Secretary-General

Keynote speech on the future of productivity: Productivity by all and for all

 

Address by Ángel Gurría,

Secretary-General, OECD

Mexico City, Mexico

6 July 2015 

(As prepared for delivery)

 

Friends:

 

Welcome to this first Global Dialogue on the Future of Productivity. It gives me much pleasure to launch this initiative, in collaboration with the Government of Mexico and with the participation of the Mexican Minister for Finance, Luis Videgaray, and also Enrique Iglesias, who has been instrumental in trying to improve productivity in Latin America.

 

We have been experiencing a crisis for seven years now: the worst economic crisis of our lives. Many of our economies are suffering the legacies of this crisis: poor growth, high levels of unemployment, low levels of trade and investment, difficulties in accessing credit, growing inequality and a drastic erosion of confidence.

 

During these difficult years, productivity growth has slowed down, reviving fears that we are now entering a period of poor growth and low job creation. One of the main challenges facing our countries is what to do to re-launch productivity, the main factor of long-term growth, and how to do it. This has been the focus of the report we are launching today entitled “The Future of Productivity”.

 

A new type of productivity

 

So what sort of productivity are we talking about? Today, we would like to propose a form of productivity which involves “working smarter”, not necessarily “working harder”. We are talking about how to produce better output, not just about how to produce more output.

 

Productivity as an engine of growth but also as an instrument of inclusivity, enabling us to continue to prosper whilst appreciably reducing unemployment, poverty and inequality. We are talking about increasing production by investing in knowledge, skills and abilities, or by better combining inputs, thanks to new ideas, technological innovations and new business models.

 

Historical innovations such as printing, the steam engine, electricity, the telephone, the factory system and now the Internet have led to radical changes in the way in which we produce and trade goods and services, and even in the way we consume. These innovations have transformed the world, by improving our economies and our living standards. However, not all countries have followed the same path and not everyone has benefited from these advances. This is why there are significant differences between countries today in terms of income per capita; this is why we are currently experiencing such high levels of inequality, which to a large extent reflect differences in productivity.

 

Increasing productivity means “growing the size of the pie” and improving the quality of the pie. However, this increased productivity does not always lead to a fairer distribution of portions. Higher productivity is a necessary – but not a sufficient – condition for raising the living standards of our societies. Although increased productivity and higher levels of employment went hand-in-hand for much of the 20th century, this basic relationship has broken down in recent years.

 

In order for productivity and innovation to be able to generate shared benefits, investing in the skills that complement technological change will be key. It will also be key to offer a safety net to get everyone on board in these systems.

 

Contributing to a form of development which offers opportunities for all and whose benefits are shared more evenly across society is the core objective of the OECD Initiative on Inclusive Growth which aims to go beyond economic growth and income distribution and to seek progress in all aspects of life that influence well-being, such as education, health and work. Increased productivity is essential for achieving inclusive growth.

 

Over the coming decades, and in spite of the momentum of emerging economies, global growth will be affected by population ageing and, in many economies, by a plateauing both in educational attainment and in labour force participation. Productivity will then become the main driver of future growth.

 

The future of productivity

 

Policies to enhance and democratise production are required now more than ever if we are to aspire to a new wave of prosperity. Higher productivity growth is essential in order to offset the impact of demographic pressures on public budgets, to overcome the middle-income trap that afflicts many emerging economies and to usher in a new era of efficiency that dramatically shrinks our footprint on the environment. More productive societies not only grow faster and create more jobs, but also enjoy better living standards.

 

The outlook for future productivity is very mixed and hotly debated. Investment, which underlies technology adoption and innovation, has been faltering since the beginning of the crisis. Global flows of direct foreign investment in 2014 stood at 40% below their 2007 levels.

 

For some – the more pessimistic ones – all the “ripe fruit” has already been picked and the IT revolution has run its course, and the benefits of other technologies such as biotechnology and highly automated manufacturing remain uncertain. For others – the more optimistic ones – this revolution continues apace, accompanied by dramatic changes in the nature of production, which will fuel a new wave of productivity growth.

 

Our work tackles these issues from a novel angle. The new OECD report on “The Future of Productivity”, which we are launching today, shows that the globally most productive firms have continued to register robust productivity growth in the 21st century. The strength of global frontier firms reflects their capacity to “innovate”, pointing to the importance of investing in R&D and of introducing new technologies. However, it is also vital to develop new ways of combining human, technological and organisational capital in production processes, throughout global value chains, and to harness the power of digitisation in order to diffuse and replicate ideas rapidly.

 

Diffusion is key

 

As our study suggests, the main source of the productivity slowdown is not so much a slowing of the pace of innovation, but rather a slowing of the pace at which innovations spread throughout the economy. Although we are not running out of technology or ideas, the gap between the most productive firms and the rest has been increasing over time.

 

The recent OECD study on “The Future of Productivity” shows that, in these early years of the 21st century, the productivity of frontier industrial firms increased by 3% per annum more than that of other firms in the same sector. That gap increases to 5% in the services sector, where firms have lower levels of skills and productivity, in addition to stricter regulation. Future growth will depend to a large extent on reviving the diffusion machine in each of the national sectors, a factor which propelled a productivity convergence between countries for a large part of the 20th century.

