Productivity growth plays a vital role in economic development, per capita income growth and poverty reduction besides being a single metric and indicator of technological progress. Measurement of productivity growth is a core constituent of analysis of economic growth. Hence, periodic measurement of trends in productivity growth and analysis of its drivers will be helpful to identify appropriate policies for sustaining and accelerating productivity. In the context of the global financial crisis (GFC) of 2008–09 and the ongoing economic crisis unleashed by COVID-19 pandemic with their long-lasting impacts on productivity and economic growth, the World Bank publication titled Global Productivity: Trends, Drivers and Policies assumes enormous significance from a policy perspective. By incorporating the productivity impacts of ongoing COVID-19 pandemic, this volume is not only up to date but also well-timed. For the purpose of analysis, the authors have ­divided the world into economic classes, namely, advanced eco­nomies, emerging market and developing economies (EMDEs), and low-income countries; and into regions, namely Latin America and the Caribbean, Europe and Central Asia, Middle-East and North Africa, East Asia and Pacific, South Asia, and sub-Saharan Africa.

Innovation and Demand

Chapter 1 presents global productivity growth trends for the period from 1980 to 2018, and the factors that ­explain productivity growth, particularly the slowdown in productivity growth following the financial crisis of 2007–09. Overarching focus on EMDEs, decomposition of productivity to find out the sources of a slowdown in the aftermath of 2007–09 GFC, and assessment of synchronisation in productivity growth are the special features of the chapter. A key finding is the steepest, the longest and broadest slowdown in labour productivity growth following the GFC covering 70% of economies, with commo­dity exporting EMDEs being the worst affected. Investment weakness and slow technological progress also contributed to a slowdown in productivity growth. Paradoxically, however, the productivity slowdown has occurred at a time of rapid technological change, increasing participation of firms and countries in global value chains (GVCs), and rising education levels in the labour force, all of which are generally associated with higher productivity growth (OECD 2016).

The debate on the reasons for the slowdown in productivity growth centres around two broad explanatory factors: a slowdown in the overall innovation process, which is illustrated through the decline in the rate of technological progress measured by the total factor productivity growth; and the second factor is a global lack of demand, and economic growth in most countries has become more and more debt-driven which is unsustainable in the long run if productivity growth does not accelerate (Erber et al 2017). In this context, Chapter 2 makes an exhaustive analysis of factors behind the recent productivity trends and factors explaining long-term productivity growth, along with policy options to boost productivity growth. Investments in innovation, physical capital, and ­human capital—mainly health and education—are the important long-term drivers of productivity growth. However, over time there has been a change in the effects of different drivers on productivity growth. Innovation and expertise in producing relatively complex and sophisticated exports have gained imp­ortance in explaining productivity growth, while the importance of urbanisation related to the sectoral shift from agriculture to manufacturing and services has weakened. The gaps in many productivity drivers between EMDEs and advanced economies have either stalled or widened. For factors that are important for innovation, such as tertiary education, financial development, and the number of patents per capita, the gaps have widened, while the gaps in institutions and economic complexity have stalled. Though EMDEs invest much less than the advanced economies informal research and development (R&D), the gap between EMDEs and advanced economies has narrowed after 2000, mainly due to increased R&D investments in China. Another interesting finding of this chapter is the inverse relationship between income inequality and productivity growth after controlling for initial productivity levels. This finding is of particular contemporary relevance in view of the increase in within-country inequality.

Chapter 3 undertakes a syste­matic cross-country analysis of the ­impact of a broad range of adverse events, including natural disasters, pandemics, wars and financial crises on productivity growth. The recent surge in most of these adverse events provides a strong contemporary relevance to the chapter. During 1960–2018, the number of episodes of natural disasters was 25 times that of wars and 12 times that of financial crises. Climate-related events were the most frequent type of natural disaster, with a doubling of their frequency after 2000. Productivity is highly vulnerable to financial stress, especially when accompanied by a rapid build-up of debt and the current COVID-19 is likely to exacerbate the vulnerability. Adverse events affect productivity growth through multiple pathways such as erosion of human capital, destruction and mis­allocation of physical capital, macro­economic instability, income inequality, and disruption of innovation and trade. Environmental issues relating to pollution, exhaustion of natural resources and ­climate change need to be mainstreamed in the debates on productivity growth. It is necessary to ensure that growth balances with ecological and ­environmental constraints, which are the major exogenous limits for sustainable growth. Financial crises such as the GFC of 2007–09 have the potential to significantly slow down productivity growth. Further, with a global debt of about 230% of the global gross domestic product (GDP) in 2018, the world is riding on the fourth debt wave. High government debts have the potential to dampen long-term productivity growth by discouraging private investments and hence this chapter assumes greater significance from the perspective of the financial crisis (Kose et al 2019).

