Slowing Productivity: Why It Matters and What To Do

From The IMFBlog.

Output per worker and total factor productivity have slowed sharply over the past decade in most advanced economies and many emerging and developing countries.

Even before the global financial crisis, productivity growth showed signs of slowing in many advanced economies. But in the aftermath of the crisis, there was a further, abrupt deceleration.

Unlike normal economic slowdowns, deep recessions leave long-lasting scars on total factor productivity, as this chart shows. The global financial crisis was no different.

IMF.Productivity_chart

Consider, for example, the impact of the credit crunch on advanced economy firms that had entered the crisis with high levels of debt. These companies were often forced into fire sales of assets and deep cuts in investment, including in innovation—with lasting effects on their own and aggregate productivity.

Subdued productivity is a cause for concern, according to a new IMF paper. Another decade of weak productivity growth could seriously threaten progress in raising global living standards. Slower growth would also make it more difficult to sustain existing private and public debt levels in some countries—which could jeopardize their financial stability.

Moving the productivity needle should be a policy priority.

For advanced economies, this starts with boosting demand and investment where it remains weak; helping firms restructure debt and strengthen bank balance sheets; and giving clear signals about future economic policy, in particular fiscal, regulatory, and trade policies.

Structural reforms are also needed to tackle the structural headwinds that will constrain productivity growth—aging, the global trade slowdown, and slowing improvements in educational attainment.

Read about slowing productivity and what can be done about it in this new IMF paper.

You can also read the speech by the IMF Managing Director Christine Lagarde on “Reinvigorating Productivity Growth.”

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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