Economic growth theory provides a framework to divide GDP growth into employment growth and labor productivity growth. Although all four countries showed stronger economic growth in the past decade than in the 1990s, there were substantial variations in the relative importance of employment and labor productivity growth across countries.
In China and Russia, more than 90 percent of the output expansion can be attributed to the growth in labor productivity. In Brazil, the labor productivity growth actually slowed down over the past decade, and an increasing portion of growth has come from employment. In India, employment and labor productivity both grew faster and their shares of contribution to the output growth remained stable.
China is the only BRIC country that has seen slower employment growth in the past decade – due largely to that nation’s recent over-reliance on investment in heavy industries, which employ far fewer workers than light industries producing consumer goods and the service sector.
In the long term, the employment growth potential in a country is mainly determined by the labor supply condition. A closer look at BRIC demographic trends shows that India faces the most promising prospects from this perspective, thanks to its solid population growth and low urbanization rate. Brazil will benefit from the double-digit expansion of its working-age population in the next 20 years, although there is little room left for further urbanization. The labor market conditions in China and Russia will be less rosy, but the relatively low urbanization rate in China can at least partially offset the negative impacts of its aging population on economic growth.
Labor productivity (defined as the average output produced per unit of labor) is one of the most frequently used measures of an economy’s efficiency. A detailed examination of the factors that contribute to the growth in labor productivity highlights the fact that capital accumulation and Total Factor Productivity (TFP) growth combined can explain the majority of the growth in output per worker, while the contribution from labor quality, which is measured by the changes in the composition of education levels in the labor force, has been very limited during the past 20 years in the BRICs.
An international comparison shows that the overall levels of educational attainment in the BRICs did not exceed what the East Asian countries had achieved at similar stages of development. Although Brazil and China progressed substantially in implementing nine-year compulsory education during the last decade, their gains in higher education were still low compared with Japan and South Korea.
Russia has the highest average years of schooling in the BRICs, but it lags far behind with regard to the percentage of population that has finished basic education. The relatively slow improvement in India’s educational attainment in terms of the average years of schooling and literacy rate is more evident than in other BRIC countries and stands in sharp contrast to a generally favorable foreign perspective on India’s education system.
Physical capital accumulation has been a major driver of the labor productivity growth in all four countries during the past two decades, and the pace of physical capital accumulation in an economy is largely determined by the fixed asset investment rate.
China has distinguished itself with its exceptionally high investment rate, and in India, the improvement of economic performance in the last decade coincided with a significant rising of the domestic investment rate as well. In Brazil and Russia, the investment to GDP ratios has been persistently low during this period thanks to the macroeconomic volatility.
Crystal Ball Gazing
Although it is difficult to project future investment rates in the BRICs, China and India will face much brighter prospects in physical capital accumulation than will Brazil and Russia since the saving rate, which is demonstrated to have a tight relationship with the fixed asset investment rate, is projected to remain high in China and India for the next two decades.
In contrast, Brazil’s saving rate has hardly changed in the past decade, and the saving rate in Russia continued its downward trend only until recently.
TFP is the portion of output that cannot be explained by the amount of inputs used in production, and its level is determined by how efficiently and intensively the inputs are utilized in the production process. In the past decade, China’s TFP growth increased at twice the speed of India’s in absolute levels. Recent studies have shown that the fast expansion of the more efficient private sector and the relocation of labor from the agricultural sector in rural areas to nonagricultural sectors in urban areas are the biggest contributors to the faster TFP growth.
In Brazil, on the other hand, TFP growth has been trapped at abnormally low levels since 2000, and one major obstacle comes from Brazil’s informal economy, which is estimated to account for one-third of gross national income but operates at just a fraction of the average productivity level of formal companies. The high-level efficiency gains in Russia should be viewed with caution because of the difficulty in measuring the capital stock and the big swing in the capital utilization rate.
It is problematic to project the future TFP growth trajectory since factors proven to be important sources of TFP growth, such as institutional quality, infrastructure, financial development, and regulations, depend heavily on government policy conditions. However, it is widely agreed that all BRIC countries still have massive room for further improvement in their TFP levels, even though each country faces quite different challenges. With massive populations still working directly in agriculture, both China and India can sustain their TFP growth momentum in the near future through continuing to shift rural populations to the more productive industrial and service sectors. Russia and Brazil can realize efficiency gains through structural reforms, including simplifying and clarifying regulations and reducing state controls.
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