What Advanced Economies Can Do to Rise Above the “New Mediocre”
IMF Blog, March 30, 2015
Source details
- Canonical URL
- What Advanced Economies Can Do to Rise Above the “New Mediocre”
Other formats
Bibliographic details
- Authors: Era Dabla-Norris, Vikram Haksar, Kalpana Kochhar
- Published: March 30, 2015
Overview and context
- Global growth remains anemic more than five years after the global financial crisis; without action the prospect of settling into a “new mediocre” will become reality, especially in advanced economies.
- Continued sluggish growth partly reflects the scale of public and private balance sheet damage from the crisis and the slow process of shedding debt since then.
- Underlying output and productivity growth in most advanced economies had been slowing well before the global financial crisis.
- Financial-cycle ups and downs and pre-crisis productivity bursts from technology and reforms masked the longer-term slowdown.
Key findings from the analysis
- Sectors with the most distortions in advanced economies: agriculture and personal services, possibly reflecting subsidies, preferential policies, and lack of competition due to entry barriers.
- Product and labor market distortions induce misallocation of capital and labor (examples: heavily-subsidized agricultural sectors; policies affecting the size of retail establishments in Japan; employment protection policies in Italy and France that take effect beyond a certain size threshold).
- Reforming product and labor markets can lead to sizable increases in growth; example projection: if Italy and Portugal were to eliminate distortions within the next decade, they could boost productivity growth by at least 1½–2 percent per annum.
- Historical reform patterns:
- Large infrastructure shocks mainly in the 1970s have since waned.
- Product market reforms saw a spurt in the 1990s and continued at a similar pace in the 2000s.
- Labor market reforms—as measured by a reduction in job protection or a reduction in the labor tax wedge—the percentage of taxes and transfers paid in the share of total labor costs-- have been less frequent.
- Frequency of positive information and communications technology “shocks” increased since the 1970s but slowed on the eve of the crisis.
- Productivity payoffs from reforms vary across sectors and are typically larger the closer the sector is to the technological frontier.
- Advanced economies must boost productive capacity of workforces, invest in physical and information and communications technology infrastructure, and encourage innovation and skills development to raise potential growth.
Policy recommendations and priorities
- Go back to basics.
- Prioritize innovation and investments in equipment, information and communications technology, and new ideas.
- High returns are especially likely in technologically advanced countries such as the United States and Germany.
- These efforts can generate large global technological spillovers that benefit other countries.
- Make services reform a priority.
- Product market reforms in services can yield significant payoffs.
- Example: If Italy reduced services sector regulations to bring them in line with those of the Netherlands, the average total factor productivity growth gain across all industries could amount to about 0.1 percentage point a year, and about 0.4 percentage point in the services sector.
- Invest in infrastructure.
- Investments in transport, energy, and telecommunications are essential to improving productivity, boosting employment, and increasing output.
- These investments are large-scale and long-term and require high levels of coordination to maximize wider societal benefits.
- Governments will often need to play a vital role in planning, delivering, and financing projects.
- At present, debt-financed projects could have large productivity and output effects, particularly if clearly identified infrastructure needs are met through efficient investment.
- Calibrate reforms.
- Economic-structure changes during reform can have short-term costs in employment and growth.
- Where demand is weak, investment efficiency is high, and there is slack in the labor market, prioritize product market reforms and increased investment in productive infrastructure to reap immediate employment and output benefits.
- Additional reform emphasis:
- Remove binding product and labor market rigidities that impede resource allocation within the most dynamic sectors and firms.
- Augment human capital, reduce skills gaps, and improve the quality of education to support productivity gains.
- Encourage competition, innovation, and technology uptake to sustain long-term growth.
Source: What Advanced Economies Can Do to Rise Above the “New Mediocre”, Era Dabla-Norris, Vikram Haksar, Kalpana Kochhar, March 30, 2015.
Content in this bundle
- Staff Discussion Note
- Staff Discussion Note
