{ "title": "Eliminating the Productivity Drag", "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2024/09/eliminating-the-productivity-drag-li-noureldin", "canonical": "https://www.imf.org/en/publications/fandd/issues/2024/09/eliminating-the-productivity-drag-li-noureldin", "overlayPath": "/en/publications/fandd/issues/2024/09/eliminating-the-productivity-drag-li-noureldin/index.md", "summary": "Reforms to address misallocation of resources can boost productivity enough to revive stagnating global growth", "sections": [ { "heading": "Overview and key projection", "content": "- Global growth could stagnate at just 2.8 percent by the end of the decade without timely policy interventions or breakthroughs in technology and its adoption.\n- This would be a drop of 1 percentage point from prepandemic levels.\n- The United States leads the world among the sample countries in allocative efficiency.\n- If less efficient countries narrow their gap with the United States by 15 percent, this would:\n - boost productivity and stimulate investment, adding about 1.2 percentage points to annual global growth.\n- Structural reforms addressing regulatory barriers, labor market rigidity, and access to financing are highlighted as key to achieving these gains." }, { "heading": "Recent productivity trends (exact figures preserved)", "content": "- Productivity growth has markedly decelerated and accounts for more than half of the decline in global growth.\n- Advanced economies: annual productivity growth fell from 1.4 percent during 1995–2000 to 0.4 percent after the pandemic.\n- Emerging market economies: fell from 2.5 percent during 2001–07 to 0.8 percent.\n- Low-income countries: fell from 2 percent during 2001–07 to nearly zero after the pandemic." }, { "heading": "Drivers of productivity", "content": "- Two main factors drive productivity growth:\n - Within-firm improvements (technology, management practices, innovation).\n - Economy-wide allocative efficiency (how well capital and labor flow to most productive firms).\n- Diminishing returns on R&D investment are noted (example: semiconductor industry requiring more researchers to double chip density), implying limits to relying only on within-firm advances.\n- Allocative efficiency analogy: resources should flow to the most innovative and efficient companies so the best businesses thrive and less efficient ones exit." }, { "heading": "Misallocation: scale, causes, and impact", "content": "- Misallocation of capital and labor across companies within sectors has increased.\n- Misallocation has been dragging down productivity growth by an average of 0.6 percentage point annually.\n- Without the increase in misallocation, productivity growth could have been 50 percent higher.\n- Two-thirds of the observed misallocation is attributable to persistent structural issues.\n- Primary structural frictions associated with higher misallocation include:\n - Regulatory barriers\n - Rigid labor markets\n - Financing constraints\n - Lack of trade openness" }, { "heading": "Policy approaches to address misallocation (recommendations)", "content": "- Reduce barriers to market entry and increase competition (example: India’s 1991 deregulation and removal of compulsory industrial licensing).\n- Liberalize financial markets to improve firms’ access to funding and allow high-potential firms to grow.\n- Reduce labor market rigidities to facilitate worker mobility and formal-sector employment (example: Brazil’s past stringent regulations contributing to large informal sector).\n- Address institutional barriers: tackle corruption and weak property rights via governance and institutional reforms.\n- Improve regulatory frameworks and ensure transparent, fair market practices.\n- Foster an innovation and adoption ecosystem that supports creativity and minimizes frictions in reallocation of research resources to accelerate technological adoption." }, { "heading": "Role of emerging technologies", "content": "- Emerging technologies with potential to lift productivity include:\n - Artificial intelligence\n - Supercomputer chips\n - Biotechnology\n - Green technologies\n- Examples of productivity gains from AI: optimizing supply chains, reducing operational costs, improving customer service, AI-driven diagnostics and personalized medicine in health care, AI-powered automation in manufacturing.\n- Governments should foster ecosystems that support innovation and reduce reallocation frictions for research resources." }, { "heading": "Thought experiment and policy payoff", "content": "- If every country closed policy gaps with the best-performing economy in labor market flexibility, financial market liberalization, trade liberalization, and certain product market regulations:\n - Narrowing policy gaps with the United States by 15 percent could eliminate the drag on annual productivity growth from allocative inefficiency, reversing the decline in productivity and boosting growth.\n- Historical reforms demonstrate such targets can be ambitious yet achievable." }, { "heading": "Country vignettes (selected findings)", "content": "- Brazil:\n - Worker productivity increased after a 2017 labor reform (decline in litigation and associated costs).\n - A 2023 value-added tax reform is expected to improve resource allocation, particularly in manufacturing, boost investment, and increase formal-sector activities, raising economic growth by 0.3-0.5 percentage points per year.\n - Greater hydrocarbon output and investment in green growth opportunities could further lift economic potential.\n- China:\n - Rapid transformation historically drove exceptional performance, but growth has slowed and is projected to decelerate further amid an aging population and declining productivity growth.\n - Allocative efficiency worsened in the service sector (which accounts for more than half of value added): less productive services firms hold large market shares while more productive firms remain small due to difficulty attracting capital and labor.