## We Need a New Growth Compact

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### Diagnosis: slowing growth and its sources
- Global growth has steadily slowed; the outlook continues to weaken.
- Economists decompose growth into three inputs: labor; capital (including land); and total factor productivity (TFP).
- More than half of the growth lost since the crisis was driven by slowing total factor productivity growth.
- The world has avoided a severe growth crisis despite shocks from the pandemic and Russia’s war in Ukraine.

### Findings on productivity and resource allocation
- The United States differed from most other economies in that efficiency in resource allocation has improved and contributed positively to productivity growth.
- In most other countries, frictions—such as regulatory barriers and financing constraints—reduce flexibility, and these frictions have become more binding.
- Removing frictions can yield economy-wide benefits that outweigh localized costs (example: Argentina’s leather export restrictions harmed meat-packers and ranchers and prevented tanneries from expanding capacity).
- The global financial crisis underscored the critical role of financial regulation; removing safeguards can be perilous (example: collapse of Silicon Valley Bank and a few other midsize US banks two years ago).

### Innovation, AI, and growth potential
- Productivity can be raised by addressing structural constraints and by exploiting recent technological breakthroughs.
- AI’s boost to labor productivity is uncertain but potentially substantial, depending on how, and how much, workers use it.
- Some newer AI models (including DeepSeek and Mistral) have much lower development costs, indicating the full story is far from written.
- The pace of innovation is described as staggering, with the cost of generative AI dropping by a factor of 10 each year, according to some estimates.
- Policy must manage societal transformations induced by AI to avoid major dislocations and associated political blowback.

### Global integration, trade, and value chains
- World trade has increased fivefold in real terms since 1980.
- The share of world trade in global output expanded to 60 percent from 36 percent.
- Reductions in trade costs supported expanded global value chains, driving productivity gains and goods exports since the early 1990s.
- Lower trade costs increased global GDP by 6.8 percent in real terms between 1995 and 2020.
- Low-income countries saw an increase of 33 percent in real GDP attributable to lower trade costs over the same period.

### Geopolitics, connector countries, and fragmentation
- Geopolitical risks have grown over the past 15 years: conflicts proliferate, alliances change, and countries are raising trade and migration barriers.
- Despite headwinds, global trade has remained remarkably constant relative to economic output; the global-level impact of geopolitical shifts has been muted.
- The composition of trade is changing rapidly; multinational firms have moved production to "connector countries"—notably Mexico, Morocco, and Vietnam—that belong to neither Western nor China-led blocs and trade freely with both.
- Connector countries differ from past geopolitical fragmentation episodes (e.g., Cold War) because they have already moved up the value chain via earlier trade integration.
- While connector countries attenuate the costs of fragmentation, stretched supply chains can be more inefficient and vulnerable, and greater opacity in trade and financial flows makes spotting risks harder.
- Too much trade disruption will diminish global growth and prosperity.

### Distributional impacts and adaptation
- Trade and financial integration helped lift growth momentum, but not everyone benefited equally, especially in advanced economies.
- Globalization had a much smaller impact than technological progress on rising inequalities within countries.
- The speed of economic transformation matters; rapid change can leave little time for systems and safety nets to adapt, heightening adjustment costs and political backlash.

### Policy recommendations and instruments
- Structural reforms can play a central role in reigniting growth:
  - Ease worker mobility across employers, industries, and regions to minimize trade adjustment costs and promote employment.
  - Implement compensatory measures for the most vulnerable and help workers adapt and sharpen skills; such measures can also boost public support for government policies.
  - Assess regulatory guardrails against their broader welfare costs, balancing protection (for financial stability and other purposes) with the potential to stifle innovation and competition.
- Carefully calibrated policy should pursue trade integration and expansion insofar as they support employment and improved living standards.
- The IMF’s historic mission emphasizes facilitating balanced growth of international trade to contribute to high levels of employment and real income.

*Pierre-Olivier Gourinchas; JUNE 2025, F&D*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2025/06/pov-gourinchas.pdf_