Technology is not enough to ensure the productivity that matters
- Scientific and technological innovation might be necessary for the productivity growth that enriches societies, but it is not sufficient
- Without the right kind of complementary policies, technological progress might not lead to sustainably rising living standards and could even set a country back
Our intuition about how innovation promotes productivity is shaped by everyday experience in business. Firms that adopt new technologies tend to become more productive, allowing them to outcompete technological laggards.
Worse, the conventional narrative might have become even less true with the most recent wave of technological advances. New technologies can fail to lift all boats because their benefits can be overwhelmingly captured by a small group of players, be it a few firms or narrow segments of the workforce.
One culprit is inappropriate institutions and regulations, which skew bargaining power in the economy or restrict entry by outsiders to modern sectors. Another is the nature of technology itself: innovation often empowers only specific groups, such as highly skilled workers and professionals.
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As a recent analysis by the economists Oscar Fentanes and Santiago Levy demonstrates, Mexican manufacturing did become more productive as it was forced to compete globally. While less productive firms that failed to adapt eventually shut down, many remaining firms adopted new technologies and became more productive.
The problem was twofold. First, manufacturing firms – especially formal ones – shrank in terms of employment, absorbing an ever-smaller share of the economy’s labour force. Then the rest of the economy, which was dominated by small, informal firms, became less productive. The upshot was that productivity gains in the shrinking globally oriented manufacturing sector were more than offset by the poor performance in other activities, mostly informal services.
Fentanes and Levy attribute these consequences to Mexican labour and social insurance regulations, which they claim encouraged informality and hampered the growth of formal-sector firms. Yet one can find the same pattern of productivity polarisation in many other Latin American economies, as well as in sub-Saharan countries.
Whatever the underlying cause, this issue exemplifies why government strategies to boost productivity can miss the mark. Whether it comes in the form of plugging into global value chains, subsidising research and development or investment tax credits, conventional policies often target the wrong problem.
In many cases, the binding constraint is not a lack of innovation in the most advanced firms but rather the large productive gaps between them and the rest of the economy. Raising the bottom – by providing training, public inputs and business services to smaller, service-oriented firms – can be more effective than lifting the top.
As Arjun Ramani and Zhengdong Wang argue in a recent commentary, the productivity benefits of AI could be limited if important parts of the economy – construction, face-to-face services, human-dependent creative work – remain immune to it. This would be a version of the so-called Baumol cost disease, whereby the rising relative prices of certain activities choke off economy-wide improvements in living standards.
These considerations should not turn us into techno-pessimists or Luddites, but they do caution against equating productivity with technology, R&D and innovation. Scientific and technological innovation might be necessary for the productivity growth that enriches societies, but it is not sufficient. Transforming technological progress into broad productivity growth requires policies specifically designed to encourage broad diffusion, avoid productive dualism and ensure inclusivity.