In recent years, productivity growth in the East Asia and Pacific (EAP) region has experienced a slowdown despite significant technological advancements. This trend raises questions about the underlying causes of this productivity puzzle.
According to a report, the primary driver of aggregate productivity growth in EAP has been improvements within firms rather than market share reallocation or firm turnover. However, productivity growth among the most productive firms in EAP, referred to as "the national frontier," has lagged behind less productive firms. This situation impacts overall productivity since these frontier firms contribute significantly to output and employment.
Globally, leading firms—termed "the global frontier"—have maintained rapid productivity growth, particularly in digital-intensive sectors such as electronics and information technology services. In contrast, national frontier firms in EAP are not keeping pace with their global counterparts. For instance, between 2005 and 2015, productivity in digital manufacturing at the global frontier rose by 76 percent, while similar firms in Indonesia, Malaysia, the Philippines, and Viet Nam saw only a 34 percent increase on average.
The widening gap in technology use between EAP's top firms and those globally is one factor contributing to divergent productivity trends. Impediments to competition are also limiting innovation incentives among frontier firms. While manufacturing tariffs are relatively low in EAP, nontariff measures and restrictions on services trade hinder competition.
For sustained productivity growth and technology adoption, policies need to address barriers to market entry and competition. Tariff liberalization in Viet Nam during its WTO accession is cited as an example that boosted productivity for both frontier and other firms. Additionally, developing foundational skills that complement new technologies is crucial for enhancing workforce capabilities.
Authors of the report include Francesca de Nicola, Senior Economist; Aaditya Mattoo, Chief Economist; and Jonathan Timmis, Senior Economist.