special report - standard charteredspecial report – economics: escaping the productivity slump 14...

l Global Research l

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2016 https://research.sc.com

Madhur Jha +44 20 7885 6530

[email protected]

Senior Economist, Thematic Research

Standard Chartered Bank

Samantha Amerasinghe +44 20 7885 6625

[email protected]

Economist, Thematic Research


Acknowledgements We would like to acknowledge the contribution of

John Calverley, Chief Economist,

Calverley Economic Advisors Ltd.

Special Report – Economics

Escaping the productivity slump

Highlights

Weak productivity growth is a major concern for governments,

central banks and markets. We attribute the widespread productivity

slump to lower investment due to weak demand, and the slow pace

of economic reforms after the golden age of reform in the 1990s.

Higher productivity will require more investment and new reforms.

But it will also require a greater focus on services productivity. We

introduce our Services Potential Index to measure countries’ ability

to drive productivity in services based on their strengths in

technology, innovation and education, and well-functioning markets.

We combine our Services Potential Index with investment trends

and progress on reforms to identify countries likely to outperform in

terms of productivity in the next few years. Topping the list are

China, Malaysia, Vietnam, Indonesia and India. At the bottom are

Spain, the UK, South Africa, Italy and the US.

In the US, weak productivity growth is keeping interest rates down

and the Fed cautious, but could also bring an overheating economy.

For countries generally we find that stronger productivity growth could

boost credit, stock and property markets and real exchange rates.

https://app.brainshark.com/standardcharter/vu?pi=zHUz13R9SFzGrsSz0

Special Report – Economics: Escaping the productivity slump

14 September 2016 2

Contents

Key messages 3

Productivity prospects 5

Overview 6

Why productivity matters 6

Why productivity has slowed 6

Services will be key 7

Four drivers of productivity trends 8

Picking the winners and losers 8

Implications for investors 9

Productivity and the economy 10

Productivity trends 11

Growth has slowed, though not quite everywhere 12

US productivity has been falling 15

Are digital technologies being measured properly? 15

Why productivity has slowed 17

Cyclical versus structural factors 18

Lower investment is key 18

Slower growth of TFP 20

Why has technology diffusion slowed? 23

The golden era of reforms is over 25

Regulatory reforms – Mixed progress 29

Implications: Winners and losers 31

Implications for monetary policy 32

The key role of services 34

Introducing the Services Potential Index 36

Winners and losers over the next three to five years 39

Productivity prospects 40

Longer-term prospects 42

Currency markets 43

Stock markets 44

Sovereign credit markets 45

Real estate markets 45

References 46

Global Research Team 47


14 September 2016 3

Overv

iew

Key messages

Productivity has moved centre-stage

Productivity has slowed almost everywhere over the last 10 years. India and

Indonesia are the main exceptions in our 26-country sample.

In developed countries weak productivity and the resulting slow GDP growth are

encouraging populist policies, which may damage productivity further. Emerging

countries urgently need new reforms but only a few are delivering.

The Fed has reduced its estimate of ‘neutral’ rates to 3%, which means that

current rates are not as stimulatory as earlier thought. But if productivity stays

weak and growth picks up, there is a risk of overheating and inflation. That said,

our view is that weak productivity will keep GDP growth slow.

Our research finds that countries with stronger productivity growth experience

stronger credit, stock and property markets and real exchange rates. We identify

countries with the potential for strong productivity growth.

Weak investment is the main problem

The slump is due to slower adoption rather than slower technical progress.

Mis-measurement of the value of new digital technologies accounts for only part

of the productivity slowdown.

Weak investment is limiting capital deepening (machines per worker), as well as

the adoption of new technologies.

In developed countries low investment is due to the general growth slowdown

but also increased taxes and regulations, volatile oil prices (which also damaged

productivity growth in the 1970s) and the anti-competitive effects of ‘zombie’

companies following the global financial crisis (GFC).

In emerging markets too, weak investment reflects the growth slowdown,

especially due to China’s transition and weak commodity prices, but also a

slump in the pace of reforms after a golden period of reform in the 1990s.

Identifying potential winners

A recovery in productivity would be beneficial for growth, political stability and

markets. But this will require increased investment, new economic reforms and

embracing new technologies and business models.

Improving productivity in services will be increasingly important as manufacturing

is a declining share of most economies. New technologies can deliver gains in

services productivity.

We introduce a Services Potential Index to assess which countries should excel

in services productivity. It ranks countries according to the size and importance

of services today, technological and educational readiness, openness to FDI, the

efficiency of government and the extent of regulation in the labour market. (See

page 36, Introducing the Services Potential Index).

We use this index together with investment rates, the efficiency of investment,

progress on reforms and other indicators to identify countries which are likely to

show strong overall productivity growth in coming years.

China, Malaysia, Vietnam, Indonesia and India top our list. The laggards are

Spain, the UK, South Africa, Italy and the US.


14 September 2016 4

Overv

iew

Productivity has slowed almost everywhere

Change in output per worker before and after 2007, % p.a.

Investment/GDP ratios have fallen in many countries

Change from 2001-07 to 2007-15, ppt

2001-07

2007-15

-2

0

2

4

6

8

10

12

IT FR GB MX DE TR JP BR KE US ES TW SG AU ZA MY TH HK KR PH NG ID VN GH IN CN

-8

-6

-4

-2

0

2

4

6

8

10

ID CN GH IN NG KE BR AU MX FR VN SG TR PH HK US GB KR DE TW IT TH JP MY ES

Why investment is lower

Weak demand

Lack of reforms

Increased taxes and

regulations

Oil price boom and

bust

Zombie companies

Source: Standard Chartered Research


14 September 2016 5

Overv

iew

Productivity prospects


China

Malaysia

Ghana

Vietnam

Indonesia

India

Singapore

Hong Kong

Philippines

Turkey

Kenya

Taiwan

Nigeria

Korea

Thailand

France

Australia

Mexico

Germany

Brazil

US

Italy

South Africa

UK

Spain

Good prospects: need more investment

Best prospects

Laggards High investment but low

performance

Higher investment

Strength of key drivers


14 September 2016 6

Overv

iew

Overview

Why productivity matters

The widespread slump in productivity growth has become a major source of concern

for policy makers and investors. US output per hour has actually fallen over the last

year. In developed countries weak productivity means stagnating living standards

and a turn towards political extremes. In emerging countries after a decade of rapid

catch-up, growth has fallen back and convergence has dwindled.

In this report we address the following issues: What have been the recent trends in

productivity? Why has it slowed and will it recover? What policies could help? Which

countries have the best chance for revived productivity growth? What are the market

implications?

Why productivity has slowed

Slower adoption, not slower technical progress

We conclude that the main reason for lower productivity growth is that companies are

investing less in new technologies and processes than 10-15 years ago. In the US

and Europe this seems to be due to a combination of weak demand, increased taxes

and regulations, volatile oil prices (which also damaged productivity growth in the

1970s) and the anti-competitive effects of zombie companies following the GFC.

Some argue that the productivity potential of new digital technologies is still evolving

and that there is a temporary hiatus in technical progress. There may be an element

of truth in this for the US, at the frontier of technology, but our analysis points to

slower adoption rather than slower underlying progress as the main problem.

Emerging markets are also seeing slower diffusion of technology and processes,

which is partly due to slower growth following the commodity slump and China’s

slowdown. But we also identify a major slackening in the economic reform effort after

a golden age of reform in the 1990s.

Figure 1: Productivity growth has slowed almost everywhere


Source: WDI, Eikon, Standard Chartered Research

2001-07

2007-15

-2

0

2

4

6

8

10

12


Slowdown in economic reforms has

also led to an EM productivity

slowdown

Weak productivity means

stagnating living standards


14 September 2016 7

Overv

iew

Mis-measurement of new digital technologies?

There is some evidence that the new digital technologies are not properly captured in

productivity statistics. But the timing of the productivity slowdown in the US does not

correlate well with this view and we believe mis-measurement accounts for only part

of the productivity slowdown. It is true that the value of new products like search

engines, social networks and mobile communications is not fully captured by GDP,

but GDP only measures market goods and services, not how effectively consumers

use their leisure time. That said, it is good news that we are better off than GDP

suggests and also that these benefits are being shared more equitably.

Services will be key

A major theme of our report is that services will need to replace manufacturing as the

driver of productivity growth. In the US less than 7% of jobs are production roles, and

globally services have now risen to two-thirds of GDP (Figure 2). Fortunately,

productivity growth in services can exceed that of manufacturing. A recent OECD

study found that ‘frontier’ firms in services achieved 5% productivity growth annually

while frontier manufacturing firms gained only 3.5% (Figure 3). New technologies

offer opportunities for greater efficiency, even in traditional services industries such

as health and education, restaurants, fast food and social and personal services.

Our Services Potential Index

Fulfilling the productivity potential in services will require the rapid adoption of new

technology, processes and business models. But regulatory barriers and human

capital limitations – including skills, business sophistication and an innovation culture

– may be a constraint. We introduce a new Services Potential Index (SPI) to

measure which countries are best and worst placed. Developed countries top our list,

including (in order) Hong Kong, Singapore, the US and UK. Meanwhile Korea,

Thailand and China come relatively low on the list. Manufacturing has been a key

focus of development in these countries and their low ranking underlines the need for

reforms to focus more on services potential in future.

Figure 2: Services is now the dominant sector

Services as % of global GDP

Figure 3: Services productivity is strong at frontier firms

Cumulative labour productivity; Index 2001=0

Source: World Bank, Standard Chartered Research Source: Source: OECD, Standard Chartered Research

Note: ‘Frontier firms’ corresponds to the average labour productivity of the 100 globally most

productive firms in each 2-digit sector in ORBIS

55

60

65

70

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Frontier firms (Mfg)

Frontier firms (Svs)

All firms (Mfg)

All firms (Svs)

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

2001 2002 2003 2004 2005 2006 2007 2008 2009

Mis-measurement cannot explain all

of the productivity slowdown

Our index shows Hong Kong,

Singapore, the US and UK to be

best placed


14 September 2016 8

Overv

iew

Four drivers of productivity trends

1. Services potential will be key

We use the changes in our SPI over recent years to gauge the likelihood of

productivity gains in the next few years. We find the Philippines, China, France,

Germany and Turkey to have made the most progress in improving services

potential, with Malaysia and Singapore close behind.

2. Investment – Still strong in Asia

New investment is critical as it both creates new capital, boosting labour productivity,

and can embody new technology, raising total factor productivity (TFP).

Investment/GDP ratios are still strong in most Asian countries. The Philippines is the

main exception where, to see productivity step up in coming years, the ratio needs to

rise from its current 20% level. China is also exceptional in that its investment ratio

remains too high at about 45% of GDP. Over-investment is creating excess capacity

and lowering productivity, as well as adding to an already high debt ratio. In

developed countries investment/GDP ratios are still running at 2-3ppt below pre-crisis

levels which represents a major drag on productivity. Hopes for stronger investment

in the US as it approaches full capacity have so far been dashed, though this is

something the Fed is watching closely.

3. Progress on reforms

The 1980s and 90s was a golden age of economic reform in both developed and

emerging markets but progress on reforms has been patchy this century. We focus in

on regulatory reforms and find good progress in Taiwan, Germany, China, the

Philippines, Malaysia, Mexico and Vietnam. The biggest gains are in ease of doing

business regulations and labour-market reforms.

4. Investment efficiency – ICORs

The incremental capital output ratio (ICOR) is the ratio of investment as a percentage of

GDP to the GDP growth rate. Lower is better because it means more growth is being

generated for each percentage point of investment. We find that ICORs either rose in

the 2000s or were already high in many countries. The biggest exceptions (good

performers) are mostly in Asia – the Philippines, India, Indonesia, Malaysia, Singapore

and Hong Kong – together with Ghana and Nigeria in Africa. In China the ICOR has

risen, particularly in the state sector, underlining the threat from excess investment.

Picking the winners and losers

Considering these pointers alongside recent performance we identify countries which

are likely to outperform over the next three to five years (see infographic, page 5).

Countries with the best prospects rank well on all indicators, though having a high ratio

of investment to GDP is particularly important and we show this dimension separately.

Best prospects

The countries most likely to excel in productivity are China, Malaysia, Vietnam,

Indonesia and India. That said, we expect China’s productivity growth to slow further

because the ICOR has risen (lower investment efficiency) and the ratio of investment

to GDP is also set to decline. Ghana is high on our list too but, unfortunately, this

reflects the recent oil exploration boom and is unlikely to be repeated. Singapore and

Hong Kong also make the cut, reflecting their good scores overall and relatively high

investment rates.

China, Malaysia and Vietnam excel

in overall productivity indicators


14 September 2016 9

Overv

iew

Good prospects but need more investment

Another group of countries also has good prospects for productivity growth but needs

higher investment rates to really do well. The Philippines is top of the list here. If it could

raise its investment/GDP ratio to the 25-30% range, it could deliver very strong

productivity and GDP growth. Turkey, Kenya, Taiwan and Nigeria are also in this group.

Strong investment, disappointing productivity

The third group of countries has reasonably strong investment but ranks poorly on

our other measures. This group includes Thailand, where past productivity growth

has been solid but there has been little progress in recent years on reforms or

making the services sector more dynamic. Korea is also in this group, largely

because of its low ranking on our Services Potential Index.

The laggards

The laggards are mostly the old developed countries with recent weak performance

in both productivity and investment, together with little reform. Mexico, Brazil and

South Africa also fall into this group. Mexico probably has the best chance of moving

up if the current reform programme continues.

Implications for investors

Stronger productivity growth is good for markets

Our research clearly supports the intuitive view that increasing productivity delivers

macroeconomic benefits and should be supportive of asset prices. We find that high-

productivity countries enjoy stronger credit, stock and property markets, as well as a

rising real exchange rate. Higher productivity growth means that wages rise faster

than prices, driving up asset prices. For investors this underlines the importance of

monitoring productivity, as well as investment trends and reform programmes.

