Program : Magister Manajemen

Major : Business Management (Eksekutif Muda)

Batch : 15B
Group :2
Members : Adeline Chitranegara
Budi Kurnia
Christian Putra Nugroho
Ervina Gani
Hary Nugroho
Pieter Alexander De Haan
Subject : Economics for Business
Lecturer : Paul Oppusunggu, MM.

TOTAL FACTOR PRODUCTIVITY

Extraction of Total Factor Productivity elements: institutions, rent seeking, and
financial institutions; from the text book, Miles and Scott's Macroeconomics –
Understanding the Wealth of Nations, with additional references.

BOOK REFERENCE
1. Miles, D. and A. Scott, Macroeconomics – Understanding the Wealth of
Nations, John Wiley & Sons, England, 2005.
2. Lambsdorff, Johann Graf, The Institutional Economics of Corruption & Reform:
Theory, Evidence and Policy, 2007.
3. Lipsey, Richard G, Economics, Harper Collins, USA, 1993.
TOTAL FACTOR PRODUCTIVITY (TFP)
TFP is the measure of efficiency on how all production inputs is utilized. It reflects a
huge range of influences on both economics and socio-cultural. Here we will only have
a look on a few factors that might influence a level of TFP.

FIRST, THE IMPORTANCE OF INSTITUTIONS…

The term “Institutions” does not limit to a government building, instead the term extends
to a wide range of implicit and explicit social behaviors that might influence the
economy; hence, it is also called the “rules of the game” in society.
An economy that has high quality Institutions will produce higher levels of GDP per
capita; and government plays an important role in the growth of GDP. Thus,
government institutions need to provide the framework for its market economy which is
given by such things as: well-defined property rights security, security and enforcement
of contracts, law and order and the basic rights of individual to do anything they like
with his or her sound money.
What kind of indicators that we use to measure a quality of government institutions?
The World Bank has developed six indicators to measure institutions' quality across
countries:
1. Voice and accountability
2. Political stability and lack of violence
3. Government effectiveness
4. Regulation quality
5. Rule of law
6. Corruption
In cases of a country with abundant natural resources, the Institutions may have poor
quality, as it usually would only raise revenue from selling raw materials, which then
would lead to rent seeking and corruption to flourish. Such condition is known as the
“Natural Resource Curse,” where the Institution is doing no value-added activities to
raise either its revenue or its economic growth; hence, zero productivity.

MOVING ON TO… RENT SEEKING AND CORRUPTION

In order to have a high level of TFP, value-added activities must be encouraged and
acted upon. Rent-Seeking is exactly the contrary of that activity. Rent-Seekers are
individuals that earn their money by taking the value added someone else has
produced. Rent Seeking can lower economic growth; as a result of how Rent Seeking
would kill the sources of economic growth: innovation and output creation.
Rent Seeking can be done in three ways:

1
 1. It absorbs labor that could be potentially productive in entrepreneurships
2. Rent seekers act as a tax and decrease the supply of entrepreneurs
3. If rent seeking is rewarded high, the most talented people become rent seekers
and entrepreneurs' quality gets suffered
Corruption is a form of Rent Seeking activities presents in many countries and in some
cases, corruption could help boost the economy if it helps to oil the wheels of trade.
Despite that fact, corruption adversely affects TFP and the level of output in an
economy.
Another form of Rent Seeking is lobbying, a form of rent-seeking activities done by
rent-seekers to obtain prospects rents. While, lobbying is commonly pursued between
two parties or more with the same interest in self-enrichment and increase rent’s size;
corruption is commonly described as the more monopolistic form of rent-seeking.
Moreover, corruption has worse welfare implication than alternate rent seeking
activities.
Studies showed that the least corrupt economies are richer than most corrupt. This is
due to the lack of trust to public institution caused by corrupt economies; whereas trust,
between contractual partners, is an indispensable part of successful economy. This is
known as Social Capital. Societies with high social capital have higher value added
activities. Thus, Institutions must encourage individuals to earn their income through
engaging in Entrepreneurships rather than any Rent Seeking activities.

LAST BUT NOT LEAST… FINANCIAL INSTITUTIONS

Another form of Institutions that has a huge influence on TFP is Financial Institutions.
The lack of adequate, trustworthy and trusted system of financial institutions is often a
barrier to development. When banks and other financial institutions do not function
effectively, the link between private savings and investment may be broken, making it
difficult to raise fund for investment. Or when banks cannot count on their deposits
being left in the banking system, they can not engage in the kind of long-term loans
that are needed to finance investment.
In relation to Social Capital, developing countries must create financial institutions as
well as develop enough stability and reliability so people will trust their savings to the
banking or financial institutions. Countries with well develop financial systems saw
faster growth in GDP per capita and capital and also saw higher levels of TFP.