The Power of Productivity Wealth, Poverty, and the Threat to Global Stability
by William W. Lewis
University of Chicago Press, 2004
Cloth: 978-0-226-47676-6 | Paper: 978-0-226-47698-8 | Electronic: 978-0-226-47700-8
DOI: 10.7208/chicago/9780226477008.001.0001
ABOUT THIS BOOKAUTHOR BIOGRAPHYREVIEWSTABLE OF CONTENTS

ABOUT THIS BOOK

The disparity between rich and poor countries is the most serious, intractable problem facing the world today. The chronic poverty of many nations affects more than the citizens and economies of those nations; it threatens global stability as the pressures of immigration become unsustainable and rogue nations seek power and influence through extreme political and terrorist acts. To address this tenacious poverty, a vast array of international institutions has pumped billions of dollars into these nations in recent decades, yet despite this infusion of capital and attention, roughly five billion of the world's six billion people continue to live in poor countries. What isn't working? And how can we fix it?

The Power of Productivity provides powerful and controversial answers to these questions. William W. Lewis, the director emeritus of the McKinsey Global Institute, here draws on extensive microeconomic studies of thirteen nations over twelve years—conducted by the Institute itself—to counter virtually all prevailing wisdom about how best to ameliorate economic disparity. Lewis's research, which included studying everything from state-of-the-art auto makers to black-market street vendors and mom-and-pop stores, conclusively demonstrates that, contrary to popular belief, providing more capital to poor nations is not the best way to help them. Nor is improving levels of education, exchange-rate flexibility, or government solvency enough. Rather, the key to improving economic conditions in poor countries, argues Lewis, is increasing productivity through intense, fair competition and protecting consumer rights.

As The Power of Productivity explains, this sweeping solution affects the economies of poor nations at all levels—from the viability of major industries to how the average consumer thinks about his or her purchases. Policies must be enacted in developing nations that reflect a consumer rather than a producer mindset and an attendant sense of consumer rights. Only one force, Lewis claims, can stand up to producer special privileges—consumer interests.

The Institute's unprecedented research method and Lewis's years of experience with economic policy combine to make The Power of Productivity the most authoritative and compelling view of the global economy today, one that will inform political and economic debate throughout the world for years to come.

AUTHOR BIOGRAPHY

William W. Lewis was a partner at McKinsey & Company for twenty years and the Founding Director of the McKinsey Global Institute. He held several policymaking positions in the U.S. Departments of Defense and Energy and also served in the World Bank for four years earlier in his career. His work has appeared in the Wall Street Journal, the New York Times, and the Economist.

REVIEWS

“The question Lewis set out to answer was why poor countries are poor and rich ones rich.  It had been asked before, and answered by looking at the big differences between nations: history and culture, capital markets, labor markets, etc.  Lewis’ approach was to look at specific businesses.  He made a point not to focus on export industries, like cars in Japan and software in India.  Each is only a sliver of that country’s employment. . . .  This is a valuable book.  . . . Lewis confirms much of the free-market canon, and in a way that the free-marketeers have generally not done and some of them refuse to do.  They should read it.”--Bruce Ramsey, <I>Liberty
— Bruce Ramsey, Liberty

“Bill Lewis’s book aims to distill the lessons from a large body of original research on a question of enormous importance: what determines the performance, especially the productivity performance, of national economies and the industries within them? I was able to participate in much of the research, and I can report that I learned a lot about the sources of productivity in both the manufacturing and service sectors of modern economies. The obvious answers are only part of the story. Readers all around the world will see vital issues in a new light.”<\#209>Robert M. Solow, winner of the 1987 Nobel Prize in Economics
— Robert M. Solow, winner of the 1987 Nobel Prize in Economics

“One of the central questions of economics concerns why some countries are rich, why other countries are poor, and how poor countries can best be helped to become rich.  Among the many authors of books on this subject, Bill Lewis has the big advantage that the governments of many major countries asked him and his colleagues to investigate their economies and to advise them. His comparative perspective, consistent framework, and crystal-clear writing make this book a compelling read. It is also a delightful and surprising read: for instance, you probably never guessed why Japan produces automobiles much more efficiently than it produces milk.”<\#209>Jared Diamond, Professor of Geography at UCLA and author of the Pulitzer Prize-winning book <I>Guns, Germs, and Steel
— Jared Diamond, Professor of Geography at UCLA and author of the Pulitzer Prize-w