Productivity and Fed thinking

Low productivity growth has encouraged the Fed to lower its estimate of the ‘neutral’

rate of interest to 3%. This makes the stimulus from the current 0.5% rate lower than

originally thought and points to less need for tightening. But if GDP growth holds up

at 2% as the Fed expects, while productivity remains weak, unemployment will

decline further, potentially leading to an overheating economy. The Fed would

welcome this initially as it would push inflation up to the 2% target and enable it to

raise rates (leaving more ammunition for a downturn). Some FOMC members also

argue that ‘running the economy hot’, which would boost capacity use and raise

wages, could stimulate productivity growth by encouraging more investment. Beyond

a certain point, however, there is the risk that the Fed falls behind the curve.

That said, our view is that US economic growth will disappoint, partly because of

weak productivity growth which is limiting profits and real wage growth. If GDP

growth stays weak, the Fed will be reluctant to raise rates. Both the data and the

evolution of Fed thinking on productivity will be critical for policy and for markets.

Mexico, Brazil and South Africa are

lagging on productivity indicators

Low productivity has forced Fed

policy makers to lower potential

growth estimates


14 September 2016 10

Info

gra

ph

ic

Productivity and the economy

Low productivity

growth

Low GDP growth

Less government investment

Low investment

Lower ‘neutral rate’

Worse fiscal position

Austerity hits low paid and unemployed

Less adoption of new

technology

Risk of ‘excess savings’

Low interest rates

Risk of bubbles and

inflation

Low wage growth

Bad policies Political

extremism

Economy

Policy

Market

Impact

Productivity trends



Pro

du

cti

vit

y t

ren

ds

Productivity trends

Growth has slowed, though not quite everywhere

Productivity growth has slowed almost everywhere. In developed countries the

slowdown began before the 2008 GFC, while for emerging countries it is more recent

in most cases (Figures 4-8). In our sample, Indonesia and India are the main

exceptions, with productivity growth holding up well.

Growth rates, living standards and political stability

Productivity growth is a key driver of economic growth and the main determinant of

living standards. In the US, productivity per worker has risen 47% since 1991, but it

would be up 73% if the 1991-2007 growth rate had continued. India’s living standards

would be 50% higher than current levels if it had matched China’s labour productivity

growth since 2001.

Of the 26 countries in our study, 15 have raised their productivity level relative to the

US since 1991, mainly Asian countries (Figure 9). Singapore, Hong Kong, Taiwan

and Korea surged to reach full developed status during the 1990s; while Malaysia,

Thailand, China, Indonesia, India and Vietnam all closed the gap significantly.

Meanwhile Europe (except the UK) fell back relative to the US, as did a number of

low-growth emerging countries including Russia, Mexico, Brazil and Kenya.

The consequences of slow productivity growth

For developed countries, slow productivity growth makes dealing with ageing

populations and high government debt more difficult. For emerging countries, it

means the convergence of living standards with high-income countries happens

slowly, if at all. For all countries, slow productivity growth likely makes dealing with

rising inequality harder since, even if faster productivity growth benefits mostly those

with higher skills, higher tax revenues make it easier to redistribute. For all countries,

slow growth is a potential threat to political stability as incomes stagnate. It may be

driving the increased support for more extremist parties, as well as more populist

policies seen in recent years. In turn, political instability and poor policy feeds back to

slow investment and weakens productivity further.

Figure 4: Productivity growth has slowed almost everywhere



2001-7

2007-15

-2

0

2

4

6

8

10

12


Slow productivity growth makes it

harder to tackle rising income

inequality globally

Productivity is the main determinant

of living standards



Pro

du

ctiv

ity tre

nd

s

Figure 5: The slump in major countries

Output per worker, % p.a. 5Y moving avg.

Figure 6: Asian developed countries have also slowed

Output per worker, % p.a. 5Y moving avg.

Source: Oxford Economics, Eikon, Standard Chartered Research Source: Oxford Economics, Eikon, Standard Chartered Research

Figure 7: Productivity slower in China, India and Brazil

Output per worker % p.a., 5Y moving avg.

Figure 8: The Philippines and Indonesia on the rise

Output per worker % p.a., 5Y moving avg.

Source: Oxford Economics, Eikon, Standard Chartered Research Source: Oxford Economics, Eikon, Standard Chartered Research

US

EA

JP

GB

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1990 1993 1996 1999 2002 2005 2008 2011 2014

HK

SG

KR

TW

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

CN

IN

BR

-2

0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

ID

PH

MX

TR

-4

-3

-2

-1

0

1

2

3

4

5

6

7

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Figure 9: Asia rising and Europe falling relative to the US

Output per worker as % of US levels 1991 and 2015


1991

2015

0

20

40

60

80

100

120

140

KE VN GH IN PH NG ID CN TH BR MX ZA MY TR KR JP GB ES DE IT AU FR TW HK US SG



Pro

du

cti

vit

y t

ren

ds

TFP growth has slowed or turned negative except in Asia

In this study we focus mainly on output per worker as it best captures average living

standards. An alternative measure is total factor productivity (TFP). This is calculated

by subtracting the gains that can be attributed to more capital or better-educated

workers. TFP represents the gains from innovation in technology and processes,

improved infrastructure or reduced regulation.

Among developed countries, Hong Kong, Taiwan, Singapore and Korea saw better

TFP growth this century after weakness in the 1990s due to the Asian crisis. Japan

also did poorly in the 1990s, reflecting its lost decade, but has done slightly better

since. In contrast, the US, UK and Australia did relatively well in the 1990s and less

well since, while continental Europe has seen TFP in overall decline since 1991

(Figure 10).

Among emerging countries the picture is better, with firm gains in most this century,

especially in Asia (Figure 11). China is the outstanding performer but India has also

done well. Southeast Asia dipped after the Asian crisis but has recovered well since.

Figure 10: Strong TFP growth in Asian developed countries, weak elsewhere

Total factor productivity growth among DM, % pa

Source: Eikon, Standard Chartered Research

Figure 11: Asian EM do best in TFP though some performed poorly in the 1990s

Total factor productivity growth in EM, % pa

Source: Eikon, Standard Chartered Research

1970-91 1991-01

2001-11 -1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

HK TW SG KR US JP GB FR DE AU ES IT

1970-91

1991-2001

2001-11

-2

-1

0

1

2

3

4

5

CN IN TR PH TH ID MY BR KE ZA MX

TFP has seen an overall decline in

continental Europe since 1991



Pro

du

ctiv

ity tre

nd

s

US productivity has been falling Over the last year US labour productivity has declined by 0.4%. It rose in 2009-10 in

the initial recovery from the GFC (as is normal) but has averaged only 0.6% from

2010-16. As the country at the ‘frontier’ of technology and with the Fed talking more

about productivity, the US case has received close attention.

The long-term picture is summarised in Figure 12 created by John Fernald, a

productivity expert at the San Francisco Fed. After a long period of stellar productivity

growth from 1945-73, driven by both strong investment and strong TFP, productivity

growth slowed until 1995 then picked up again for nearly a decade before slowing

from 2004. The especially poor performance from 2010-16 is due to weak

investment. Note that TFP growth in the last few years is not much different from

2004-07, nor the pace from 1973-95.

Fernald argues that the US has oscillated between two ‘regimes’ for productivity

growth, fast and slow. In the fast phases (1945-73, 1995-2004 and briefly 2007-10)

productivity grows at around 3% p.a. In the slow phases (1973-95 and 2004-07) it

grows at only about 1.25%. The 1945-73 period is explained as the successful

peacetime exploitation of electricity, the internal combustion engine and the

telephone, while the 1995-2004 period saw the exploitation of the personal computer

and better inventory management.

The intuition here is that the fast phases are periods where a confluence of new

technologies combines with strong investment to create a virtuous circle of

productivity and GDP growth. But since 2010 weak investment means that

productivity growth has been below even the ‘slow productivity growth’ regime pace.

Are digital technologies being measured properly? Life is being transformed by digital technologies and some argue that they are not being

properly accounted for (Mandel 2012). The price index for computer hardware and

software has been declining rapidly but critics suggest the price decline may still be

underestimated (Copeland 2013). Some studies suggest that improving internet speeds

are not being properly measured nor the proliferation of resources on the internet. An

hour on the internet is much more valuable than a decade ago (Goldman Sachs 2014).

Also many products like search engines and social media are priced at zero or negligible

cost, while the ‘sharing economy’ has generated new business models in areas such as

taxi services and room rentals which may not be captured in the statistics.

Figure 12: US productivity – More investment needed

Contributions to growth in US output per hour, business sector, % chg, annual rate

Source: Fernald (2014). Quarterly samples end in Q4 of years shown except 1973 (end Q1) and 2016 (end Q2). Capital

deepening is contribution of capital relative to quality-adjusted hours. TFP measured as a residual.

TFP

Capital deepening

Labour quality

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1947-73 1973-95 1995-04 2004-07 2007-10 2010-16

The especially poor productivity

performance from 2010-16 is due to

weak investment



Pro

du

cti

vit

y t

ren

ds

Recent studies suggest the problem is exaggerated

Several recent studies, however, suggest that mis-measurement is only responsible

for a small portion of the slowdown in underlying GDP and productivity (see Syverson

2016, Byrne 2016). One reason is that, for the US at least, the slowdown in

productivity started around 2004 but mis-measurement of the real value of computer

hardware would have started long before that; and indeed would have been greater

before, when more hardware was made in the US.

Also, the benefits to consumers from smartphones and free software are conceptually

‘non-market’. These technologies allow consumers to be more productive in their non-

market time to produce services they value (e.g., finding information, shopping and

connecting with friends). The major ‘cost’ to consumers is not the software,

smartphone, data or wifi but their time. But GDP measures market services, not the

efficiency of leisure time so, quite correctly, cannot take this into account.

Welfare gains from technology appear less than lost productivity

Making consumers more productive in their non-market time is a good thing (‘welfare-

enhancing’ in the jargon). Also sharing of taxis and the renting of spare rooms to

tourists or house-swapping is a more efficient use of property. But estimates of the

likely value are relatively modest compared with the loss from lower measured

productivity growth. One study (by a ‘technology optimist’) found the increase in

consumer surplus created by free internet services to be over USD 100bn in the US

(Brynjolfsson 2012). The figure would be higher today but likely still much less than

the USD 3tn estimate for lost GDP due to slower productivity growth since 2004.

Productivity is mis-measured in health, education and government too

Productivity in areas such as education, health care and government – typically

accounting for around one-third of the economy – is also likely under-estimated. The

outcomes in this area are hard to measure and very difficult to adjust for quality. This is

nothing new, though these sectors are becoming a larger share of the economy, so this

could be another contributing factor to slower productivity. Still, it is a long-term trend,

not something that can account for the sudden slowdown in US productivity growth in

the early 2000s.

The bottom line, then, is that productivity growth has genuinely slowed and new

technologies only partially compensate. TFP has turned negative for many countries

(Figure 14). The question is what drives productivity and why is it weak.

Figure 13: Labour productivity growth slower since 2007

2001-07 (x-axis), 2007-15 (y-axis)

Figure 14: TFP also slower and negative for many

2001-07 (x-axis), 2007-11 (y-axis)

Source: BIS, Standard Chartered Research Source: BIS, Standard Chartered Research

AU BR

CN

DE

FR

GH

HK

ID

IN

IT

JP KE

KR MY

MX

NG PH

SG ES

TH

TW TR GB

US

VN

ZA

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

-2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0

2007

-15

2001-07

Slower

Faster

AU

BR

CN

DE

FR

HK

ID IN

IT

JP KE

KR

MY

MX

PH

SG

ES

TH

TW

TR GB

US

ZA

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-2.0 0.0 2.0 4.0 6.0 8.0

2007

-11

2001-07

The benefits to consumers from

new technology are often ‘non-

market’ so not captured in GDP

It is hard to measure productivity

in areas such as education and

health care



Wh

y p

rod

ucti

vit

y h

as s

low

ed


Cyclical versus structural factors

In part, the productivity slowdown is cyclical, reflecting slower economic growth

(though this begs the question of whether slower growth may be at least partly

structural). Developed countries have faced headwinds since the GFC from weak

bank lending, fiscal tightening and the euro crisis. Moreover, in response to the crisis

households and business undertook a major balance sheet adjustment which cut

back spending and borrowing for a while and has made them more risk-averse.

With the recovery slow, businesses have had less need to add to capacity, while

governments have cut back on infrastructure investment to reduce budget deficits.

Meanwhile, the slow rise in wages, due to ongoing weak labour markets, may have

discouraged companies from replacing workers with machines.

But the slowdown in US productivity dates to around 2004, before the GFC. And

productivity growth in many continental European countries has been slow for even

longer. This strongly suggests that there are structural factors at work too.

In emerging countries the productivity slowdown is more recent and is closely linked

to the transition in China and the collapse of investment in commodity-producing

countries. That said, the emerging market boom of recent years disguised the

relative lack of progress on new economic reforms after the golden period of the

1990s. Without the stimulus from rapid industrialisation in China and the commodity

boom, countries will need to find new sources of growth.

Lower investment is key

In the US, UK, Germany and Japan investment has picked up since the crisis but in

2012-14 remained 2-3ppt of GDP below the average for 1990-2007 (Figure 15).

Since more than half of gross investment is actually replacement investment this is a

significant shortfall. One reason is lower government investment in infrastructure to

try to meet fiscal targets. But private-sector investment has also declined.

The investment ratio has also been falling in developed Asia, though the level is still

relatively high. Most emerging countries enjoyed higher investment until 2013 at

Figure 15: Change in investment to GDP ratio since 2007

% change 2012-14 vs 1990-2007 average

Source: WDI, Standard Chartered Research

-8

-6

-4

-2

0

2

4

6

8

10

ID CN GH IN NG KE BR AU MX FR VN SG TR PH HK US GB KR DE TW IT TH JP MY ES

Weak bank lending, fiscal tightening

and the euro crisis have lowered

demand in developed countries

China’s transition of its economy

has affected productivity in

emerging markets



Wh

y p

rod

uctiv

ity h

as s

low

ed

least, though for the commodity producers, lower prices are now bringing a sharp

decline. China has the opposite problem – over-investment after a long period of

state-directed investment and a booming economy. There are concerns that

productivity growth will continue to decline as funding goes increasingly to more

marginal projects.

