Bengaluru, NFAPost: The Covid-19 pandemic struck the global economy after a decade that featured a broad-based slowdown in productivity growth.
Global Productivity: Trends, Drivers, and Policies presents the first comprehensive analysis of the evolution and drivers of productivity growth, examines the effects of Covid-19 on productivity, and discusses a wide-range of policies needed to rekindle productivity growth.
The book also provides a far-reaching dataset of multiple measures of productivity for up to 164 advanced economies and emerging market and developing economies and introduces a new sectoral database of productivity.
PRAISE FOR THE BOOK
“The World Bank has created an extraordinary book on productivity, covering a large group of countries and using a wide variety of data sources. There is an emphasis on emerging and developing economies, whereas the prior literature has concentrated on developed economies. The book seeks to understand growth patterns and quantify the role of (among other things) the reallocation of factors, technological change and the impact of natural disasters, including the COVID-19 pandemic. This book is a must read for specialists in emerging economies, but also provides deep insights for anyone interested in economic growth and productivity.”
— Martin Neil Baily, Senior Fellow, The Brookings Institution, former Chairman U.S. President’s Council of Economic Advisers
“This is an important book at a critical time. As the book notes global productivity growth had already been slowing in the run on to the COVID-19 Pandemic, and collapses with the pandemic. If we want an effective recovery, we have to understand what was driving these long-run trends. The book examines and presents a novel global approach to examining the levels, growth rates and drivers of productivity growth. For anyone wanting to understand or influence productivity growth this is an essential read.”
— Nicholas Bloom, William D. Eberle Professor of Economics, Stanford University
“The COVID-19 pandemic hit a global economy that was already struggling with an adverse pre-existing condition—slow productivity growth. This extraordinarily valuable and timely book brings considerable new evidence that shows the broad-based, long-standing nature of the slowdown. The book is comprehensive, with an exceptional focus on emerging market and developing economies. Importantly, it shows how severe disasters (of which COVID-19 is just the latest) typically harm productivity. There are no silver bullets, but the book suggests sensible strategies to improve growth prospects.”
— John Fernald, Schroders Chair in European Competitiveness and Reform and Professor of Economics, INSEAD
“The impact of the COVID-19 pandemic on the global economy is yet to be fully comprehended. This timely and comprehensive book explores the experience of productivity growth across countries, across sectors and across time. Key issues explored include what drives productivity growth, what harms productivity growth, what is the experience of productivity convergence across countries and what policies can enhance productivity performance. Importantly in the context of the current crisis, the book explores the impact of natural disasters and economic disruptions on productivity growth. With its focus on data and empirical evidence organized through a historical lens for a wide range of countries, this book is a valuable resource for researchers and policymakers who are interested in the changing nature of productivity growth.”
— Warwick Mckibbin, Professor and Director of the Centre for Applied Macroeconomic Analysis, Australian National University
“This study is valuable in providing a very timely overview of recent developments in productivity growth around the world. The global shock of COVID-19 is placed in the context of pre-existing trends, with the slowdown in productivity growth across all groups of countries as the dominant development. The perspective on emerging market and developing economies is likewise valuable as their convergence to living standards seen in advanced economies today is conditional on (strong) productivity growth. This study provides several useful perspectives on these crucial topics with policy-relevant findings, including on the importance of stimulating structural transformation in emerging market and developing economies.”
— Robert Inklaar, Professor, University of Groningen
“This book is possibly the most comprehensive and global empirical analysis of the drivers of long-term productivity growth. By using a variety of datasets and methodologies, it provides the reader with a variety of novel insights. This is particularly true for emerging markets as previous studies have been too focused on advanced economies. A must read for academics and policy makers interested in designing growth-friendly policies.”
— Antonio Fatas, Portuguese Council Chaired Professor of European Studies and Professor of Economics, INSEAD
“This is a very comprehensive assessment on the global slowing of productivity growth that now extends over a full decade. It is a book of unusual breadth examining recent developments in both advanced and emerging market economies together with an extensive amount of sectoral and firm-level analysis. It highlights many of the common causes including a near universal slowing of capital accumulation and markedly lower rates of total factor productivity in countries at widely differing stages of economic development. Many researchers will also be drawn to very up-to-date appraisal of the empirical literature.”
— Barry Bosworth, Senior Fellow, Robert V. Roosa Chair in International Economics, Brookings Institution
“This study is a must read for policy makers, academics, and those in industry who are interested in the drivers and challenges of low productivity growth and its policy implications, including the impact of technological change. The comprehensive look at productivity drivers in emerging markets and developing economies (EMDEs) is also a very welcome contribution and will inform policies that can foster sustainable economic growth.”
