manufacturing sector grew by an average 6.8 %. Labour and capital inputs grew by an average of 4.1% and 5.6 % respectively, while labour and capital productivity increased by only 2.7 % and 1.3 % respectively. The average growth rate of multifactor productivity increased by 1.8 % over that period of time. Average compensation of employees soared by an average of 10 %, while unit labour costs increased by 7.2 % between 1983 and 2003. Again, labour productivity was insufficient to efficiently match the increase in labour costs, therefore eroding our competitive advantage.

■ <B>Low productivity growth rates </B>

At a macroeconomic level, productivity growth is a crucial source of growth in living standards. Indeed, higher real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. Productivity growth also means more value is added in production and this means more income is available to be distributed.

At the firm’s level, the benefits of productivity growth can be distributed in a number of different ways, namely to the workforce through better wages and other conditions; to shareholders through increased profits and dividend distributions; to customers through lower prices; and to governments through increases in tax payments.

We often see private sector representatives, struggling to remain competitive, asking for duty-free access to world markets, reduced tariffs on imported inputs, lower taxes on corporate income, and easier access to bank financing. While all these factors external to the industries no doubt help, at the end of the day the key to industrial growth is productivity, which needs to be improved at the firm’s level.

Statistics have shown that most of our firms operate at productivity growth rates far below global best practice levels. Part of this could be explained by technology differences. However, even where we use the same technology, we usually operate it with much lower productivity than the most productive firms in the world.

In Mauritius, investments in capital usually exceed the normal production level of firms and given the small size of our production units, productivity growth rates remain relatively modest. There are wide differences in productivity levels, which vary significantly from firm to firm in the same industry. This has been observed recently in the EPZ textile sector, where some companies have fared well despite the difficult circumstances, while others have been driven out of business. An important challenge for us is thus to catch up with international best practices.

Indeed, catching up with best practice is the essence of companies’ efficiency and competitiveness. Cross-country experience tells us that one of the key ingredients of companies’ success is the ability to adopt and adapt good practices, be they in technology, production processes, organizational methods or institutional arrangements. Adoption of better practices is needed to improve productivity. And productivity is key to growth.

If we want to see our industries adopt and adapt good practices, we need to create an investment climate that both generates the incentives to do so as well as enables the economic actors to carry out the necessary actions. An investment climate that rewards entrepreneurship and opens doors for it is critical for rapid growth. The other dimensions of a good investment climate include macroeconomic stability, open and competitive markets, strong property rights, rule of law and good governance, reduced bureaucracy and an adequate supply of infrastructural and financial services – in short, the ingredients which make up the competitiveness of a nation.

International experience suggests that open and competitive markets are the key to the adoption and diffusion of best practices. Open economies give people access to new ideas, products, techniques and ways of doing things. Competitive markets generate the incentives to adopt these good practices. Although Mauritius has opened up its economy considerably in recent years, there are still many barriers to entry, especially for foreign investment. For example, till recently, private entry into telecoms services was not allowed in Mauritius.

The market was subsequently liberalised but in practice, there are still significant barriers to open fair competition for potential operators. Sometimes, there are no outright bans but all kinds of bottlenecks that effectively prevent private sector provision. If Mauritius is to enhance productivity, it needs to fully exploit the potential of the private sector. It is important to note that the mere opening up of a sector to private enterprises in cases where there are natural monopolies is not enough. It is crucial to have a competitive private sector. One does not want to replace state monopolies with private monopolies.

There is no simple way for governments to boost productivity growth. They can help by paying attention to framework conditions, including the degree of competition and market openness, since policies to enhance productivity growth within firms require a competitive environment, where a process of renewal enables entry and exit, allowing successful firms to grow and unsuccessful ones to fail. If government policies hinder this process, productivity growth will be lowered.

However, government action can help: in supporting education and training, physical capital formation and public infrastructure, and in promoting technological change. But the responsibility for improving productivity lies ultimately in the hands of the private operators.

<B>Isabelle RAMDOO</B>

<I>Analyst – Mauritius Chamber of Commerce and Industry</I>

STATISTICS

<B>Explaining the productivity paradox</B>

■ Robert Solow, the Nobel Prize economist once said that “we see computers everywhere, except in productivity statistics”. Productivity measures do not seem to show technological innovation.

In many countries where data is available, productivity growth has slowed down in every decade since the 1960’s. Although investment in information technology has grown dramatically, there seem to have been little evidence in productivity statistics. One possible explanation of this paradox is that in the "old economy", the animating force was to mechanise goods production and handling to automate the assembly line of the firm. And this effort paid off handsomely, with the highest productivity growth recorded in the manufacturing and the agricultural sector. Contrastingly, in the “new economy”, more than half of jobs are located in the services sector, where productivity growth is relatively slower. It is however difficult to introduce the same mechanization process in the services sector that were used in the manufacturing sector. Digitisation is only in its early ages and hasn’t yet reached the critical mass necessary to significantly affect the productivity statistics.

In the years to come, there is however no doubt that the effects of the digital economy are likely to be felt economy wide, bringing spillover benefits, measurable in figures.