Higher ICORs

As well as lower investment many countries are showing a declining efficiency of

investment, as measured by the ICOR (the ratio of investment as a percentage of GDP

to the GDP growth rate). Lower is better because it means more growth is being

generated for each percentage point of investment. Note that because of the difficulty

of separating replacement investment from new investment the ICOR uses gross

investment as the top line. In developed countries, where the majority of investment is

for replacement, ICORs are naturally higher than in emerging countries (Figure 16).

We find that ICORs either rose in the 2000s or were already high in many countries,

given their stage of development. The main exceptions (good performers) are mostly

in Asia: the Philippines, India, Indonesia, Malaysia, Singapore and Hong Kong; plus

Nigeria in Africa (Figures 17-19). In China, the ICOR has risen, particularly in the

state sector.

Figure 16: Investment to GDP – Asia still leads

%

Source: WDI, Standard Chartered Research

Figure 17: ICORs are higher in DMs compared to EMs

ICOR

Figure 18: Singapore bucks the trend of rising ICORs in

Asia; ICOR

Source: World Bank, Standard Chartered Research Source: World Bank, Taiwan National Statistics Standard Chartered Research

1990-07

2012-14

0

5

10

15

20

25

30

35

40

45

50

CN ID IN KR SG AU GH VN MY TH HK FR TW JP MX KE PH BR TR US ES DE GB IT NG

1990s

2000s

2010-15

0

5

10

15

20

25

AU DE GB US

1990s 2000s

2010-15

0

1

2

3

4

5

6

7

8

9

HK KR SG TW

ICORs are low mostly in Asia and

also in Nigeria



Wh

y p

rod

ucti

vit

y h

as s

low

ed

Smaller gains from increasing education

OECD estimates suggest that improvements in the so-called ‘composition of labour’

(i.e., a better-educated workforce) added c.0.3-0.5% to average labour productivity

growth in Europe and the US during the 1990s and more in newly emerged countries

such as Korea. This effect is dwindling now as educational attainment levels off and

is expected to add little in the next decade. For the US, this will likely subtract about

0.2% from potential GDP in future years compared with past years. However, in low

and middle-income countries investment in people remains a key driver of

productivity. The challenge in many countries is to improve the quality of education.

Lower investment in knowledge-based skills

Investment in so-called knowledge-based skills (also called intangibles) slowed in

Europe and the US in the 2000s (OECD 2015). It was at its strongest in the late

1990s, then slowed in the early 2000s and further still after 2007. Knowledge-based

skills include investment in research and development, company-specific skills,

organisational know-how, databases, design and intellectual property. Studies for the

US and UK have found this cut in investment to be a significant contributory factor to

slower productivity growth (Fernald 2014, Goodridge 2013).

What is not clear is why this investment slowed, starting well before the 2008 crisis.

One possibility is that firms felt the need to invest heavily in the 1990s, with the initial

explosion of the internet, the threat from Y2K (the feared Millennium Bug) and the

increased recognition in those years of the value of brand. Another view is that weak

macroeconomic conditions have had an impact; e.g., the OECD suggests that the

slowdown in new business formations, especially after 2007, could be a factor.

Slower growth of TFP

Slower technological progress?

As discussed above, the US enjoyed a wave of strong productivity growth from about

1995-2004, driven by IT gains, including the spread of personal computers and better

inventory management. The slowdown in productivity growth since then may reflect a

slowdown in IT gains. Most people in developed countries were already using a

connected computer for work by the early 2000s and the big innovations in

technology since then have been in mobile and in consumer products.

Figure 19: ICOR has improved for Philippines

ICOR

Figure 20: ICORs are generally higher in non-Asia EMs

ICOR

Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research

1990s

2000s

2010-15

0

2

4

6

8

10

12

CN IN ID PH

1990s

2000s

2010-15

0

2

4

6

8

10

12

14

BR MX NG ZA

Educational attainment is levelling

off in developed countries but for

emerging markets this is still

important



Wh

y p

rod

uctiv

ity h

as s

low

ed

Optimists point out that, in the past, the gains from technology sometimes came in

waves. In our view a new wave could be around the corner driven by big data,

robotics, the internet of things and 3D printing (Special Report, 19 January 2015,

‘Technology: Reshaping the global economy’). However, the impact on productivity is

unlikely to be significant in the next year or two. It could show up within three to five

years but is probably likely to unfold over the next several decades. With luck it could

rival the rapid productivity performance of 1947-73, though this is controversial.

Robert Gordon is famous for his view that the technologies invented around the turn

of the 20th

century and exploited to their full after the Second World War are non-

repeatable (Gordon 2015). Digital technology enthusiasts demur and we tend to take

the view that the new technologies will turn out to be just as transformational.

However, invention is not the same as innovation and countries do need to adopt these

technologies in a broad and effective way, and be prepared to change work practices

and procedures. Europe’s weak performance of the last 20 years is likely due to slow

adoption; and we believe adoption has slowed in the US too, particularly since 2008.

Comparing the best firms with the worst

A major OECD study found that ‘global frontier firms’ in manufacturing achieved

productivity growth of 3.5% p.a. in the 2000s while non-frontier firms managed only

0.5% (OECD 2015). For services-sector firms the difference is even greater, with

frontier firms achieving 5% p.a. while non-frontier firms saw productivity fall 0.1%.p.a.

Note that the leading services firms’ productivity rose faster than the leading

manufacturing firms’, a point to which we will return.

Across the OECD area the average gap in labour productivity between global frontier

firms and non-frontier firms is 10 times, of which about half is due to less capital and

half to lower TFP. Global frontier firms tend to be larger, more capital- and patent-

intensive, more global (and more integrated in global value chains) and often

younger. They also tend to spend more on R&D, rely more on equity than debt

financing and have often experienced considerable M&A activity in the past. Access

to finance and talent are important.

How do the low productivity firms survive? The answer lies in a varying combination

of sunk costs, lower wages, lower profits, niche markets (geographical or product)

which allow firms to charge higher prices, together with government subsidies and

protection. Also, some countries, especially the emerging market members of the

OECD group such as Turkey and Mexico, have lower productivity across many

sectors, so they can be competitive via a low exchange rate.

Low productivity firms should sink or swim

The OECD research resonates with earlier work which found that productivity growth

within countries is determined not so much by the performance of the top firms but

how quickly the low-performing firms either transform themselves or fade and go out

of business. One US study found that the TFP of the 90th

percentile firm in an

industry is about 1.9 times that of a firm at the 10th

percentile. For emerging markets

the ratio tends to be higher, reflecting the less competitive environment; in China, for

example, the ratio is close to 5:1 (Syverson 2011). Low-performing firms may ‘trap’

resources and slow the growth of higher-performing firms. The explosion of world

trade in the 1990s and early 2000s was important for culling low-productivity

manufacturing firms in developed countries. The slowdown in trade growth since then

may be cushioning some poor performers.

Gains from technology can unfold

over several decades

Global frontier firms are on average

10 times more productive than non-

frontier firms

https://research.sc.com/Portal/Assets/DownloadReport/2236-72411-1




Wh

y p

rod

ucti

vit

y h

as s

low

ed

Management is also important. Managers are ‘conductors of an input orchestra’

(Syverson) and careful research has shown how better management can make a big

difference. One study paid for management consulting advice to a random selection

of Indian textile firms, with the control group receiving no advice. Those with help

raised productivity 17% within a year and expanded faster in following years (Bloom

2012). According to the study, low-performing firms were held back mainly by lack of

information.

The OECD has also found evidence of an increasing divergence between regions

within a country, particularly between big city conurbations and other areas. This may

reflect the increasing importance of knowledge-based capital in comparison to

machine-incorporated capital. Meanwhile, diffusion of technology between countries

seems to have stepped up, likely reflecting increased trade and FDI as well as the

role of global value chains.

Figure 21: Regulation still pervasive in EM

Product and labour market regulation scale 1-5, 2013

Figure 22: State control is widespread in EM

Public ownership and involvement, scale 1-5, 2013

Source: OECD, Standard Chartered Research Source: OECD, Standard Chartered Research

Figure 23: Often hard to start a new business

Scale 1-5, 2013

Figure 24: Barriers to trade and FDI persist

Scale 1-5, 2013


GB NZ

IR

AU

JP

MX

ES

GR PO

TR

KR

CL DE IT

FR PR

BR ZA

CN IN

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.5 1.5 2.5 3.5 4.5

Res

tric

tiven

ess

of p

rodu

ct m

arke

t re

gula

tion

Employment protection

Best

Worst

ES

GB

JP

CL PR IT MX

KR

DE

GR

NZ

AU

IR

FR

TR

PO

BR

ZA CN

IN

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1.0 2.0 3.0 4.0 5.0

Sta

teco

ntro

l: in

volv

emen

t in

bus

ines

s op

erat

ion

State control: public ownership

Best

Worst

AU

NZ CL

GB

IR

JP DE

KR

IT

FR

ES

GR

MX

PR PO

TR

ZA

BR

IN

CN

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 1.0 2.0 3.0 4.0 5.0

Reg

ulat

ory

prot

ectio

n of

incu

mbe

nts

Administrative burdens on start-ups

Best

Worst

PR ES

DE

GR

IR

IT

JP

CL

TR

GB

PO FR

AU

KR

MX

NZ

ZA

BR

IN CN

0.0

0.5

1.0

1.5

2.0

2.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Oth

er b

arrie

rs to

trad

e an

d in

vest

men

t

Barriers to FDI

Worst

Good management also boosts

productivity growth



Wh

y p

rod

uctiv

ity h

as s

low

ed

Crony capitalism and lack of reforms

This point goes to the heart of the critique of ‘crony capitalism’. When the

government protects established firms with trade barriers, easier access to credit,

government procurement bias and barriers to new entrants, firms with the right

connections may be able to coast with low productivity growth (Figures 21-24). This

tendency towards an uncompetitive environment can be mitigated where firms are

focused on export markets and/or are participants in global value chains (Special

Report, 27 May 2015, ‘Global supply chains: New directions’). But large elements of

the services sector are less exposed to trade and this is often where the

inefficiencies are greatest. Weak judicial systems and ineffective bankruptcy

procedures can also slow the weeding out of low performers.

The OECD offers a list of policy recommendations, many of which focus on

increasing competition between firms and avoiding measures which favour

established firms. Improving labour mobility is also recommended as excessive

labour regulations tend to lead to a skills mismatch and impede workers migrating to

the more efficient firms. We return to these issues below when considering reforms.

But first the question arises, why might diffusion have slowed within countries in

recent years and, for many developed countries, apparently from around 2004?

Why has technology diffusion slowed?

Here there are plenty of ideas but limited hard evidence and the story likely varies

from country to country. The most plausible reasons for slower diffusion are:

The cyclical story – slow demand growth. In a normal economic cycle

productivity growth is low during periods of slower demand growth. In this cycle

demand growth has been persistently slow, leaving plenty of capacity and

keeping wage growth weak.

New reform has slowed in recent years as we document below.

The benefits from the golden period of reforms in the 1990s – which included

controlling inflation, privatisation and freeing product markets and, above all,

opening up to more trade and FDI – have run out of steam (Figure 25).

Increased product and environmental regulation has raised barriers to new

entrants and to the growth of SMEs. Complex regulations often favour existing

large firms and may be written to favour domestic firms or state enterprises,

even when they are lower performers than international firms.

Restrictive labour-market laws make hiring and firing difficult, discouraging

expansion of successful firms and movement of people to more dynamic firms,

as well as the introduction of new business models. In EM such restrictions leave

many people stranded in the informal sector where lack of financial and other

support keeps productivity low. This constraint is not new but may be more

important in the context of disruptive technologies and slow overall growth.

Increased tax rates on higher incomes, dividends and capital gains in most

developed countries. This, combined with increased regulation, seems to have

particularly depressed investment in technology by small company owners in

the US.

Competition in services sectors tends to be lower than in manufacturing,

especially in areas where international trade is small. As the services sector

increases relative to manufacturing, this could lower overall diffusion.

Low interest rates, together with banks’ reluctance to recognise non-performing

loans after 2008, allowing so-called zombie firms to survive.

Large elements of the services

sector are less exposed to trade;

allowing for greater crony

capitalism and inefficiencies





Wh

y p

rod

ucti

vit

y h

as s

low

ed

Increased protectionism. Fears of blanket protectionism after 2008 in a repeat of

the 1930s have proved unfounded but there have been many more cases of

administrative measures, subsidies and other restraints. Moreover, only a portion

is unwound over time (Evenett 2015).

Lower investment. As well as limiting the amount of capital per worker, as

discussed above, lower investment means less incorporation of new technologies.

Global risk aversion makes successful firms less inclined to expand aggressively

and discourages low productivity firms from upgrading capital.

High oil prices. Productivity growth slumped in the 1970s during the first and

second oil shocks. This century, oil prices first doubled from 2000-04 to around

USD 40/bbl, exactly when the US productivity slowdown occurred. The

mechanisms may include higher costs of operations and a shift away from

investing in energy-intensive machines to replace people. Government

promotion of alternative energies which, for now at least, are much more costly

than fossil fuels, may also have hurt productivity.

Figure 25: The opening up to trade in goods was largely completed by 2010

Heritage scores on trade freedom, out of 100

Source: Heritage Foundation, Standard Chartered Research

CN

IN

World

0

10

20

30

40

50

60

70

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016



Wh

y p

rod

uctiv

ity h

as s

low

ed

The golden era of reforms is over

Reform has stalled or reversed in most countries

To gauge the reform effort over time we use changes in the Economic Freedom

Index from the Fraser Institute as a proxy (Figures 26-29). This index covers a range

of indicators in five broad areas: size of government, legal system and property

rights, sound money, trade and regulations.