\n - Priorities: reform state-owned enterprises, remove protectionist barriers, and open up international trade in services.\n- Euro Area:\n - Productivity growth has lagged the United States since the 1990s; companies have not matched US innovative success.\n - Lack of a truly integrated market for goods, services, labor, and capital limits economies of scale and growth, notably for disruptive start-ups.\n - Inefficient insolvency frameworks slow exit of unproductive firms and hinder reallocation and technology adoption.\n - Aging population and skills mismatches discourage necessary job churn for productivity growth.\n - A stronger single market would improve competition and allocative efficiency.\n- Japan:\n - Total factor productivity growth recovered in the 2010s due to investments in software and digitalization but then slowed again.\n - Despite high R&D spending as a share of GDP, insufficient technological breakthroughs have prevented restoration of historical productivity levels.\n - A widening gap between high- and low-productivity companies reduces allocative efficiency; poor-performing companies persist and delay exit, dragging on economy-wide productivity growth.\n\nSource: NAN LI and DIAA NOURELDIN; F&D Magazine, September 2024.\n\n---\n\n Content in this bundle\n\n- Eliminating the Productivity Drag\n - Eliminating the Productivity Drag (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Eliminating the Productivity Drag (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2024/09/eliminating-the-productivity-drag-li-noureldin" } ], "bullets": [ "[Markdown version](/en/publications/fandd/issues/2024/09/eliminating-the-productivity-drag-li-noureldin/index.md)", "[Structured JSON version](/en/publications/fandd/issues/2024/09/eliminating-the-productivity-drag-li-noureldin/index.json)", "[Bundle manifest](/en/publications/fandd/issues/2024/09/eliminating-the-productivity-drag-li-noureldin/bundle-manifest.json)", "Authors: NAN LI, DIAA NOURELDIN", "Published: September 3, 2024", "Global growth could stagnate at just 2.8 percent by the end of the decade without timely policy interventions or breakthroughs in technology and its adoption.", "This would be a drop of 1 percentage point from prepandemic levels.", "The United States leads the world among the sample countries in allocative efficiency.", "If less efficient countries narrow their gap with the United States by 15 percent, this would:", "Structural reforms addressing regulatory barriers, labor market rigidity, and access to financing are highlighted as key to achieving these gains.", "Productivity growth has markedly decelerated and accounts for more than half of the decline in global growth.", "Advanced economies: annual productivity growth fell from 1.4 percent during 1995–2000 to 0.4 percent after the pandemic.", "Emerging market economies: fell from 2.5 percent during 2001–07 to 0.8 percent.", "Low-income countries: fell from 2 percent during 2001–07 to nearly zero after the pandemic.", "Two main factors drive productivity growth:", "Diminishing returns on R&D investment are noted (example: semiconductor industry requiring more researchers to double chip density), implying limits to relying only on within-firm advances.", "Allocative efficiency analogy: resources should flow to the most innovative and efficient companies so the best businesses thrive and less efficient ones exit.", "Misallocation of capital and labor across companies within sectors has increased.", "Misallocation has been dragging down productivity growth by an average of 0.6 percentage point annually.", "Without the increase in misallocation, productivity growth could have been 50 percent higher.", "Two-thirds of the observed misallocation is attributable to persistent structural issues.", "Primary structural frictions associated with higher misallocation include:", "Reduce barriers to market entry and increase competition (example: India’s 1991 deregulation and removal of compulsory industrial licensing).", "Liberalize financial markets to improve firms’ access to funding and allow high-potential firms to grow.", "Reduce labor market rigidities to facilitate worker mobility and formal-sector employment (example: Brazil’s past stringent regulations contributing to large informal sector).", "Address institutional barriers: tackle corruption and weak property rights via governance and institutional reforms.", "Improve regulatory frameworks and ensure transparent, fair market practices.", "Foster an innovation and adoption ecosystem that supports creativity and minimizes frictions in reallocation of research resources to accelerate technological adoption.", "Emerging technologies with potential to lift productivity include:", "Examples of productivity gains from AI: optimizing supply chains, reducing operational costs, improving customer service, AI-driven diagnostics and personalized medicine in health care, AI-powered automation in manufacturing.", "Governments should foster ecosystems that support innovation and reduce reallocation frictions for research resources.", "If every country closed policy gaps with the best-performing economy in labor market flexibility, financial market liberalization, trade liberalization, and certain product market regulations:", "Historical reforms demonstrate such targets can be ambitious yet achievable.", "Brazil:", "China:", "Euro Area:", "Japan:", "**Eliminating the Productivity Drag**" ], "related": [ { "title": "Eliminating the Productivity Drag", "role": "document", "sourceUrl": "https://www.imf.org/-/media/files/publications/fandd/article/2024/09/li-productivity.pdf", "summary": { "path": "/-/media/files/publications/fandd/article/2024/09/li-productivity.pdf.md", "mime": "text/markdown" }, "binary": { "path": 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