Why do certain countries prosper?

A new study looks at productivity and comes up with some contrarian conclusions.

The New York Times, "Economic Scene" , July 14, 2004

An educated work force is not essential for economic growth. Neither is a high saving rate. Manufacturing is not the most influential economic sector.

These contrarian conclusions come from a new book by William W. Lewis, the founding director of the McKinsey Global Institute, a division of the McKinsey & Company consulting firm. Since 1991, the institute's researchers have conducted the most comprehensive international studies available on productivity by industry sector.

In ''The Power of Productivity,'' published by the University of Chicago Press, Mr. Lewis pulls together some results of that decade-long research.

The book helps explain why the American economy has done better -- and Europe and Japan have done worse -- than most people predicted in the late 1980's. It also offers a simultaneously hopeful and depressing view of economic conditions in poor countries, focusing on Brazil, India and Russia.

''Productivity,'' Mr. Lewis writes, ''is simply the ratio of the value of goods and services provided consumers to the amount of time worked and capital used to produce the goods and services.''

What the McKinsey research makes clear is that it's not what you put into the economy that matters, but what you get out of it. Consumption is the goal of production.

To know why some countries prosper while others fall behind, then, we need to know which industries in which countries are more productive and why.

Most studies of the subject, however, concentrate on a narrow slice of the economy: products that are traded in world markets. That's because, thanks to customs regulations, most countries have excellent data on those goods.

Looking only at traded goods can be highly misleading. International businesses tend to face intense competition. They have to adopt practices that improve productivity. Domestic industries, by contrast, are often protected from competition.

McKinsey's research fills in the picture, providing data and case studies of industries like retailing, food processing and construction.

Poorer countries are hampered mostly by government policies, especially high taxes that drive businesses underground, rather than by the inherent problems of poverty, Mr. Lewis argues. If they could solve their policy problems, they would attract foreign investment. Businesses could train workers on the job, achieving competitive productivity.

''If illiterate Mexican immigrants can reach world-class productivity building apartment houses in Houston,'' he writes, ''there is no reason why illiterate Brazilian agricultural workers cannot achieve the same in Sao Paulo.''

When highly productive multinationals enter previously protected markets, their business practices come with them.

Consider what happened in India after 1983, when Suzuki was allowed to build auto plants as part of a joint venture called Murati. ''Suzuki with Indian labor and Indian inputs was able to achieve roughly 50 percent of the productivity of the advanced auto industry in their home country,'' Mr. Lewis said in an interview. ''That's compared to maybe 10 percent for the rest of the Indian industry.''

In the 1990's, the Indian government opened the auto business to other foreign investment, with similar results.

The McKinsey Global Institute's first study, published in late 1992, shocked readers then with its conclusion that in most industries, companies in the United States were far more productive than Europeans or Japanese. Back then, notes Mr. Lewis, the conventional wisdom was that the American economy was going down the tubes, and that American workers were duds.

''There were some really pejorative comments about how U.S. workers were lazy and uneducated and unintelligent,'' he recalls. ''Well, it may be that they were lazy, uneducated and unintelligent, but they were still performing in most industries at productivity levels far higher than those in Japan.''

Toyota is a world leader in quality and efficiency in manufacturing, for instance, but it's atypical of the Japanese economy, even in manufacturing.

Food processing in Japan, Mr. Lewis writes, ''has more employees than the combined total of cars, steel, machine tools and computers,'' or about 11 percent of all manufacturing workers. While Japan's fiercely competitive auto industry is the most productive in the world, its food-processing industry is only 39 percent as productive as the United States industry, McKinsey found.

As a result, Japanese consumers are paying unnecessarily high prices for food and, Mr. Lewis notes, Japanese workers are ''devoting their extraordinary talents to propping up an economic structure with limited future development potential.''

Inefficient industries may keep people employed in the short term, but over time their sluggish productivity makes the economy stagnate.

The best predictor of productivity, he argues, is product market competition. That competition takes place not just in manufacturing but with all the services that support a product, before and after it leaves the plant.

Competition in each stage of that process has ripple effects in the others.

Take retailing, arguably the most influential sector in today's advanced economies. Despite some consolidation and the introduction of some big-box retailers, the Japanese food-processing industry remains fragmented and inefficient because Japanese grocery stores are still mostly tiny mom-and-pop shops protected by strict land use laws.

In the United States, by contrast, a revolution in retailing over the last 25 years has increased productivity not just for stores but for wholesalers and makers of consumer goods as well.

Big retailers, notably Wal-Mart, have bargained down prices and threatened to eliminate wholesalers altogether. In response, manufacturers and wholesalers have found ways to improve their own operations. (So did Wal-Mart's retailing competitors.)

At the same time, retailers have collected better information about what consumers are buying, and what they might want, and have shared that data with their suppliers. As a result, manufacturers have been able to spend their production dollars more efficiently.

Meanwhile, in a small shop near McKinsey's Tokyo office, a hat has languished unsold on the same shelf for 15 years.