Most countries saw gains in economic freedom in the 1990s. Emerging Asia was the

exception, reflecting the problems that arose from the Asian crisis of 1997-98 but the

region moved on to an improving trend after 2000.

Since the mid-2000s the index for most countries has either levelled off or declined.

The old developed countries have seen marked declines, opening up a widening gap

with newly developed Asia – Hong Kong, Korea, Singapore and Taiwan.

Among our sample only four countries have continued to show improvements since

2007 – China, the Philippines, Indonesia and Vietnam. But even in these countries

the improvement has been limited, with Indonesia the best.

Figure 26: Declines in developed markets since 2000

Scores on the Economic Freedom Index

Figure 27: HK and Singapore are best; Taiwan closing in


Source: Fraser Institute, Standard Chartered Research Source: Fraser Institute, Standard Chartered Research

AU

GB

US DE

ES FR IT

6.0

6.5

7.0

7.5

8.0

8.5

9.0

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

HK

SG

TW

KR

MY

JP

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Figure 28: China still improving but India has stalled


Figure 29: ASEAN on an improving trend except Thailand


Source: Fraser Institute, Standard Chartered Research Source: Fraser Institute, Standard Chartered Research

MX

TR

BR CN IN

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

TH

PH

ID

VN

5.5

5.7

5.9

6.1

6.3

6.5

6.7

6.9

7.1

7.3

7.5

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

The Economics Freedom Index

shows limited gains for most

countries since the mid-2000s



Wh

y p

rod

ucti

vit

y h

as s

low

ed

New IMF research on which reforms matter

A recent IMF report (Dabla-Norris 2016) provides the most comprehensive analysis

of data on reforms so far attempted. It identified major areas where past research

has found reforms can improve productivity – financial-sector reforms, trade and FDI

liberalisation, labour markets, product markets, institutions and human capital

innovation (see Figure 30). This is just a small selection of studies and surveys of the

work in this area as researchers try to identify exactly which reforms are the most

important, taking into account different stages of development.

The study then used the IMF’s new database of actions on reforms in 108 countries

since 1970 to identify which are the most important. We present a simplified version

of the results in Figure 31. For each measure it shows the average percentage gain

in labour productivity for the whole sample and broken down by income quartile (Q1

is low-income countries). We have excluded results which are not statistically

significant.

Financial, trade and agricultural reforms have a big impact

Across the whole sample financial-sector reforms (especially capital market

development, bank privatisation and better banking supervision), trade and FDI

liberalisation and agricultural-sector reforms were found to be most effective. But

subdividing by the level of development gave some different emphases.

Different reforms for different stages of development

For the lower quartile of countries, like Nigeria, Vietnam, Kenya and Ghana in our

sample, the most potent reforms are improved banking supervision, trade and FDI

liberalisation and the removal of interest rate controls.

For the next quartile up, which includes China, India, Brazil, Indonesia and the

Philippines in our sample, again banking supervision is key but agricultural reforms,

the removal of credit controls and bank privatisation are also very important.

For the third quartile – countries such as Malaysia, Mexico and Turkey – capital

market development is the most potent, with banking supervision and bank

privatisation again important. For the top quartile, developed countries, trade

liberalisation and agricultural regulation are the most important.

Freeing FDI and labour markets matters most for services

The IMF study also broke down productivity improvements by sectors. Fewer results

are significant because of the smaller sample but for services two reforms stand out

(Figure 32). First, opening to foreign direct investment is particularly important for

middle-income countries in quartiles 2 and 3. These countries have often

successfully industrialised to a point but their services sector remains protected and

inefficient. Second, freeing labour markets seems to be particularly important for

second-quartile economies.

Which of the four areas matters

most depends upon the level of

development of the country

Recent IMF work shows which

areas of reform matter the most for

productivity



Wh

y p

rod

uctiv

ity h

as s

low

ed

Figure 30: Past studies emphasise the benefits of reforms

Summary

Financial-sector reforms Developed financial systems result in more efficient allocation of capital (Rajan and Zingales 2001,

Tressel 2008)

In Eastern Europe reducing financial repression raised manufacturing productivity by 17% by facilitating the

movement of resources to more productive firms (Larrain and Stumpner 2013)

Efficient financial systems increase investment, spur innovation (Levine, 2005)

Availability of financial instruments useful for financing innovation can be more relevant for countries closer

to the tech frontier (Aghion, Howitt and Mayer-Foulkes, 2005)

Trade and FDI liberalisation More open economies with lower trade barriers grow faster (Wacziarg and Welch, 2008)

Services barriers in EM (on average) are much higher than in OECD countries (Borchert, Gootiiz and

Mattoo, 2010)

In many low-income countries (especially SSA) tariffs are high and non-tariff barriers hinder regional

integration (Tombe, 2012)

Easing of regulatory restrictions for FDI in the services sector is associated with higher productivity in

downstream manufacturing (Fernandes and Paunov, 2012)

Labour markets Mandatory dismissal regulations weaken productivity growth in industries where lay-off restrictions are

more binding (Bassanini, Scarpetta and Visco, 2000)

Labour productivity and TFP growth tend to be weaker in industries with more stringent employment

protection (Bassanini and Duval, 2009)

Less stringent labour market institutions facilitate the movement of labour to more productive firms and

make firm entry and exit easier (Henrekson and Johansson, 2010)

Excessive regulation can slow down job creation in global value chains (GVCs) (World Bank, 2012)

A 1ppt drop in levels of informality in Latam countries reduces the TFP gap with the US by 0.5ppt (Inter-

American Development Bank, 2013)

Product-market reforms In manufacturing, gains from lowering entry barriers are higher for countries further from the frontier

(Nicoletti and Scarpetta, 2003); (Bourles et. al, 2013); (Dabla Norris et. al, 2015)

Low product market competition impairs productivity growth, inhibits new firm creation and business

investment and slows the diffusion of new technologies (Conway, de Rosa, Nicoletti and Steiner, 2006)

Regulations limiting entry into product markets can hinder the adoption of technologies, especially for

countries closer to the global tech frontier (Aghion, Howitt and Mayer-Foulkes, 2009)

Agricultural-sector reforms including efforts to scale back excessive government intervention can generate

productivity gains (Adamopoulos and Restuccia, 2011)

Countries with lighter direct and indirect regulatory burdens have experienced higher productivity growth

(Dall’Olio et.al, 2013)

Agricultural reforms (e.g., scaling back export monopolies and administered prices, and improving infra-

structure and crop yields) brings economy-wide productivity gains (Adamopoulos and Restuccia 2011)

Institutions, human capital and innovation

Secure property rights and sound legal systems have a first-order effect on long-term economic growth (Acemoglu, Johnson and Robinson, 2005)

As a country catches up to the global technology frontier, tertiary education becomes more relevant for

growth (Vandenbussche, Aghion and Meghir, 2006)

Investment in R&D can increase growth by facilitating innovation in countries near the frontier and

increasing absorptive capacity of countries not yet there (Acemoglu, Aghion and Zilibotti, 2006)

Primary and secondary education matters more for a country’s ability to imitate the frontier technology;

tertiary education has a larger impact on ability to innovate (Aghion and Howitt, 2009)

Source: IMF, Standard Chartered Research; For references see: Era Dabla-Norris et. al, ‘Structural Reforms and Productivity Growth in Emerging Markets and Developing Economies’ , IMF

Working Paper WP/16/15, 2016.



Wh

y p

rod

ucti

vit

y h

as s

low

ed

Figure 31: Which reforms raise labour productivity the most?

% gain in labour productivity, all countries and by quartiles

Full sample Q1 Q2 Q3 Q4

Financial-sector reforms

Banking-system reforms 4.32 4.54 7.07 7.57

Interest rate controls 1.16 2.23 1.66

Credit controls 1.45 3.45

Privatisation 2.01 2.97 3.66

Supervision 2.29 5.21 4.96 4.60 0.91

Capital market development 2.29 6.60

Trade and FDI liberalisation

Trade (tariff and C/A restrictions) 1.52 5.05 2.78

FDI liberalisation 1.94 2.52 2.89 2.25

Institutional reforms

Legal system and property rights 0.35 0.94 0.35 0.44

Product market and regulatory reforms

Agriculture 2.43 4.64 1.63

Business regulation 0.59 1.08 0.67 0.29

Labour-market regulations 0.29 1.59 0.57

Which countries in which quartile? Income group quartiles (based on GDP per capita at PPP relative to the US)

Nigeria Vietnam Kenya Ghana

Brazil China, India Indonesia Philippines

South Africa Thailand

Malaysia Mexico Turkey

Australia, France Germany, Hong

Kong, Italy, Japan Korea, Singapore, Spain, Taiwan, UK,

US

Source: IMF, Standard Chartered Research

Figure 32: Reforms and distance to frontier: sectoral productivity growth

Productivity growth in services

Full sample Q1 Q2 Q3 Q4

Financial-sector reforms

Banking-system reforms 0.65 0.48

Capital market development 1.98

Trade and FDI liberalisation

Trade (tariff and C/A restrictions) -3.86

FDI liberalisation 2.81 4.59 4.17

Institutional reforms

Legal system and property rights 1.78

Product market and regulatory reforms

Agriculture 2.39

Business regulation -0.94

Labour-market regulations 2.71

Source: IMF, Standard Chartered Research



Wh

y p

rod

uctiv

ity h

as s

low

ed

Regulatory reforms – Mixed progress

Which countries have undertaken important reforms recently? We have looked at the

change in scores provided by the Fraser Institute across four of the important areas –

freedom to trade internationally, credit-market regulations, labour-market regulations

and business regulations – in our regulatory change heatmap to gauge the changes

since 2007 (Figure 33).

The most progress is on business and labour regulations

Most countries in our heatmap have made good progress on business regulations,

led by China, the Philippines, India, Malaysia and Taiwan. Measures such as

simplifying licensing requirements, making tax compliance easier (e.g., by providing

for online filing) and eliminating minimum capital requirements have made it easier to

start a formal business. Many have also made progress on labour regulations,

including Germany, Taiwan, China, Turkey and the Philippines.

However, far fewer have made progress on freedom to trade, with Vietnam, the

Philippines and Malaysia the best performers. Reductions in non-tariff barriers and

easing of capital restrictions (as in the Philippines) are big steps forward. Not many

countries have made improvements in credit-market regulations either, though Italy,

Mexico and Turkey are the best improvers.

Credit-market and trade regulations have deteriorated for some

Meanwhile quite a few countries have deteriorated in terms of credit-market

regulations, including developed countries such as the UK, Spain and the US, and

the African countries in our sample. A number of countries have deteriorated on trade

regulations too, again including several developed countries, and likely a reaction to

the GFC.

Overall top performers – Taiwan, Germany, China, the Philippines

Averaged across our four measures Taiwan comes first, with significant gains on

labour-market and business regulations. Germany is second with a substantial jump

in its labour-market regulations score, a change which is generally credited with

making Germany highly competitive within the euro area. China and the Philippines

are third and fourth, with gains in labour-market and business regulations and, in the

case of Philippines, with the freedom to trade. Most of the countries at the bottom of

the table are developed countries, including Australia, the US, UK and Spain. South

Africa and Thailand also languish low down.

Taiwan and Germany have made

most progress overall while

South Africa and Thailand have

made the least

There has been less progress on

credit-market regulations and

freedom to trade



Wh

y p

rod

ucti

vit

y h

as s

low

ed

Figure 33: Regulatory change indicators heatmap

Change 2012-13 vs 2007-08 in index (Index from 0-10; 10 being best)

Freedom to trade

internationally Credit-market

regulations Labour-market

regulations Business regulations Overall score

Taiwan 0.17 0.19 1.54 0.66 0.64

Germany -0.32 0.04 2.55 0.05 0.58

China 0.07 0.31 0.75 0.83 0.49

Philippines 0.48 0.00 0.55 0.79 0.46

Malaysia 0.40 0.00 0.37 0.68 0.36

Mexico 0.09 0.66 0.09 0.57 0.35

Vietnam 0.50 -0.12 0.17 0.56 0.28

Turkey -0.35 0.59 0.59 0.27 0.28

Italy -0.27 0.75 0.48 0.03 0.25

Brazil -0.17 0.18 0.51 0.06 0.15

India -0.07 -0.31 0.19 0.72 0.14

Korea -0.16 0.00 0.46 0.10 0.10

Kenya -0.12 -0.73 0.24 0.48 -0.03

Indonesia 0.03 0.07 -0.54 0.27 -0.04

Nigeria 0.25 -0.61 -0.26 0.38 -0.06

Hong Kong -0.34 0.00 0.06 0.01 -0.07

Ghana -0.44 -0.83 0.11 0.41 -0.19

France -0.28 -0.41 0.08 -0.14 -0.19

Singapore -0.56 0.00 -0.08 -0.14 -0.20

Japan 0.23 -0.92 0.04 -0.18 -0.21

Thailand 0.07 -0.13 -0.81 0.04 -0.21

South Africa 0.13 -0.96 -0.13 0.01 -0.24

Spain -0.13 -1.17 0.16 0.10 -0.26

United Kingdom -0.32 -1.47 0.28 0.26 -0.31

United States -0.52 -0.43 -0.20 -0.15 -0.33

Australia 0.13 -0.45 -1.65 0.02 -0.49

Source: Fraser Institute, Standard Chartered Research

Implications: Winners and losers



Imp

licati

on

s:

Win

ne

rs a

nd

lo

sers


Implications for monetary policy

Productivity and neutral rates

Standard economic theory suggests that higher productivity growth should be

associated with higher real interest rates and vice versa. The current low levels of

bond yields in developed countries, as well as reduced expectations for the ‘neutral’

level of the Federal Funds rate, are commonly attributed to lower potential growth in

the US (Figure 34).

