To keep development goals in sight, policymakers need to fan the embers of productivity growth

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Growth of labor productivity – output per worker – is demonstrably the main source of lasting per capita income growth, which in turn is the primary driver of poverty reduction. That the COVID-19 pandemic could depress productivity growth even further, after a decade of broad-based declines, should be a cause for concern and intensify efforts to achieve development goals as we recover and rebuild.

The central contribution of productivity growth to raising living standards is clear: emerging market and developing economies that generated the fastest labor productivity growth during the period between 1980 and 2015 cut their extreme poverty rates by an average of more than 1 percentage point per year , a new World Bank study, Global Productivity: Trends, Drivers, and Policies, shows. During that same time, poverty rates rose in countries with lower productivity growth.

Although the productivity gap between developing economies and the advanced world is still wide, the decline in extreme poverty—to 10 percent of the world’s population from 36 percent between 1990 and 2015—is an encouraging sign that poorer economies are making productivity and income gains.

Unfortunately, many of the factors that drove improved productivity during previous decades have faded in recent years.  Global productivity growth peaked in 2007. In the aftermath of the 2007-2009 global financial crisis, emerging market and developing economies experienced the steepest, longest, and most synchronized fall-off in productivity growth in decades, putting at risk hard-won gains in catching up to advanced economies. And now, the global gut punch of the COVID-19 pandemic threatens to curb productivity further

Managing the massive health and economic challenges posed by the COVID-19 pandemic is the immediate priority.  But as policymakers envision recovery and rebuilding, the task of rekindling productivity growth should be high on their to-do lists for regaining lost ground. To formulate a path forward, it is imperative to take a comprehensive look at the evolution of productivity and understand what drives it, and what policy options exist in the current environment to reignite it.

A look at productivity measures in advanced and emerging and developing economies over the last 40 years shows that productivity gains due to reallocation of resources from less productive sectors to more productive ones, such as the shift from employment in lower-value manufacturing to services, eventually ran their course.  In addition, the stabilization of educational attainment and the stalling of global supply-chain growth have been important factors dampening productivity growth. The leveling off, or decline, of economic diversification, urbanization, and innovation has played a role as well. Add to that a series of adverse shocks, COVID-19 being the latest. Natural disasters have become more common. SARS, Ebola, and Zika were health epidemics that preceded COVID-19 in this century alone, and wars and armed conflict have taken their toll as well.

And now, there are multiple ways the COVID-19 pandemic could amplify forces weighing against productivity growth.  Investment and trade, which both play a central role in fueling productivity, may diminish amid uncertainty about the duration of the pandemic and the new business landscape that will emerge when it ends. Lost schooling will set back human capital accumulation for many young people. Mobility restrictions may slow the shift to more productive firms and sectors.

“An acceleration of technology adoption, the incorporation of digital technologies in manufacturing, finance, and education, and improved resilience in supply chains, are among ways that productivity may, paradoxically, have been given a boost by the disruptions brought about by the pandemic.”

There may also be productivity-enhancing opportunities fostered by our search for solutions to the challenges facing us. An acceleration of technology adoption, the incorporation of digital technologies in manufacturing, finance, and education, and improved resilience in supply chains, are among ways that productivity may, paradoxically, have been given a boost by the disruptions brought about by the pandemic.

Even so, policymakers must ensure that any gains in these areas are evenly distributed, and that any technology-related labor market shifts are managed with training and social protection. Similarly, government investment in widespread internet access could broaden availability of quality online schooling and training. A better-educated workforce is one that is less likely to be replaced by automation. 

The broader context calls on us to consider how to restore or enhance productivity gains as the pandemic recedes. Some past examples may prove illustrative. A number of emerging market and developing economies have been particularly successful in closing the productivity gap with advanced economies. They share common characteristics: a strong educational foundation, institutional strength, and a diverse production structure.

Looking ahead, policy priorities will differ from region to region. For example, policies to boost investment will be particularly important in South Asia and Sub-Saharan Africa, where infrastructure gaps are large, as well as in Latin America and the Caribbean, where investment has been subdued or has contracted. Initiatives to boost educational attainment could also spur productivity gains in South Asia and Sub-Saharan Africa.

“The threat of the pandemic to productivity requires urgent policy action to arrest declines.”

Economic diversification could be key to enhancing productivity in regions that have relied heavily on energy and metals production , such as Europe and Central Asia, Latin America and the Caribbean, the Middle East and North Africa, and Sub-Saharan Africa.

Policies to reinvigorate technology adoption and innovation could get a boost from strengthening intellectual property rights in East Asia and the Pacific, reducing state ownership in Europe and Central Asia, or revamping rigid labor regulations in Latin America and the Caribbean.

In all regions, reducing trade barriers and further integration into global value chains could also spur greater firm-level productivity.  In addition, given the possibility of financial stress in coming months, debt and investment transparency will be critical for achieving good development outcomes. 

Given the prevalent role—and low level of productivity—of agriculture in many low-income countries, policies to raise agricultural productivity through infrastructure investment and land and property rights would also pay significant dividends.

The productivity slowdown is complex and resolving it will require multi-faceted solutions. The threat of the pandemic to productivity requires urgent policy action to arrest declines.  If we are to keep our eyes on the prize of poverty eradication, even as we cope with the devastating shock of COVID-19, we must find ways to fan the embers of productivity growth and generate sustainable, balanced, and equitable income growth.

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Global Productivity: Trends, Drivers, and Policies, shows

The World Bank Group and COVID-19

Authors

M. Ayhan Kose

Deputy Chief Economist of the World Bank Group and Director of the Prospects Group, Development Economics

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September 10, 2021

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Nnamdi O Madichie
September 10, 2021

What role are universities playing in this space? Afterall policy makers in meritocratic climes should have passed through these institutions.