— Joshua Meltzer, Senior Fellow, Brookings Institution
“Productivity growth is the key driver of sustainable income growth and poverty reduction. Its effects on human welfare are enormous. While economists agree on the importance of productivity, its measurement and drivers remain elusive. We sometime refer to productivity as a “residual” or even as a “measure of our ignorance.” This important book analyzes the trends and drivers of productivity growth, with a special focus on emerging and developing countries. It uses state-of-the-art econometric techniques and brings together the analysis of a wide range of productivity drivers which, so far, have been analyzed in isolation. It also discusses the impact of COVID-19 on productivity growth. Reading this book will help in reducing our ignorance on the most important driver of human wellbeing.”
— Ugo Panizza, Pictet Chair in Finance and Development, The Graduate Institute, Geneva, and Vice President, CEPR
“This book is one of the most comprehensive studies of recent trends in productivity. Especially in its research covering emerging and developing economies, it breaks new ground in analytical breadth and depth. Its analysis of the impact of shocks, such as the COVID-19 pandemic, makes this work even more valuable and timely. With its emphasis on drawing implications for policy, the book is useful reading for researchers and practitioners alike.”
— Zia Qureshi, Visiting Fellow, Brookings Institution
Deepest recession
The Covid-19 pandemic has plunged the global economy into its deepest recession since World War II. Per capita incomes are expected to decline in about 90 percent of countries in 2020, the largest fraction since 1870.
The pandemic may leave lasting economic scars through multiple channels, including lower investment, erosion of human capital because of unemployment and loss of schooling, and a retreat from global trade and supply linkages. These effects may also lower productivity and limit the ability of economies to raise real incomes in the long term.
Worryingly, the pandemic has occurred on the heels of a steep, broad-based slowdown in productivity growth after the 2007-09 global financial crisis. The post-crisis slowdown was widespread, affecting around 70% of advanced economies and emerging market and developing economies (EMDEs) and more than 80% of the global extreme poor.
Productivity growth slowed in all six EMDE regions. In EMDEs, which have a history of recurring multi-year productivity growth surges and setbacks, the productivity growth deceleration after the global financial crisis was the steepest, longest, and broadest in recent decades.
The slowdown in productivity growth is concerning because productivity growth is the main source of lasting per capita income growth, which in turn is the primary driver of poverty reduction. Most cross-country differences in per capita
incomes have been attributed to differences in productivity.
Whereas the onequarter of EMDEs with the fastest labor productivity growth during 1981-2015 reduced their extreme poverty rates by an average of more than 1 percentage point per year, poverty rates rose in EMDEs with labor productivity growth in the lowest quartile.
This book presents the first comprehensive study of the evolution, sources, and drivers of productivity growth during the past decades, including at the regional level. It studies the impact of major adverse events, such as natural disasters, wars, and financial crises, on productivity.
It provides analysis that disentangles longterm and short-term productivity fluctuations. It examines how sectoral reallocation has contributed to productivity growth trends. And importantly, it discusses a range of policy options to rekindle productivity.
Main conclusions
First, there are multiple reasons for global productivity growth slowdown. Since the global financial crisis, improvements in several key correlates of productivity growth have slowed or gone into reverse. Working-age population growth has decelerated, educational attainment has stabilized, and the pace of expansion into more diverse and complex forms of production has lost momentum as the growth of global value chains stalled.
At the same time, reallocation of labor across and between economic sectors has slowed. The COVID-19 pandemic may compound these trends. Although they are less frequent than climate-related disasters, historically, pandemics and epidemics have had significant and persistent adverse impacts on productivity.
Second, the productivity growth slowdown since the global financial crisis, compounded by the impacts of COVID-19, may have profound impacts on progress toward development goals. Since the global financial crisis, the pace of EMDEs’ convergence to advanced-economy productivity levels has slowed.
At recent productivity growth rates, it would take more than a century to halve the productivity gap between EMDEs and advanced economies. Moreover, the manufacturing and export-led approach to increasing productivity growth taken by EMDEs that converged rapidly to productivity levels in advanced economies prior to the global financial crisis may move further out of reach as automation increases and the world retreats from global value chains
Finally, a proactive policy approach is needed to boost productivity growth. Policymakers will need to facilitate investment in physical and human capital. Resources will need to be reallocated toward more productive sectors and enterprises, including through strengthening competition.
Technology adoption
Firms’ capabilities to reinvigorate technology adoption and innovation will need to be reinvigorated, including through ensuring that workers possess appropriate skills to transition to new sectors and that they are adequately covered by
social protections.
A stable macroeconomic environment and growth-friendly institutional environment will increase the effectiveness of these approaches. Although the productivity growth slowdown is common to a large number of countries, the policy initiatives to boost productivity must be well targeted. Individual country characteristics and the interactions between policy measures need to be taken into account.
The COVID-19 pandemic is a once-in-a-century crisis that presents extraordinary challenges to policymakers around the world. In addition to the immediate challenges associated with the health and economic crises, there are formidable long-term developmental challenges magnified by the pandemic.
The global community’s significant progress on poverty reduction in recent decades will likely be partly reversed. It will also be more difficult to achieve broader development goals by the end of this decade.
