Recently, the OECD (Organization for Economic Cooperation and Development) released a study relating to the levels of labor productivity within its member states during three distinctive time periods: 1995- 2011, 2001-2007 and 2007-2011. The study focuses on the impact that labor productivity has over GDP growth and its effect over the economic expansion of each of the organization’s members.
The importance of the study lies with the fact that a high level of productivity is considered one of the most significant factors in the GDP growth of every country. Measurement of productivity exemplifies the efficiency of the labor force as well as the quality of the infrastructure that is being used at any given economic activity, which in turn enables competition in the global markets.
In the study one can notice that between the years 1995- 2011 there is a sustained rise in the productivity of the member states. This rise derives from investments in infrastructure and capital as well as from the introduction of MFP (Multifactor Productivity). MFP is often perceived as a pure measurement of technological change yet it also embodies economies of scale, efficiency change, a higher level of management and investments in intangible assets. The introduction of MFP is perceived as substantial factor which contributes to a higher level of output for every hour worked yet with a marginal increase in the level of costs. The study also states that economic activities which were more exposed to global competition have demonstrated a higher level of productivity.
In its discussion regarding the level of productivity in Israel, the study points to the fact that the level of productivity in Israel has been low throughout this period.
It also states that after the financial crisis in 2008, the productivity level in Israel became negative.
In contrast with the low productivity in Israel, the study relates to the fact that during the same period countries such as Poland and Slovakia have demonstrated high levels of productivity, at an annual average of 4 percent. This trend further continued both in Poland and Slovakia even after the 2008 crisis at average pace of 2.5% annually. In light of fact that Poland was a communist country with a centralized economy up until 1989, whereas Slovakia gained its independence in1993 after splitting from Czechoslovakia (which was a communist country until 1989), a question arises, namely why and how these countries succeeded where Israel has failed? In order to provide an answer for this question there is a need to review the economic policies which both countries implemented.
With its transition to a democracy, Poland set forth an economic strategic goal to change its communist- oriented centralized economy to free market economy. This goal was characterized by three main processes: legislating and executing political and economic reforms, a joint commitment of all the ruling governments to achieve sustained economic growth based upon integration within the European sphere and attracting foreign investors.
During the past 20 years Poland’s economy expanded due to several reasons: enactment of a balanced taxation policy versus the business sector, opening up the local markets to foreign investors, which led to an expansion of the local workforce as well as the introduction of professional knowhow, an increase of the industrial activity and governmental investment in infrastructure which has further expanded after the entry to the European union in 2004.
As in the case of Poland, so was Slovakia engaged during its first years of independence in transforming its centralized-oriented economy to a free-market one.
Yet in contrast with Poland where the process was executed in a gradual manner, the Slovakian governments executed a rapid policy which carried several strategic goals: privatization of governmental organizations and firms, opening up the local markets to foreign investors as well as applying a wide-scale fiscal policy which led to deficit spending.
Yet from the beginning of the 21st century the Slovakian governments turned to more balanced economic policies. These were mainly aimed at reducing the government deficit, a sustained support of Slovakian exports, introducing attractive taxation incentives to foreign investors (mainly within the heavy and automobile industries) and introduction of lenient labor legislation.
These policies had several long-term effects: The Slovakian economy enjoyed high levels of GDP growth (an annual average of 4.5% until the economic crisis of 2008 and afterwards 3% annually); Slovakian exports expanded rapidly and now contribute 80% to the total GDP; automobile giants such as Kia, Peugeot and Volkswagen established large numbers of factories, a move which in turn contributed to the introduction of a high level of professional knowledge and better management practices.
The OECD study explicitly specifies that that there is a direct link between high levels of productivity and the exposure to global markets. The productivity data in Poland and Slovakia was up until 2008 at an annual average rate of 4.2% and after 2008 averaging at 2%.
The study further states that high levels of productivity are representative of economies where the ratio of export to GDP is high. Consequently in Poland and Slovakia the highest levels of productivity were reached within the heavy and automobile industries which as stated earlier is heavily competing in the global markets.
These high levels of productivity are due to several factors: a high level of efficiency coupled with professional management and innovation (MFP), governmental investment in infrastructure and long-term governmental policies aimed at supporting the domestic export activities.
Upon observing the low and even negative productivity levels in Israel throughout this period, it seems that the Israeli government can and should learn from the Polish and Slovakian governments in encouraging the openness of the local markets to competition while maintaining a long-term policy aimed to strengthen Israeli exports.
The author is principal at DS Consulting.