Thoughts on productivity

After going through a lot of IMF data and previous discussions, I feel that one can arrive at broad levels of productivity ($ per capita per annum) in large polulations as follows:

Personal productivity level

Illiterate subsistence: <500 $/PA
Literate/Semi skilled: 2,500 $/PA
Skilled 10,000 $/PA
Intelligent and skilled 20,000 $/PA

Governance Pemium National productivity level

Non-existent governance Same as personal productivity
Poor quality governance Double personal productivity
Good governance but corrupt Quadruple personal productivity
Good governance without corruption Eight times personal productivity

Regional deflator:

Above average population: 1.25
Average 1
Below average 0.75

Personal productivity levels:

1. Illiterate subsistence: These are basically living in iron age agrarian subsistence level or below, without mechanization. Examples are Africa, Indian subcontinent, Burma. People living in Neolithic hunter gatherer tribal levels have a per capita GDP of about 200$. Depending on climate and rains, agricultural settlements can range from 200 (famine in Orissa or sub-Saharan Africa) to about 500$ (=25000Rs=2000Rs per month) per annum in most illiterate agrarian communities. Bihar at 350$ is an example, as is Burma, rural UP and most of rural India.

2. Literate/semi skilled: This includes agrarian communities with some amount of irrigation, some amount of mechanization. For example, Rural Poland, Ukraine, rural Byelorussia, rural Slovakia, Rural North Korea, Indonesia, rural Malaya and Thailand, Rural China. Also for semiskilled workers like weavers, metal workers, carpenters, masons, BPO workers etc. Range of productivity from 2000-5000$ (80- 250,000 Rs per annum = 10,000 -20,000 Rs per month). Many of the worst exploited industrial workers in India, China, Mexico, Bangladesh have this level of productivity. Also includes BPO workers fresh out of school or college, without significant work experience.

3. Skilled: These are highly trained workers who can do five-10 times as much work as semiskilled workers and use the latest machinery and equipment. Similar to most blue and white collar workers in countries like USA, Italy, Germany etc, urban South Korea, Taiwan etc. (production floor workers in big mechanized factories high on machinery and low on labour, nurses, secretaries. Lack math skills and or big memory retention or independent original thinking but capable of learning and using highly specialized equipment. Most factory workers in Taiwan, South Korea, Malaysia, other healthcare professionals like nurses etc, low level IT workers.

In many developing countries surviving on wage arbitrage, such skilled workers are paid the wages of semiskilled workers despite their higher productivity. So a Hero Honda worker is probably half as productive as a Japanese Honda worker, but is paid only 15-20,000 per month, much below his actual levels of productivity – but this gets reflected in low cost of the finished product as well.

4. Intelligent and skilled: These people have the capacity for innovation, highly specialized thinking along with high skills. Include engineers, doctors, IT workers, entrepreneurs, business men, business managers, biologists, college professors, pharmacologists etc. Their productivity is to be measured in terms of managers who direct the activity of other less able workers and hence part of their value is how they help others to work.

Governance premium: National productivity level

This is reflected in governance success or failure. I have tried to ball park my estimate of its value as indicated above. There can be no doubt that it can boost productivity in geometric progression. So the same doctor has a value of say 20,000 $ per annum in India but 160,000$ per annum in USA – eight times higher, because of the improved governance, refected in superior productivity at every level.

1. Non-existent governance: Govt doesn’t work. Includes Africa, Rural India, Burma etc. Most populations living in illiteracy are because of this kind of govt failure. India probably has pockets of poor quality governance alternating with large swathes of no governance. So the current 1200 $ per annum per capita GDP reflects an average between enormous numbers of illiterates with no governance, small numbers of literates/semi skilled/skilled/skilled with intelligence living in no governance areas and many small pockets of poor quality governance like Gujrat, Bombay and other big cities. Extremely small numbers live in good governance but corrupt levels of governance, largely within the confines of a big companies campus, where to some extent the pervasive government failure is held at bay. For example, Infosys, Jamshedpur, some of the Bombay companies, some areas of Gujrat etc.

