## Sustained Economic Growth Hinges on Productivity Gains as Populations Age

_IMF Blog, September 4, 2024_

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## Bibliographic details
- Authors: Gita Bhatt
- Published: September 4, 2024

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### Central thesis: productivity as the foundation of prosperity
- "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.

### Evidence of a pervasive slowdown
- 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."

### Focus on total factor productivity and innovation
- 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.

### Contributions and perspectives in the F&D issue
- 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.

### Policy implications and recommended measures
- 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.

### Stakes and call to action
- 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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## References

- [total factor productivity](https://www.imf.org/en/Publications/fandd/issues/2024/09/back-to-basics-total-factor-productivity-robert-zymek)
- [IMF analysis](https://www.imf.org/en/Publications/fandd/issues/2024/09/Eliminating-the-Productivity-Drag-Li-Noureldin)
- [issue of F&D](https://www.imf.org/en/Publications/fandd)
- [Michael Peters](https://www.imf.org/en/Publications/fandd/issues/2024/09/america-must-rediscover-its-dynamism-michael-peters)
- [Ufuk Akcigit](https://www.imf.org/en/Publications/fandd/issues/2024/09/the-innovation-paradox-ufuk-akcigit)
- [Michael Spence](https://www.imf.org/en/Publications/fandd/issues/2024/09/AIs-promise-for-the-global-economy-Michael-Spence)
- [Daniel Susskind](https://www.imf.org/en/Publications/fandd/issues/2024/09/we-must-change-the-nature-of-growth-daniel-susskind)
- [Edmund Phelps](https://www.imf.org/en/Publications/fandd/issues/2024/09/Point-of-view-mass-flourishing-and-economic-dynamism-edmund-phelps)

_Source: https://www.imf.org/en/blogs/articles/2024/09/04/sustained-economic-growth-hinges-on-productivity-gains-as-populations-age_