Productivity Can Power Poor Countries to Developed Status 244.0

“The disparity between rich and poor countries is the most serious, intractable problem facing the world today.”

William Lewis, Founding Director of McKinsey Global Institute, contends in McKinsey’s book, The Power of Productivity, (2004 University of Chicago), that “the key to improving economic conditions in poor countries is increasing productivity through intense fair competition and protecting consumer rights.”

This post is SYNTHESiST’s sixth recent entry on productivity improvement as object of innovation and addresses a similar issue on causes of differences in wealth between rich and poor countries as in our post on William Easterly’s The Elusive Quest for Growth, 2001 MIT Press.

McKinsey’s Methodology. Being a management consulting firm, McKinsey’s approach is different from macro-economist Easterly. It carries a strong bias for a developed world context; emerging markets must tread carefully if the choice is made to follow their prescriptions.

The research design used case studies focused on industries and countries rather than aggregates. As such, the approach is inductive and can only be used with full consideration of the case study assumptions.

Still, as Kathleen Eisenhardt says about grounded theory, case studies can allow for a “rich empirical base” for grounded theory though purists claim that no conclusions can be reached with inductive logic.

Nobel Prize winner for economics in 2009 Elinor Ostrom, in her book Governing the Commons (1990 Cambridge University Press), cautions it best about her conclusions from case studies, and I paraphrase, “Relying on metaphors as the foundation for policy advice can lead to results substantially different from those presumed to be likely” because in differences in institutional arrangements between theory and reality.

Therefore, we must take the McKinsey study and conclusions with care; there seems to me a big ideological jump from analysis to conclusions on competition to that of consumer rights.

How about consumer power? The McKinsey conclusion that consumer power is apparently a countervailing force to producer and working interests. Ralph Nader’s lack of success and reading of some basic literature shows that, in reality, consumers get into a free rider problem and cannot come together as a real force.

True competition as meritocracy. Competition, if taken as meritocracy, seems to me a more powerful locomotive for productivity.

Still, institutional powers, say from government or from civil society or NGOs, are necessary to counteract market failures and other un- or under-represented constituencies like future generations and Gaia, for true competition to flourish.

Likewise, an argument can be made for direct incentives, as William Easterly argues and the success experiences of Japan, Korea and Taiwan prove,for locomotive industries to pull whole economies forward.

Free grants to qualified entrepreneurs in the unique transition experience of China in Lenovo (Legend) and Great Wall with indigenous innovation can also drive innovation and productivity in a catch up mode for emerging markets that is quite a different context from McKinsey’s.

(Note: China was never studied over the twelve years the McKinsey Global Institute research period covered in the book.)

Case studies at industry and country level. It is a thin line that divides industry and country case studies used by McKinsey Global Institute to divine their conclusions from industrial policy or guided economy as the cases I quoted above – and posted in SYNTHESiST from evolutionary economist authors.

It seems to me it is just the ideological perspective of free market capitalism.

Still it is good to learn nuance and subtlety from the strong position taken in the McKinsey book.

For me, practicality and pragmatism based on the specific case at the firm level is the best option (instead of an ideologically biased choice.)

As in my previous post on Paul Krugman’s paper on competition, the test of productivity is one that “raises and sustains the people’s standard of living.” Ultimately, this qualifier should guide our choices for drivers of productivity.