## fd0924-productivity

## Source details

**Canonical URL:** [fd0924-productivity](https://www.imf.org/-/media/files/publications/fandd/article/2024/09/fd0924-productivity.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/fandd/article/2024/09/fd0924-productivity.pdf.md)
- [Structured JSON version](/-/media/files/publications/fandd/article/2024/09/fd0924-productivity.pdf.json)

---

### Institutional reform and governance
- Core prescriptions:
  - "The IMF must reform its constitution."
  - "The World Bank must become, as its dynamic new president, Ajay Banga, has proposed, a global public goods bank focused on both human capital and environmental stewardship."
  - "The World Bank and multilateral development banks will need further funds from shareholders through a capital increase."
  - "Given that the membership of the Group of Seven is too narrow to be the steering committee for the world economy, the G20 should become what it was intended to be: the premier forum for global economic cooperation."
- Recommended G20 changes:
  - "It needs to be more representative through a constituency system."
  - "It should assemble a professional secretariat that can ensure continuity of policy from year to year."

### Climate finance and development needs
- Funding needs and allocation:
  - "It is estimated that emerging market and developing economies, excluding China, need $3 trillion a year by 2030 to fund climate action and the SDGs."
  - Of that $3 trillion: "$2 trillion should be raised domestically and $1 trillion will have to come from outside."
- MDB and mobilization proposals:
  - "The Summers-Singh Group of Twenty (G20) report has proposed that multilateral development banks provide an annual increase of $260 billion."
  - "Innovative financial mechanisms, including the use of guarantees to de-risk and scale up private sector investment, must be mobilized to boost and complement these efforts."

### Global cooperation, risks, and choices
- Political observation:
  - "Popular disappointment with current leaders is reflected in populist nationalism, with voters blaming globalization itself for their fate when the real culprit is our failure to manage globalization well."
- Historical examples cited as reasons for hope:
  - "Kennedy’s nuclear test ban treaty in the 1960s,"
  - "Ronald Reagan’s and Mikhail Gorbachev’s nuclear arms reductions in the 1980s,"
  - "multinational efforts to prevent the depletion of the ozone layer in the 1990s,"
  - "the 2009 G20 summit stabilizing the global economy,"
  - "the more recent Paris accord on climate."
- Two possible futures:
  - One "toward global fragmentation and deepening crises."
  - The other toward "prosperity, progress, and hope" if collective action is taken.

### Keynesian perspective and policy tools for the century
- Bretton Woods expectations and concerns:
  - Keynes hoped institutions would bring "wisdom, patience, and grave discretion" and feared they could become "instruments of US power rather than truly independent international bodies."
- Contemporary policy implications:
  - "The policy tools appropriate for this century will not simply replicate those of recent decades."
  - On trade and industrial policy: "tariffs, state subsidies, and state-owned enterprises—so often maligned by economists as barriers to innovation and competition—will likely be essential for the development of a healthy global market for climate-friendly industry."
  - Rationale: "green technologies are infant industries that require far more protection than discipline."
- Role for international institutions:
  - Bretton Woods institutions can "play a transformative role not only in the fight against climate change, but in the furtherance of international harmony" by supporting experimentation with a broad economic policy palette.

### Innovation, dynamism, and productivity — values and evidence
- Thesis: mass flourishing arises from higher levels of dynamism driven by modern values—"individualism, vitalism, and a desire for self-expression."
- Country-level indigenous innovation rates (post–World War II high-innovation period):
  - United States: "1.02"
  - United Kingdom: "0.76"
  - Finland: "0.55"
  - Germany: "0.42"
  - Italy: "0.40"
  - France: "0.32"
- Values analysis (OECD countries):
  - High-strength modern values observed in "the US, Ireland, Australia, Denmark, and less so Switzerland, Austria, the UK, Finland, and Italy" correspond to relatively high indigenous innovation rates.
  - Specific value effects: "the willingness to take the initiative, the desire to achieve on the job, teaching children to be independent, and the acceptance of competition contribute positively to economic performance . . . measured by TFP [total factor productivity] growth, job satisfaction, male labor force participation, and employment."
  - Countervailing effect: "Teaching children to be obedient, however, reduced economic performance."
- Historical TFP cumulative growth example:
  - "Cumulative growth of TFP in the US over 20-year periods went from 0.381 in 1919–39"

### Innovation slowdown and loss of innovation (Edmund Phelps)
- Time-series measures of innovation intensity (Bojilov’s calculations):
  - "0.446 in 1950–70, then down to 0.243 in 1970–90 and 0.302 in 1990–2010, Bojilov’s calculations show."
- Nature of recent innovation:
  - Breakthroughs in AI and electric vehicles exist, but "most of these innovations come from the high-tech Silicon Valley region of California, a small part of the economy."
  - Daron Acemoğlu: "AI would add no more than 1 percent to US economic output over the next decade."
- Economic and social consequences:
  - Near stagnation of wage rates; diminished capital formation; asset prices rose "relentlessly from about 1973 to 2019," reducing housing affordability.
  - Reported job satisfaction in the United States has been "on a downhill slide since 1972."
  - Anne Case and Angus Deaton link an "outbreak of despair in America" to economic developments.
- Prescriptions:
  - Need to "regain these values and reverse the slowdown of innovation."
  - Economists should "design an economy high in dynamism where people can experience mass flourishing from the grassroots up."

### Demographic decline and implications (Andrew Stanley)
- Fertility and population facts:
  - "Over half of the world’s economies, accounting for two-thirds of the global population, now have fertility rates below the replacement fertility level of 2.1 children per woman."
  - Replacement rate: "2.1 live births per woman."
  - In a few African countries (Somalia, Chad, Niger, the Democratic Republic of the Congo (DRC), and the Central African Republic) "women are still having more than six children on average."
  - Nigeria and Pakistan are expected to become the world’s fourth and third most populous countries sometime after mid-century.
- Aging and dependency:
  - "By 2050, the number of people 65 and older will double to 1.6 billion."
  - "Japan’s old-age dependency ratio in 2023, meaning that for every two working-age adults (15–64), there is at least one person aged 65 or older."
  - "By 2050, nearly 20 economies, all located in Asia and Europe, are expected to have an old-age dependency ratio exceeding 50%."
- Economic effects and policy responses:
  - Lower birth rates → smaller working-age population → reduced productivity and higher burden on pensions and health care.
  - Policy responses include pro-natalist and family-support policies (Nordic countries), financial incentives (Singapore), technology and automation investments (Japan), and for high-fertility countries, investment in education, healthcare, and job creation.

