Raw Materials, Profits, and the Productivity Slowdown: A Complementary Note

Abstract

raise. Ever since the problem was first discussed in the late 1970s, there has been growing evidence that the sharp productivity slowdown of the industrial countries in the last decade must have been closely linked to the specific macroeconomic shocks of that period and could not be explained by gradual processes such as the slowing down of the technological frontier or the drying up of the sources of conventional factor supplies like land-or immigrant labor. In no case, except possibly the United States, is there evidence of a sharp slowdown in productivity growth in the 15-20 year period before 1973. A simple statistical test' dates at least one major kink in the productivity growth of most countries in and around the period 1973-1975. The implied link with the sharp oil and raw material price shock of that time is further borne out by the fact that the total productivity slowdown across countries, at least in manufacturing, seems correlated with the relative raw material price acceleration in different countries, though this is not the only direct explanatory factor [Bruno and Sachs, 1985, Table 12.4]. In an attempt to give a theoretical rationale for the link between the events of the 1970s and the sharp productivity slowdown, several candidates offer themselves. The first and most obvious one for gross output measures of productivity in a material-intensive sector like manufacturing is the direct substitution in production of primary inputs against costly energy and raw materials. Other things being equal, conventional doubledeflated base-weighted measures of value-added productivity will in such case impart a downward bias to the slowdown.