Labour and Technology

Chapter 4 focuses on the convergence of productivity across clubs of nations in light of the fact that there exists a wide gap in labour productivity across economies—labour productivity in EMDEs is less than one-fifth of the labour productivity in advanced economies, while the labour productivity in low-income economies is only 2% of that in advanced economies. Within the EMDEs, labour productivity was the lowest in South Asia and sub-Saharan Africa probably because of the larger share of agriculture in the economy and the largest number of informal workers. Though there was only limited broad-based productivity convergence until 2000, subsequently, EMDEs are now closing the gap with advanced economies following a broad-based increase in EMDE productivity growth. High education levels have helped some of the EMDEs to move to higher convergence trajectories. The EMDEs and low-income countries need to take advantage of the digital technology revolution, enhance infrastructure investments and strengthen human capital through investments in higher education to catch up with the advanced economies.

Chapter 5 analyses productivity growth across six EMDE regions. Though there has been a heterogeneous productivity slowdown across all EMDE regions, the post-financial crisis slowdown in productivity growth was most pronoun­ced in East Asia and Pacific, Europe and Central Asia and sub-Saharan Africa. The chapter argues for well-targeted policies aimed at improving institutions and governance and addressing educational issues and economic diversification. It is also necessary to address the issues of widespread informality across EMDE ­regions since the GDP share of informal sector ranges from 22% to 40%, and its employment share from 22% to 62%, while self-employment accounts for about 70% of employment in South Asia. Improvement in productivity of informal sector with a special focus on agriculture is necessary. Efforts to improve labour force skill, enhancing the participation in the global value chain and promoting business-friendly environment are some of the policies that will be helpful to reallocate resources from low-producti­vity informal sectors to high productivity formal sectors.

To a large extent, technological progress animates labour productivity which in turn leads to a sustained increase in per capita income and poverty reduction. However, technological progress has led to a fall in employment in 70% of the countries in the EMDE group and 90% of the countries in advanced economies. Automation and artificial intelligence may further aggravate the employment situation in much of the advanced economies and in some of the EMDEs also. Technological progress might also lead to unequal distribution of gains depending on whether the technical progress is capital-deepening or labour-deepening, and the sectors in which technology imp­roves. Against this backdrop, it is appropriate that Chapter 6 deals with the trade-off between technology, demand and emp­loyment. The analysis in this chapter reveals that technological improvements contributed to a large portion of labour productivity variation during 1980–2018. The chapter also deals at length with the labour market disruptions due to productivity-enhancing tech­nological improvement and suggests policies to manage the disruptions with emphasis on early stages of education. This chapter, however, did not deal with technology impact on productivity or ­total factor productivity (TFP) growth during the post-GFC period. An International Monetary Fund (IMF) study finds that there has been a widespread and persistent drop in TFP growth following the GFC across advanced economies, EMDEs and low-income countries which has mainly contributed to output losses relative to pre-crisis trends (Adler et al 2017). To revive the growth momentum in technical progress, it is necessary to boost the investments in innovation and knowledge-based capital with special focus on nanotechnology, biotechnology, genetic engineering, energy and health. Apart from investments in R&D, technology diffusion assumes greater significance in view of the wide gap in productivity growth bet­ween the global frontier firms and other firms. This could be facilitated by R&D fiscal incentives, trade openness, increased participation in global value chains and the international mobility of skilled workers (OECD 2015). Reforms are also needed to position economies to better harness the productivity growth potential of new technologies led by digital transformation.

