Three Nobel laureates and Bangladesh’s Economic Future

To graduate, or not to graduate -- that seems to be the question!

Graduation from LDC status is a much-discussed subject in Bangladesh. There are concerns about losing competitiveness once we graduate and forego duty-free access to several markets. Understandably, there are appeals to postpone this graduation.

Surprisingly, there is very little discussion on a subject that should be central to such concerns. This is productivity.

Let’s do some simple maths. If our exports to a market face an additional 10% duty after graduation, we can maintain our competitiveness by lowering production (and shipping) costs by a similar percentage.

These costs depend on several factors, some within the control of the exporting firm and some beyond. To lower costs, we would need to work on both fronts, i.e. the broader investment climate, and factors within the control of the firm.

In this piece I focus on the latter. More specifically, I shall discuss ways in which firms may enhance their productivity levels and thereby offset, at least partially, the adverse effect of duty increases.

By now, the readers are perhaps wondering: “Well that’s very well, but what has this got to do with Nobel laureates? And who are the three laureates I am talking about?” So let me come to them now.

The first is Robert Solow.

Born in 1924 in Brooklyn, New York, and living to the ripe old age of 99, Robert Merton Solow won the Nobel Prize in economics in 1987. His most cited work is a theory of economic growth first articulated in a 1957 article titled “Technical Change and the Aggregate Production Function.”

In that seminal piece, Solow showed, based on US data for 1909-1949, that less than a fifth of US GDP growth could be explained by factor accumulation, i.e. increases in the stock of capital and labor. This came as a big surprise to economists who had previously believed that much of GDP growth comes from factor accumulation.

So how was the rest -- more than 80% of growth explained? Solow argued that the missing element was technological progress. New machines embodied newer technology and were thus more productive.

When firms adopt new technology, this increases total factor productivity, i.e. the productivity of all production factors taken together. New machinery, digital systems, automation, or improved production equipment may shorten production time, improve product quality, reduce material wastage, and lead to greater output per worker.

Thus, investing in machines of newer technological vintage is one of the ways in which firms may increase productivity. Many Bangladeshi firms have indeed done that over the years.

In the garment industry, for example, a firm that has been in business for say 30 years may have introduced newer machines and equipment several times in its journey, thereby increasing productivity over time. At the same time, many Bangladeshi firms are stuck with machines of old vintage and thereby of low productivity.

Ongoing research by the Bangladesh Institute of Development Studies on adoption of new technology in the garment industry has found evidence of how technological upgrading has helped increase productivity.

Economists Kazi Iqbal, Mozammel Huq and K. M. Nabiul Islam gathered data from 43 factories on process-level changes in productivity over the period 2011-2023.

At a conference presentation in December 2024, they showed that by adopting modern timesaving machines, firms have achieved productivity increases that ranged from 35% (for woven shirts and trousers) to 150% for jackets.

But is this the only way to increase productivity? If it were, it would be bad news for firms that lack the capacity (such as funds) to invest in new machines. Fortunately, you can get more from the same machine through continuous learning. This brings us to our second Nobel Laureate.

Kenneth Arrow was also born in New York, just a few years earlier than Solow and, like him, enjoyed a long life. Arrow, who died in 2017 at age 96 in Palo Alto, California, was one of the earliest recipients of the Nobel Prize in economics. Most famous for his contributions to social welfare theory and general equilibrium theory, the 1972 Nobel laureate also made an important contribution to our understanding of productivity.

In an article published in 1962 (“The Economic Implications of Learning by Doing”) Arrow introduced one of the most influential ideas in modern growth economics, i.e. learning-by-doing. People and companies get better at making things simply by making them.

The more they produce, the more they learn from experience. They discover more efficient production techniques, optimize workflows and processes, improve team coordination, and reduce mistakes and downtime.

In a garment factory for example, over time, workers may improve their hand speed while supervisors reorganize and optimize the sequence of tasks to reduce bottlenecks and idle time.

As a result, costs go down and skills accumulate. The same machines are used more productively. And if knowledge spreads from one firm to another, the entire economy benefits.

