## World Must Prioritize Productivity Reforms to Revive Medium-Term Growth

_IMF Blog, April 10, 2024_

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## Bibliographic details
- Authors: Nan Li, Diaa Noureldin
- Published: April 10, 2024

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### Overview
- Global growth—stripped of cyclical ups and downs—has slowed steadily since the 2008-09 global financial crisis.
- Without policy intervention and leveraging emerging technologies, the stronger growth rates of the past are unlikely to return.
- Five-year ahead projections in the latest World Economic Outlook indicate global growth will slow to just above 3 percent by 2029.
- Growth could drop by about a percentage point below the pre-pandemic (2000-19) average by the end of the decade.
- A persistent low-growth scenario, combined with high interest rates, could put debt sustainability at risk and discourage investment, potentially deepening the slowdown.
- Geoeconomic fragmentation and harmful unilateral trade and industrial policies are strong headwinds.

### Drivers of the slowdown
- Key drivers of economic growth: labor, capital, and total factor productivity (TFP).
- More than half of the growth decline since the crisis was driven by a deceleration in TFP growth.
- TFP increases with technological advances and improved resource allocation across firms.
- Resource misallocation has increased, dragging down TFP and global growth:
  - If resource misallocation hadn’t worsened, TFP growth could have been 50 percent higher.
- Demographic pressures and weak business investment also contributed:
  - Shrinking working-age populations in major economies have weighed on labor growth.
  - Weak business investment has stunted capital formation.

### Medium-term pressures
- United Nations projections imply demographic pressures will increase in most major economies, causing an imbalance in world labor supply.
- Working-age population trends:
  - Increase in low-income and some emerging economies.
  - Labor squeeze in China and most advanced economies (excluding the United States).
- By 2030, the growth rate of the global labor supply is expected to slide to just 0.3 percent.
- Some resource misallocation may self-correct over time, but structural and policy barriers will slow the process.
- Technological innovation may mitigate the slowdown, but overall TFP growth is likely to continue to decline due to:
  - Increasing difficulty of technological breakthroughs.
  - Stagnation in educational attainment.
  - Slower convergence of less developed economies.
- Absent major technological advances or structural reforms, global economic growth is expected to reach 2.8 percent by 2030, compared with a historical average of 3.8 percent.

### Policy scenarios and quantified impacts
- The analysis evaluates policies affecting labor supply and resource allocation amid AI advancement, public debt overhang, and geoeconomic fragmentation.
- Scenarios considered include ambitious but achievable policy shifts to address resource misallocation by improving:
  - Flexibility of product and labor markets.
  - Trade openness.
  - Financial development.
- Labor supply and participation policies considered include:
  - Reforming retirement and unemployment benefits.
  - Supporting childcare.
  - Expanding re-training and re-skilling programs.
  - Improving integration of migrant workers.
  - Removing social and gender barriers.
- Estimated impacts:
  - Focused policy actions to enhance market competition, trade openness, financial access, and labor market flexibility could lift global growth by about 1.2 percentage points by 2030.
  - The potential of AI to boost labor productivity is uncertain but possibly substantial, possibly adding up to 0.8 percentage points to global growth depending on adoption and workforce impacts.

### Policy recommendations and priorities
- Prioritize reforms that enhance productivity and fully leverage AI to revive medium-term growth.
- Address resource misallocation by removing persistent barriers that favor or penalize firms irrespective of productivity.
- Implement policies to improve:
  - Market competition.
  - Trade openness.
  - Financial access.
  - Labor market flexibility.
- Support labor-supply measures that expand workforce participation and integration (childcare, retraining, migrant worker integration), acknowledging their comparatively modest benefits versus productivityfocused reforms.
- Pursue innovation-driven policies in the long run to sustain global growth.

*Based on Chapter 3 of the World Economic Outlook, “Slowdown in Global Medium-Term Growth: What Will it Take to Turn the Tide?”, reflecting research by Chiara Maggi, Cedric Okou, Alexandre B. Sollaci, and Robert Zymek.*

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## Content in this bundle

- **Chapter 3**
  - [Chapter 3 (Markdown version)](/-/media/files/publications/weo/2024/april/english/ch3.pdf.md){rel="alternate" type="text/markdown"}
  - [Chapter 3 (PDF)](/-/media/files/publications/weo/2024/april/english/ch3.pdf){rel="external" type="application/pdf"}

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## References

- [Our analysis](https://www.imf.org/en/Publications/WEO/Issues/2024/04/16/world-economic-outlook-april-2024?cid=bl-com-SM2024-WEOEA2024001)
- [artificial intelligence](https://www.imf.org/en/Blogs/Articles/2024/01/14/ai-will-transform-the-global-economy-lets-make-sure-it-benefits-humanity)
- [innovation-driven policies](https://www.imf.org/en/Publications/FM/Issues/2024/04/17/fiscal-monitor-april-2024?cid=bl-com-SM2024-FMOEA2024001)

_Source: https://www.imf.org/en/blogs/articles/2024/04/10/world-must-prioritize-productivity-reforms-to-revive-medium-term-growth_