### US productivity slowdown, causes, and policy options (Michael Peters)
- Magnitude of slowdown:
  - Labor productivity growth:
    - "Between 1947 and 2005, labor productivity in the US grew at an average annual rate of 2.3 percent."
    - "But after 2005, the rate fell to 1.3 percent."
    - If growth had stayed at 2.3 percent between 2005 and 2018, "the American economy would have produced $11 trillion more in goods and services than it did."
  - Historical patterns: gains slowed from "3–3.5 percent a year in the 1960s and 1970s to about 2 percent in the 1980s." Temporary rebound to "3 percent" in late 1990s/early 2000s. Since about 2003, slowed to "an average growth rate of less than 1.5 percent in the decade after the Great Recession."
- Key micro patterns:
  - Entry rate fell "from 13 percent in 1980 to 8 percent in 2018."
  - Average number of employees rose "from 20 in 1980 to 24 by 2018."
  - "The average markup by publicly traded US companies surged from about 20 percent in 1980 to 60 percent today."
  - "Since 1980, labor’s share of the US economy has fallen by about 5 percentage points."
- Mechanism: creative destruction and reallocation
  - Falling entry rates and larger incumbents imply less creative destruction and slower aggregate productivity growth.
- Four broad explanations discussed:
  - IT and economies of scale: initial boom followed by barriers to entry and reduced dynamism.
  - Changes in knowledge diffusion: advanced firms may be too far ahead; defensive patenting and concentrated patenting create diffusion frictions.
  - Slowing population growth: reduces business entry and creative destruction.
  - Policy changes: regulatory entry costs, R&D subsidies favoring incumbents, corporate tax changes—quantitative evidence suggests these are unlikely to fully explain the slowdown.
- Policy implications and recommendations:
  - Focus on global changes: "The development of advanced information technology and declines in population growth fit that bill and are most likely to have played an important role."
  - Demographics: "the main policy lever available in the short to medium term is likely to be immigration policy."
  - Market power and IT: strengthen "antitrust enforcement" and competition policy.
  - Broader levers: strengthen economic dynamism, family-support measures, invest in technology and diffusion, review R&D subsidies and regulatory barriers.

### AI’s promise and structural forces (Michael Spence)
- Findings and timing:
  - AI could reverse the downward productivity trend and eventually produce a major sustained surge in productivity.
  - "My best guess (and it is just a guess, based on current patterns of investment) is that we may start to see meaningful impacts in labor productivity by the end of this decade."
- Recent measured productivity:
  - US productivity growth averaged 1.68 percent from 1998 to 2007 and then slowed to 0.38 percent from 2010 to 2019.
  - Productivity growth for the tradable goods and services sectors fell from 4.27 percent to 1.23 percent.
  - Productivity growth in large nontradable services sectors declined from 0.73 percent to effectively zero.
- Sovereign debt context:
  - "Global sovereign debt now exceeds global gross domestic product."
  - "United States sovereign debt ratio is now 120 percent."
  - "Europe’s sovereign debt ratio is 88.6 percent."
- AI-specific observations:
  - Generative AI is the first AI with a humanlike capacity to operate in multiple domains.
  - Best model: machine-human collaboration ("augmentation") rather than full automation.
  - Talent, computing power, and rapidly expanding electricity demand are main barriers; availability of data is not a major constraint.
  - Training-scale systems "reside largely in cloud computing systems in the private sector, mostly in the US and China."
- Policy recommendations:
  - Balance risk-mitigation with policies to promote accessibility, diffusion, and skills acquisition.
  - Expand computing infrastructure to the broad research community.
  - Effective competition policy to prevent concentrated market power limiting diffusion.
  - Prioritize retraining and new skills acquisition.
- Projections:
  - With policy support to accelerate diffusion, AI could "significantly accelerate economic growth" and help productivity rebound, assist the energy transition, and help younger working populations support older ones.

### Misallocation and "Eliminating the Productivity Drag" (Nan Li and Diaa Noureldin)
- Core findings:
  - Without timely policy interventions or breakthroughs, global growth could stagnate at "just 2.8 percent by the end of the decade"; this is "a drop of 1 percentage point from prepandemic levels."
  - Misallocation of capital and labor across companies within sectors has increased and has been dragging down productivity growth by "an average of 0.6 percentage point annually."
  - Without this increase in misallocation, productivity growth could have been "50 percent higher."
  - "Two-thirds of observed misallocation is attributable to persistent structural issues (regulatory barriers, rigid labor markets, financing constraints, lack of trade openness)."
- Country and region diagnostics:
  - Advanced economies: annual productivity growth plunged from "1.4 percent during 1995–2000 to 0.4 percent after the pandemic."
  - Emerging market economies: dropped from "2.5 percent during 2001–07 to 0.8 percent after the pandemic."
  - Low-income countries: fell from "2 percent during 2001–07 to nearly zero after the pandemic."
- Policy prescriptions:
  - Narrow policy gaps with best-performing economies through labor market flexibility, financial liberalization, trade liberalization, and product market reform.
  - Reduce barriers to entry and increase competition; liberalize financial markets; reduce labor market rigidities; tackle institutional barriers (corruption, weak property rights); foster innovation and adoption ecosystems.
- Thought experiment:
  - Narrowing policy gaps with the United States by "just 15 percent" could eliminate the drag on annual productivity growth from allocative inefficiency.

### Innovation paradox, R&D spending, and firm dynamics (Ufuk Akcigit)
- R&D and paradox:
  - R&D spending rose from "2.2 percent of GDP to 3.4 percent of GDP."
  - Private R&D spending by businesses increased from "1.1 percent of GDP to 2.5 percent of GDP."
  - Despite rising R&D, productivity growth slowed.
- Structural shifts:
  - Proportion of population involved in patent production nearly doubled while productivity growth fell by half.
  - Reallocation of innovative resources toward large, established companies: early-2000s roughly "48 percent" of American inventors worked for big incumbents; by 2015 that surged to "58 percent."
  - Inventors who move to large firms become less innovative compared with inventors who move to young firms.
- Innovation-stifling hiring:
  - After 2000, the wage premium offered by established companies widened by "20 percent" relative to salaries paid by younger businesses.
  - Inventors’ innovativeness dropped by "6 percent" when they joined larger companies.
- R&D tax credits and perverse incentives:
  - The R&D tax credit introduced in 1981 has tended to benefit large businesses disproportionately.
  - Firms claiming R&D tax credits are more likely to engage in innovation-stifling hiring.
- Policy implications:
  - Concentration of R&D among large businesses has led to diminishing returns in productivity.
  - Policy options: targeted tax credits for small businesses; grants for early-stage innovation; policies encouraging competition and reducing barriers to entry.

### R&D spending, ideas, inequality, and climate‑compatible growth
- High R&D intensity benchmark and inequality:
  - Contrast: country R&D intensity example "5.4 percent of GDP each year" versus leading companies (Alphabet, Huawei, Meta) spending "more than 15 percent of their revenue on R&D."
  - Claim: "The US could, for instance, quadruple innovation if racial minorities, women, and children from low-income families invented at the same rate as white men from high-income families."
- Technology-enabled discovery example:
  - DeepMind’s AlphaFold "in 2020 … solved the ‘protein folding’ problem and can now calculate the 3D shape of millions of proteins in minutes."
- Redirecting technological progress:
  - Historical cost declines: Stern (2008) estimated "2 percent of GDP" to reduce carbon emissions by 80 percent; by 2020 UK Climate Change Committee found cost fell to "0.5 percent of GDP."
  - A "200-fold fall in the price of solar technology" cited.
  - Claim: reshaping economic incentives can both drive growth and make it greener.