 

This is vital for countries such as Mexico, given that its labour productivity convergence with the United States has halted over recent decades. This is yet another reason why the recent structural reforms backed by the government of President Peña Nieto are so important.

 

Reviving the innovation diffusion machinery will also promote more inclusive growth. The rise in wage inequality reflects the increasing dispersion in average wages paid across firms. Raising the productivity of laggard firms, via a better diffusion of technology and knowledge, will help to contain the rise in wage inequality. This diffusion would also reduce production costs and increase the quality and variety of the necessary inputs and services, thereby raising real incomes, broadening access to better education and improving health services.

 

Making progress along this path requires considerable efforts and reforms. In order to promote productivity diffusion, we will need to grapple with deeply entrenched structures, inertias and cultures. This is a huge challenge, especially in the services sector. This issue is set to become more important as services account for an increasing share of economic activity.

 

If we fail to do this, the efficiency of global value chains could be compromised, given that certain services such as logistics, finance, business services and communications are the oil that greases the wheels of globalisation.

 

What do we need to do to foster innovation and knowledge diffusion, and to achieve more inclusive growth?
 

  1. First, we need to keep pushing out the global innovation frontier. This requires significantly more public investment in research to support the continued emergence of breakthrough innovations – such as the Internet and GPS – which had their origins in public research. Governments play a key role in conducting basic research, so that it can serve as a basis for innovation on the part of firms.
     
  2. Second, we need to create the climate for greater investment in R&D. The worrying trend across OECD countries is that governments, universities and firms are all investing less in basic research (the “R” in R&D). We need to reverse this trend if we are to keep the innovation engine running. Given the tight fiscal climate, this is going to be easier if countries share some of the costs and risks of basic research through closer collaboration, as exemplified by the International Space Station or the CERN particle accelerator.
     
  3. Third, we need to promote experimentation with new technologies and business models. Since innovation operates on a trial and error basis, failures provide an opportunity to learn and rebound, they are not the end of the line. Thus, the regulatory environment should allow firms to prosper and be successful, and at the same time enable firms to exit the market in the case of difficulty, so that scarce resources can be released to underpin the growth of successful firms.


And fourth, we need to design and implement a toolkit of targeted policies for diffusing knowledge and productivity,
which includes regulations and effective measures to:
 

  • Promote competition in the goods and services markets, especially in the services sector, by offering incentives to firms to invest in and adopt new technologies and business practices.
     
  • Facilitate closer collaboration between firms and universities, to enable knowledge to flow to lagging firms.
     
  • Promote investment in public infrastructure, education and skills that complements new technologies. This means recognising that infrastructure is no longer just roads, ports, airports, bridges and railways but increasingly digital and knowledge-based.


This brings me to one of the key points that I would like to highlight in my presentation, namely the importance of investing in human talent.

 

Improving human capital

 

Our study highlights the importance of promoting policies to strengthen skills and improve the allocation of human talent. More specifically, we see huge scope for boosting productivity and reducing inequality simply by facilitating a more effective allocation of the abilities and skills of the labour force. In some economies, more than 25% of workers report a mismatch between their skills and those required to do their job. A better use of abilities in countries where the mismatch is very high – such as Spain – could boost the level of labour productivity by up to 10%.

 

It is also essential to invest in education and life-long learning to ensure that workers have the capacity to learn new skills, to make the most of digitisation and to adapt to changing technologies and working conditions. As we always say at the OECD: skills, skills, skills. This is key in the knowledge-based economy in which we live.

 

Bearing these considerations in mind, you might ask yourselves: what is the role of international organisations, such as the OECD, in all of this?

 

The role of the OECD

 

The OECD has been at the forefront of productivity research for many years – in fact, one of the first acts of the OEEC, which administered the Marshall Plan, was to establish a Committee for Productivity and Applied Research. We have been the thought-leaders in advising governments on policies for advancing frontier innovation and promoting diffusion to ensure inclusive growth.

 

We have also been at the forefront of productivity measurement, which was always challenging in the case of services but is becoming more challenging with the emergence of new digital technologies, big data and the growth of the sharing and freelance economies.

 

For all these reasons, the OECD can help you all to achieve robust and more inclusive productivity growth. This Global Dialogue on Productivity is the first step towards establishing a Global Forum on Productivity capable of bonding and supporting policy makers in this field. Such a Forum will enable greater collaboration in the analysis of productivity and a more effective sharing of good practices across countries.

 

Furthermore, it will not only enable existing experiences to be exploited for the benefit of all countries but will also help to improve the design of institutions seeking to promote higher productivity.

 

Minister, Ladies and Gentlemen:

 

The future of productivity will define the future of the world. It is time to launch a new wave of productivity, based on a new concept of inclusive, shared, environmentally-responsible productivity: a form of productivity which is driven by technology and knowledge within the reach of small and medium-sized firms, and by abilities and skills which provide the labour force with the tools to confront and benefit from the digital age; a form of productivity which is driven by national systems of unfettered innovation in which governments are the drivers, diffusers and also beneficiaries of research and development.

 

The only way to promote these changes is through mutual learning and international co-operation, and this is exactly what we are trying to achieve today, with the launch of this World Forum on Productivity. We are hoping for your best ideas, your most innovatory proposals, so that together we can bring about a future in which productivity becomes the driver of the strong, inclusive and sustainable growth that our peoples deserve.

 

Thank you.