However, the full analytical framework sees real interest rates determined by the

interaction between productivity (or, strictly, total potential growth including labour

force increases), savings and investment. When low productivity growth is associated

with low investment then real rates are naturally lower to encourage more investment

and discourage savings. This may be what is happening currently.

But if savings are high, independently of productivity, perhaps because Chinese

companies and households are saving heavily for precautionary reasons, then real

rates can be low even when productivity growth is high. That seems to be what

happened in the early 2000s when US real rates came down even as productivity

growth surged. And world productivity growth was strong then too. So it seems the

‘excess savings’ hypothesis was dominant at that time.

We also show the current position for productivity growth in 2015 and real rates

across our countries (Figure 35). While there is an upward slope in this distribution,

the relationship is very loose. This is not too surprising as there are many other

things going on, including the savings/investment balance mentioned above and

short-term cyclical movements.

Real rates and the Fed’s thinking

In the last year US output per worker in the business sector fell by 0.4% and growth

has averaged less than 1% p.a. for several years. This feeds into Fed thinking in

several ways. First, low productivity growth means potential GDP growth is lower and

therefore the ‘neutral’ rate of interest is lower. Whereas pre-crisis the Fed generally

viewed the neutral rate as being 4-5%, now the projections released by the FOMC

suggest it may only be 3%. Many in the markets believe it may be lower still and that

the Fed will continue to reduce its estimate.

Figure 34: US real yields vs labour productivity growth

% y/y

Figure 35: Productivity growth vs real interest rates

%

Source: Eikon, Standard Chartered Research Source: OECD, Bloomberg, Standard Chartered Research

Labour productivity

growth

US real yield

-1

0

1

2

3

4

5

6

1988 1990 1992 1994 1997 1999 2001 2003 2005 2007 2010 2012 2014

AU

BR

CN

DE FR

GH

HK

ID

IN IT

JP

KE

KR MY

MX

NG

PH

SG ES

TH TW

TR

GB US

VN

ZA

-8

-6

-4

-2

0

2

4

6

8

10

-2.0 0.0 2.0 4.0 6.0 8.0

Rea

l in

tere

st r

ates

Productivity growth 2014-15

Currently real rates are low because

both productivity and investment

are weak

Fed estimates of the natural rate

have fallen to 3.0% currently from

4-5% before the GFC



Imp

licatio

ns

: Win

ne

rs a

nd

los

ers

Second, if GDP growth registers 2% in 2016-18 as the Fed forecasts, unemployment

will continue to decline. This has been the pattern throughout the recovery so far.

Fernald’s figures suggest that from 2010-15 the average 2.07% GDP growth

achieved can be accounted as a 1.68% increase in hours worked (more employment

and a longer working week) and only a 0.47% increase in output per hour.

The Fed forecasts only a very gradual decline in unemployment going forward, from

4.9% currently to 4.6% by end-2018. This minimal change is perhaps because it

anticipates an improvement in productivity growth (which could be boosted by higher

investment as capacity use tightens) or an improved participation rate as the labour

market tightens. Both of these are plausible (and indeed the participation rate has

stabilised over the last year after falling steadily since the GFC). That said, the Fed

has persistently underestimated the rate of decline of unemployment in this recovery.

Unemployment fell below 4% in 2000 and could do so again. Depending on the pace

and extent of decline, fears of rising wages (where there is already an early stirring)

and eventually an overheating economy may encourage the Fed to undertake further

tightening.

Third, the Fed is considering the idea of ‘running the economy hot’ for a while to try to

boost productivity growth. The need to invest to add capacity, as well as rising wages

which may encourage new investment in labour-saving technology, could stimulate

higher productivity. The danger would be that wage growth and inflation accelerate

too quickly, forcing a major tightening and bringing a new recession. But many

FOMC members believe that the inflation response is very muted at present, as

globalisation means that it is the global output gap that matters. Europe still has

plenty of excess capacity, as does China, which could keep a lid on inflationary

pressures in the US. Others on the FOMC believe that rather than precautionary

tightening it is better to wait until inflation actually does increase before acting.

US potential growth now

Historically, US potential growth has typically been estimated in the 2-3% range. In

the early 1990s most estimates put it at 2.25-2.5%. Then the boost to productivity

around the turn of the century saw estimates of 3% or even above. Fernald’s analysis

discussed above puts it at 1.6% for the next 7-10 years. In part, this is because of

slower labour-force growth as the baby-boomers reach retirement, plus a reduction

because of less new educational attainment. But most of it is due to slower

productivity growth. That said, productivity growth has to increase from the rates of

the last few years to reach even this level. We are not so sure it will.

We take a non-consensus view

Our forecast is that growth will not recover much from the slowdown of the last three

quarters so that GDP growth will not reach 2% in 2016-17. Indeed, we see continuing

weak productivity growth as a key reason for expecting poor economic performance,

by holding down profits and wages and keeping confidence in check. For us,

overheating is not likely to be an issue. Instead, we look for low and stable interest

rates in the foreseeable future.

Many Fed members believe that the

global output gap matters, keeping

inflation low and allowing the Fed to

run the economy hot

We expect the US economy to

experience weak productivity

growth next year



Imp

licati

on

s:

Win

ne

rs a

nd

lo

sers

The key role of services

Neglected for too long

Most studies on productivity trends focus on manufacturing, whether the transition

from agriculture to manufacturing in emerging markets or drivers of manufacturing

productivity such as automation. Surprisingly little attention has been paid to services

productivity. One reason is the greater difficulty in measuring productivity in services

compared with other sectors. It is more difficult to determine whether one hairdresser

or doctor is more productive than another, as so much depends on the quality of the

service, not just the quantum.

Another reason is the general assumption that services-sector productivity will

always be lower than manufacturing-sector productivity. This is often known as

Baumol’s disease after the economist William Baumol who first discussed it in the

1960s. Baumol theorised that most parts of the services sector would suffer from low

productivity growth as it is more difficult to automate production in services than in

manufacturing. For example, it would be hard to conceive of a technology that would

allow one hairdresser to cut two people’s hair at the same time.

Historically, services productivity has been lower than manufacturing-sector

productivity. It grew by only 0.3% y/y during 2001-09 for OECD countries compared

with 1.7% p.a. growth in manufacturing productivity over the same period. And while

manufacturing productivity growth has slowed in most countries since the crisis,

services productivity growth remains lower (Figures 36 and 37).

Services make up 70% of global output

We believe policy makers will increasingly need to focus on services productivity as

the key to future productivity growth for the whole economy. Services now account

for nearly 70% of global output (Figure 38), reflecting their growing importance in the

developed world, but also in emerging markets such as India, Kenya, and even

traditionally manufacturing-led economies such as China, which is trying to reorient

towards services. Policy makers in several emerging economies in Sub-Saharan

Africa and Asia will also have to design policy for countries facing ‘premature de-

industrialisation’ – countries that are becoming services economies with still-weak

industrial sectors (Rodrik, 2015) (Figure 39).

Figure 36: Services lagged manufacturing in 2001-07

Real value added per hour, % change y/y

Figure 37: It remained lower in 2009-14

Real value added per hour, % change y/y


Bs services excl. real

estate

Manufacturing

-2

0

2

4

6

8

10

12

GB IT AU FR DE EA19 EU28 ES IR KR

Bs services excl real estate

Manufacturing

0

2

4

6

GB IT AU FR DE EA19 EU28 ES IR KR

Historically services productivity

lags manufacturing productivity

Even emerging market countries are

becoming more services-sector

oriented

Problems in estimating quality

make it hard to measure services

productivity



Imp

licatio

ns

: Win

ne

rs a

nd

los

ers

Moreover, the demand for services is likely to rise relative to goods demand in many

countries as populations age. Older people spend more on health care and financial

planning than manufactured goods. And manufacturing itself is increasingly being

unbundled into a series of processes from design to production to marketing and

sales, most of which fall in the services sector. As robots and 3D printers take on

more of the actual production role, even the production process itself will depend

primarily on services such as coding, maintenance and repair.

A final reason for focusing more on services is that recent academic work suggests

that improving services-sector productivity in areas such as electricity supply,

telecommunications, health and education can help raise the labour productivity and

TFP levels in other sectors, including manufacturing.

The 3Ts can boost services productivity growth

Baumol’s disease implies that the rising share of the services sector is an

impediment to higher economy-wide productivity growth. Recent academic work

suggests otherwise. Ghani et al argue that the 3Ts – namely growing tradability,

sophisticated technology and lower transport costs – are helping to elevate services

productivity in many services sectors (Ghani, 2010). The internet has allowed

previously untradeable services to become tradable through integration into global

supply chains. As the price of digital technology has fallen, this has helped lower the

cost of transporting these services as well. In addition, many services do not have to

face the customs and logistics barriers faced by manufactured goods, which also

lowers their costs.

Sectors such as retail and wholesale trade, finance and information and technology

can have productivity levels higher than those seen in the manufacturing sector. And

improvements in these sectors can also help to raise the productivity levels in more

‘traditional’ services sectors, such as health and education, utilities and social and

personal services. Moreover, new technologies such as artificial intelligence (AI) and

service robots have the potential to drive faster productivity even in these more

traditional services.

According to the latest data for OECD countries, modern services productivity growth

still lags manufacturing productivity growth in general. However, labour productivity

growth in frontier firms in modern services averaged 5.0% p.a. over 2001-09 while

that of frontier firms in the manufacturing sector only averaged 3.5% p.a. over the

Figure 38: Services is now the dominant sector

Services as % of world GDP

Figure 39: Premature de-industrialisation?

Manufacturing as % of GDP

Source: World Bank, Standard Chartered Research Source: World Bank, Standard Chartered Research

55

60

65

70

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

KE

ID

GH

0

5

10

15

20

25

30

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Higher tradability, new technology

and lower transport costs are

boosting services productivity

Higher services productivity could

boost productivity in other sectors

as well

Productivity growth in modern

services frontier firms has outpaced

that in manufacturing frontier firms



Imp

licati

on

s:

Win

ne

rs a

nd

lo

sers

same period (OECD 2015) (Figure 40). This suggests that greater competition

through trade, lower transport costs and especially the use of modern technology is

enabling firms in the services sector to raise productivity levels.

Introducing the Services Potential Index

To understand which countries have the best potential for a rise in services-sector

productivity, we introduce our Services Potential Index (SPI). The index comprises 13

indicators chosen to capture the current state of the services sector and the potential

for services productivity to accelerate (Figure 41). Several indicators show the size

and importance of the services sector today. Others focus on technological readiness

and measures of educational attainment, innovation and sophistication. Another set

measure some of the key environmental factors that influence services, including the

openness to FDI, the efficiency of the government, the development of the financial

sector and the extent of regulation in the labour market.

Figure 40: Higher productivity growth in service frontier firms than in

manufacturing; Labour productivity; Index 2001=0

Source: OECD, Standard Chartered Research

Note: “Frontier firms” corresponds to the average labour productivity of the 100 globally most productive firms in each 2-digit

sector in ORBIS

Frontier firms (Mfg)

Frontier firms (Svs)

All firms (Mfg)

All firms (Svs)

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

2001 2002 2003 2004 2005 2006 2007 2008 2009

We look at 13 indicators to develop

a Services Potential Index

14 S

ep

tem

ber 2

01

6

37

Sp

ec

ial R

ep

ort –

Ec

on

om

ics

: Esc

ap

ing

the

pro

du

ctiv

ity s

lum

p


Figure 41: Our Services Potential Index

Rank (unless specified)

Country Services as

% of GDP

Svs prody/mfg

prody

Marketable services/GDP

(%)

Services exports/total exports (%)

Technological readiness

Business sophistication

Innovation FDI and

technology transfer

Higher education

and training

Labour market

efficiency

Financial market

development Govt sector

Govt efficiency

Average rank

HK 92.7 2.1 74.1 20.3 3 6 11 1 15 2 1 6 3 4.2

SG 75.0 0.8 60.4 36.7 2 7 4 2 9 15 6 1 1 5.3

US 78.0 0.8 58.4 42.6 6 3 1 3 5 12 4 2 12 5.3

GB 78.4 0.7 45.3 71.5 1 4 6 6 1 17 3 7 4 5.9

DE 69.0 0.8 46.1 18.2 4 2 3 5 17 10 11 5 8 7.6

AU 70.5 0.7 49.0 22.1 8 12 10 4 13 19 10 3 7 9.0

JP 72.0 0.6 40.7 23.0 7 1 2 11 12 20 8 8 16 9.3

FR 78.7 0.8 34.4 47.3 5 9 8 18 4 13 2 10 10 10.7

TW 62.0 1.1 43.6 17.7 11 8 5 8 20 7 15 4 13 10.2

MY 51.2 0.5 35.7 17.9 13 5 9 15 19 22 21 12 2 11.8

ES 75.1 0.7 35.6 40.7 9 14 15 16 7 16 5 11 17 14.0

TR 64.9 1.0 44.0 32.4 16 21 20 7 10 8 13 14 11 14.3

KE 50.4 1.8 34.9 65.9 22 19 16 17 2 3 22 24 18 14.7

PH 57.3 0.4 41.7 41.0 18 18 19 10 6 25 17 17 9 14.7

ZA 68.1 0.9 40.3 18.1 15 13 17 12 18 9 12 20 19 15.0

IT 74.3 0.8 32.0 21.5 12 10 14 19 14 11 7 13 26 15.9

KR 59.6 0.5 28.0 19.4 10 11 7 23 16 24 16 9 20 16.5

IN 52.6 1.3 38.6 48.2 26 22 18 13 3 6 20 22 25 16.6

TH 52.7 0.4 29.6 24.2 17 16 22 20 11 26 19 15 6 16.6

MX 62.2 0.8 42.3 5.3 19 23 21 9 25 14 14 21 5 17.1

ID 42.3 0.5 25.7 13.0 21 15 12 25 22 23 25 16 14 17.2

BR 70.8 0.7 38.6 17.3 14 20 24 14 21 18 9 18 15 17.8

CN 48.1 0.6 28.8 11.9 20 17 13 22 23 21 24 19 22 18.8

GH 49.9 1.7 27.0 37.4 24 24 23 24 8 4 23 25 24 20.2

VN 39.0 3.4 28.8 7.2 23 26 25 21 24 1 26 23 23 21.1

NG 54.8 1.6 19.2 1.6 25 25 26 26 26 5 18 26 21 21.2

Source: GCI, EFI, National Statistical Sources, Standard Chartered Research



Imp

licati

on

s:

Win

ne

rs a

nd

lo

sers

Malaysia, Kenya and Turkey lead the emerging markets

We calculate the SPI for 26 countries covering both developed and emerging markets,

ranking countries on all individual indicators and then calculating an average rank

across all the indicators. While the final rank is calculated as the average for all 13

indicators, in the table we give the actual values (rather than the ranks) for the first four

indicators. Developed countries led by developed Asia (Hong Kong and Singapore) sit

at the top of the SPI table, scoring well on almost all fronts including technology, human

capital, share of service exports and efficiency of governments.