### Financing development, revenue mobilization, and digital public infrastructure
- Financing needs and fiscal context:
  - IMF estimate: low-income developing countries need "$3 trillion annually through 2030 to finance development goals and the climate transition."
  - Global debt projected to reach "100 percent of GDP before the end of this decade."
  - Tax potential: untapped tax potential of "8–9 percent of GDP" in these countries.
- Digital public infrastructure three-step approach:
  1. Introduce digitally verifiable assets and credentials (examples: Aadhaar; Brazil’s Pix; Thailand’s PromptPay; India’s Unified Payments Interface).
  2. Align incentives for formalization by ensuring immediate value from joining the formal sector.
  3. Generate value for taxpayers through the tax system (examples: India’s digitally signed business IDs; GST credit discount of "up to 20 percent"; more than "55 licensed third-party platforms" used to file taxes after opening API access).
- Outcomes and caveats (India example):
  - Revenue collection via GST "has grown by more than 50 basis points of GDP since 2018."
  - Time to process electronic returns and refunds has fallen; tax base broadened with a rise in noncorporate taxpayers.
  - Caveat: improvements "cannot … be attributed to technology alone." Governance and policy reforms are also critical.
- Value-first tax reform:
  - Recommendation: move from enforcement to "value-first" approach—deliver social value and trust so tax collection increases as a derivative benefit.

### Remote work and labor supply effects (Nicholas Bloom)
- Scale and labor supply:
  - WFH expanded about tenfold following the pandemic and settled at about five times its pre-pandemic level.
  - Hybrid work valued at about "an 8 percent increase in salary" by surveyed workers.
  - Typical workers spend "about 45 hours a week in the office and close to another 8 hours a week commuting"; working from home three days a week saves "about five hours a week (about 10 percent of total weekly work and commute time)."
  - Approximately "2 million more employees with a disability are working in the US following the pandemic."
  - Prime-age female employment in the US has risen "about 2 percent faster than prime-age male employment since the pandemic."
  - Preliminary US survey analysis suggests perhaps "0.3 to 0.5 more desired children per couple when both work from home one day or more a week."
- Capital and productivity effects:
  - Office occupancy in major city centers is now "50 percent below pre-pandemic levels."
  - WFH has curbed commuting traffic volumes across the US and Europe by an estimated "10 percent."
  - Hybrid work (typical pattern for about "30 percent of the US, European, and Asian labor forces") shows roughly flat impact on productivity in firm- and individual-level studies; fully remote working (about "10 percent of employees") has mixed micro results.
- Aggregate conclusion:
  - The 2020 surge in WFH "has helped offset the pre-pandemic productivity slowdown and is boosting present and future growth; aggregate benefits of WFH are judged to outweigh losers."

### Modern industrial policy — shaping markets (Mariana Mazzucato)
- Problem statement and scale:
  - Climate finance shortfall: "at least $5.4 trillion a year by 2030 is needed."
  - World spent "$7 trillion subsidizing fossil fuels in 2022."
  - S&P 500 companies transferred "$795.2 billion to shareholders last year through stock buybacks."
  - Five of the world’s largest listed energy companies transferred "$104 billion through buybacks and dividends in 2023."
  - Share of total income going to workers has declined by "6 percentage points since 1980."
- Conceptual shift and instruments:
  - Move from "fixing markets" to "shaping markets" with mission-oriented industrial policy.
  - Use conditionalities on public funds to align firm behavior with mission goals (examples include curbing emissions, restricting stock buybacks, workforce development).
  - Strategic public procurement: global public procurement budgets total "about $13 trillion a year," accounting for "20–40 percent of national public spending in OECD countries."
  - National development banks (NDBs) have "$20.2 trillion under management" and MDBs a further "$2.2 trillion."
- Institutional capability and measurement:
  - Build stable national innovation ecosystems and public-sector dynamism ("Govlabs").
  - Move beyond static GDP metrics to dashboards including economic, social, and environmental indicators.
- International coordination:
  - Avoid green protectionism; design national industrial strategies mindful of international development and trade.
- Overall recommendation:
  - Modern industrial policy should orient investment, innovation, growth, and productivity around bold climate and inclusion goals and use public finance strategically to catalyze mission-focused investments.

*Source: fd0924-productivity - IMF Finance & Development (September 2024).*

### 13.7 percent of the world’s population,

### 13.7 percent of the world’s population,

### Institutional reform and governance
- "The IMF must reform its constitution."
- "The World Bank must become, as its dynamic new president, Ajay Banga, has proposed, a global public goods bank focused on both human capital and environmental stewardship."
- "The World Bank and multilateral development banks will need further funds from shareholders through a capital increase."
- "Given that the membership of the Group of Seven is too narrow to be the steering committee for the world economy, the G20 should become what it was intended to be: the premier forum for global economic cooperation."
- Recommended G20 changes:
  - "It needs to be more representative through a constituency system."
  - "It should assemble a professional secretariat that can ensure continuity of policy from year to year."

### Climate finance and development needs
- Estimated funding needs: "It is estimated that emerging market and developing economies, excluding China, need $3 trillion a year by 2030 to fund climate action and the SDGs."
  - Of that $3 trillion: "$2 trillion should be raised domestically and $1 trillion will have to come from outside."
- Multilateral development bank proposal: "The Summers-Singh Group of Twenty (G20) report has proposed that multilateral development banks provide an annual increase of $260 billion."
- Financial mobilization measures: "Innovative financial mechanisms, including the use of guarantees to de-risk and scale up private sector investment, must be mobilized to boost and complement these efforts."

### Global cooperation, risks, and choices
- Political observation: "Popular disappointment with current leaders is reflected in populist nationalism, with voters blaming globalization itself for their fate when the real culprit is our failure to manage globalization well."
- Historical examples of successful global cooperation cited as maintaining hope:
  - "Kennedy’s nuclear test ban treaty in the 1960s,"
  - "Ronald Reagan’s and Mikhail Gorbachev’s nuclear arms reductions in the 1980s,"
  - "multinational efforts to prevent the depletion of the ozone layer in the 1990s,"
  - "the 2009 G20 summit stabilizing the global economy,"
  - "the more recent Paris accord on climate."
- Two possible futures: one "toward global fragmentation and deepening crises," the other toward "prosperity, progress, and hope" if collective action is taken.

### Keynesian perspective and policy tools for the century
- Keynes’s expectations for Bretton Woods institutions:
  - Gifts hoped for: "a many-colored coat... a set of vitamins... 'wisdom, patience, and grave discretion' to win the trust of peoples in need."
  - Concern that the institutions become "instruments of US power rather than truly independent international bodies."
- Contemporary policy implication: "The policy tools appropriate for this century will not simply replicate those of recent decades."
  - On trade and industrial policy: "tariffs, state subsidies, and state-owned enterprises—so often maligned by economists as barriers to innovation and competition—will likely be essential for the development of a healthy global market for climate-friendly industry."
  - Rationale: "green technologies are infant industries that require far more protection than discipline."
- Role for international institutions: "By helping different nations pursue new technology and expertise through experimentation with a broad economic policy palette, the Bretton Woods institutions can play a transformative role not only in the fight against climate change, but in the furtherance of international harmony."

