Sustained Economic Growth Hinges on Productivity Gains as Populations Age

IMF Blog, September 4, 2024

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"Productivity isn’t everything," Paul Krugman wrote in his 1990 book, The Age of Diminished Expectations, "but in the long run it is almost everything."
The only way a country can raise its standard of living sustainably is to produce more with existing or fewer resources; that requires improving productivity.
Productivity is difficult to explain, difficult to measure, and, as the past 20 years show, difficult to improve.

The piece highlights a broad slowdown in productivity growth seen across almost all countries over the past 20 years.
Slower gains in total factor productivity account for more than half the deceleration in economic growth since the global financial crisis, IMF analysis shows.
"Another decade of weak productivity growth could seriously erode living standards and threaten financial and social stability."

Total factor productivity measures how efficiently businesses turn capital and labor into output and captures innovation and technology.
The sluggish growth of total factor productivity is especially vexing and central to the overall slowdown.

Yale economist Michael Peters: examines causes of slowing productivity growth in the US; emphasizes that declining dynamism in the US economy could reverberate globally; suggests greater immigration and stronger competition rules to encourage innovation by smaller, younger enterprises.
Ufuk Akcigit (University of Chicago): argues small companies are more innovative relative to their size and use R&D resources more efficiently; notes that as firms grow and dominate markets they often shift to protecting market position rather than fostering innovation.
Michael Spence (Nobel laureate): notes new technologies and digital transformation, notably artificial intelligence, have the potential over time to underpin a major surge in productivity; for AI to achieve its full economic potential it "must be accessible to all sectors of the economy, and to companies large and small."
Daniel Susskind (King’s College London): calls for a renewed approach to improve people’s lives in light of productivity’s outsized role in economic growth.
Edmund Phelps (Nobel laureate): argues a productive society should allow people to enjoy "mass flourishing" from the grassroots up.

Policies should encourage more effective reallocation of resources away from low-productivity firms and support smaller businesses and start-ups—not just large incumbents.
Potential measures discussed include:
- targeted tax credits,
- grants for early-stage innovation,
- workforce retraining,
- policies that encourage competition and reduce barriers to entry for new players.
Greater immigration and stronger competition rules are highlighted as possible levers to offset demographic headwinds and stimulate innovation.

Reviving productivity growth is crucial because it underpins sustained economic growth, living standards, and financial and social stability.
The issue aims to stimulate fresh thinking and further the debate on how to reverse the withering of productivity gains.

Source: IMF blog post by Gita Bhatt, September 4, 2024.

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