The Economist: Total Factor Productivity is China's Secret Sauce

In the latest issue of The Economist, we get a great article about why Productivity Growth is perhaps the single most important gauge of an economy’s strength.  More importantly, we read about Total Factor Productivity, a measure by which China leaves everyone in the dust.

Here’s what it’s all about…

A better gauge of an economy’s use of resources is “total factor productivity” (TFP), which tries to assess the efficiency with which both capital and labour are used. Once a country’s labour force stops growing and an increasing capital stock causes the return on new investment to decline, TFP becomes the main source of future economic growth. Unfortunately TFP is much harder to measure than labour productivity. It is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour. So if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%. Measuring hours worked is fairly easy, but different ways of valuing a country’s capital stock can produce different results.

So how does China’s TFP stack up against that of the rest of the world?

Chopsticks

from The Economist

The OECD publishes figures for its rich-country members. These show that since 1990, average TFP growth has been remarkably similar in America, Japan, Germany, Britain and France, at around 1% a year. A recent report by Andrew Cates, an economist at UBS, attempts to estimate TFP growth in emerging economies over the past two decades (see chart). He calculates that China has had by far the fastest annual rate of TFP growth, at around 4%. Probably no other country in history has enjoyed such rapid efficiency gains.

It was interesting to see how unproductive BRIC nations Brazil and Russia have been based on this measure versus China and India.

Read the rest:

Economic Focus: Secret Sauce  (The Economist)