Among emerging markets, Malaysia, Turkey, Kenya and the Philippines are the

better performers. Malaysia does particular well on indicators such as government

and labour-market efficiency, business sophistication and financial-market

development. Turkey benefits from a small government sector, a relatively high share

of marketable services to overall services and relatively favourable services-sector

productivity to overall productivity. Kenya also benefits from a favourable services

productivity performance and a high share of services exports in overall exports.

India risks losing the services crown; Philippines and China gain

We also compare recent performance with 2007 to evaluate which countries have

made progress on improving services-sector potential since the GFC. This could

herald an acceleration of services productivity.

The Philippines has seen the biggest improvement in overall rank (Figure 42), with

notable improvements in FDI and technology transfer, financial-market development

and innovation. China has also gained rapidly in rank, reflecting some success of

recent attempts by authorities to deepen and strengthen financial markets, as well as

improve government efficiency.

Korea and India have seen the largest deterioration in performance, sending warning

signals in particular to India, which – unlike Korea – does not have a manufacturing base

to fall back on. India has seen a sharp deterioration in terms of FDI and technology

transfer, business sophistication and technological readiness, as well as higher education

and training. This is surprising given India’s status as a specialist in IT services, though

these clusters of excellence are surrounded by a huge informal sector where productivity

is weak. Korea also suffers from deteriorating government efficiency scores, and weaker

performance in financial-market development and technological readiness.

Figure 42: India’s ranking has been falling while the Philippines’ has risen

Change in rank between 2007 and latest; positive change is better


India

Philippines

-20

-15

-10

-5

0

5

10

15

Ser

vice

s as

% o

f GD

P

Ser

vice

s pr

ody/

Mfg

pro

dy

Mar

keta

ble

serv

ices

/GD

P

Ser

vice

s ex

port

s/to

tal

expo

rts

Tec

hnol

ogic

al re

adin

ess

Bus

ines

s so

phis

ticat

ion

Inno

vatio

n

FD

I and

tech

nolo

gy tr

ansf

er

Hig

her e

duca

tion

and

trai

ning

Labo

ur m

arke

t effi

cien

cy

Fin

anci

al m

arke

t de

velo

pmen

t

Gov

t sec

tor

Gov

t effi

cien

cy

India and Korea have deteriorated

the most on the SPI post-crisis

Malaysia and Turkey are the best

performers in emerging markets



Imp

licatio

ns

: Win

ne

rs a

nd

los

ers

Winners and losers over the next three to five years

Four groups of countries

We bring together the various drivers of productivity discussed above: changes in

our SPI, investment ratios, progress on reforms, ICORs and recent productivity

performance (Figure 43). The investment ratio is particularly important in our view.

Countries with a high ratio will nearly always show good growth in labour

productivity, even if they over-invest as China does. Equipping workers with more

machines and/or building infrastructure will bring results. We therefore use two

dimensions – overall productivity strength and the investment ratio – to divide

countries into four groups.

1. Best prospects – Asian emerging countries lead

We find eight countries which both score well on our five drivers and have a relatively

high investment ratio: China, Malaysia, Vietnam, Indonesia, India, Ghana, Singapore

and Hong Kong. China is top, though we expect its productivity growth to continue to

slow because the efficiency of investment has declined and the ratio of investment to

GDP is also set to decline.

Ghana makes the list but, unfortunately, this reflects the recent oil exploration boom

and is unlikely to be repeated. Singapore and Hong Kong have good scores overall

and relatively high investment ratios, even though it will always be harder for

developed countries to grow as rapidly as emerging countries.

2. Good prospects but need higher investment

Another group of countries also has good prospects for productivity growth but needs

higher investment rates to do really well; this group comprises the Philippines,

Turkey, Kenya, Nigeria and Taiwan. The Philippines is top of the list here. If it could

raise its investment/GDP ratio to 25-30%, from c.20% currently, it could deliver very

strong productivity and GDP growth. The Philippines, like Kenya and Nigeria,

achieves quite good productivity growth, reflecting the fact that all three have very

little capital currently and so most of their gross investment is new investment. That

said, these countries could potentially grow at 8-10% if they could also mobilise

higher investment.

Asian countries dominate the list of

countries with the best prospects



Imp

licati

on

s:

Win

ne

rs a

nd

lo

sers

Productivity prospects


China

Malaysia

Ghana

Vietnam

Indonesia

India

Singapore

Hong Kong

Philippines

Turkey

Kenya

Taiwan

Nigeria

Korea

Thailand

France

Australia

Mexico

Germany

Brazil

US

Italy

South Africa

UK

Spain

Good prospects: need more investment

Best prospects

Laggards High investment but low

performance

Higher investment

Strength of key drivers



Imp

licatio

ns

: Win

ne

rs a

nd

los

ers

3. High investment, disappointing performance

The third group of countries has reasonably strong investment but ranks poorly on

our other measures. This includes Thailand, where past productivity growth has been

solid but there has been little progress in recent years on reforms or making the

services sector more dynamic. Korea is also in this group, largely because of its low

ranking on our SPI. France and Australia are also in this group. Australia’s

investment is falling back because of the commodity slump and it is at risk of

transitioning into the laggards group before long.

4. The laggards – Weak investment and low productivity potential

Countries in the bottom left of the table are mostly the old developed countries with

recent weak performance in terms of productivity and investment, together with little

reform. That said, if the economic upswing continues we should eventually see a

cyclical pick-up in investment. But structural factors could keep productivity growth

low, at least in the near term.

Mexico, Brazil and South Africa also fall in this group. Mexico probably has the best

chance of moving up in coming years if the current reform programme continues.

Figure 43: Productivity drivers

Rank

Rank Productivity

growth % Regulatory

reforms Change in

Services potential Investment/GDP ICOR

China 1 1 3 2 1 10

Philippines 2 7 4 1 19 2

Malaysia 3 11 5 7 10 7

Ghana 4 3 18 15 5 3

Vietnam 5 4 8 21 8 6

Indonesia 6 5 14 17 2 11

India 7 2 11 25 3 8

Turkey 8 21 7 5 18 5

Singapore 9 14 19 8 6 9

Kenya 10 18 13 6 17 4

Hong Kong 11 9 16 11 11 12

Taiwan 12 15 1 19 13 15

Nigeria 13 6 15 15 26 1

Korea 14 8 12 26 4 17

Mexico 15 23 6 12 14 13

Germany 16 22 2 3 23 21

Thailand 17 10 21 23 9 14

France 18 25 17 4 12 24

Brazil 19 19 10 18 15 20

Australia 20 13 26 20 7 22

Japan 21 20 20 13 16 23

US 22 17 25 10 21 19

Italy 23 26 9 9 24 26

South Africa 24 12 22 22 22 18

UK 25 24 24 14 26 16

Spain 26 16 23 24 20 25

Source: WEF GCI, IMF, World Bank, Standard Chartered Research

Spain, the UK and Italy languish at

the bottom of the list



Imp

licati

on

s:

Win

ne

rs a

nd

lo

sers

Longer-term prospects

Looking beyond the next few years, the drivers of productivity performance will likely

remain much the same as discussed above, with two major caveats – the potential

for a boost from technology; and the effects on productivity growth as countries

transition through different stages of development.

The potential for a boost from technology

We support the view that new technologies such as robotics, AI and additive

manufacturing (3D printing), alongside existing rapid growth of digital technologies

including mobile, the cloud and the IoT could bring a new wave of technology-driven

productivity growth in the longer term (Special Report, 19 January 2015,

‘Technology: Reshaping the global economy’). But new products – such as driverless

cars, flexible robots, digital personal assistants and truly expert systems – although

already appearing, will only affect the productivity data on a 10-20-year view.

On past form the countries most set to benefit will be the US, UK, Hong Kong and

Singapore among our list, as they were the most enthusiastic adopters of the earlier

wave of digital advances associated with the internet and personal computer.

Continental Europe was slower to adopt these technologies in the 1990s and, with

exceptions such as Germany, may again be relatively slow unless inflexible labour

laws can be improved.

For emerging countries, new technologies offer opportunities but also potential

challenges. India and the Philippines have benefited considerably from developing

services exports around digital technology. China is heavily supporting technological

innovation in a move to push manufacturing companies up-market, while rising wages are

having the same effect. However, for emerging countries the important thing remains to

adopt the new technologies, not necessarily to invent them. Often barriers to foreign

investment, local content rules or labour and product regulations get in the way of this.

Another challenge for emerging markets is that some of the new technologies, such

as robotics, are ideal for replacing low-skilled labour and could make it more difficult

for them to generate the jobs needed in the face of population growth and people

leaving the rural sector. China’s population is stabilising and the majority have

already moved to towns but for many emerging markets in South Asia and Africa the

new technologies could prove a major challenge.

Productivity at different stages of development

A separate issue in thinking about long-term productivity potential is the potential for

countries at different stages of development. For very low-income countries,

achieving the initial ‘take-off’ to high productivity can be difficult, as many African

countries continue to demonstrate. If they can get started, then East Asian countries

– including the latest and most spectacular example, China – have shown that

economic growth of 8-10% is achievable (of which typically productivity accounts for

6-8%). Among the countries on our list, Vietnam and the Philippines have the best

chance of achieving this. The Philippines needs a higher investment rate while

Vietnam needs more supply-side reforms, though both are already doing well.

Once countries gain middle-income status, achieving rapid productivity growth

becomes more difficult as the relatively ‘easy’ option of building factories and

employing low-skilled workers reaches a limit. Instead, skills and education become

more important and generating productivity growth in the services sector, by now

For emerging markets adoption of

existing technologies, not

invention, will be important

New technologies are likely to affect

productivity trends over the next

decade or two





Imp

licatio

ns

: Win

ne

rs a

nd

los

ers

much larger, becomes critical. At this point many countries become mired in the

‘middle-income trap’, largely because the services sector is over-protected with

product, labour and foreign investment regulations which limit its potential.

For developed countries, the services sector is even more important and, for many,

again over-regulation is a problem. Current initiatives to prise open services sectors

by freeing up trade – including the European Single Market, the Transatlantic Trade

and Investment Partnership (TTIP), the Trans-Pacific Partnership (TPP) and others –

are at risk of failing in the face of the backlash against globalisation.

Recent events have refocused attention on the losers from both globalisation and

technological change. The challenge for governments is to find a way to keep both

on track while supporting and compensating those who lose jobs or incomes. In the

absence of enthusiastic technology adoption and continued trade growth, the

prospects for productivity growth in the long run will be more difficult.

Currency markets

There is a long-established theoretical relationship which says that faster productivity

growth leads to a rise in the real exchange rate (adjusting for relative prices). As

wages rise in high-productivity sectors (usually manufacturing in emerging markets)

competition for labour raises them for companies in low-productivity areas too and

firms have no choice but to raise prices. This relationship is broadly confirmed by our

analysis (see Figure 44).

That said, the relationship is long-term and not wholly reliable, according to some

studies (Peltonen 2009). Moreover, its usefulness is limited for currency investors

because the rise in the real exchange rate occurs via higher wages and prices not via

a nominal exchange rate appreciation. Our analysis finds that there is no relationship

between productivity growth and nominal exchange rates.

There is, however, a group of countries in Asia with high productivity growth and a

rising nominal exchange rate, including China, Singapore, Korea, Thailand and the

Philippines. Several other countries, including Vietnam, Indonesia and India, have

experienced a long-run tendency towards a declining exchange rate, despite decent

productivity growth. The latter countries have struggled to keep inflation down. If

wages and prices rise faster than productivity growth it is hard to avoid a declining

nominal exchange rate.

Figure 44: Labour productivity and real exchange rates

Change 2001-15 % p.a.

Figure 45: TFP and real exchange rates

Change 2001-15 % p.a.


BR

CN

DE FR

HK ID

IN

IT

JP

KR MY

MX

PH SG

ES

TH TW TR

GB

US

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

-40 -30 -20 -10 0 10 20 30 40

Ch

ang

e in

rea

l exc

han

ge

rate

s

Labour productivity growth

CN

DE

FR HK

ID

IN

IT

JP

KR

MY MX

PH

SG

ES

TH

TW

TR GB

US

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

-40 -30 -20 -10 0 10 20 30 40

Ch

ang

e in

rea

l exc

han

ge

rate

s

TFP growth

Current initiatives to open up the

services sector are facing

headwinds

We do not find any relationship

between productivity growth and

nominal exchange rates



Imp

licati

on

s:

Win

ne

rs a

nd

lo

sers

In principle, higher productivity growth should make it easier to control inflation by

helping to generate stronger government revenues and therefore keep budget

deficits down. In practice, this is not always easy for governments. Also, the higher-

inflation countries tend to have infrastructure bottlenecks which keep inflation higher.

So, what does productivity growth tell investors thinking about exchange rates? First,

be careful about relying on real exchange rates alone to judge whether or not a

currency is competitive. For example, China’s real exchange rate has risen 27%

since end-2001, but with labour productivity growth averaging almost 9% p.a. this

does not necessarily make China less competitive. Wage behaviour also has to be

taken into account.

