TFP Growth And The Importance Of TFP Growth In Asian Economy

Concept of Total factor productivity

Discuss about the TFP Growth and the Importance of TFP growth in Asian Economy. 

This essay gears up understanding about TFP growth and the importance of TFP growth in Asian economy. TFP growth is essential for the continuing growth of countries economy. Asian economy has experienced slow-moving trend in factor productivity growth as a result of global financial crisis occurred past 10 years. That affected the industries of the Asian economies to recoup the computation emerging with the developed economies in terms of technological advancement. Apart from that decline in FDI flow also impacted the growth of trade and commerce of the region. Apparent economic environment has focused the need of policy makers to analyse the TFP growth determinants in the economy to attain its sustainable growth in extremely competitive global business environment. The essay also explains the ways to improve total factor productivity growth for Asian economy. The essay also explains the theoretical concept of total factor productivity, sources and importance of TFP growth.

The long-term economic growth of the country is grounded on development of total factor productivity approach. Total factor productivity is assessment tool that calculates residual growth in industry or national economies aggregated output, which cannot be easily derived by analysis of conventional production inputs like capital and labor. Increase in total factor productivity shows that input elements are efficiently utilized in the production process. Total factor productivity outlines the requirement of long-term technological innovations[1].

The theory of total factor productivity is applied to assess the collective productivity of all the inputs. The total factor productivity denotes the ratio of total produced output to the cost of all inputs utilized in production activity. Total factor productivity not only indexes joint productivity of the whole economy but also forms basis to analyse economic technological development. Progressive growth in resources like capital, land, labour and percentage increase in TFP assures sustainable economic growth. Frequent innovations and improvement in existing technology makes input factors more effective. If the total factor produc­tivity increases along with increase in number of resources, then it results into quick increase in the quantum of output in comparison to increase in the quantity of resources[2]. The formula that measures relation between total factor productivity and economic growth concerning production function and also measures the contributions of several elements to economic growth [3] is detailed as under-

Y=  

Where,

Y =>Gross domestic product of the country

Asian Economy Outlook

A=> Total factor productivity

γ=> The extent of returns to scale

α =>Importance of physical capital in output

K=> Physical capital

H=> Human-capital-adjusted labor input

In the context of Asian economy, dynamically changing climate has adversely affected the economy and efforts involved in eradication of carbon emission inclusive of high cost immerged to be a serious concern issue for the economic development of Asian continents. To measure productivity of economic factor of production, the impact of carbon release mitigation policy and climate change is to be analyzed to achieve total factor productivity growth. However, the incentive structure followed by the institutions operating in the economic environment of the country outlines the path of economic development of the country. Business environment of the economy where property rights are secured and contracting rights are mandated to be enforced are performing well in comparing the rigid economic structure[4].

Hence, developed institutional framework assist in lowering down the adverse effects of climate change and reducing the cost involved in eliminating the carbon emission. Most of the population of the Asian constituency is poor and the business institutions are underperformers[5]. Since the economic position is week, so the economic surroundings are more sensitive towards environmental changes. The key requisite to environmental transformation is research and innovation in the field of production technology by which the production processes be reformed.

Several variable factors of Asian economy determine the outcome of TFP and these variable factors functions with one or more variables to determine TFP. The medium through which total factor productivity growth is achieved is innovative improvements in technology and production process[6].

Innovation

Research and developmental activity carried out by Asian firms gradually improve the production efficiency of the manufacturing industry. R&D activities assist in development of innovative technologies that improves the production capacity and optimize the production competence in the particular level of input-process-output cycle.

Reallocation Results

The income derived from production activity through the shifting of least productive to the most productive medium creates the significant difference in the revenue and total factor productivity growth. This shifting operational environment forms the basis of closer of certain production units and creation of new business units. In addition to that leads to change in market share and adjustment in the product line and product portfolio[7].

Quality of the production

Quality of production plays significant role in attainment of efficient total factor productivity.  The adoption of innovative technology into the production function results into refinement of the quality of the produced output, which improves the TFP growth of the economy.

Sources of Total factor productivity growth

Training and Education

Educated and trained workforce is competent to deliver superior quality of goods and services. Well-designed and innovative training programs not only enhance the skillfulness and knowledge of the employee but also improve the performance of entire industry. Thus, workforce development is globally accepted strategic tool through which factor productivity can be enhanced[8].

Economic Restructuring

Economic restructuring refers to situation where resources are deployed from the less productive economic sector as a pre-requisite of economic restructuring. These moved resources employed in highly performing economic sector to attain high degree of total factor productive growth. Industrial progressive growth depends upon the core competitive advantages of the industry. Enhancement of competitive advantage of the firms is achieved through shifting of operational activities from basic to critically analyzed system where firm can get economic advantage over its competitors. Thus, the economic restructuring shift from low productive to the high productive industries provides progressive pace to economy through development of innovative methods for industrial mix which expands the scope commerce[9].