### Innovation, dynamism, and productivity
- Thesis: mass flourishing arises from higher levels of dynamism driven by modern values—"individualism, vitalism, and a desire for self-expression."
- Evidence and country-level indigenous innovation rates during post–World War II high-innovation period:
  - United States: "1.02"
  - United Kingdom: "0.76"
  - Finland: "0.55"
  - Germany: "0.42"
  - Italy: "0.40"
  - France: "0.32"
- Findings from values analysis (Organisation for Economic Co-operation and Development countries):
  - Countries with high-strength modern values (examples): "the US, Ireland, Australia, Denmark, and less so Switzerland, Austria, the UK, Finland, and Italy" had relatively high indigenous innovation rates.
  - Specific value effects: "the willingness to take the initiative, the desire to achieve on the job, teaching children to be independent, and the acceptance of competition contribute positively to economic performance . . . measured by TFP [total factor productivity] growth, job satisfaction, male labor force participation, and employment."
  - Countervailing effect: "Teaching children to be obedient, however, reduced economic performance."
- Historical total factor productivity (TFP) cumulative growth example: "Cumulative growth of TFP in the US over 20-year periods went from 0.381 in 1919–39"

_Source: fd0924-productivity - 13.7 percent of the world’s population,_

### 0.446 in 1950–70, then down to 0.243 in

### fd0924-productivity - 0.446 in 1950–70, then down to 0.243 in

### Innovation slowdown and loss of innovation (Edmund Phelps)
- Time-series measures of innovation intensity:
  - "0.446 in 1950–70, then down to 0.243 in 1970–90 and 0.302 in 1990–2010, Bojilov’s calculations show."
- Nature of recent innovation:
  - Breakthroughs in artificial intelligence and electric vehicles exist, but "most of these innovations come from the high-tech Silicon Valley region of California, a small part of the economy."
  - Daron Acemoğlu: "AI would add no more than 1 percent to US economic output over the next decade."
- Economic consequences of declining innovation:
  - Near stagnation of wage rates; diminished capital formation as capital investments run into diminishing returns no longer offset by technical progress.
  - Asset prices rose "relentlessly from about 1973 to 2019," reducing housing affordability.
- Social consequences:
  - Reported job satisfaction in the United States has been "on a downhill slide since 1972."
  - Anne Case and Angus Deaton link an "outbreak of despair in America" to economic developments.
- Cultural and value drivers:
  - Decline in modern values that fuel dynamism; rise of the "money culture" (term by John Dewey) may weaken national dynamism.
- Prescriptions and outlook:
  - Need to "regain these values and reverse the slowdown of innovation."
  - Economists should "design an economy high in dynamism where people can experience mass flourishing from the grassroots up."
  - Institutional interest: Melissa Kearney has shifted Aspen Economic Strategy Group focus "from resilience to strengthening dynamism."

### Demographic decline and implications (Andrew Stanley)
- Fertility and population trends:
  - "Over half of the world’s economies, accounting for two-thirds of the global population, now have fertility rates below the replacement fertility level of 2.1 children per woman."
  - The replacement rate: "2.1 live births per woman."
  - In a few African countries (Somalia, Chad, Niger, the Democratic Republic of the Congo (DRC), and the Central African Republic) "women are still having more than six children on average."
  - With high fertility and large bases, "Nigeria and Pakistan are expected to become the world’s fourth and third most populous countries sometime after mid-century."
- Aging and dependency:
  - "By 2050, the number of people 65 and older will double to 1.6 billion."
  - "Japan’s old-age dependency ratio in 2023, meaning that for every two working-age adults (15–64), there is at least one person aged 65 or older."
  - "By 2050, nearly 20 economies, all located in Asia and Europe, are expected to have an old-age dependency ratio exceeding 50%."
- Economic effects:
  - Lower birth rates → smaller working-age population → reduced productivity and higher burden on social support systems (pensions, health care) → pressure on public finances.
- Policy responses and adaptation:
  - Pro-natalist and family-support policies: Nordic countries—generous parental leave and subsidized childcare.
  - Financial incentives: Singapore provides financial incentives for families to have more children.
  - Technology and automation: Japan invests in automation to "enhance productivity despite a shrinking workforce."
  - For high-fertility countries: invest in education, healthcare, and job creation to leverage youthful demographics for growth.

### US productivity slowdown, causes, and policy options (Michael Peters)
- Magnitude of the slowdown:
  - Labor productivity growth:
    - "Between 1947 and 2005, labor productivity in the US grew at an average annual rate of 2.3 percent."
    - "But after 2005, the rate fell to 1.3 percent."
    - If growth had stayed at 2.3 percent between 2005 and 2018, "the American economy would have produced $11 trillion more in goods and services than it did."
  - Historical patterns: labor productivity gains slowed from "3–3.5 percent a year in the 1960s and 1970s to about 2 percent in the 1980s." A temporary rebound to "3 percent" in late 1990s/early 2000s. Since about 2003, labor productivity slowed to "an average growth rate of less than 1.5 percent in the decade after the Great Recession."
- Key micro patterns:
  - Decline in business dynamism:
    - Entry rate fell "from 13 percent in 1980 to 8 percent in 2018."
    - Average number of employees rose "from 20 in 1980 to 24 by 2018."
  - Markups and concentration:
    - "The average markup by publicly traded US companies surged from about 20 percent in 1980 to 60 percent today."
  - Labor share:
    - "Since 1980, labor’s share of the US economy has fallen by about 5 percentage points."
  - Decline in business-to-business reallocation since the late 1980s.
- Mechanism: creative destruction and reallocation
  - Aggregate productivity depends on arrival of new technologies and reallocation from unproductive to productive firms.
  - Falling entry rates and larger incumbents imply less creative destruction and slower aggregate productivity growth.
- Proposed fundamental causes (four broad explanations discussed):
  - The advent of information technology and resulting economies of scale:
    - IT raised returns to scale for productive firms, producing an initial productivity boom, but creating barriers that reduce new-entry incentives and long-run dynamism.
  - Changes in the process of knowledge diffusion:
    - Technologically advanced firms may be so far ahead that adoption by lagging firms becomes "impossible"; defensive patenting and concentrated patenting exacerbate diffusion frictions.
  - Slowing population growth:
    - Declining population growth reduces business entry and creative destruction, contributing to lower productivity growth.
  - Policy changes:
    - Regulatory entry costs, R&D subsidies favoring incumbents, and corporate tax changes could matter, but aggregate quantitative evidence suggests they are unlikely to fully explain the slowdown.
- Policy implications and recommendations:
  - Occam’s razor suggests focusing on global changes: "The development of advanced information technology and declines in population growth fit that bill and are most likely to have played an important role."
  - Demographics:
    - Given the limited success of policies to reverse fertility declines, "the main policy lever available in the short to medium term is likely to be immigration policy."
  - Information technology and market power:
    - If IT-driven concentration caused the slowdown, then strengthened "antitrust enforcement" and competition policy become central tools to address higher markups, slower innovation, and reduced growth.
  - Broader policy levers mentioned across pieces:
    - Design policies to strengthen economic dynamism and mass flourishing.
    - Family-support measures (parental leave, subsidized childcare) and financial incentives to affect fertility.
    - Invest in technology, automation, and policies that enable diffusion of knowledge to less-advanced firms.
    - Review R&D subsidies and regulatory barriers that may disproportionately advantage incumbents.

