Productivity: Observations from India

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I recently got back from one of my longer trips to India. While staying with my parents, I used the gym in their condo when I could muster the requisite willpower. One of those days, as I struggled to neutralize the holiday fat, three cleaning ladies showed up to clean a gym not much larger than my living room in New York City.

They came equipped with brooms and ragged pieces of cloth that looked pretty suspect. They then proceeded to smack at different equipment with the dusty cloth and haphazardly swept the floor. There was no strategy or division of labor that made sense, just a resolve to keep themselves busy for a few minutes. No cleaning liquid or disinfectant was used. The gym looked no cleaner to me right after.

One more incident comes to mind. My girlfriend and I arrived at a hotel in a smaller city in time for their lunch buffet, which was supposed to start at 12 pm. But we were told to come back at 12:30. When we came back, they asked for “a few more minutes”. As I waited, I realized that the food looked ready to go. When I enquired once more, my voice dripping with impatience, I was told they were “just waiting for the mocktails to come out”. We couldn't have cared less about the mocktails, and nor could the ten other famished clients. When I told him so, he opened up the buffet.

In both cases, it’s obvious that these workers are being much less productive than they could be. For pretty much the same amount of time and effort, the gym could’ve been much cleaner, and the hotel guests could’ve been much more satisfied with their experience. In both cases, these workers weren’t shirking or being lazy. I also wouldn’t attribute it to skill levels per se. There are no pre requisite skills to be a gym cleaner - most people can do it, and I don’t have reason to believe the workers’ IQ or education level would be relevant if they were given the most basic training, or if they had ever had jobs before where they were given the most basic training.

Similarly, with the waiter at the hotel buffet - he spoke English well enough and seemed to understand the basics of logic and decency. The problem was two fold: he didn’t manage expectations by giving us a fair estimate of wait times; and that he didn’t feel empowered to make reasonable judgement calls to accommodate clients’ needs. Perhaps this also points to a lack of appreciation for his objective function - ensuring that clients are happy, and more likely to either return or recommend the establishment to others.

Now, we also enjoyed some of the best service and hospitality in India - especially while interacting with employees of VC backed startups, multinational companies etc. But it’s probably true that one can expect many more of such “unforced error” type situations in the developing world.

Regan Arntz-Gray

, who spent a couple of years in Malawi, told me waiters routinely failed to mention if something on the menu was unavailable. They would sheepishly admit it wasn’t after bringing everyone else’s food out. These anecdotes have one thing in common: they demonstrate the impact of relatively soft and intangible things like culture and management practices on productivity, which is often less appreciated. Consider how one interprets a result below:

Indian workers in the US earns ~6x as much as their counterparts in India. Note that this result controls for not just traits such as education level and age that seem directly relevant, but also “implicitly controls for nationality-specific characteristics that affect productivity in the US (e.g. culture, language) and the quality and relevance of a country’s schooling to US labor market outcomes”¹

First things first, we should note that this result applies more directly to skilled workers. But the insights generalize. Why is a worker with identical potential and skills paid significantly more in the United States? The study looks at wages adjusted for purchasing power, ruling that out as the explanation. It must thus be the case a worker can either produce more or produce better quality output in the United States.

Another way to restate this is that an employer in the US can squeeze out much more value from this worker than an employer who would employ him/her in India. One relatively uncontroversial mechanism is technology. Technologically advanced countries use more technology, which acts as a force multiplier on every unit of labor. So even if workers do nothing substantially different except learn to use these tools, they can multiply their output, create more value and capture part of it for themselves. For example, if that same cleaner moved to America, she would be given a vacuum cleaner which would allow her to do what three cleaners could in India, only better.

But we forget that advanced nations are also good at more intangible types of social technology - better training, management practises, efforts to align incentives etc. More importantly, each worker that moves to the US has the benefit of working with other people, who have all benefited from this better paradigm over the years.

Imagine that waiter from the lunch buffet came to America. Perhaps he’d be given training on hospitality that helps him develop a customer-centric view of his job. But even if he isn’t given any training, he would probably learn from people around him who seem to be more agentic and adaptive to client requests. He would probably notice that his colleagues routinely muster the courage to convey accurate information to hotel guests, even when momentarily unpleasant. But even if he didn’t learn naturally, his incompetence would probably stand out more in his new work environment. He’d be given feedback and a plan to improve his performance.

Regan also convinced me that there’s more to this than just bad management. In these interactions, we observed evidence of timidness and a lack of agency, that Regan hypothesizes has to do with classism and history of rigid social hierarchies. In India, the vestiges of feudalism are palpable. People at the bottom of the hierarchy have internalized the longstanding expectation that they ought to behave subserviently at all costs. It’s the difference between treating the customer as someone you want to please for transactional reasons, and viewing them as belonging to a superior class of people, who must not be contradicted or even disappointed.

It would also be naive to think that this is one way street. Employers and managers probably hang on to these beliefs too, likely exhibiting a lower tolerance for dissent and a preference for more hierarchical organizational norms that not only inhibit worker productivity but also pose barriers to information flow, which adversely affects quality of decision-making. This has a self-fulfilling component, since low productivity by employees - be it due to IQ and education levels or organizational culture, is taken as further evidence of their incompetence.

In developed countries, labor is more expensive. But this also means more of an incentive to make them as productive as possible, by equipping them with technology and motivating them with incentives. When we say labor is cheap in a country like India (relative to the US), it’s important to recognize that is also implies lower demand for labor- fewer organizations and employers that can use labor as productively as possible. In wealthier countries, more capital is allocated more efficiently to projects led by more skilled managers that can best identify and utilize inputs, including labor, to produce what’s most valuable for consumers

This is all facilitated by better institutional quality - the rule of law, enforceability of the contracts etc. This is the top down view of it all. Better institutions lead to lower expected losses from security concerns, unfair competition, government interference etc, resulting in higher expected profits and more risk-taking. Successful firms are selected under intense competitive forces for their ability to generate more value per unit input through technology and management practices. Individual employees are thus more productive in these systems, and are able to internalize some of that increased productivity through higher wages.

However, as economist Garett Jones points out, better institutions don’t just happen by accident. Institutions affect markets and culture; but people also shape institutions over time, especially in democratic countries. This is why protectionism is so bad for countries like India. Mobility of capital and labor does more than making smartphones more affordable for Indian consumers. It raises the productivity of the workforce, through these soft, less observable phenomena in addition to transferring tangible skills and technology. Capital and people from more productive countries are conduits for norms and practices that can provide countries the necessary escape velocity for better institutions and a more prosperous future.

1. Clemens, Michael A., Claudio E. Montenegro, and Lant Pritchett. "The place premium: wage differences for identical workers across the US border." World Bank Policy Research Working Paper 4671 (2008).