Capital Structure

This refers to the investment activities in superior quality of capital assets like plant and machinery and equipments utilized in the process of producing the goods which encompasses high quality batch of units produced in optimum cost. The appropriate composition of capital invested in production inputs involved in business operations insures long-term performance of the firm as industry participant and effects the growth in terms of TFP.

Technical Progress

Technical advancement of the economic society includes optimum utilization of input resources of the country viz. capital assets, technology, human resources and research and development activities. Country can achieve technical advancement by managing human capital, assets or resources, production processes and technological innovations. Technological advancements influence both the attitude of the human asset at work and the innovative expertise. Benchmark standards set on the economic environment of developed nations reveals the fact that economic reshuffle towards low cost high quantity production process and advancement of the educational level of the human assets along with technical evolution leads to TFP growth[10].

Demand Intensity

The force of demand in the economy replicates the level of production capacity. Hike in demand of product and services in the society encompass optimum utilization of capacity of capital assets. Hence, change in demand influences TFP growth as increase in demand of the product increases the production level and gradually TFP grows. 

Asian economy has observed slugging productivity growth as the impact of global financial crisis occurred past 10 years and not able to meet up with technological upgrade as compared to developed countries globally. The sluggish TFP growth has mainly affected the highly developed economies of Asian region including China. Other factors responsible for productivity slowdown comprises of low paced trade investments, slumping trade and commerce, low rate of creating structure of human asset for industries, shifting of resources to low productive sectors of the economy and majority of aging population. In contrast to above, emerging market places and developing countries of the Asian economy influenced by global financial crisis has observed low decline in productivity growth[11].

 Figure 1: Real GDP Growth (Source: IMF Regional              Figure 2: Total Factor Productivity Growth (Source: 

         Economic Outlook, 2017)                                        IMF Regional Economic Outlook, 2017)

Figure 1 and 2 presents overview over actual GDP development and total TFP growth in the Asia region in comparison with growth in the United States. Both figures explain average growth rate over four different period’s developmental tendency.

Above figures presents, the difference between TFP and actual GDP growth rate. It represents that the growth after the global financial crisis period is relatively downturned and driven more by the factors that determines TFP growth. Furthermore, the advanced economies of Asia had shown 1% lower average TFP growth rate later than the global financial crisis. TFP growth in India as compared to China’s TFP growth is large than that of its actual GDP rate.

TFP growth plays the vital role in long-standing economic growth of a country. Analysis of TFP growth is important as it assists the economic policy makers to understand the growth drives. Growth in TFP indicates that the economy of the country is moving forward towards growth in trade and commerce. Prevailing era of immense competition with developed countries and adverse external economic elements influencing the growth of the economy. Analysis of TFP growth explores the growth drivers and growth obstructs present in the economic system in front of policy makers. By utilizing the TFP factors analysis the country assures its sustainable growth in extremely competitive global business environment. It helps in exploring the share of production growth that can be unrevealed by varying physical inputs. It assists in studying the procedures involved in production, which design working hypotheses for key elements influencing the volume of TFP and its growth style. Study of TFP growth portrays design of production system of the business or industry that helps to administer government establishments and industries based on production competence[12].

Asia is undergoing factor productive growth decline as adverse external environment subsequent to the global financial crisis affected the growth path of Asian economy. As a result low productive investments in trade and commerce of the region and lacking technological advancement has turned economic growth downward. Although enormity and environment of the slug is different for associated economies of the region, but elevating productivity growth is a strategic priority of Asian economic policy[13].

The economic policies should be formulated in such a manner that encompasses with strong productivity benefits associated with trade liberalization. The legislative acquaintances of associated economies should draw their focus around strengthening the research and development activity of the respected nations through increasing budgetary benefits in this function and taking corrective actions in terms of raising factor productivity of the service sector. Increased competitive ambiance will also aid to drive innovations. The focus of the economic policies for developing economy and emerging marketplaces in Asian region should be oriented towards attracting FDI inflows through reallocating the productive spread outs in realigned format for their optimum capacity utilization. Public infrastructural development and strengthening human capital through imparting quality education and training also supports economy to elevate TFP growth[14].

Conclusion

In view of the above study, it is stated that the intensity of adverse external environment to Asian economy is high. Emerging competition from developed economies in terms of technological progression through there innovational efforts in the area of research and development have made the slumping growth path of Asian economy. Declining FDI flow in the economy also affected the development of trade and commerce of the region. To revamp the economic growth effected by the global financial crisis and to address the challenging issues imposed by the unfavourable external environment, policy makers are recommended to analyze the determinants of TFP growth to convert the present economic scenario into favourable state.  The economic policy should be formulated in such a fashion that promotes service industry delivery through focus on R&D activities. Attracting FDI to invest in Asian economy through reallocating the resources to productive functions and developing human capital with effective training that improves there competencies.

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