The Power of Productivity

Lewis founded the McKinsey Global Institute and this book presents the conclusions from twelve years of its country productivity studies, covering the United States, Japan, Germany, France, Korea, Brazil, Russia, India and others. The method was sector-level micro analysis: rather than working from national aggregates, MGI teams studied specific industries such as retail, automotive, housing construction, food processing and banking, and compared productivity plant by plant.

The central finding is that differences in national income are explained overwhelmingly by differences in productivity within specific sectors, that those differences are caused by competitive conditions in product markets rather than by capital, education or labour market institutions, and that the most important barrier is regulation and informality that protects unproductive incumbents. He gives the example of Japanese retail and food processing, which were far less productive than American equivalents despite Japan's world-leading automotive productivity, and attributes this to land use rules and distribution regulations that protected small stores.

His most contested claim concerns informality. Lewis argues that large informal sectors in Brazil, India and Russia are not a symptom of poverty but a cause, because informal firms avoid taxes and regulations and can therefore survive at productivity levels that would make them uncompetitive if everyone complied.

The evidence is proprietary McKinsey studies not available for independent verification, which is the book's main methodological limitation. The consultant authorship also shapes the policy conclusions, which favour product market deregulation consistently.