Second, rapid productivity growth will tend to push up wages and prices relative to

other countries; this is what is meant by a rise in the real exchange rate. Therefore

investments in the country which are linked to wages and prices should go up in value

for foreigners both through domestic price appreciation and because the real exchange

rate is higher. This applies particularly to real estate, where the supply of land is

naturally constrained. It may also apply to stock markets, to which we now turn.

Stock markets

We find a correlation between stock market returns and productivity growth, both

labour productivity and TFP (Figure 46 and 47). This supports the intuition that faster

productivity growth should be good for stock markets.

That said, we are cautious about claiming that higher productivity growth is the cause

of a better-performing stock market for several reasons. First, they are both

themselves correlated with higher GDP growth and while higher productivity growth

can be a cause of higher GDP growth, the reverse is true too: higher growth

stimulates more investment and therefore better productivity. Second, economic

theory and evidence suggest that most productivity gains naturally flow through to

consumers in the form of lower prices and/or workers as higher wages.

Third, productivity growth, especially where it comes from major technological

innovations, is often generated by new firms which may not be listed on stock

markets until they have already made the biggest gains in productivity. Linked to this,

as we have already argued, it may be the demise of low-productivity firms which is

critical to higher productivity growth but they may drag the stock market down in their

Figure 46: Stocks are correlated with labour productivity

Total return index and labour productivity % p.a., 2001-15 avg.

Figure 47: Stocks are also correlated with TFP

Total return index and TFP % p.a., 2001-11 avg.


AU BR

CN

DE FR

HK

ID

IN

IT JP

KR

MX

MY

PH

SG

ES

TH

TR TW GB

US

ZA

0

2

4

6

8

10

12

14

16

18

20

-2 0 2 4 6 8 10

To

tal r

etu

rn in

dex


AU

BR CN

DE

FR

HK

ID

IN

IT JP

KR MX

MY PH

SG

ES

TH

TR

TW

GB US

ZA

0

5

10

15

20

25

30

-2 -1 0 1 2 3 4

To

tal r

etu

rn in

dex

TFP growth

Real exchange rates should not be

taken as the key guide for currency

competitiveness

Stock market returns and

productivity growth are positively

correlated but it is hard to ascribe

causation



Imp

licatio

ns

: Win

ne

rs a

nd

los

ers

dying days. Finally, it should not be forgotten that the link between productivity

growth and stock market returns may go in the opposite direction: well-functioning

international capital markets which recognise potential may stimulate new investment

and thus help drive the productivity itself.

Sovereign credit markets

We find a broadly positive relationship between productivity growth and sovereign

rating changes (Figures 48 and 49). That said, the dispersion is still considerable,

reflecting the many other factors that go into ratings. China is an outlier in the sense

that it has had rapid productivity growth but only a two-notch upgrade (to A+ from A-).

This partly reflects the relatively strong rating it already held in 2001. India too has

seen only a two-notch upgrade (to BBB- from BB) despite good productivity growth,

in its case reflecting the high budget deficit.

Figure 48: Sovereign ratings and labour productivity

Rating notches changes, LP % p.a., 2001-15

Figure 49: Sovereign ratings and TFP growth

Rating notches changes, TFP % p.a., 2001-11

Source: Fitch ratings, Standard Chartered Research Source: Fitch ratings, Standard Chartered Research

Real estate markets

We also find a broadly positive relationship between productivity growth and house

price growth (Figure 50). Again there is some dispersion, with the UK, for example,

showing rising house prices despite weak productivity growth. This likely reflects very

tight planning regulations. Again, an important driver of the relationship is the

expected rise in the real exchange rate. As people in emerging markets become

better off wages rise, which drives up both house prices and the real exchange rate.

AU

BR

CN

GH HK

ID

IN

JP

KR MY MX

PH SG TH TW TR

GB US

VN

ZA

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

-4 -2 0 2 4 6 8

Ch

ang

e in

so

vere

ign

rat

ing

s


AU BR

CN

HK

ID IN

JP KR MY

MX

PH

SG

TH

TW TR

GB

US ZA

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

0 1 2 3 4 5 6 7

Ch

ang

e in

so

vere

ign

rat

ing

s

TFP growth

Figure 50: Productivity and house prices (%)

Source: BIS, Bloomberg, Standard Chartered Research

AU

DE

ES FR GB

HK ID

IN

IT MX

MY PH SG

US

CN

ZA KR

JP

-2

0

2

4

6

8

10

-50% 0% 50% 100% 150% 200% 250%

Pro

du

ctiv

ity

gro

wth

200

1-1

5

Change in house prices in USD terms

Productivity growth and house-

price growth are positively related



Refe

ren

ces

References

Andrews, D, Criscuolo, C, and Gal P, ‘Frontier Firms, Technology diffusion and public

policy: Micro evidence from OECD countries’, OECD 2015

Bloom N, Eifert B, Mahajan A, McKenzie D, Roberts J, ‘Does Management Matter:

Evidence from India’, QJE November 2012

Brynjolfsson, Erik and Oh, JooHee, ‘The Attention Economy: Measuring the Value of

Free Digital Services on the Internet’, AIS Electronic Library.

Byrne, David M, Fernald, John G, and Reinsdorf, Marshall B, ‘Does the United States

have a Productivity Slowdown or a Measurement Problem’, Finance and Economics

Discussion Series 2016-17, Washington: Board of Governors of the Federal Reserve

System.

Copeland A, `Seasonality, Consumer Heterogeneity and Price Indices: The Case of

Pre-Packaged Software, `Journal of Productivity Studies, 2013.

Dabla-Norris E, Giang Ho and Annette Kyobe, IMF Working Paper, ‘ Structural

Reforms and Productivity Growth in Emerging Market and Developing Economies,

February 2016.

Evenett, Simon and Fritz, Johannes, ‘The Tide Turns? Trade, Protectionism and

Slowing Global Growth’, CEPR 2015

Fernald, J, ‘Productivity and Potential Output Before, During and After the Great

Recession’. NBER Macroeconomics Annual 2014.

Ghani E and Kharas H, ‘The Service Revolution’, World Bank, May 2010

Goodridge, Peter, Haskel, Jonathan and Wallis, Gavin, ‘Can Intangible Investment

explain the UK Productivity Puzzle’, NIESR No 224 May 2013.

Gordon, Robert, The Rise and Fall of American Growth. Princeton, 2015

Lin J, ‘Technological Adaptation, Cities and New Work’, Review of Economics and

Statistics, May 2011.

Mandel, Michael, ‘Beyond Goods and Services: The (Unmeasured) Rise of the Data-

Driven Economy’, Progressive Policy institute, October 2012

OECD, The Future of Productivity, Paris 2015

Peltonen, T A, Sager, M, ‘Productivity Shocks and Real Exchange Rates: A

Reappraisal’, ECB Working Paper April 2009

Rodrik D, ‘Premature Deindustrialization’ NBER Working Paper No 20935, February

2015

Syverson, Chad, ‘What determines productivity’, JEL, June 2011

Syverson, Chad, Challenges to Mismeasurement Explanations for the US

Productivity Slowdown, NBER WP, No 21974, February 2016.



Global Research Team

Management Team

Dave Murray, CFA +65 6645 6358

Head, Global Research

[email protected]

Standard Chartered Bank, Singapore Branch

Marios Maratheftis +971 4508 3311

Chief Economist

[email protected]


Thematic Research

Madhur Jha +44 20 7885 6530

Head, Thematic Research

[email protected]


Enam Ahmed +44 0207 885 7735

Senior Economist, Thematic Research

[email protected]


Samantha Amerasinghe +44 20 7885 6625

Economist, Thematic Research

[email protected]


Global Macro Strategy

Eric Robertsen +65 6596 8950

Head, Global Macro Strategy and FX Research

[email protected]


Mayank Mishra +65 6596 7466

Macro Strategist

[email protected]


Becky Liu +852 3983 8563

Head, China Macro Strategy

[email protected]

Standard Chartered Bank (HK) Limited

Geoffrey Kendrick +44 20 7885 6175

Emerging Market FX & Global Macro Strategist

[email protected]


Economic Research

Africa Asia

Razia Khan +44 20 7885 6914

Chief Economist, Africa

[email protected]


Victor Lopes +44 20 7885 2110

Senior Economist, Africa

[email protected]


Sarah Baynton-Glen +44 20 7885 2330

Economist, Africa

[email protected]


Edward Cheng +44 20 7885 5284

Economist, Africa

[email protected]


Emmanuel Kwapong +44 20 7885 5840

Economist, Africa

[email protected]


David Mann +65 6596 8649

Chief Economist, Asia

[email protected]


Southeast Asia Edward Lee Wee Kok +65 6596 8252

Head, ASEAN Economic Research

[email protected]


Chidu Narayanan +65 6596 7004

Economist, Asia

[email protected]


Usara Wilaipich +662 724 8878

Senior Economist, Thailand

[email protected]

Standard Chartered Bank (Thai) Public Company Limited

Aldian Taloputra +62 21 2555 0596

Senior Economist, Indonesia

[email protected]

Standard Chartered Bank, Indonesia Branch

Jonathan Koh +65 6596 1262

Economist, Asia

[email protected]


South Asia Anubhuti Sahay +91 22 6115 8840

Head, South Asia Economic Research

[email protected]

Standard Chartered Bank, India

Saurav Anand +91 22 6115 8845

Economist, South Asia

[email protected]


Kanika Pasricha +91 22 6115 8820

Economist, India

[email protected]


Greater China Shuang Ding +852 3983 8549

Head, Greater China Economic Research

[email protected]


Kelvin Lau +852 3983 8565

Senior Economist, HK

[email protected]


Betty Rui Wang +852 3983 8564

Economist, NEA

[email protected]


Se Yan +86 10 5918 8302

Senior Economist, China

[email protected]

Standard Chartered Bank (China) Limited

Lan Shen +86 10 5918 8261

Economist, China

[email protected]


Tony Phoo +886 2 6603 2640

Senior Economist, NEA

[email protected]

Standard Chartered Bank (Taiwan) Limited

Korea Chong Hoon Park +82 2 3702 5011

Head, Korea Economic Research

[email protected]

Standard Chartered Bank Korea Limited

Kathleen B. Oh +82 2 3702 5072

Economist, Korea

[email protected]

Standard Chartered Bank Korea Limited

The Americas

Mike Moran +1 212 667 0294

Head, Economic Research, The Americas

[email protected]

Standard Chartered Bank NY Branch

Thomas Costerg +1 212 667 0468

Senior Economist, US

[email protected]


Italo Lombardi +1 212 667 0564

Senior Economist, Latam

[email protected]


Europe Middle East and North Africa

Sarah Hewin +44 20 7885 6251

Chief Economist, Europe

[email protected]


Achilleas Chrysostomou +44 20 7885 6437

Economist, Europe

[email protected]


Dima Jardaneh +971 4 508 3591

Head of Economic Research, MENA

[email protected]


Carla Slim +971 4 508 3738

Economist, MENA

[email protected]


Bilal Khan +92 21 3245 7839

Senior Economist, MENAP

[email protected]

Standard Chartered Bank (Pakistan) Limited

Philippe Dauba-Pantanacce +44 20 7885 7277

Senior Economist, Global Political Analyst

[email protected]


mailto:[email protected]




FICC Research

Rates Research Credit Research FX Research

Kaushik Rudra +65 6596 8260

Head, Rates & Credit Research

[email protected]


Nagaraj Kulkarni +65 6596 6738

Senior Asia Rates Strategist

[email protected]


Arup Ghosh +65 6596 4620

Senior Asia Rates Strategist

[email protected]


Lawrence Lai +65 6596 8261

Asia Rates Strategist

[email protected]


John Davies +44 20 7885 7640

US Rates Strategist

[email protected]


Samir Gadio +44 20 7885 8618

Head, Africa Strategy

[email protected]


Eva Murigu +25 42 0329 4004

Africa Strategist

[email protected]

Standard Chartered Investment Services Kenya Limited

Kaushik Rudra +65 6596 8260

Head, Rates & Credit Research

[email protected]


Shankar Narayanaswamy +65 6596 8249

Head, Credit Strategy & Financials

[email protected]


Bharat Shettigar +65 6596 8251

Head, Asia Ex-China Corporate Credit Research

[email protected]


Jaiparan Khurana +44 20 7885 6213

Sovereign Strategist

[email protected]


Simrin Sandhu +65 6596 6281

Senior Credit Analyst, Financials & Head, ME Credit Research

[email protected]


Nikolai Jenkins, CFA +65 6596 8259

Credit Analyst, Financials

[email protected]


Zhi Wei Feng +65 6596 8248

Head, China Corporate Credit Research

[email protected]


Melinda Kohar +65 6596 9543

Credit Strategist

[email protected]


Eric Robertsen +65 6596 8950

Head, Global Macro Strategy and FX Research

[email protected]


Robert Minikin +44 20 7885 8674

Head, Asian FX Strategy

[email protected]


Eimear Daly +44 20 7885 6162

G10 FX Strategist

[email protected]


Nick Verdi +1 646 845 1279

Senior FX Strategist

[email protected]


Devesh Divya +65 6596 8608

Asia FX Strategist

[email protected]


Eddie Cheung +852 3983 8566

Asia FX Strategist

[email protected]


Lemon Zhang +65 659 69498

[email protected]

Analyst, FX Research / Global Macro Strategy


Commodities Research

Paul Horsnell +44 20 7885 6913

Head, Commodities Research

[email protected]


Nicholas Snowdon +44 20 7885 2276

Metals Analyst

[email protected]


Suki Cooper +1 212 667 0319

[email protected]

Precious Metals Analyst


Priya Narain Balchandani +65 6596 8254

Energy Analyst

[email protected]


Judy Zhu +86 21 6168 5016

Metals Analyst

[email protected]




This page is intentionally blank



Disclosures appendix

Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.

