Yet another aspect of the disappointing pace of global growth is the broad-based slowdown in productivity growth over the last ten years. Growth in productivity – output per worker – is essential to raising living standards and achieving development goals.
An extensive look at productivity trends in this edition of Global Economic Prospects focuses on how the productivity slowdown has affected emerging and developing economies. Average output per worker in emerging and developing economies is less than one-fifth that of a worker in an advanced economy, and in low-income economies that figure drops to 2%.
Among emerging and developing economies, which have a history of productivity growth surges and setbacks, the slowdown from 6.6% in 2007 to a trough of 3.2% in 2015 has been the steepest, longest, and broadest on record. The slowdown is due to weaker investment and efficiency gains, dwindling gains from the reallocation of resources to more productive sectors, and slowing improvements in the key drivers of productivity, such as education and institutional quality.
How to rekindle productivity growth? The outlook for productivity remains challenging. Therefore, efforts are needed to stimulate private and public investment; upgrade workforce skills to boost firm productivity; help resources find the most productive sectors; reinvigorate technology adoption and innovation; and promote a growth-friendly macroeconomic and institutional environment.
Two other issues merit consideration in this edition of the outlook: adverse consequences of price controls and inflation prospects in LICs.
While price controls are sometimes considered a useful tool to smooth price fluctuations for good and services such as energy and food, they can also dampen investment and growth, worsen poverty outcomes, and lead to heavier fiscal burdens. Replacing them with expanded and targeted social safety nets alongside the encouragement of competition and an effective regulatory environment, can be beneficial both to poverty eradication and to growth.
And while inflation has declined sharply among low-income countries over the last 25 years, keeping it low and stable cannot be taken for granted. Low inflation is associated with more stable output and employment, higher investment, and falling poverty rates. However, rising debt levels and fiscal pressures could put some economies at risk of disruptions that could send prices sharply higher. Strengthening central bank independence, making the monetary authority’s objectives clear, and cementing central bank credibility are essential to keep prices anchored.
While the global economic outlook for 2020 envisions a fragile upward path that could be upended, there is high degree of uncertainty around the forecast given unpredictability around trade and other policies. If policy-makers manage to mitigate tensions and clarify unsettled issues in a number of areas – they could prove the forecast wrong by sending growth higher than anticipated.
Since the global financial crisis, there has been a broad-based slowdown in productivity in emerging and developing economies. © World Bank Group