Productivity Is Almost Everything

“Productivity is not everything but, in the long run, it is almost everything.”

This aphorism from Nobel Laureate economist Paul Krugman has strong relevance for Bangladesh. 

Why is productivity important? Krugman himself provided an answer: “A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

There are many economic topics that we discuss and debate in contemporary Bangladesh -- growth and inequality, job creation and informality, export growth and diversification, Trump’s tariffs, and Bangladesh’s graduation from LDC status, among others. 

We worry about the millions of unskilled and semi-skilled workers spending a lifetime working informally at low wages with poor working conditions. We lose sleep over what may happen when we graduate from the LDC status next year and the duty concessions and other privileges are withdrawn. 

We get excited by the possibility of FDI being diverted from China to our shores. We are frustrated when that does not happen.

And now, of course, we have sleepless nights about the 35 per cent tariff that the US government may impose on Bangladeshi exports, unless a more favorable deal is reached by August 1. 

We talk about everything under the sun except productivity. The word does crop up from time to time. But that’s not what I mean. I am talking about a serious discussion of the subject -- a serious stocktaking and benchmarking of where our firms stand on this front, something that Krugman so eloquently described as one of the most crucial factors shaping a nation’s welfare in the long run.  

Understanding Productivity 

Let us begin by unbundling the concept of productivity. Let us try to understand how productivity increases in an economy. 

There are primarily three ways this may happen. First, resources may move from less productive to more productive sectors. We know, for example, that average productivity is lower in agriculture than in manufacturing. Thus, when resources -- capital, land or labor -- move from agriculture to manufacturing, the average productivity of those resources goes up. 

Productivity enhancing resource reallocation can also happen within the manufacturing sector or within specific industries. For example, if electronics production is more productive than garments, a shift in resources from garments to electronics will help increase the average productivity of the manufacturing sector. A similar shift may happen within a particular industry such as garments.

Thus, average productivity of the garment industry may increase if the share of the more efficient garment companies in the industry’s aggregate production capacity increases and that of the less efficient companies declines. This is a topic of much significance given the hotly discussed subject of US tariffs and the future of the RMG industry. I shall come back to this in a moment. 

The above discussion was all about resource reallocation and its impact on productivity. Productivity can also increase within a firm without necessarily any shift in resources from other sectors or firms. A firm may take a variety of productivity enhancing measures that increase its productivity levels.

A Task Force Talks about Productivity

All these possibilities were recognized by the government’s Task Force on Economic Re-strategizing, of which I was a member. Chapter 4 of the Task Force’s report, which was devoted to the manufacturing sector, started by pointing out that when an economy has a limited supply of skilled workers, it can increase its productivity by putting unskilled workers to work with machines. The same worker, when assigned to work with a machine, would be more productive than if he or she remained in agriculture. To quote from the report: “Amidst skills shortages, a small number of entrepreneurs and technicians can organize production processes that employ millions of unskilled workers at productivity levels significantly higher than in agriculture or services.” 

But that is not all. The report also pointed out that while productivity can also increase in other sectors, the increase is likely to be faster and larger in manufacturing. Productivity increases through learning by doing and technological progress, The scope for both is usually greater in manufacturing than in other sectors of the economy. As the report said: “Even workers with limited skills can see their skills and productivity increase fast if employed in manufacturing and given the opportunity to learn.”

The final point made in the report about the productivity prospects of manufacturing has to do with international trade and participation in global markets. Customers in global markets are more demanding. To respond to their demands, exporters need to upgrade their productive skills and technological knowledge. Moreover, participation in global markets enable firms to ramp up their production and hence reap economies of scale. This also helps increase productivity. The link between international trade and productivity is a major reason why many advocate not only industrialization but also export-oriented manufacturing growth. 

Productivity Trends Elsewhere

Globally, productivity growth has slowed. This is even true of a dynamic region such as East Asia. A recently published report by the World Bank (Firm Foundations of Growth: Productivity and Technology in East Asia and Pacific) provides data showing a slowdown in total factor productivity growth in the region in the last two decades. 

Why has this happened? According to the report, the main culprit is the slowing productivity growth within established firms. 

The report tells us that much of the productivity growth in East Asia is due to productivity improvements within firms. Reallocation of resources between firms is not unimportant but in this region in recent years this has not been the main driver of productivity growth.

According to the report, about half of the productivity growth in the region in recent years came from the top 10 percent of the firms (in terms of productivity levels). These firms are important for the productivity story of the region, not only because they account for a large share of output and jobs but also because they are the source of technological knowledge for other firms in their respective countries. 

However, in recent years, such firms have fallen behind their global peers, especially in sectors that are at the forefront of innovation, such as digital manufacturing. The report states: “In the digital manufacturing sectors, between 2005 and 2015, the productivity of the global frontier increased by 76 percent, whereas national frontier firms in Indonesia, Malaysia, the Philippines, and Vietnam increased their productivity by only 34 percent on average.”