*Source: IMF Finance & Development (September 2024) — excerpts on innovation decline, demographic shifts, and productivity slowdown.*

### references

### fd0924-productivity - references

### References cited
- Aghion, Philippe, Antonin Bergeaud, Timo Boppart, Peter J. Klenow, and Huiyu Li. 2023. “A Theory of Falling Growth and Rising Rents.” Review of Economic Studies 90 (6): 2675–702.
- Akcigit, Ufuk, and Sina Ates. 2023. “What Happened to U.S. Business Dynamism?” Journal of Political Economy 131 (8): 2059–124.
- De Ridder, Maarten. 2024. “Market Power and Innovation in the Intangible Economy.” American Economic Review 114 (1): 199–251.
- Peters, Michael, and Conor Walsh. 2021. “Population Growth and Firm-Product Dynamics.” NBER Working Paper 29424, National Bureau of Economic Research, Cambridge, MA.

### Michael Spence — “AI’S PROMISE FOR THE GLOBAL ECONOMY”
Findings and analysis
- AI has the potential not only to reverse the downward productivity trend, but over time to produce a major sustained surge in productivity.
- My best guess (and it is just a guess, based on current patterns of investment) is that we may start to see meaningful impacts in labor productivity by the end of this decade.
- Measured productivity edged up during the pandemic, largely because less productive industries were partially shuttered, while higher-productivity sectors shifted to remote work.
- US productivity growth averaged 1.68 percent from 1998 to 2007 and then slowed to 0.38 percent from 2010 to 2019.
- Productivity growth for the tradable goods and services sectors fell from 4.27 percent to 1.23 percent.
- Productivity growth in large nontradable services sectors declined from 0.73 percent to effectively zero.
- Global sovereign debt now exceeds global gross domestic product.
- United States sovereign debt ratio is now 120 percent.
- Europe’s sovereign debt ratio is 88.6 percent.

Key structural forces
- Three powerful, colliding forces: shocks (war, pandemic, climate change, geopolitical tensions, nationalism), secular trends (declining productivity, aging populations, rising sovereign debt, fading deflationary effects from emerging market growth), and technological revolutions (digital/AI, biomedical/life sciences, sustainable energy technologies).
- Supply-chain fragmentation and a shift away from cost-minimizing global supply networks toward resilience and diversification are contributing to inflationary pressures (example: India now produces 15 percent of iPhones; only South Korea and Taiwan Province of China make the most advanced semiconductors).

AI-specific points
- Generative AI is the first AI with a humanlike capacity to operate in multiple domains and to detect and switch domains based only on conversational prompts.
- The better model is machine-human collaboration (“augmentation”) rather than full automation.
- Talent, computing power, and rapidly expanding electricity demand are the main barriers to building increasingly powerful generative AI models; availability of data is not a major constraint.
- The systems powerful enough to train models with billions of parameters reside largely in cloud computing systems in the private sector, mostly in the US and China.

Policy recommendations and challenges
- Balance risk-mitigation regulation with policies to promote accessibility, diffusion, and skills acquisition so AI benefits all sectors, including government, health care, construction, and hospitality.
- Expand computing infrastructure to the broad research community to democratize model-building and achieve a balance between academic and private innovation.
- Effective competition policy should be part of the policy portfolio to prevent concentrated market power from limiting diffusion.
- Retraining and new skills acquisition deserve priority attention to manage job disruptions and transitions.

Projections and broader impact
- With policy support to accelerate diffusion across the entire economy, AI could significantly accelerate economic growth, help productivity growth rebound, and relax supply-side constraints that contribute to inflation and elevated real interest rates.
- AI could play a key role in the energy transition and help the younger working population support an older population without undue sacrifice.

### Nan Li and Diaa Noureldin — “ELIMINATING THE PRODUCTIVITY DRAG”
Core findings
- Without timely policy interventions or breakthroughs in technology and its adoption, global growth could stagnate at just 2.8 percent by the end of the decade; this is a drop of 1 percentage point from prepandemic levels.
- Misallocation of capital and labor across companies within sectors has increased and has been dragging down productivity growth by an average of 0.6 percentage point annually.
- Without this increase in misallocation, productivity growth could have been 50 percent higher.
- Two-thirds of observed misallocation is attributable to persistent structural issues (regulatory barriers, rigid labor markets, financing constraints, lack of trade openness).

Country- and region-specific observations
- United States: leads the world among the sample countries in allocative efficiency.
- Europe/Euro Area: productivity growth has lagged the United States since the 1990s; lack of truly integrated market for goods, services, labor, and capital; inefficient insolvency frameworks slow exit of unproductive firms.
- Japan: total factor productivity growth recovered in the 2010s but slowed again; wide gap between high- and low-productivity firms keeps poorly performing companies operating for years.
- Brazil: labor reform in 2017 led to increased worker productivity; 2023 value-added tax reform expected to boost growth by 0.3-0.5 percentage points per year.
- China: allocation of capital and labor has become less efficient in the service sector; reform priorities include state-owned enterprise reform, removing protectionist barriers, and opening up to international trade in services.

Policy prescriptions to address misallocation
- Narrow policy gaps with best-performing economies by improving labor market flexibility, financial market liberalization, trade liberalization, and regulation of product markets; closing a 15 percent policy gap with the United States is modeled as an ambitious but achievable target.
- Reduce barriers to market entry and increase competition (example: India’s 1991 deregulation removing compulsory industrial licensing).
- Liberalize financial markets to enable high-productivity firms to access funding.
- Reduce labor market rigidities to facilitate worker movement and formalization (example: Brazil’s reforms reducing litigation and associated costs).
- Tackle institutional barriers such as corruption and weak property rights through governance and institutional reforms.
- Foster innovation and adoption ecosystems that minimize frictions in reallocation of research resources and support diffusion of emerging technologies (AI, supercomputer chips, biotechnology, green technologies).

Thought experiment result
- If other countries were to narrow their policy gaps with the United States by just 15 percent, the drag on annual productivity growth from allocative inefficiency could be eliminated, reversing the decline in productivity and boosting growth.

### Regional and sectoral diagnostics (selected excerpts)
- Advanced economies: annual productivity growth plunged from 1.4 percent during 1995–2000 to 0.4 percent after the pandemic.
- Emerging market economies: productivity growth dropped from 2.5 percent during 2001–07 to 0.8 percent after the pandemic.
- Low-income countries: productivity growth fell from 2 percent during 2001–07 to nearly zero after the pandemic.
- Misallocation is identified as a significant contributor to the global slowdown in productivity and growth.

