Reinvigorating Productivity Growth
IMF News, April 3, 2017
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- Authors: Christine Lagarde
- Published: April 3, 2017
Productivity slowdown
- Technological innovation appears to be accelerating (examples cited: driverless cars, robot lawyers, 3D-printed human organs), yet measurable productivity gains are weak.
- Over the past decade, sharp slowdowns in measured output per worker and total factor productivity have been observed.
- In advanced economies, productivity growth has dropped to 0.3 percent, down from a pre-crisis average of about 1 percent.
- The slowdown has affected many emerging and developing countries, including China.
- Even before the global financial crisis, productivity growth was slowing in many advanced economies such as the United States, with a further abrupt slowdown after the crisis—especially in continental Europe.
- IMF estimate: if total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today.
- Projection: another decade of weak productivity growth would seriously undermine the rise in global living standards and could jeopardize financial and social stability by making it more difficult to reduce excessive inequality and sustain private debt and public obligations.
- Specific illustrative statistic: the average American worker today works only about 17 weeks to live at the annual real income level of the average worker in 1915.
Productivity headwinds
- Three major headwinds identified as holding back innovation and technology diffusion:
- Population aging in most advanced economies: research suggests worker skills tend to increase until a certain age and then decline, with negative effects on innovation and productivity (issue remains subject to debate).
- Slowdown in global trade: reduced trade growth—driven by lack of global demand and gradual increases in trade restrictions—has hurt the incentives for firms to invest in new technologies and share technologies across borders.
- Unresolved legacy of the global financial crisis in some major economies: deep recessions leave permanent scars on total factor productivity; credit crunch effects (firms with high debt forced into fire sales and deep cuts in physical and intangible investment) produced lasting negative effects on productivity, notably in Southern Europe.
- IMF Staff Discussion Note released concurrently underscores that the legacy issue is a crucial factor.
Reinvigorating productivity growth (policy recommendations and estimates)
- Core premise: more innovation is required; market forces alone will not suffice because innovation and invention have public-good characteristics.
- Governments should do more to unleash entrepreneurial energy by:
- Removing unnecessary barriers to competition.
- Cutting red tape.
- Investing more in education.
- Providing tax incentives for research and development (R&D).
- IMF analysis estimate: if advanced economies were able to ramp up private R&D by 40 percent on average, they could increase their GDP by 5 percent in the long term.
- To encourage investment and risk-taking, governments should give clear signals about future economic policy; high-quality public investments in education and training, R&D, and infrastructure could catalyze private investment while boosting productivity and economic potential.
- Policy signals about tax policy can enhance predictability for investors.
- Reinforcing trade is recommended to reduce uncertainty and boost productivity.
- In Europe, specific measures include facilitating corporate debt restructuring and strengthening bank balance sheets to encourage fresh corporate investment and improve capital allocation away from low-productivity firms toward young and vibrant companies.
- For countries receiving large numbers of refugees, effective integration of immigrant workers is recommended to contribute to a younger and more dynamic workforce with growth and productivity dividends.
- Fiscal note: IMF: April 2016 Fiscal Monitor indicates the economic benefits (in net present value terms) from increased R&D should be compared with R&D investment costs; calculations suggest the net social benefit is likely to be positive.
Distributional and human-capital priorities (conclusion)
- Structural change has historically accompanied growth but is currently generating entrenched economic and social problems in disadvantaged regions amid rising inequality.
- Lower-skilled workers are disproportionately affected—experiencing job losses, family breakdowns, and poor physical and mental health—what Arthur Brooks termed the “dignity deficit.”
- Policy priorities to address distributional consequences:
- Targeted education programs.
- Skills training.
- Employment incentives.
- Retooling income policies and tax systems (example: advocating extension of the earned income tax credit in the United States).
- Education and training emphasized as the key policy actions to raise productivity growth and reduce inequality.
- IMF estimate: in advanced and emerging economies, the slowdown of educational attainment has lowered labor productivity growth by 0.3 percentage points annually since the 1990s.
- Broader message: active policy choices are required now—leaning back and waiting for technological breakthroughs alone is not an option.
Source: Reinvigorating Productivity Growth — Speech by Christine Lagarde, Managing Director, International Monetary Fund, April 3, 2017.