Global Disclaimer: Standard Chartered Bank and/or its affiliates (“SCB”) makes no representation or warranty of any kind, express, implied or statutory regarding this document or any information contained or referred to in the document (including market data or statistical information). The information in this document, current at the date of publication, is provided for information and discussion purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices, or represent that any such future movements will not exceed those shown in any illustration. The stated price of the securities mentioned herein, if any, is as of the date indicated and is not any representation that any transaction can be effected at this price. SCB does not represent or warrant that this information is accurate or complete. While reasonable care has been taken in preparing this document and data obtained from sources believed to be reliable, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. This document does not purport to contain all the information an investor may require and the contents of this document may not be suitable for all investors as it has not been prepared with regard to the specific investment objectives or financial situation of any particular person. Any investments discussed may not be suitable for all investors. Users of this document should seek professional advice regarding the appropriateness of investing in any securities, financial instruments or investment strategies referred to in this document and should understand that statements regarding future prospects may not be realised. Opinions, forecasts, assumptions, estimates, derived valuations, projections and price target(s), if any, contained in this document are as of the date indicated and are subject to change at any time without prior notice. Our recommendations are under constant review. The value and income of any of the securities or financial instruments mentioned in this document can fall as well as rise and an investor may get back less than invested. Future returns are not guaranteed, and a loss of original capital may be incurred. Foreign-currency denominated securities and financial instruments are subject to fluctuation in exchange rates that could have a positive or adverse effect on the value, price or income of such securities and financial instruments. Past performance is not indicative of comparable future results and no representation or warranty is made regarding future performance. While we endeavour to update on a reasonable basis the information and opinions contained herein, we are under no obligation to do so and there may be regulatory, compliance or other reasons that prevent us from doing so. Accordingly, information may be available to us which is not reflected in this document, and we may have acted upon or used the information prior to or immediately following its publication. SCB is acting on a principal-to-principal basis and not acting as your advisor, agent or in any fiduciary capacity to you. SCB is not a legal, regulatory, business, investment, financial and accounting and/or tax adviser, and is not purporting to provide any such advice. Independent legal, regulatory, business, investment, financial and accounting and/or tax advice should be sought for any such queries in respect of any investment. SCB and/or its affiliates may have a position in any of the securities, instruments or currencies mentioned in this document. SCB and/or its affiliates or its respective officers, directors, employee benefit programmes or employees, including persons involved in the preparation or issuance of this document may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities or financial instruments referred to in this document and on the SCB Research website or have a material interest in any such securities or related investments, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments and may have received compensation for these services. SCB has in place policies and procedures and physical information walls between its Research Department and differing public and private business functions to help ensure confidential information, including ‘inside’ information is not disclosed unless in line with its policies and procedures and the rules of its regulators. Data, opinions and other information appearing herein may have been obtained from public sources. SCB expressly disclaims responsibility and makes no representation or warranty as to the accuracy or completeness of such information obtained from public sources. SCB also makes no representation or warranty as to the accuracy nor accepts any responsibility for any information or data contained in any third party’s website. You are advised to make your own independent judgment (with the advice of your professional advisers as necessary) with respect to any matter contained herein and not rely on this document as the basis for making any trading, hedging or investment decision. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental, consequential, punitive or exemplary damages) from the use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents or associated services. This document is for the use of intended recipients only and, in any jurisdiction in which distribution to private/retail customers would require registration or licensing of the distributor which the distributor does not currently have, this document is intended solely for distribution to professional and institutional investors. This communication is subject to the terms and conditions of the SCB Research Disclosure Website available at https://research.sc.com/Portal/Public/TermsConditions. The disclaimers set out at the above web link applies to this communication and you are advised to read such terms and conditions / disclaimers before continuing. Additional information, including analyst certification and full research disclosures with respect to any securities referred to herein, will be available upon request by directing such enquiries to [email protected] or clicking on the relevant SCB research report web link(s) referenced herein.

Country-Specific Disclosures – This document is not for distribution to any person or to any jurisdiction in which its distribution would be prohibited. If you are receiving this document in any of the countries listed below, please note the following:

United Kingdom and European Economic Area: SCB is authorised in the United Kingdom by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This communication is not directed at Retail Clients in the European Economic Area as defined by Directive 2004/39/EC. Nothing in this document constitutes a personal recommendation or investment advice as defined by Directive 2004/39/EC. Australia: The Australian Financial Services Licence for Standard Chartered Bank is Licence No: 246833 with the following Australian Registered Business Number (ARBN: 097571778). Australian investors should note that this communication was prepared for “wholesale clients” only and is not directed at persons who are “retail clients” as those terms are defined in sections 761G and 761GA of the Corporations Act 2001 (Cth). Bangladesh: This research has not been produced in Bangladesh. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED IN BANGLADESH AND MAY NOT BE OFFERED OR SOLD IN BANGLADESH WITHOUT PRIOR APPROVAL OF THE REGULATORY AUTHORITIES IN BANGLADESH. Any subsequent action(s) of the Recipient of these research reports in this area should be subject to compliance with all relevant law & regulations of Bangladesh; specially the prevailing foreign exchange control regulations. Botswana: This document is being distributed in Botswana by, and is attributable to, Standard Chartered Bank Botswana Limited which is a financial institution licensed under the Section 6 of the Banking Act CAP 46.04 and is listed in the Botswana Stock Exchange. Brazil: SCB disclosures pursuant to the Securities Exchange Commission of Brazil (“CVM”) Instruction 483/10: This research has not been produced in Brazil. The report has been prepared by the research analyst(s) in an autonomous and independent way, including in relation to SCB. THE SECURITIES MENTIONED IN THIS REPORT HAVE NOT BEEN AND WILL NOT BE REGISTERED PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL AND MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS AND IN COMPLIANCE WITH THE SECURITIES LAWS OF BRAZIL. China: This document is being distributed in China by, and is attributable to, Standard Chartered Bank (China) Limited which is mainly regulated by China Banking Regulatory Commission (CBRC), State Administration of Foreign Exchange (SAFE), and People’s Bank of China (PBoC). Germany: In Germany, this document is being distributed by Standard Chartered Bank Germany Branch which is also regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Hong Kong: This document (except any part advising on or facilitating any decision on futures contracts trading) is being distributed in Hong Kong by, and is attributable to, Standard Chartered Bank (Hong Kong) Limited 渣打銀行（香港）有限公司 which is regulated by the Hong Kong Monetary Authority. Insofar as this document advises on or facilitates any decision on futures contracts trading,

https://research.sc.com/Portal/Public/TermsConditions




it is being distributed in Hong Kong by and is attributable to, Standard Chartered Securities (Hong Kong) Limited 渣打證券（香港）有限公司 which is regulated by the Securities and Futures Commission. India: This document is being distributed in India by Standard Chartered Bank, India Branch (“SCB India”). SCB India is a branch of SCB, UK and is licensed by the Reserve Bank of India to carry on banking business in India. SCB India is also registered with Securities and Exchange Board of India in its capacity as Merchant Banker, Investment Advisor, Depository Participant, Bankers to an Issue, Custodian etc. For details on group companies operating in India, please visit https://www.sc.com/in/india_result.html. The particulars contained in this document are for information purposes only. This document does not constitute an offer, recommendation or solicitation to any person to execute any transaction with SCB India. Certain information or trade ideas in this document may not be specifically permissible under Indian regulations; hence, users of this document should seek professional legal advice before acting on any information. Indonesia: The information in this document is provided for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or represent that any such future movements will not exceed those shown in any illustration. Japan: This document is being distributed to Specified Investors, as defined by the Financial Instruments and Exchange Law of Japan (FIEL), for information only and not for the purpose of soliciting any Financial Instruments Transactions as defined by the FIEL or any Specified Deposits, etc. as defined by the Banking Law of Japan. Kenya: Standard Chartered Bank Kenya Limited is regulated by the Central Bank of Kenya. This document is intended for use only by Professional Clients and should not be relied upon by or be distributed to Retail Clients. Korea: This document is being distributed in Korea by, and is attributable to, Standard Chartered Bank Korea Limited which is regulated by the Financial Supervisory Service and Financial Services Commission. Macau: This document is being distributed in Macau Special Administrative Region of the Peoples' Republic of China, and is attributable to, Standard Chartered Bank (Macau Branch) which is regulated by Macau Monetary Authority. Malaysia: This document is being distributed in Malaysia by Standard Chartered Bank Malaysia Berhad only to institutional investors or corporate customers. Recipients in Malaysia should contact Standard Chartered Bank Malaysia Berhad in relation to any matters arising from, or in connection with, this document. Mauritius: Standard Chartered Bank (Mauritius) is regulated by both the Bank of Mauritius and the Financial Services Commission in Mauritius. This document should not be construed as investment advice or solicitation to enter into securities transactions in Mauritius as per Securities Act 2005. New Zealand: New Zealand Investors should note that this document was prepared for “wholesale clients” only within the meaning of section 5C of the Financial Advisers Act 2008. This document is not directed at persons who are “retail clients” as defined in the Financial Advisers Act 2008. This document does not form part of any offer to the public in New Zealand. NOTE THAT STANDARD CHARTERED BANK (incorporated in England) IS NOT A “REGISTERED BANK” IN NEW ZEALAND UNDER THE RESERVE BANK OF NEW ZEALAND ACT 1989, and it is not therefore regulated or supervised by the Reserve Bank of New Zealand. Pakistan: The securities mentioned in this report have not been, and will not be, registered in Pakistan, and may not be offered or sold in Pakistan, without prior approval of the regulatory authorities in Pakistan. Philippines: This document may be distributed in the Philippines by, Standard Chartered Bank (Philippines) which is regulated by the Bangko Sentral ng Pilipinas (Telephone No. (+63) 708-7701, Website: www.bsp.gov.ph). This document is for information purposes only and does not constitute, and should not be construed as an offer to sell or distribute in the Philippines securities that are not registered with the Securities and Exchange Commission unless such securities are exempt under Section 9 of the Securities Regulation Code or such offer or sale qualifies as an exempt transaction under Section 10 thereof. Singapore: This document is being distributed in Singapore by SCB Singapore branch and/or Standard Chartered Bank (Singapore) Limited, provided that research reports relating to certain products may be distributed only to accredited investors, expert investors or institutional investors, as defined in the Securities and Futures Act, Chapter 289 of Singapore. Recipients in Singapore should contact SCB Singapore branch or Standard Chartered Bank (Singapore) Limited (as the case may be) in relation to any matters arising from, or in connection with, this document. South Africa: SCB is licensed as a Financial Services Provider in terms of Section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002. SCB is a Registered Credit Provider in terms of the National Credit Act 34 of 2005 under registration number NCRCP4. Thailand: This document is intended to circulate only general information and prepare exclusively for the benefit of Institutional Investors with the conditions and as defined in the Notifications of the Office of the Securities and Exchange Commission relating to the exemption of investment advisory service, as amended and supplemented from time to time. It is not intended to provide for the public. UAE: For residents of the UAE – Standard Chartered Bank UAE does not provide financial analysis or consultation services in or into the UAE within the meaning of UAE Securities and Commodities Authority Decision No. 48/r of 2008 concerning financial consultation and financial analysis. UAE (DIFC): SCB is regulated in the Dubai International Financial Centre by the Dubai Financial Services Authority. This document is intended for use only by Professional Clients and Market Counterparties and should not be relied upon by or be distributed to Retail Clients. United States: Except for any documents relating to foreign exchange, FX or global FX, Rates or Commodities, distribution of this document in the United States or to US persons is intended to be solely to major institutional investors as defined in Rule 15a-6(a)(2) under the US Securities Exchange Act of 1934. All US persons that receive this document by their acceptance thereof represent and agree that they are a major institutional investor and understand the risks involved in executing transactions in securities. Any US recipient of this document wanting additional information or to effect any transaction in any security or financial instrument mentioned herein, must do so by contacting a registered representative of Standard Chartered Securities (North America) Inc., 1095 Avenue of the Americas, New York, N.Y. 10036, US, tel + 1 212 667 0700. WE DO NOT OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS EITHER (A) THOSE SECURITIES ARE REGISTERED FOR SALE WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND WITH ALL APPROPRIATE U.S. STATE AUTHORITIES; OR (B) THE SECURITIES OR THE SPECIFIC TRANSACTION QUALIFY FOR AN EXEMPTION UNDER THE U.S. FEDERAL AND STATE SECURITIES LAWS NOR DO WE OFFER OR SELL SECURITIES TO U.S. PERSONS UNLESS (i) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL ARE PROPERLY REGISTERED OR LICENSED TO CONDUCT BUSINESS; OR (ii) WE, OUR AFFILIATED COMPANY AND THE APPROPRIATE PERSONNEL QUALIFY FOR EXEMPTIONS UNDER APPLICABLE U.S. FEDERAL AND STATE LAWS. Any documents relating to foreign exchange, FX or global FX, Rates or Commodities to US Persons, Guaranteed Affiliates, or Conduit Affiliates (as those terms are defined by any Commodity Futures Trading Commission rule, interpretation, guidance, or other such publication) are intended to be distributed only to Eligible Contract Participants are defined in Section 1a(18) of the Commodity Exchange Act. Zambia: Standard Chartered Bank Zambia Plc is licensed and registered as a commercial bank under the Banking and Financial Services Act Cap 387 of the laws of Zambia and is regulated by the Bank of Zambia, the Lusaka Stock Exchange and the Securities Exchange Commission.

© Copyright 2016 Standard Chartered Bank and its affiliates. All rights reserved. All copyrights subsisting and arising out of all materials, text, articles and information contained herein is the property of Standard Chartered Bank and/or its affiliates, and may not be reproduced, redistributed, amended, modified, adapted, transmitted in any form, or translated in any way without the prior written permission of Standard Chartered Bank.

Document approved by

Sarah Hewin Chief Economist, Europe

Document is released at

15:55 GMT 14 September 2016

https://www.sc.com/in/india_result.html

special report - standard charteredspecial report – economics: escaping the productivity slump 14...

Documents