### Innovation dynamics — introduction to “THE INNOVATION PARADOX” (Ufuk Akcigit)
- Increasing R&D spending in the United States over four decades coincided with slower innovation, productivity gains, and economic expansion.
- Giant enterprises dominating large sectors may crowd out more innovative smaller businesses and start-ups; the biggest players often prioritize defensive strategies over genuine innovation.
- Policymakers should encourage not only R&D spending but also more effective allocation of resources to support innovation and competition.

*Italic: Content derived from fd0924-productivity - references (IMF F&D, September 2024).*

### 2.2 percent of GDP. Today, that figure is 3.4 percent,

### Productivity

### R&D spending and the productivity paradox
- R&D spending rose from 2.2 percent of GDP to 3.4 percent of GDP, according to the National Science Foundation (see Chart 1).
- Private R&D spending by businesses increased from 1.1 percent of GDP to 2.5 percent of GDP.
- Based on conventional economic models, that increase in R&D spending should have led to accelerated economic growth; instead the economy experienced a slowdown.
- Productivity growth between 1960 and 1985 averaged 1.3 percent.
- Over the subsequent three and a half decades, gains in productivity fell below that average, with only a brief uptick in the early 2000s, and annual growth has generally been declining.

### Structural and distributional shifts in innovation
- Aggregate data masks important structural shifts; analysis requires high-quality microdata on businesses, inventors, and innovations.
- Over the past two decades, the proportion of the population involved in patent production nearly doubled while productivity growth fell by half.
- Goldschlag and the author documented a reallocation of innovative resources toward large, established companies between the start of this century and 2015.
  - At the beginning of this century, roughly 48 percent of American inventors worked for big incumbent companies (more than 20 years old and employing more than 1,000 workers).
  - By 2015, that figure had surged to 58 percent.
- Inventors who move to large firms become less innovative compared with inventors who move to young firms.

### Innovation-stifling hiring
- A specific practice identified is innovation-stifling hiring: large, established enterprises hire key employees from younger competitors—often by offering higher salaries—but place them in roles that do not fully leverage their skills.
- After 2000, the wage premium offered by established companies widened by 20 percent relative to salaries paid by younger businesses, prompting many innovators to switch jobs and join larger companies (see Chart 2).
- These inventors’ innovativeness dropped by 6 percent compared with that of their peers who joined younger employers.
- One interpretation: hiring top talent from rivals can neutralize potential competitive threats, weakening competitors and preventing disruptive innovations elsewhere.

### R&D tax credits and perverse incentives
- The R&D tax credit was introduced in 1981 as part of the Economic Recovery Tax Act.
- Minnesota adopted a state-level R&D tax credit in 1982; many other states followed.
- Research with Goldschlag shows large businesses are much more likely to benefit from R&D tax credits than smaller ones.
- Firms actively claiming R&D tax credits are more likely to engage in innovation-stifling hiring and to offer higher salaries that correlate with declines in inventors’ subsequent innovativeness.
- The policy—while intended to encourage research and development—may unintentionally favor big companies and contribute to market concentration and reduced business dynamism.

### Implications and policy recommendations
- The concentration of R&D resources among large businesses has led to diminishing returns in terms of productivity growth; simply expanding R&D spending will not automatically yield economic growth.
- Effective industrial policy should consider not just the amount of R&D investment but also its allocation and the incentives created for incumbents versus smaller, younger firms.
- Policy options to foster a more dynamic and innovative economy include:
  - Targeted tax credits for small businesses.
  - Grants for early-stage innovation.
  - Policies that encourage competition and reduce barriers to entry for new players.
- Designing incentives that encourage dynamic, risk-taking behavior—particularly among smaller enterprises and start-ups—could better harness innovation to revive productivity gains.

*Source: F&D, September 2024 — ufuk akcigit; Census Bureau Project 7083300: CBDRB-FY24-CES007-01.*

### references

### fd0924-productivity - references

### References (selected)
- Akcigit, Ufuk, and Sina Ates. 2021 “Ten Facts on Declining Business Dynamism and Lessons from Endogenous Growth Theory.” American Economic Journal: Macroeconomics 13 (1): 257–98.
- Akcigit, Ufuk, Salome Baslandze, and Francesca Lotti. 2023. “Connecting to Power: Political Connections, Innovation, and Firm Dynamics.” Econometrica 91 (2): 529–64.
- Akcigit, Ufuk, and Nathan Goldschlag. 2022. “Where Have All the ‘Creative Talents’ Gone? Employment Dynamics of US Inventors.” NBER Working Paper 31085.
- Akcigit, Ufuk, and Nathan Goldschlag. 2024. “Understanding the Innovation Puzzle: Firm Size, Inventors, and Industrial Policy.” University of Chicago Working Paper.
- Akcigit, Ufuk, and William Kerr. 2018. “Growth through Heterogeneous Innovations.” Journal of Political Economy 126 (4): 1374–443.

### Remote Work’s Growth Gift — Key findings and mechanisms (Nicholas Bloom)
- Working from home (WFH) expanded about tenfold following the pandemic and has settled at about five times its pre-pandemic level.
- Labor supply effects:
  - Hybrid work is valued at about an 8 percent increase in salary by surveyed workers in the United States, Europe, and Asia.
  - Typical workers spend about 45 hours a week in the office and close to another 8 hours a week commuting; working from home three days a week saves about five hours a week (about 10 percent of total weekly work and commute time).
  - Approximately 2 million more employees with a disability are working in the US following the pandemic, concentrated in high-WFH occupations.
  - Prime-age female employment in the US has risen about 2 percent faster than prime-age male employment since the pandemic.
  - Preliminary US survey analysis suggests perhaps 0.3 to 0.5 more desired children per couple when both work from home one day or more a week.
  - Collective labor-supply effects could increase labor supply by several percent.
- Capital effects:
  - Office occupancy in major city centers is now 50 percent below pre-pandemic levels, creating potential for office space reduction and reuse.
  - Driving speeds during the morning commute are now about 2 or 3 miles per hour faster, reducing the need for additional transport infrastructure.
  - Releasing underused land for housing effectively increases usable land supply and may allow longer commutes, opening space farther outside city centers for housing.
  - These capital contributions could raise output a few percent over coming decades.
- Productivity effects:
  - Hybrid work (typical pattern for about 30 percent of the US, European, and Asian labor forces) shows roughly flat impact on productivity in firm- and individual-level studies.
  - Fully remote working (about 10 percent of employees) has mixed micro results: large negative impacts in some early-pandemic studies, large positive impacts in well-managed, self-directed activities.
  - Aggregate macro impact is likely positive due to labor market inclusion and improved matching:
    - Remote work expands candidate pools (example contrast: local vs regional vs global candidate pools), improving match quality; AI can aid screening.
  - WFH has curbed commuting traffic volumes across the US and Europe by an estimated 10 percent, reducing pollution—particularly low-level heavy particulates—that health studies link to cognitive and productivity damage.
- Positive feedback loop:
  - Larger WFH markets spur technology and product development (hardware, software, AR/VR, holograms), evidenced by a rise in patent applications using “remote work,” “working from home,” or similar terms starting in 2020.
  - City-center retail spending has fallen but largely relocated to suburbs; overall consumption resumed pre-pandemic trend.
  - Reduction in commercial office valuations is a loss for investors but may enable conversion to residential use, improving downtown housing affordability for essential in-person workers.
- Overall conclusion:
  - The 2020 surge in WFH has helped offset the pre-pandemic productivity slowdown and is boosting present and future growth; aggregate benefits of WFH are judged to outweigh losers.

