Global Productivity Slowdown Risks Creating Instability

Living standards around the world could fall unless governments invest more in research and education that can help revive weak productivity growth, International Monetary Fund Managing Director Christine Lagarde warned.

Lagarde said in a speech in Washington on Monday that the private sector alone will not be able to generate enough innovation to lift productivity to acceptable levels without government help, Reuters reported.

Her remarks were accompanied by a release of an IMF study that found that the 2008-2009 financial crisis and deep recession played a bigger role in slowing productivity than previously thought, stifling global demand and investment.

“Another decade of weak productivity growth would seriously undermine the rise in global living standards,” Lagarde told an audience at the American Enterprise Institute, a pro-business think-tank in Washington.

“Slower growth could also jeopardize the financial and social stability of some countries by making it more difficult to reduce excessive inequality and sustain private debt and public obligations,” she added.

Economists have long viewed productivity gains as essential for sustaining higher wages and living standards, but have struggled to explain a protracted slowdown in productivity growth since the early 2000s.

Lagarde said the post-crisis recession has left a “permanent scar” on output per worker and total factor productivity, a broad measure of innovation that includes both labor and capital inputs.

“We estimate that, if total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5% higher today,” Lagarde said. “That would be the equivalent of adding another Japan—and more—to the global economy.”

 More Innovation Needed

She said that all governments should do more to unleash entrepreneurial energy, including cutting barriers to competition, investing in education and providing tax incentives for research and development.

“One thing is clear: we need more innovation, not less. Market forces alone will not be able to deliver that boost, because innovation and invention are to some degree public goods.”

Lagarde said smartphone technologies have hugely benefited from large-scale state spending on developing the internet and global positioning satellite system, while defense spending often creates new technologies that have civilian uses.

She cited IMF research last year showing that an increase of private research spending by 40% in advanced economies could increase their GDP by 5% in the long term.

Lagarde said a critical improvement in education and worker retraining programs was needed to aid those displaced by the effects of technological change, trade and structural reforms.

“Leaning back and waiting for artificial intelligence or other technologies to trigger a productivity revival is simply not an option.”

 Headwinds

The released IMF study highlighted three “headwinds” holding back productivity growth: ageing populations; a slowdown in global trade; and the “unresolved legacy” of the global financial crisis in some big economies.

In Britain, productivity growth has been sluggish for years and is behind most other big economies, prompting the chancellor, Philip Hammond, to pledge more investment in infrastructure and other areas with a £23 billion ($28.62 billion) national productivity investment fund.

Calling on all governments to do more, Lagarde sought to emphasize productivity as the most important source of higher income and rising living standards. “For example, the average American worker today works only about 17 weeks to live at the annual real income level of the average worker in 1915,” she said.

Lagarde did not mention the US president, Donald Trump, by name but she had a clear warning for him and other politicians who have pursued a more protectionist stance on global trade, seemingly to the approval of many voters who feel they have been left behind by globalization.

Trade had “served all economies, not just some to the detriment of others”, Lagarde said. “I firmly believe that reinforcing trade as an engine of broadly shared growth will reduce uncertainty and boost productivity.”

“Above all, we need more and better education,” she said. “Education and training are the key policy actions to raise both productivity growth and reduce inequality.”