“A “bottom up” analysis of productivity (as opposed to the usual macroeconomic approach) that is fascinating, diverse, and complex.”--Richard N. Cooper
— Richard N. Cooper, Foreign Affairs

TABLE OF CONTENTS

Acknowledgments

Prologue

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0001
[economic success, public policy, poverty, poor countries, rich countries, development economics]
This chapter argues that the difference in economic success among countries is not a matter of nature, intellect, or genetics. The problem—and the solution—lies in public policies. But effective policies can be created and implemented only if one truly understands what makes the economies of poor (or rich) nations grow. But even during the 1990s, when development economics seemed most promising, it lacked that understanding. The chapter discusses the failure of development economics; the disparities in wealth among those nations at the peak of the global economic landscape; the McKinsey Global Institute research project; and the importance of productivity and why productivity levels are so different around the world. (pages 1 - 20)
This chapter is available at:
    University Press Scholarship Online

PART 1: Rich and Middle-Income Countries

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0002
[Japanese economy, competition, productivity, product market, macroeconomic policy]
This chapter presents an analysis of the Japanese economy. It suggests that despite Japan's stature as an economic powerhouse, its condition is precarious. All the factors that economists traditionally think contribute to economic prosperity are not enough for Japan. Despite the unrivaled success of such big names as Honda, Sony, and others, the Japanese severely distort competition in most of their markets where goods and services are sold. There, productivity ranks among the middle-income countries, not the richer ones. These product market distortions simply overpower labor and capital market factors, and limit the potential influence of macroeconomic policy. (pages 23 - 49)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0003
[European economy, European Union, common currency, fiscal policy, monetary policy, macroeconomic policy]
This chapter presents an analysis of the European economy. Europe is a very important piece of the global economic landscape. Taken together, the countries of the European Union have an economy roughly equal in size to that of the United States. Europe and the United States together account for about half of the total GDP of the world. Most of the countries of the European Union now have a common currency. Entry into the monetary union carries conditions on fiscal policy about deficit financing and total debt levels. Thus, much of macroeconomic policy in Europe is harmonized. The ability of the European Union to discipline members not conforming to fiscal policy and whether that policy is flexible enough is currently being tested. Also being tested is whether one monetary policy can accommodate the different rates of growth among the members of the monetary union. (pages 50 - 79)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0004
[United States economy, new economy, productivity growth]
This chapter presents an analysis of the U.S. economy. In 1990 the conventional wisdom around the world was that the U.S. economy had seen its day. That point of view was wrong. In the second half of the 1990s, productivity growth rates accelerated in the United States to almost twice the level seen for the previous twenty-five years. The conventional wisdom became that the United States had a “new economy,” unlike anything seen before. This point of view was made official in President Clinton's last Economic Report of the President, of January 2001. This point of view was also wrong. (pages 80 - 104)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0005
[Korean economy, Japan, labor productivity, economic growth, domestic manufacturing]
This chapter presents an analysis of the Korean economy. Korea is following the Japanese development path. Koreans work very hard, save a lot of what they earn, and invest heavily in industries that have been favored by the government. These actions have yielded record-breaking economic growth. In 1970, Korea's GDP per capita was $2,500 in today's dollars. In 1995, it was $12,600, or five times higher. However, in both Korea and Japan, protection of domestic manufacturing industries and regulations constraining the development of services have resulted in low labor productivity and low return on capital invested. Moreover, if anything, Korea has not developed as efficiently as Japan. Korea has not developed any world-class industries, as Japan did in automobiles and electronics. Thus, without further reform, Korea, like Japan, will inevitably begin to stagnate as it approaches the economic frontier. (pages 105 - 132)
This chapter is available at:
    University Press Scholarship Online