However, every crisis presents new opportunities. For example, major economic disruptions such as those caused by the pandemic can usher in structural changes that may improve productivity within certain sectors. A sustained shift toward teleworking, or the onshoring of the production, with greater capital intensity, of certain essential products, could be direct results of the COVID-19 recession, with important consequences for productivity and welfare. Rapid technological changes triggered by the pandemic may result in large productivity gains.
Foster investment
EMDEs need to urgently put in place the necessary preconditions to seize the potential opportunities offered by the disruptions caused by the Covid-19 pandemic. Skills building and labor flexibility could help spread the gains from
any Covid-19-induced technology improvements more evenly.
Fostering investment in digital connectivity could broaden access to quality online schooling and training. Better-targeted social safety nets could prevent the school dropouts that are associated with long-term income losses.
Streamlined government regulations and robust bankruptcy codes that ensure prompt and efficient resolution of failing firms could facilitate labor reallocation from low-productivity firms and sectors to higher-productivity ones. These policies would also form part of a comprehensive package to address the challenges of informality that could, over time, shrink the large part of the economy that is particularly vulnerable to disruptions.
Many questions remain about the impact of COVID-19 on prospects for global growth. Policymakers now need to get ahead of the health crisis with bold, timely, and comprehensive measures. Once the crisis abates, they need to look forward and explore policy interventions to build back their economies better and lay the foundations for sustainable and equitable growth.
The COVID-19 pandemic has plunged the global economy into its deepest recession since the Second World War. Per capita incomes are expected to decline in about 90% of countries in 2020, the largest fraction in recorded economic history, and many millions will be tipped into poverty (World Bank 2020a).
Lower investment
The pandemic is also likely to leave lasting scars through multiple channels, including lower investment, erosion of human capital because of unemployment and loss of schooling, and a possible retreat from global trade and supply linkages. These effects may lower productivity and limit the ability of economies to generate growth of real incomes in the long-term.
The likely adverse impact of the pandemic on productivity would be a worrisome outcome, as growth of labor productivity is the main source of lasting per capita income growth, which in turn is the primary driver of poverty reduction. Most cross-country differences in per capita incomes have been attributed to differences in labor productivity.
Whereas the one fourth of emerging market and developing economies (EMDEs) with the fastest labor productivity growth during 1981-2015 reduced their extreme poverty rates by an average of more than 1 percentage point per year, poverty
rates rose in EMDEs with labor productivity growth in the lowest quartile (Figure 1).
The pandemic struck the global economy after a decade that witnessed a broad-based decline in productivity growth. The productivity slowdown, prior to the pandemic, affected around 70% of advanced economies and EMDEs. In advanced
economies, the prolonged deceleration in productivity growth before the pandemic sparked an intense debate on how it would evolve in the future.
Some innovations that had held the promise of considerable productivity gains, including digital technologies
and automation of production processes, seemed to have been disappointing in this regard.
Productivity slowdown
Meanwhile, EMDEs experienced the steepest, longest, and most synchronized productivity slowdown over recent decades. In these economies, decelerating productivity growth has put at risk hard-won gains in terms of catch-up with advanced
economies achieved prior to the 2007-09 global financial crisis (GFC). Labor productivity gaps with advanced economies remain substantial, with workers in the average EMDE producing less than one-fifth of the output of those in advanced
economies.
Against this backdrop, this book presents the first comprehensive study of the evolution and drivers of productivity growth and policy options to rekindle it. It makes several contributions to a large literature
• Organizational and technological changes. The Covid-19 pandemic may trigger lasting organisational and technological changes to the way businesses operate if the pandemic becomes a source of “cleansing” effects that eliminate the least efficient firms and encourages the adoption of more efficient production technologies (Barrero, Bloom, and Davis 2020; Caballero and Hammour 1994; Foster, Grim, and Haltiwanger 2016).
The Covid-19 pandemic may trigger lasting organizational and technological changes to the way businesses operate. These could adversely affect productivity growth if they erode capital or disrupt the accumulation of physical or human capital. The foregone productivity gains would set back progress toward development goals.
Structural changes
However, pandemic-induced structural changes could also have productivity-enhancing effects, such as a “cleansing” effect, eliminating the least efficient firms and encouraging the adoption of more efficient production technologies (Caballero and Hammour 1994). While such effects could result in faster overall per capita income gains, they might well
increase income inequality, especially if they are unskilled-labor-saving.
Against this backdrop, this chapter reports research that disentangles long-term productivity changes from short-term, cyclical productivity fluctuations using structural vector auto-regressions (SVAR). Throughout this chapter, the long-term drivers of productivity growth will be referred to as “technology,” as is common in the literature, and encompass changes to total factor productivity as well as investment that embeds new technologies.
Changes in technology, in this sense, may occur not only as a result of technical innovations but also when there are organisational or institutional changes to the production process.
