Tag Archives: growth

Save the planet, increase workforce satisfaction, increase productivity by hiring better managers

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Two economists just completed a huge worldwide survey on management practices. A team of MBA’s went to firms and interviewed them on their management practices, generating scores in three different categories (Incentives, Monitoring, and Targets) and then using the data to draw a whole bunch of conclusions about management. Everything in here is correlation (it’s not certain which way the causation runs) but when you generate enough correlations, it gives you an idea of the importance of good management, in a Bayesian sense.

  • GDP and good management practices are highly correlated (R^2 of 0.81). That is, countries with high GDP are also likely to have firms with good management practices. Greece scores even worse than India and Brazil on firm management. Portugal is just slightly ahead of India and Brazil. Their low scores can be attributed in part to government intervention in the labor market.
  • Improved reallocation accounts for a large percentage of the difference. That is, the market identifies more efficient firms and allows them to grow more rapidly in countries like the USA. Competition is highly important for this process, and also to weed out inefficient firms. It’s more important to look at the bottom of the distribution than the top to determine which countries have the best management; countries that allow inefficient firms to hang around score poorly.
  • Higher management scores are correlated with better performance at the firm level. A one standard-deviation increase in management correlates with a 38 percent increase in sales per employee.
  • Larger firms have better management. On the surface this may refute the Peter Principle, but it tends to suggest that smaller firms with better management out-grow other small firms with bad management. Over time, if a firm stays the same size perhaps management falls.
  • At the firm level, better management is associated with improved health care outcomes, employee satisfaction, and energy efficiency. Note to shareholder activists: Promote better management!
  • Labor market regulation hinders incentives management. At least half of incentives management is the ability to remove/improve low-performing workers, pay for performance and change the workstaff’s hours.
  • In terms of classes of ownership, private equity companies have the best management, followed by dispersed shareholder ownership. Government has the worst management, followed closely by family firms with a in-family CEO, firms still owned by the founders, and firms owned by private individuals. I was surprised to see that firms owned by the founder (in 100-5000 person companies) perform so poorly. The authors suggest that necessary management skills for a start-up don’t transfer well to necessary skills for a 100-5000 person firm.
  • Management practices diffuse slowly over time. Managers are not well informed about how good their own management practices are and which areas need improvement (ha! Maybe there’s a role for consultants after all.

All in all these suggest that one of the best things we can do for development is try to transfer good management practices to developing nations, either in the form of FDI or through education. There was a great speaker at the Ath last year whose firm provided business guidance to small companies in Mexico and helped them grow.

Another experiment by the same group took a random group of textile firms in India and provided them with free management consulting. Not only did performance grow in the firms provided the consulting, but they also said the reason that they didn’t implement the changes sooner was because they were not aware of good management practices.

Data collection is an underrated skill – this analysis was only possible because these guys arranged surveys of thousands of firms in 40 different countries. The impressiveness is in the dataset, not in the analysis; same goes for Ken Rogoff and Carmen Reinhart’s This Time is Different, which I’m currently reading. It’s usually lumped in with science or statistics but it’s something people should know how to do (and analyze)

Good incentives are fragile

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Two articles today show how difficult it is to maintain good incentives in poor countries. The first was from Madagascar, one of a handful of countries in Africa which was exempt from U.S. tariffs under a special program, the AGOA program. The textile industry in Madagascar was thriving, employing over 100,000 workers and also employing hundreds of firms that supplied the raw inputs to the textile shops. The AGOA ran out at the end of 2009, forcing thousands in Madagascar and the surrounding countries to find other work. The results have not been pretty; there have been riots in the streets, and increased stress on profits in other professions, like street sales.

Ostensibly, Congress ended Madagascar’s inclusion in the program because of a military coup in March. But there isn’t really much evidence that imposing sanctions on the workers has had or will have any effect on the authoritarian leadership. Indeed these sanctions tend to hit the working classes much more than they hit the people in charge. Growth and good governance go hand in hand, but it doesn’t make sense to kill a country’s growth because the government changed.

Robert Strauss, head of the American Chamber of Commerce in Madagascar, told IRIN that a quarter of the jobs in the formal economy were dependent on AGOA, and the reintroduction of US import duties of up to 34 percent had made keeping factories open unprofitable.

The rapid decline of the textile industry was also having a knock-on effect in other countries in the region, including Mauritius, Swaziland, Lesotho and South Africa, where many of the materials used in Madagascar’s textile factories, such as zips, were produced, Strauss said.
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Fabien Rakotonirina, a textile factory machinist who lost his job in December 2010, told IRIN: “Here on the street there is not enough profit. In the factory I earned 10,000 ariary ($4.65) a day, now I earn 6,000 ($2.80).”

The second story is from India, whose farmers this year will produce less rice per hectare than Pakistan, Sri Lanka and Bangladesh. The Indian government has long subsidized the use of different types of fertilizer in agricultural production, which has by and large stimulated crop yields and reduced India’s need to import food. As government revenues wax and wane, subsidies have gone up and down – but the urea (a type of fertilizer) manufacturers are politically powerful and have prevented the urea subsidy from being touched. Because urea is so much cheaper than other fertilizers and nutrients, farmers are spreading way more urea on their crops than is recommended (32-to-1 ratios of nitrogen to potassium, which should be about 4-to-1) and the soil quality is deteriorating. As a result India may soon have to increase its dependence on importing food.

India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year…Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts…The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea’s subsidy has survived. That’s because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.

These are both examples that demonstrate the fragility of good incentives and growth, and the power of special interests and far away people to destroy it. Throwing money or sanctions at these problems is not very helpful, but encouraging trade and denying special interests are. Politics always has winners and losers; the winners here are textile manufacturers in America and other countries, and urea manufacturers, and the losers are producers in Madagascar, taxpayers in the US (who bear the cost of the subsidy as well as the market price of the food) and farmers in India.