So, yes, the mere introduction of new technology can increase productivity by a few notches. But, often, the more substantial productivity gains come gradually, through learning-by-doing.

How much a firm can learn through several rounds of production depends on one critical factor, i.e. the skill levels of the employees. This brings us to our third Nobel laureate, Gary Becker.

Born in 1930 in Pottsville, a small town in Pennsylvania, Becker went on to win the Nobel Prize in economics in 1992. One of his most important contributions is on human capital.

Research done in the late 1950s and early 1960s resulted in his classic book titled Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. In this book, which came out in 1964, Becker argued that education and training are forms of “human capital” -- these are investments that raise a person’s productivity, just like investments in machines increase a factory’s output.

Becker argued that when people come to work at a factory, after having acquired some skills through schooling and formal training, they become better at learning from experience on the job.

They are faster in adapting to new technologies, more effective at improving processes and solving problems, more efficient at operating machines and tend to make fewer mistakes. Human capital is thus complementary to “learning by doing.”

The pioneering work of these Nobel laureates has spawned a huge literature on the drivers of productivity. Some have elaborated on the theory and concepts. Others have empirically tested the propositions and generated evidence from across the globe validating these.

One important conclusion: There is significant complementarity between the three productivity drivers: Technological upgrading, learning-by-doing, and human capital.

Studies have found, for example, that productivity gains from technology are higher when workers have complementary skills. Firms with more skilled workers benefit more from new technology. By contrast, when firms focus more on getting the most modern technology than on upgrading worker skills, their productivity gains are limited.

In brief, technology provides tools, but skilled workers determine how effectively those tools are used. It may be noted that in recent years, the capital intensity of large firms has gone up significantly in our manufacturing sector while productivity gains have been more modest. The clue to this lies in what we discussed above -- a focus on very modern machines but less attention to upgrading worker skills.

There is one other important factor at play -- the organizational capabilities of firms. Workers do not work in isolation in a factory. They may perform some tasks just by themselves, but there are many where they routinely interact with their colleagues.

How well the employees of a firm interact with each other, how they coordinate tasks, how they jointly spot and solve problems, all affect the productivity of the factory or the firm.

Thus, efforts to increase productivity in a firm should not focus just on the individual skills of the workers. Attention must also be paid to the collective skills of the firm.

How well these collective skills are developed depends on the organizational capabilities of the firm. Economist Mushtaq Khan (in a 2018 article titled “Knowledge, Skills, and Organizational Capabilities for Structural Transformation”) defines organizational capability as a measure of the effectiveness of an organization in coordinating or optimizing these collective activities. In developing countries, most firms lack even basic organizational capabilities.

Thus, a priority is to build at least the basic organizational capabilities in firms. Without this, even the supply of skilled workers may not do much good.

Organizational capabilities lay at the heart of the rapid growth of Bangladesh’s garment industry. When Daewoo, the South Korean company, signed the pioneering contract with Desh Garments, one of the first things it did was to take 130 employees of Desh to its plant in Busan.

There, through hands-on training for several months, they learned not only individual skills but also acquired organizational capabilities.

Once back home, many of these 130 employees -- managers, production engineers and workers -- left Desh to form their own companies. They took not only their individual skills but also their collective organizational practices, norms and capabilities. Very early in its journey, Bangladesh’s garment industry benefited from having a critical mass of factories with at least the basic organizational skills.

This is also a good case of knowledge spillover -- from Desh to the other companies. This happened because managers, engineers and workers moved from one company to another.

Sadly, such knowledge spillovers remain the exception rather than the rule in Bangladesh. As a result, we have some pockets of high productivity in the economy, but average productivity remains abysmally low.

So let us come back to where we started. Irrespective of whether LDC graduation is delayed or not, we must face the music sooner or later. It is time to bite the bullet and focus on productivity.

Understanding how firms increase productivity, what has held back productivity in vast sections of our economy, and what can be done to address this, should be at the top of our agenda -- both in discourse and in action.

Syed Akhtar Mahmood is an economist, previously with an international development agency.