### Modern industrial policy should shape markets, not just fix their failures — Key findings and policy recommendations (Mariana Mazzucato)
- Context and problem statement:
  - Climate crisis: temperatures set to rise at least 1.5 degrees Celsius above preindustrial levels this century.
  - Climate finance shortfall: at least $5.4 trillion a year by 2030 is needed.
  - Current perverse incentives: world spent $7 trillion subsidizing fossil fuels in 2022; the 20 biggest fossil-fuel firms are expected to invest $932 billion developing new oil and gas fields by the end of 2030.
  - Corporate cash returns: S&P 500 companies transferred $795.2 billion to shareholders last year through stock buybacks; five of the world’s largest listed energy companies transferred $104 billion through buybacks and dividends in 2023.
  - Distributional trend: share of total income going to workers has declined by 6 percentage points since 1980.
- Conceptual shift:
  - Move from “fixing markets” to “shaping markets” with mission-oriented industrial policy focused on ambitious public-purpose goals (e.g., net zero, pandemic preparedness).
  - Governments should “pick the willing” via clear missions rather than “picking winners.”
- Contract design and conditionalities:
  - Public funds and benefits (grants, loans, equity investments, tax benefits, procurement, IP rights) should be conditional on firms aligning behavior with mission goals.
  - Conditionalities can direct firms to net-zero emissions, affordable access, profit sharing, reinvestment in R&D, restrictions on stock buybacks, workforce development, accessible childcare, prevailing wages, community investment.
  - Examples:
    - French COVID-19 bailout of Air France conditioned on curbing emissions per passenger and reducing domestic flights.
    - Germany’s KfW energy-efficient refurbishment program provides low-interest loans only to companies that agree to decarbonize and offers debt relief of up to 25 percent for buildings meeting energy standards.
    - CHIPS and Science Act funding in the US requires commitments to climate and workforce development plans, accessible childcare, prevailing wages, community investment, profit-sharing for funding of $150 million or more; stock buybacks are excluded and discouraged for five years.
- Strategic public finance and procurement:
  - Global public procurement budgets total about $13 trillion a year, accounting for 20–40 percent of national public spending in OECD countries.
  - Procurement can be reoriented to outcomes, innovation, social value, and local production (examples: Brazil redesigning procurement; US Buy Clean Initiative).
  - Patient long-term financing and public financial institutions as lenders of first resort:
    - National development banks (NDBs) have $20.2 trillion under management and multilateral development banks (MDBs) a further $2.2 trillion.
    - Together these assets are about 10–12 percent of global financing.
  - Public banks should provide countercyclical financing, fund capital development, and act as venture capitalists to catalyze mission-focused investments.
  - Example: Germany’s KfW loans to the national steel sector were conditional on lowering material content, contributing to Germany having green steel today.
- Institutional and capability building:
  - Success requires a stable, connected national innovation ecosystem funding innovation from research to scaling.
  - Public sector dynamism: invest in government capabilities; develop entrepreneurial, experimental, and cross-ministerial public institutions.
  - “Govlabs” (e.g., Chile’s Laboratorio de Gobierno) provide safe spaces to experiment and scale mission-oriented policy instruments.
- Measurement and accountability:
  - Move beyond static cost-benefit and GDP metrics; adopt dashboards including economic, social, and environmental indicators, spillovers, multiplier benefits, job creation, and patent filing.
  - Indicators should support learning and accountability and reflect mission goals.
- International coordination and risks:
  - Avoid sliding into green protectionism; design national industrial strategies mindful of international development, trade, and supply-chain implications.
  - The US Inflation Reduction Act has prompted Europe to decarbonize but is draining financing from emerging economies—this makes careful national strategy design and international cooperation imperative.
- Overall recommendation:
  - Modern industrial policy can orient investment, innovation, growth, and productivity around bold climate and inclusion goals; it must drive a global green race to the top, not to the bottom.

*Source: fd0924-productivity - references (PDF).*

### references

### references

### Citations listed
- Kattel, R., and M. Mazzucato. 2018. “Mission-Oriented Innovation Policy and Dynamic Capabilities in the Public Sector.” Industrial and Corporate Change 27 (5): 787–801.
- Mazzucato, M. 2018. “Mission-Oriented Research and Innovation in the European Union.”
- Mazzucato, M. 2021. Mission Economy: A Moonshot Guide to Changing Capitalism. London: Allen Lane.
- Mazzucato, M. 2023. “Financing the Sustainable Development Goals through Mission-Oriented Development Banks.” UN DESA Policy Brief Special Issue, UN Department of Economic and Social Affairs, New York, NY.
- Mazzucato, M., and R. Collington. 2023. The Big Con: How the Consulting Industry Weakens Our Businesses, Infantilizes Our Governments, and Warps Our Economies. New York, NY: Penguin Press.
- Mazzucato, M., and D. Rodrik. 2023. “Industrial Policy with Conditionalities: A Taxonomy and Sample Cases.” UCL Institute for Innovation and Public Purpose Working Paper IIPP WP 2023-07, London.

### Major themes and findings from the article excerpt
- Political consensus places economic growth at the top of priorities after decades of sluggish performance across many economies.
- Historical context:
  - Reliable measures of the size of the economy emerged only in the 1940s.
  - The pursuit of GDP growth as a central political objective surged after World War II and during the Cold War.
  - The Cold War reframed economic growth as a key indicator of geopolitical success.
- Growth’s historical benefits and costs:
  - Growth contributed to large improvements in human welfare: extreme poverty fell from 8 in 10 people in 1820 to just 1 in 10 today.
  - Literacy improved from 9 in 10 illiterate in 1820 to 9 in 10 literate today.
  - The past eight years have been the hottest eight years in human history, and climate change is described as now a climate emergency.
  - Growth-promoting technologies have contributed to increased inequality, labor-market disruption (including AI), political disruption, and community disruption.
- The article frames a core dilemma: growth is necessary for meeting basic societal ambitions (eradicating poverty, providing good health care for all) yet has significant environmental and social costs.
- Critique of degrowth:
  - The slogan “infinite growth is not possible on a finite planet” is challenged; the article argues growth arises from ideas (intangible innovations), not merely material resource use.
  - Freezing GDP per capita at current levels would require either abandoning 800 million people to extreme poverty or slashing the income of the other 7.1 billion.
  - The article calls degrowth “folly” on humanitarian grounds while acknowledging the current growth path is unsustainable environmentally.

