Globalisation is Crucial to Productivity Growth, says Matilde Mas of the University of Valencia

Matilde Mas, a Professor of Economics at the University of Valencia, says governments need to focus on boosting productivity growth if they want their economy to recover from Covid-19 with solid fundamentals that guarantee long-term growth.

From a macroeconomic perspective, when productivity rises, so do wages which boosts per capita income and overall standards of living. High wages allows firms to attract and train talent, decreasing staff turnover. Higher wages also means more tax, which helps the pensions system and the wider welfare system.

“Strong productivity is therefore fundamental to society and we should ask ourselves why it’s not paid much attention as the main focus for long-term economic growth. Instead governments focus on short-term economic performance, such as unemployment and inflation, mainly for re-election reasons,” she says.

From a company perspective, it means directors must continue investing in processes to help them become more efficient. She says strong productivity allows businesses to stay competitive and profitable and is the only way of accessing international markets.

Calculating productivity

There are two methods used to calculate productivity. First there is capital productivity, which is how much you get for the money you invest in buying new assets such as machines, software and buildings. Then there is labour productivity, which measures the volume of output from each employee per hour worked. The two combined form multifactor productivity, which reflects the overall efficiency with which labour and technology are used together in the production process. Labour productivity tends to be the more common measurement used by statistics offices.

Many countries across Europe have struggled with productivity growth since the financial crisis of 2008. The problem is particularly acute in the UK, where productivity is estimated to be 20 per cent below its pre-crisis trend, according to the Office for National Statistics (ONS). This is despite the fact that employment was at a record high of 77 per cent in April 2020.

The so-called productivity puzzle has been attributed to many causes, including low levels of investment among firms, banks’ reluctance to lend to new businesses, higher numbers of people working beyond normal retirement age and low pay growth.

According to Mas, the main reason for low productivity growth is a lack of business investment. She says it is important that businesses invest in software and research and development to keep ahead of competitors. She adds that businesses also need to recognise the importance of investing in intangible assets, such as training workers and encouraging staff development, as well as investing in branding and design.

“Firms must invest in new technologies if they want to compete, but it’s not enough on its own,” she says. “Companies also need to invest in knowledge. In Spain, the number of people working remotely is now 30 per cent compared to just 4 per cent before the coronavirus pandemic. Firms should ensure workers know how to use the new technologies. A computer is essentially a very expensive typewriter if you don’t know how to use it.”

Mas believes globalisation is crucial to productivity, and therefore economic growth, as it encourages the spread of knowledge and technology across borders. She agrees with  Adam Smith and David Ricardo, considered the founding fathers of economic science, that free trade is the driving force of economic (productivity) growth and economic stability. Globalisation boosts competition, which reallocates resources towards more productive firms. But, at the same time, it also contributes to increased inequality, worsening the situation of less qualified people and leading to the displacement of workers mainly in manufacturing areas.

Mas is concerned people will be suspicious of an ‘open border’ policy after Covid-19.  “The first casualty of the pandemic has been globalisation. In my view, free trade improves the welfare of society, although it is true that not everybody wins as some production may move abroad. Globalisation allows businesses to build up a diverse range of suppliers and to access new markets and customers.”

However she adds that Covid-19 has exposed the need for countries to ensure they don’t rely on urgent supplies all coming from overseas. “Countries must make sure they diversify. If you have production far away and you have many borders to jump, then you have a problem. Many countries struggled with supplies of sanitary items such as face masks and gowns when Covid-19 hit. In Europe, states are saying this is not going to happen again. We are going to produce more essential items in our territory.”

Workplace change

Many economic commentators have said the structure of the workplace will change as a result of the coronavirus, and that firms will place less importance on having a physical office space where the majority of work takes place. Instead, it’s likely there will be a shift to more home working.

Whether or not this will encourage workers to become more efficient is unclear.

Mas’s concern is that it assumes people have a dedicated space where they can work without distractions of children or other home workers.  “If you don’t have a home office will you be more efficient? For some people who have been forced into working from home over the past few months it has been a very distressing situation, especially for women. In future, the best situation would be to have the option to work from home or an office. Workers need a relationship with others to be creative. Influences often come from thoughts that are not your own.  Creativity is important to productivity and humans need to share ideas with other people. Managers should take note of where their employees work most productively and allow them the flexibility to do what’s right for them and the business as a whole.”

However, she believes work will become more flexible in the future and that firms will let employees decide whether or not they come into the office each day. She adds this would have a positive impact on society, as less commuting would cut down on pollution levels.

Overall, she thinks directors should take stock of their business and decide where they aim to be in the long-term. Then they need to look at what they need to acquire to achieve that goal.

“The risk now is that to come through the crisis many businesses are taking decisions dominated by what they think is urgent, instead of what is important. But evaluation is fundamental. Businesses must think in the long-run, and technology investment is very important here. However, technology itself is not the solution if you have not trained the people who work for you. Combine investment with people knowing how to work with it, and managers knowing how to make sense of it.”

Mas’s key conclusions:

• Productivity growth should a government’s main focus for long-term economic strength
• Investment in software, technology and people management is crucial to increasing productivity among companies
• The first casualty of Covid-19 has been globalisation. Open borders are critical to economic growth, but people may be suspicious due to the rupture of global value chains as well as health concerns exposed through the pandemic
• Work will become more flexible in the future, but workers will return to the office when the pandemic has calmed down