The world economy has slowed down visibly since the global financial crisis of 2007-2008. Indeed, global growth has consistently underperformed market expectations in the post-crisis period. Tellingly, the International Monetary Fund titled the latest April 2016 edition version of its World Economic Outlook Too slow for too long.
The failure of the world economy to get out of first gear naturally brings up the issue of productivity growth. After all, productivity growth is the only sustainable source of economic growth in the long run. The burning question is then, has global productivity growth peaked?
According to The Conference Board’s latest figures, the growth of total factor productivity (TFP) averaged around zero in 2013-2015, down from 1% growth in 1996-2006 and 0.5% in 2007-12. TFP is the most comprehensive measure of productivity, and tracks output produced by one unit of labor and capital. At first glance, the answer might seem obvious: the slowdown is the result of the global financial crisis, which disrupted credit availability and slowed international trade. But the slump in TFP growth is widespread, and it is not limited to countries hit hardest by the financial crisis.
Analysis of historical data suggests that the current stagnation is far from unprecedented. There were clusters of TFP slumps in the early 1970s as well as in the late 1980s to early 1990s, both likely triggered by global oil shocks. There was a third cluster in the second half of the 1990s in the run-up to the Asian crisis, and a final one in the mid-2000s, just prior to the global financial crisis.
The fact many of these episodes are grouped at particular points in time suggests a possible role of global factors in TFP growth slowdowns. TFP slumps have been observed in low-, middle- and high-income countries alike. Evidently, no country and no period of time are immune from the risk of productivity slumps.
Within individual countries, several factors emerge time and again during TFP crashes; low education levels, unstable political systems and unusually high investment rates are the most prominent. The latter suggests that countries relying on capital accumulation to power their growth may do so at the expense of productivity by investing in low-productivity, low-return projects. This observation is also consistent with concerns that some countries which rely on investment for growth may be substituting capacity expansion for improvements in efficiency.
Indeed, stagnant productivity is currently worrying for both the People’s Republic of China and Asia in general, since productivity growth will have to play a larger role given the region’s rapid population aging. Paradoxically, countries with higher old-age dependency ratios are less likely to experience a productivity slump, despite older workers being less productive than younger ones. One possible explanation is that higher old-age dependency actually pushes countries to be more productive.
With labor relatively scarce, countries are forced to invest in innovative technologies and equipment to improve the productivity of their workforce. In other words, while high old-age dependency clearly hurts economic growth, it can catalyze the shift to a productivity-led growth paradigm. In that sense, it may be a blessing in disguise.
Technological innovation—in the form of information and communication—produced a quantum leap in global productivity between the mid-1990s and mid-2000s. Now it doesn’t seem to be quite so influential, although productivity improvement in information and communication is inherently difficult to measure. Take mobile phones, for example. We cannot even begin to adequately measure how productivity and welfare have improved by replacing landline phones with mobiles.
The same can be said of the services industry in general, and as technology carries many countries towards a sharing economy, it’s time to ask whether productivity remains the right measure for improved resource usage. At the end of the day, productivity is all about how much output we get out of a given resource. In that sense, the shared economy can contribute to higher productivity. Airbnb and Uber cause industry disruptions in the short run, but eventually benefit both suppliers and consumers.
Ultimately, while choosing the right policies to help prevent or arrest a productivity slump, there is no failsafe way of avoiding it. The determinants are notoriously elusive. The good news is that historically there aren’t just slowdowns, but also growth accelerations and even recoveries. Overall, it is far too early to tell whether the current global productivity slump will persist. The current pessimism may thus be overdone.
Number of Countries Experiencing Slumps, Accelerations and Recoveries.
Source: Eichengreen, Park, and Shin (2015).
Note: We identify TFP slumps, accelerations and recoveries by considering successive 5, 7 and 10 year periods (alternatively) and isolate episodes where the growth rate of TFP was at least 1.0 per cent or 1.5 per cent less (alternatively) on average in the second period than the first. The sample includes only those countries whose per capita GDP is above U.S. 2005 constant $4,000. Oil-exporting countries are not included.