The Productivity Story in Bangladesh

One of the most hotly discussed and vigorously debated topics in Bangladesh now are the proposed US tariffs on Bangladeshi exports. Much of the discussion and debate is focused on two issues: what will be the impact of the tariffs on Bangladesh’s garment exports to the US and, who is to blame for Bangladesh’s perceived failure in getting a good deal from the US (at least till now). 

Lost in the debates is an important subject, i.e. productivity levels in the garment industry. And, yet, at the end of the day a lot will depend on how we fare on the productivity front vis-à-vis our competitors. 

This means that we should be asking some important questions about productivity.

First, what is the average level of productivity (however defined -- labor productivity, total factor productivity, or some other measure) in our RMG industry compared to that in our major competitors.

Second, what is the dispersion of productivity levels within our RMG industry, i.e. how high is the variance around the mean? For example, if we take the most productive 10 percent of the industry (let us call them the frontier firms), what would their average productivity be compared to the industry average?

Third, how do our frontier firms perform relative to the average firm in our competitor countries; and how do they perform compared to the frontier firms in these countries?

These questions are important for a number of reasons. For example, if the average productivity of our garment industry is modest but that of our frontier garment firms is quite high, it is an indicator that Bangladeshi firms can indeed achieve high productivity and thus be in a better position to compete even with high tariffs.

In that case, we may ask what is preventing other firms from achieving the productivity levels which their compatriots are achieving? And if these laggard firms are unable to increase their productivity should there be a restructuring in the industry whereby resources move from the less efficient to the more efficient firms, thereby enhancing the average productivity of the industry?

Once we ask such granular questions, we shall start getting specific answers which would guide us better in identifying the solutions, whether at the government, industry, or firm level. My own hunch is that we would not get the answers immediately. I doubt if the government has the answers. The industry, including BGMEA and BKMEA, should have some idea, although it is possible that even they don’t have hard numbers. 

This points to a serious deficiency in our discourses on the economy, and on policy making. Firstly, the discussions are not always data oriented. Second, many critical questions, such as the ones I have posed here, are missing from our discourses. Despite its critical importance to the economy, productivity is not a much-discussed subject in Bangladesh.  

Nonetheless, there are some scattered pieces of evidence that do shed some light. I shall cite three. Firstly, there is an ongoing research project in the Bangladesh Institute of Development Studies (BIDS) led by one of its Research Directors Kazi Iqbal. This is on technology upgradation in the Bangladesh RMG industry and its impact on labor demand. Iqbal, along with his co-researchers Mozammel Huq and Nabiul lslam, presented some of their preliminary findings at BIDS’s annual conference last December. 

An important aspect of their painstaking study is data gathering at the process and sub-process level. Take, for example, the making of woven trousers, a major product of our RMG industry. Trouser making has several processes, such as weaving, dyeing, finishing and the making of the final garment product. Each of these has several sub-processes. For example, the making of the final product, i.e. the trouser, involves spreading the fabric, cutting, sewing, and finally inspection.

The study collected data from 43 RMG firms, covering 36 processes and 136 sub-processes. These firms adopted time-saving technologies, which resulted in significant increases in productivity at the sub-process level over a decade (2014-2023). The extent of increase ranged from 35 percent for woven shirts and trousers, to 150 per cent for jackets. Looking at the sub-process level, productivity of the cutting sub-process increased from 4,150 pieces per hour to 12,760 pieces per hour, and that of knitting from 1,000 kg/day to 2,500 kg/day, over this 10-year period. 

While these are encouraging findings, other studies provide a more sober picture. In 2022, the World Bank carried out a large survey of Bangladeshi enterprises. One of the questions asked was about technology adoption and innovation. Sadly, none of the manufacturing enterprises covered by the survey had introduced a new product in the three years preceding the survey and only 1 per cent had introduced process innovation. This is a dismal picture, especially when we note that even in South Asia, one out of five firms surveyed had introduced a new product and one out of four had introduced a process innovation.  

Another World Bank study, i.e. a cross-country survey of technology adoption by firms, finds that Bangladeshi firms lag significantly in technology sophistication. In the RMG industry, for example, most firms rely on non-digital technologies. Some of the large firms do use more advanced technologies, but even they lag the best-practice firms globally. 

To conclude, while there are pockets of good practice in the RMG industry, as indicated by the BIDS findings on increased productivity, large parts of the industry seem to be falling behind on technological sophistication. It is important that a comprehensive data-collection exercise be carried out so that we can rigorously benchmark productivity levels in our manufacturing sector, especially in the all-important RMG industry.  

Sometime back a leading think-tank of the country reached a tentative agreement with a leading industry association of the country to carry out a comprehensive study of productivity in the industry. But when the association was given a detailed list of the data that was required to carry out the study, it apparently got cold feet. That study never happened. So, we are left with scattered pieces of data such as the ones I cited above. Such data are useful, but we need a more comprehensive study.  

It is time to take our discourse on the industry to a different level. The debates and commentaries, and following from these policy actions, should be based on solid data and analysis, not sweeping generalizations and rhetorical posturing.

And productivity should be at the core of such discussions. Productivity is, of course, not everything, but it is at the center of many things that we need to worry about.