Thursday, August 19, 2010

Testing #2 Productivity growth issue

You sometimes hear that, even GDP grew in a period, unemployment actually increased because labour productivity grew so strongly during the period that fewer new workers were needed than the additional entrants into the workforce during the period. As a result, unemployment went up. Some see this as an argument against technological advance and attempts to achieve the highest possible rate of productivity growth.

It is certainly true that a lot of technological change may in short run throw some workers out of a job in a particular firm or industry. However, technological change will also create jobs in other firms and industries. It is easier to identify the short-term losers and, unfortunately, such identification seems to make for more sensational media stories. They are usually concentrated and more vocal than the diverse groups who gain jobs, especially when these gains may come gradually over time. The fact that there are some losers from technological change is no reason to resist it. However, there is an important role for government to play here in that appropriate transitional arrangements need to be available to enable the displaced workers to retrain or relocate to find gainful employment again elsewhere in the economy.

As a simple analogy, imagine an island economy where the inhabitants live on fish, coconut milk, fruit and nuts. They fish using spear, grow and gather coconuts and so no, and then they exchange ther products at going rates of barter system. Now suppose one morning the inhabitants wake up to find a few boats and fishing nets in good repair washed up on the beach. The inhabitants find out that using a boat to go out into deeper water and using a net, could catch a whole heap more fish in half the time. And some of them practise it. After a few days, the others in the fishing industry catch on to the fact that they are using outmoded technology and find they are being undercut by those using the new methods. The spear makers are also concerned at developments. WHAT DO THERE GROUPS DO? They immediately band together to decry the unfair practices of the few with the new technology and try to get the community's elder to ban it. They finally succeed and the boats and nets are immediately burned and things quickly return to the way they were before.

Given this outcome, the community is no worse off than before but it is no better off either.Think about what alternative actions could have been taken when the little island community found itself with the potentially very beneficial, but socially disruptive, new technology. What could have happened to the community's well-being?How could short-term transitional costs have been handled? What lessons does this parable teach us?

As a decision maker, we must be far-sighted, showing foresight and good judgement. We must not knuckle down on short pain as success never comes easy in life. As the saying goes 'No venture no gain', we have to really put some effort in something, with eternal perseverance, miracle is just a stone's throw away. Crisis, however, is an opportunity to make change. Genius or mediocrity. is up to you to choose.


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