2. Poor quality governance: Deeply flawed non-democratic govt. Includes, Stalinist govt like in USSR, Mao China and other communist regimes which are no more, current govt of Burma, Cuba, Venezuela and other South American and Central American countries, North Korea, Indonesia, Soudi Arabia, Iran, Egypt, Algeria etc. These flawed govts differ from the non existent govt in 2 main respects – their populations will show either cent per cent literacy or higher levels of productivity of their country as a whole from about 2500-5000 $ per annum. The few parts of India which have governance have this kind of flawed socialistic and ineffective governance. It is manned by inept people and run on flawed governance principles. So unnaturally loud and vociferous people (NGO, commies, socialists, loud and abrasive media) are able to sway and influence this governance. Until one gets right thinking people at the top and widespread literacy and some level of appreciation of capitalist principles, such a government will remain ineffective. Corruption in such governments is not only pervasive, it has the effect of stalling all meaningful work. Despite that, some things work. So Cuba’s health system, Mao’s education system, Russian military, Indian banking system – all work well.


3. Good governance but corrupt: These are highly efficient capitalist govt but having populations unused to corruption free existence. Include Southern Europe (Spain, Italy, Greece), Eastern Europe (Ex-communist countries), Deng’s China, Recent Brazil, Mexico, Turkey, Syria, Iraq, Malaysia, Thailand. The degree of corruption and level of efficience can vary within a range. Some aspects of US government in recent years falls within this (as it did from 1870 to 1930). Mostly these are countries which have been affluent for only a generation or so and include a lot of Crony Capitalists, Robber barons, Mafiosi, but have better administration so that capitalism can perform its magic. These countries will have periodic crisis because the corruption magnifies the economic cycle effects causing deeper and more pervasive recessions. For example the Greek crisis, the South East Asian crisis of 1998, Chaebol failures of South Korea, Dubai RE crisis of 2009, even the US crisis of 2008 marred by regulation failure in the face of corrupt lending practices. Older recessions in USA like the great depression, the recession in the 1870s, the 1890s, the 1907 also fall within the Crony Capitalist/Robber baron territory. The bursting of the South Sea bubble, the Dutch tulips etc also fall within this.

From 1850s or so, most of northern Europe moved from the “good governance but corrupt” to “good governance without corruption” phase. There are very few additions to this group since then. Japan is the great success. South Korea will probably join soon, along with Taiwan. USA, Italy and Spain continue to flirt with it. Most of the USA probably is solidly within, but significant populations show poor governance and corrupt practices associated with a less developed state. China is very very far away - as also rest of East Asia and West Asia.

4. Good governance without corruption: Mainly North Western Europe, Japan, parts of USA, parts of South Korea and Taiwan. Characterised by a population which has been affluent for a significant number of years or centuries of affluence. Highly law abiding and hard working. No tendency to break rules. Govt is efficient and doesn’t have corruption problem.

Regional deflator:

Countries away from equator (North Europe, north America, Argentina, Australia, New Zealand, Japan) have a tendency to have harder working population with high levels of intelligence, hence leads to a higher proportion of the population taking up skilled and intelligent jobs. Such countries tend to be more productive and I have jacked in 1.25 as an inflator for these. Mainly these are north Europeans, Jews and Japanese. Small pockets of classes within every average population, usually for historic reasons of hard work like with Koreans, some classes of Chinese, East and Southern Europe, West Asia etc and some classes within India (otherwise mainly slothful) also have such tendencies.

Rest most of the countries have average levels of intelligence and hard work and perform averagely

Some countries have slothful populations who demonstrate an inability to learn and improve themselves. Africa, Indian Subcontinent, Burma and small pockets elsewhere (Ukraine, Peru, Yucatan, Jamaica, Borneo, SriLanka etc) usually characterized by very bad (hot or cold) weather and historic national character of laziness. I have put in a 0.75% deflator as a ball park figure. People are not going to change their national character in a hurry. What the masses within a country do defines the country – small elites cnnot change national character.


Comments:

Countries with literate populations tend to have poor quality/communist govt. Such countries have per capita GDP ranging from 2500 (literate but ungoverned like North Korea) to 5000 (literate 2500, double for poor quality govt = 5000). Such countries are currently trying to finish the basic step of literacy. India is one such country. Such countries are currently in the transition from 2500 to 5000$ per annum. Examples are Egypt, Algeria, Ukraine, Indonesia. Literate populations within India are in the same stage. Until they achieve this basic level of productivity, further increases are difficult.

Some Countries with highly efficient but corrupt govt are currently in the high growth phase. Examples are China, Brazil, Russia, Mexico, Malaysia. These countries have recently acquired efficient govt. Their population is largely agrarian (China, rural Russia, Malaysia) but is systematically transitioning to Literate/semiskilled and to highly skilled levels. Hence their national average reflects proportions of their population in these levels of development. So China has mainly Semiskilled labour (2500$ = 5000Rs per month) mixed with skilled (10,000$ per annum). Because of efficient govt, these are then multiplied by four. Hence national GDP per capita of around 4000$ with 1.3 billion people.

