IMF Speech Exploring the Impact of Weak Productivity Growth

In my line of work once get’s to do a lot of peer review. Peer review is when you get to review someone’s research and you can critique it; pull it apart, suggest changes, push back on assumptions, rubbish the claims, support the conclusions etc. Much of our peer review is on request
– that is, the lead author of a piece of research seeks specific analyst feedback. “Since Andrew knows a thing or two about information governance, and this note is about information governance, let’s ask Andrew for peer review,” is a logical way to think of this.

But you can also peer review any
note you find. We are a large company and there is a lot going on. There are, thankfully, several avenues you can use to find out what is going on. And if you feel so inclined, you can offer a peer review for any note you find. And so it was that last evening I happened upon a speech from the Deputy Managing Director of the IMF Cleveland. To be truthful, I didn’t really do a “peer review” but I did read the speech transcript with great interest between saucepan moving and vegetable cutting. For those of you that read my blog you know that I am interested in economics (my major was economics) and so I do tend to follow much the IMF says. So here is my tongue in cheek peer review of the speech.

The speech ( Global Economic Challenges and Opportunities
, to the 59th Annual Meeting of the National Association for Business Economics, by Tao Zhang, Deputy Managing Director, International Monetary Fund

Cleveland, September 25, 2017) was posted to the IMF page and it captures some of the very relevant and pressing economic and business issues we face. CIOs, CDOs and IT in general are all caught up in the same ball-game since we are core to one of the most intractable issues of the day – that being productivity or the lack thereof. So there I was, sitting at the kitchen table, preparing dinner and reading this speech. As I read I scribbled notes in the margin. Here is a summary of the major points I wanted to call out for your information.

Growth is Doing OK

Yes, overall, it seems the IMF is more confident that economic growth is in better shape than in the recent past. It is a long, slow recovery for sure – and growth has been muted – but it is showing signs of improvement. Oddly the graph shown (figure 1 in the speech) demonstrates how the IMF’s growth forecasts have for a number of years been way too rosy. They don’t seem to forecast very accurately. They always over estimate the US economic recovery.

The speech then suggests that the “impact of the global crisis has faded.” Sorry to say I don’t quite buy that one. I also just happened to read a summary
of the recent Deutsche Bank report by Valuewalk
on “ The Next Financial Crisis
“. It seems that as a result of QE
and near-negative interest rates for record periods, we are in a strange, market-distorted place. Our central bankers are not too sure about what is happening – let’s be honest. They are not sure how QE works, if it did work – see this week’s Economist for that story.

The speech then gets interesting. Mr. Zhang then suggests he wants to explore the following:

  • The slowdown in productivity growth
  • Income polarization
  • Low inflation and low levels of wage growth
  • And the continuing need for global cooperation

He makes a good argument for how all these are connected and rooted in the first challenge – the odd case of productivity, or the lack thereof. He then says,

“As I speak, I see many of you are your tablets and smartphones. This is an area of innovation that perhaps has received more attention than any other. Some may argue that it increases productivity, some may argue the opposite.”

He does not take a side. He does not take a position. I have. I think there are ample examples of innovation that are not going to drive productivity. I have argued in my blog (last time earlier this month with The Digital Economy is Making us Worse Off. Apparently
) that email, as one example, has not driven productivity. The smartphone and tablet has just increased email output – at the same level of input per email. An email today takes you just as long to read and reply to as it did 30 years ago. You just do it at the dinner table now, and not just when at your desk.

Now, smartphones and tablets might lead to productive change if those technologies were used to change how business processes operate. But that’s a more complex topic. The speaker states correctly that “this disruptive change has taken place without an apparent increase in productivity.” He then nicely captures most of the major reasons why this is thought to be the case:

  • Measurement issues – we are not tracking what is actually driving productivity correctly
  • GDP definitions and scope issues – we are not tracing all the growth (think shadow economy such as household work)
  • The innovation we see around us is not targeting productive growth

It is the last point that grabs my attention since, after all that I read, it is this that captures the most important point of all. To be precise, the author says,

“…[M]uch of the innovation we have witnessed is doing little to make the pie bigger through more productive means of production. Rather, that innovation could be intensifying a trend of redistribution of the growth dividends away from labor and toward capital.”

This is it
right there – this cause is I think amplified with things like QE and market-distorting interest rates that twist capital allocation practice and actions by public and private industry. Again, you just have to look at the data in the new Deutsche Bank report to see the level of distortion we are experiencing in capital markets.

The speech then moves onto the other elements and the speaker makes a nice case for how productivity sits at the root of income polarization and wage stagnation. However, he does call out some policies that would help with the income challenge – but he does not call out the policies required, not just needed, to address the productivity issue. He does call out the growing concentration of large, dominant firms with pseudo-monopolistic (my terminology) positions, but he does not call out the record low-levels of new company start-ups. He also does not call out:

  • Competition policy and decreased regulation (that would free up the invisible hand and creative destruction)
  • Innovation and primary R&D tax incentives (that would trigger or incentivize new innovation growth)
  • Education and industry alignment and investment (which would increase the countries competitive position in the world)
  • Infrastructure spending (which would make us more efficient)

But to be fair, other parts of the IMF has said this too.

Finally, the last point about coordination. The IMF itself was founded on a critical need felt by many nations, centered on the US and the UK, but supported by many others including China and Russia, to work together to help manage the greatest challenge we felt at the time – imbalances. Our nation’s used to collaborate more fully. Our history is littered with success, and failures, due to such collaboration. But we have little to no collaboration today. We don’t even observe any real coordination among central banks or global economic policy. So the IMF is, in my humble opinion, failing in its primary objective. It should call to order the finance ministers of the leading nations of today and require them to report on their efforts to work together to implement the policies needed.

This need is pressing. I wrap up by calling out another key point from the Deutsche Bank report. Ever since the 1970s when Nixon tool the Dollar of gold and fiat money became a reality, financial crisis have became ever more likely. Yet at the same time, our economic leaders would have us believe that the “boom-bust” economic cycle of the 70s and 80s are “defeated” and now avoided due to their policies of the day. I think its quite interesting, and damming, that they claim these positions. Yes, economic boom and bust did lessen but the result was that the overall system of the global economy has became far more brittle. Hence this last “bust” has been massively significant. Until and if we all get round the table for a “Bretton Woods 2.0” I think our “busts” will come along in ever greater doses.

So my dinner progressed nicely, my peer review of the IMF speech completed (reasonable speech, but lacking targeted audience, and the most useful actionable insight), I was able to retire for the day.

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