Economy, Domestic Economy

Low Productivity: Economy’s Silent Ailment

Low Productivity: Economy’s Silent AilmentLow Productivity: Economy’s Silent Ailment

The National Iranian Productivity Organization released figures showing that labor productivity shrank by as much as 2.5 percent between the Iranian years 1390 and 1392 (March 2011 to March 2013).

Raising productivity is seen as the key to improve living standards in the long run, give firms competitive edge in the global markets, attract long-term direct investment and raise aggregate demand. Higher productivity implies lower relative labor unit costs that could attract both viable returns and investment.

Productivity is a complex concept consisting of factors like education and training, physical capital and infrastructure, technological progress, firm sophistication, market efficiency and even macro factors like good governance and economic stability. A common measurement of productivity is total factor productivity, which is determined by how efficiently and effectively inputs are utilized in production.

Roya Tabatabai Yazdi, head of NIPO, announced that labor productivity grew by 5 percent in 1390, only to fall by 7.3 percent the next year and by 5.2 percent in 1392.  

 Underlying Causes

Experts believe one important reason behind low productivity in Iran is the reduction in real wages. A 2010 paper on labor productivity coordinated by Firouz Fallahi, professor at Tabriz University, argues that higher wages will encourage workers in Iran to work more intensively. Over the past years, inflation has been consistently higher than minimum wage increases. While this trend has put pressure on workers to work more jobs and hours, there seems to have been a concomitant reduction in their efficiency.

Inefficient and outdated machinery and technologies have been another reason behind low productivity. Economic sectors heavily dependent on capital inputs like mining and heavy industries have performed worse. According to NIPO, labor productivity in mining and manufacturing fell by 38.9 and 10.2 percent respectively in the Iranian year 1392.

Capital productivity, which looks at the efficiency of physical capital, fell by a total of 4 percent between 1390 and 1392. Western sanctions (imposed on Iran over its nuclear energy program) have prevented firms from replacing old machinery, while government investment in infrastructure has been lackluster over the past years.

Iran has great potential for high productivity growth, particularly because of its relatively young and highly educated population. However, these highly educated individuals cannot put their potential productivity to use because the necessary jobs are lacking, the physical capital does not exists or because the technology has not developed enough.

An engineer at Saipa (the second largest Iranian auto manufacturer) test lab near Tehran told the Financial Tribune that his prestigious MSc in material engineering from the University of Tehran was of no use for his current job, simply because “the car industry lags behind by 20 years from what is taught at universities.”

 Global Phenomenon

Productivity has been on policymakers’ minds around the globe. A recent report by the Conference Board, a US-based think tank, shows that productivity growth rates have been falling in developed countries since the 2000s and in emerging markets since about 2010.

The report, which was based on official data on output and employment, showed that only India and sub-Saharan Africa recorded stronger labor productivity growth last year. In 2014, global productivity growth fell to 2.1 percent, compared with an annual average of 2.6 percent between 1999 and 2006.

According to the head of Conference Board, one of the main issues faced by emerging markets is that the limits of catch-up technologies have been reached. New global digital and electronic technologies have also failed to lift productivity significantly.