PART 2: Poor Countries

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0006
[Brazilian economy, settlements, productivity, low-income countries, economy policy]
This chapter presents an analysis of the Brazilian economy. Brazil is one of the richest of the low-income countries, yet so much poorer than the advanced countries. This is evidenced by the vast settlements (favelas) of cardboard, paper, cloth, and canvas shelters on the outskirts of the big Brazilian cities, and especially São Paulo and Rio. The favelas suggest that the people living in them have a different kind of economic life. They are living outside the legal framework of their country. They are unregistered as workers, they pay no taxes, the enterprises in which they work don't look like anything seen anymore in the rich countries, and their productivity is on average about 15 percent of the average productivity in the United States. The chapter argues that Brazil ought to be doing better economically than it is. The country suffers a huge legacy from bad economic policy. Brazil has protected its domestic industries, protected foreign direct investment, merrily indulged in hyperinflation, let the government own and run a large part of its economy, and kept a fixed exchange rate too long. (pages 135 - 165)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0007
[Russian economy, economic performance, market economy, economic reform, economic policy, productivity, competition]
This chapter presents an analysis of the Russian economy. Russia has proved that it is possible for a market economy to have a worse economic performance than a centrally planned economy. Although Russia has privatized virtually all businesses and set free virtually all prices, powerful forces against reform prevented anything more. Russia has distorted the ground rules for competition to such an extreme that businesses do well not because they do better but for other reasons. These distortions take many forms. They include government subsidies for some firms but not others; preferential taxes for some but not others; forgiving taxes or electricity and gas bills for some but not others; giving government contracts consistently to some but not others; hassling some with red tape but not others; or allowing some to steal intellectual property from others. Sometimes more productive firms cannot expand because government simply orders unproductive firms not to shut down. (pages 166 - 196)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0008
[Indian economy, poverty, productivity, macroeconomic policy, modern sector, central planning, competition]
This chapter presents an analysis of the Indian economy. It is vital that in order to understand today's global economic landscape India is examined in detail. One billion people live there. Within this decade India in fact will pass China as the world's most populous country. The majority of people in India live in desperately poor conditions not seen anywhere in advanced economies and rarely in Brazil and Russia. There is only one source of meaningful change in India's economic situation, the modern sector. Its productivity ought to be much closer to 100 percent of U.S. productivity than it is. However, India's government appears to be trying to control the economy. It is not trying to control through central planning by telling everybody what to do. It is trying to control through regulation by telling everybody what they cannot do. This regulation has the result of distorting and diminishing competition. (pages 197 - 226)
This chapter is available at:
    University Press Scholarship Online

PART 3: Causes and Implications

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0009
[economic performance, Japan, Europe, United States, Korea, Brazil, Russia, India, product markets, competition]
The previous chapters described the economic performance of the rich parts of the world, Japan, Europe, and the United States, the performance of one middle-income country, Korea, and the performance of three poor countries, Brazil, Russia, and India. This chapter brings together the explanation of why countries have the economic performance they do. It discusses patterns by industry across countries. It reviews why labor and capital markets are less important than product markets. It also addresses why education and infrastructure, both high on the World Bank's priority list, are much less important than getting competition right. (pages 229 - 256)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0010
[economic growth, Western democracies, Japan, poor countries, GDP, economic policies]
The innovations of the past fifty years in the Western democracies and Japan are transferable today to virtually every corner of the earth. These innovations improve productivity and cause today's high material standard of living in rich countries. They can also be applied in poor countries. This chapter addresses the question of why innovations have not occurred on a vast scale. It discusses some of the political reasons behind bad economic policies and why GDP per capita matters. (pages 257 - 284)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0011
[Western democracies, economic development, productivity, Japan, Korea]
This chapter reviews paths to economic development for poor countries. The previous chapters have shown two development paths that have worked—those of the Western democracies and the path of Japan and Korea. The Western democracies have achieved very high GDPs per capita by following a high-productivity path. Both Japan and Korea have followed a high labor and capital input path. However, it is shown that these paths are out of reach for most poor countries. The various ways that countries might overcome these problems are discussed. (pages 285 - 311)
This chapter is available at:
    University Press Scholarship Online

- William W. Lewis
DOI: 10.7208/chicago/9780226477008.003.0012
[economic development, rich countries, poor countries, economic policy]
This chapter begins by addressing the question: “So what?”. It says that the real “so what” of this book is how hard economic development is. If it were not so hard, there would be far more middle-income and rich countries. It then discusses how the United States and the other rich countries can help the poor countries improve economic policy. (pages 312 - 320)
This chapter is available at:
    University Press Scholarship Online

McKinsey Global Institute Reports

Recommended Readings

Index