Countries like Mexico (60 million population) , Brazil (200 million population), Russia (140 million population) have national GDP of 10,000 $ average. So does Poland, Malaysia etc.

In this scheme:
Lowest productivity is around 500$, highest is around 200,000$ productivity.

If you are intelligent and skilled (20,000$), live in efficient non corrupt country (8 times = 160,000) and are of north europe/Japanese (1.25) then you can be productive to the extent of 200,000 $.

India has a zero govt with focal poor quality govt.. Most population has 500 x 1 level of productivity. Some have 2500 x1 productivity. Very few have 10,000 x 1 and 20,000 x 1 levels. So if you are intelligent and skilled and adopt the non-corrupt efficient hard working ways of the north european/Japanese, maximum you can produce is 20,000 x 1.25 = 25,000 dollars.= 2000 dollars per month = salary expectation of around 1L per month ON AVERAGE for the best population pockets in India, assuming your salary reflects your productivity. So company salaries can be expected to be between 50,000 and 2L per month = the best you can do within India (usually best practices of north European levels are only found to some extent in software companies). Of course, small number of managers in manufacturing relying on semi skilled workers (2500 $ = 10,000 Rs per month salary) can earn whatever amount – since these are a small elite group running the working of much more inefficient workforce. Company can pay them much above 200,000 dollars also, depending on their value to the company.

Please note that because of very poor govt, no matter what you do, you cannot be more productive than 20,000 x 1 or 20,000 x 2 = no way out except emigrate for achiving higher levels of productivity (and hence income)

China: It has a efficient but corrupt govt and has average per capita GDP of 4000$ = average of 500 x 4 levels (rural) and (2500 x 4 = 10,000 levels of production along with small numbers in the 10000 x 4 levels.

Taiwan and South Korea have around 25000$ productivity i.e. average of 2500 x 4, 10,000 x 4 and small numbers of 20,000 x 4.

Japan, UK, USA, north Europe has a large number of 2500 x 8 = 32K, many 10,000 x 8 = 80K and some 20,000 x 8 = 160 K leading to an average of around 45000$ per annum.

Trends: Non-existent governance usually goes with slothful nature and illiteracy. Such countries like India, Bangladesh, Burma, Africa usually have per capita GDP of less than 500 (illiterate plus zero in govt plus 0.75% deflator)

Mexico and Brazil have a lot of 2500x4, few 10,000 x 4 and miniscule 20,000 x 4

Future Trend:

This analysis clearly indicates that India is in a different position from China, Russia and Brazil.

Growth in India is coming from shifting people from 500$ of productivity to 2500$ of productivity. This has to coincide with shifting from non-existent governance to poor quality governance. So far, this shift has been very difficult to manage (excruciatingly slow politicians) but slowly our younger population are becoming literate and employable at 2500$ productivity level. Since this has to coincide with a shift of the governance premium from single to double, India can look forward to shifting from 500$ per annum to 5000$ per annum productivity over the next couple of decades.

This means a ten times rise in AVERAGE productivity levels = 1000% return on human capital = 10,000% return on any smart business which is able to capitalize on this gigantic shift in productivity levels.

Russia Brazil and China can at best look forward to shifting from 5-10,000$ productivity levels to 20,000$ productivity levels = 2 times return on human capital. All three countries have skewed economies. Brazil has a growing population with commodity export economy, Russia has declining population and commodity export economy while China has a declining population with cheap manufacturing (2500-5000$ type) of economy.

Shifting Chinese to 10,000$ productivity by a mix of 5000 and 20,000$ productivity should be easy enough. Then it will hit a demographic impossibility to grow.

Shifting Russia from 10,000 to 20,000$ is probably more difficult because of declining education and engineering abilities. They have probably reached the best level of productivity they can. Russia is where China hopes to reach. Then both will pause without growth.

Brazil has the best growth possibilities of these 3, because of increasing population and massive tourism opportunities. Probably it will shift from 10,000 to 30,000 levels within the next 3 decades.

There can be no doubt on two things:

India is a structural long term bull run in equities and for real estate for next 50 years (ours and our children’s lifetime)
If you had money in 1950s, you should have invested in USA. If you had money in 1980s, you should have invested in China. If you had money in 2000, you should have invested in Brazil.

If you have money in 2011, invest in India.