### Policy recommendations and action items
- Reform intellectual property (IP) regimes:
  - Current regimes (example: the Berne Convention) are described as antiquated, having not changed for over half a century, and risk protecting the past at the expense of future reuse—threatening opportunities from new technologies such as generative AI.
  - IP reform should address excessive protection for training material used by generative AI and insufficient protection for material these systems create.
- Increase investment in R&D:
  - R&D trends and levels are described as discouraging.
  - Country examples cited:
    - In France, The Netherlands, and the UK, R&D expenditure as a share of GDP has collapsed since the mid-20th century.
    - In the US, the measure has stagnated at late-1960s levels for decades.
    - Israel is referenced as a global leader in investment (sentence incomplete in supplied excerpt).
- Generate more ideas to drive growth:
  - The central claim: “growth comes from technological progress, driven by discovering new ideas about the world.”
  - Asking “How do we generate more growth?” is reframed as asking “How do we generate more ideas?”
- Preserve the pursuit of growth while changing its nature:
  - The article argues we “need more growth” to meet global ambitions and that it is unimaginative to treat the current moment as an economic peak warranting a permanent pause on growth for “not simply for the next 10 years, or even 10,000 years, but for all time.”

*SEPTEMBER 2024 — F&D — Productivity*

### 5.4 percent of GDP in R&D each year, look mod-

### fd0924-productivity - 5.4 percent of GDP in R&D each year, look mod-

### Ideas, inequality, and research investment
- Finding: The text contrasts a country’s R&D intensity of 5.4 percent of GDP each year with leading companies: Alphabet, Huawei, and Meta all spend more than 15 percent of their revenue on R&D.
- Analysis:
  - “No country can expect a steady stream of new ideas unless it puts serious resources into their discovery.”
  - Reducing inequality and broadening participation in idea generation are critical to raising innovation output.
  - Example claim: “The US could, for instance, quadruple innovation if racial minorities, women, and children from low-income families invented at the same rate as white men from high-income families.”
- Technology-enabled idea discovery:
  - Example: DeepMind’s AlphaFold “in 2020 … solved the ‘protein folding’ problem and can now calculate the 3D shape of millions of proteins in minutes. (A human researcher would spend their entire PhD to do just one protein.)”
- Policy implications and recommendations:
  - Put “serious resources” into discovery (high sustained R&D funding).
  - Actively reduce inequality to unlock latent inventor capacity across demographic groups.
  - Promote and deploy technology that accelerates idea discovery (more tools like AlphaFold).

### Redirecting technological progress and climate‑compatible growth
- Historical evidence:
  - In 2008, Nicholas Stern estimated it would cost 2 percent of GDP to reduce carbon emissions by 80 percent.
  - By 2020 the UK’s Climate Change Committee found the cost of eliminating emissions had fallen to just 0.5 percent of GDP.
  - Reason: “the accumulation of two decades of major interventions—taxes and subsidies, rules and regulations, social norms—created a strong incentive for people to develop clean rather than dirty technologies.”
  - A striking outcome cited: a 200-fold fall in the price of solar technology.
- Analysis:
  - The trade-off between growth and climate can collapse when technological incentives are reshaped.
  - “By radically reshaping the economic incentives people face, we can not only encourage the development of new technologies to drive growth but also shape the types of technologies we develop.”
- Strategic goal:
  - “Redirect technological progress toward the other ends we care about—to grow the economy but also make the world fairer, greener, less dependent on disruptive technologies, and more respectful of place.”
- Framing:
  - The period presents an “existential opportunity” to pursue moral renewal and to change the nature of growth through incentive design.

### Financing development, revenue mobilization, and digital public infrastructure
- Financing needs and constraints:
  - IMF estimate: low-income developing countries need $3 trillion annually through 2030 to finance development goals and the climate transition.
  - Projection: global debt projected to reach 100 percent of GDP before the end of this decade.
  - Tax potential: these countries have an untapped tax potential of 8–9 percent of GDP.
  - Constraint: increasing borrowing may not be sound; collecting more revenue through taxation is a recommended solution.
- Challenges:
  - Large shares of the population work in difficult-to-tax activities (small-holder farming, informal services).
  - Governments often erode corporate tax bases via tax exemptions to attract industry, shifting burden toward taxes on goods and services that weigh on the poor.
  - Enforcement is “weak for the rich and punitive for the working class and the poor.”
- Proposed alternative approach: “value-first” tax reform based on strengthening the social contract and encouraging formalization
  - Core idea: how governments drive increases in tax collection (delivering social value and trust) determines how much tax they can collect.
  - Reference: World Bank report “Innovations in Tax Compliance: Building Trust, Navigating Politics, and Tailoring Reform.”

### Digital public infrastructure: mechanisms and three-step approach
- Definition: Digital public infrastructure combines interoperable, open-access, and reusable building blocks into a network of digital systems, with data security, privacy, and consent at its heart.
- Three steps to broaden the tax base and increase revenue:
  1. Introduce digitally verifiable assets and credentials to make operating outside the formal economy less desirable.
     - Examples: Aadhaar enables unique verifiable digital identification and facilitated bank account opening; Brazil’s Pix, Thailand’s PromptPay, India’s Unified Payments Interface reduce friction in digital payments.
  2. Align incentives for individuals and businesses to join the formal sector by ensuring formalization generates immediate value (primary aim: value; secondary: transparent tax collection).
     - Caution: launching payment networks explicitly tied to tax reporting could discourage usage.
     - Example benefit: digital payment footprints and verifiable business credentials improve access to formal credit.
  3. Generate value for individuals and businesses through the tax system to reward compliance:
     - Give data back to taxpayers (e.g., India provides compliant taxpayers with digitally signed business IDs usable as digital KYC credentials and public verification of GST registration facts).
     - Create incentives for filing taxes throughout the supply chain (example: India’s GST offers an income tax credit discount of up to 20 percent if businesses purchase from registered suppliers; discount is shared as a credit toward the next tax payment).
     - Allow the private ecosystem to build seamless filing and value-added services via API access (since opening API access, more than 55 licensed third-party platforms have been used to file taxes).
- Trust and taxation:
  - Trust and government effectiveness are reciprocal: trust increases with strong institutions and reliable public services; trust enables compliance and reform space.
  - Digital platforms can build trust through tamper-proof components for identity, payments, and security, reducing explicit and implicit transaction costs.
  - Broader progress needed: strengthen digital systems and policy and institutional frameworks to reinforce trust, which supports investment, innovation, productivity, and growth.

### India: practical outcomes and caveats
- Outcomes credited to digital public infrastructure and reforms:
  - Revenue collection via the goods and services tax “has grown by more than 50 basis points of GDP since 2018,” showing a marked increase over projected collections under the previous tax regime.
  - Time to process electronic returns and refunds has fallen significantly.
  - The tax base has broadened with a marked and sustained rise in noncorporate taxpayers, including small businesses and individuals.
  - More than 55 licensed third-party platforms have been used to file taxes after opening API access.
- Caveat: Improvements in revenue collection “cannot … be attributed to technology alone.” Governance and policy reforms (for example, the Goods and Services Tax Network as a unified collection mechanism) are also critical.
- Policy prescription: Move from an enforcement-of-collection lens to a value-first lens—provide value to people and businesses so tax collection increases gradually as a derivative benefit.

*Italic line: Source: Excerpts from Finance & Development, SEPTEMBER 2024*

---


_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/09/fd0924-productivity.pdf_