Chapter 7 examines productivity gaps across nine sectors and across countries within sectors. It also deals with how sectoral reallocation affects overall ­labour productivity growth by employing the most comprehensive data set on sectoral labour productivity. Productivity is lower in EMDEs in all sectors than in ­advanced economies and still lower in low-income countries. The agricultural productivity in EMDEs is only 20% of that in advanced economies, mainly due to slow technology adoption in some of the EMDEs. Increasing agricultural productivity through building rural infrastructure and application of modern Information and Communications Technologies along with high-yielding crop varieties and fertilisers is of paramount importance. An interesting finding of the chapter is that within the manufacturing sector, productivity is the highest among firms that have a high share in exports in total output, which makes it clear that export orientation boosts productivity probably bec­ause of the compulsion to be competitive.

Investment and Productivity Paradoxes

The contemporary world is facing several challenges for enhancing productivity growth. Important among them are envi­ronmental degradation and climate change, ageing population, deceleration in TFP growth, rising inequality, the slowdown in investment, and decline in lab­our share of income. Given this scenario, this book is the first comprehensive exa­mination of productivity growth across the world. It features a systematic and in-depth analysis of gaps in productivity across economies which is helpful to identify suitable policy options to enable the emerging and developing economies and low-income countries to catch up with the advanced economies. A leitmotif of the book is the long-standing and broad-based nature of productivity growth slowdown that began before the COVID-19 pandemic. In view of the broad-based nature of the slowdown, a broad-based policy package is mandatory to rekindle productivity growth. Analysis of the impact of major adverse events on productivity is one of the main contributions of the book which is highly valuable in the present context of the ­ongoing COVID-19 pandemic, the incr­easing frequency of natural disasters ind­uced mainly by climate change, and the global debt crisis.

The decline in productivity growth in spite of the remarkable advancements in digital technology, including big data, automation and artificial intelligence has prompted many analysts to invoke the Solow’s “productivity paradox.” The techno-pessimists posit that the impact of the current technological revolution spearheaded by digital technologies is producing a smaller impact on productive performance as compared to the productivity impacts of electrification and electronic revolutions. Such a small productivity impact of the current technological revolution will be a lasting phenomenon implying secular stagnation. On the other hand, techno-optimists contend that the current slowdown is a temporary phenomenon and productivity will grow sharply once the digital technologies spread to all sectors of the economy (Bergeaud et al 2018). Some of the techno-optimists argue that the new digital economy is still in its “installation phase” and productivity effects will occur once the technology enters the “deployment phase” (van Ark 2016). In any case, this book provides a solid groundwork upon which future work on productivity paradox could be anchored. Further, the causes of slowing innovation and technology diffusion, its implication for productivity growth and whether the slowdown in innovation per se is temporary or permanent are the other important areas for future work. Investment, especially fixed capital formation, has shown a persistent weakness in spite of falling interest rates, and ­recovery in corporate profitability portends an “investment paradox.” The productivity and investment paradoxes are interconnected and mutually reinforcing which have increased the risks of secular stagnation (Qureshi 2020). The relationship between debt accumulation, investment growth and productivity growth is another area for further research. Perhaps an important gap in the book is an analysis of the impact of natural resource endowment and ecological constraints, institutional environment and quality of governance on productivity growth. Overall, this book is an exc­ellent effort to provide deep insights into the problem of productivity growth that has wide-ranging ramifications for the wealth and well-being of the world.

References

Adler, G, A Duval, D Furceri, S K Çelik, K Koloskova and M Poplawski-Ribeiro (2017): “Gone with the Headwinds: Global Productivity,” IMF Staff Discussion Note 17 April, International Monetary Fund, Washington, DC.

Bergeaud, A, G Cette and R Leca (2018): “Long-term Growth and Productivity Trends: Secular Stagnation or Temporary Slowdown?” Revue de l’OFCE, Vol 157, No 3, pp 37–54.

Erber, G, U Fritsche and P C Harms (2017): “The Global Productivity Slowdown: Diagnosis, Causes and Remedies,” Intereconomics, Vol 52, No 1, pp 45–50.

Kose, M A, P Nagle, F Ohnsorge and N Sugawara (2019): Global Waves of Debt, World Bank, Washington, DC.

OECD (2015): “The Future of Productivity,” Organisation for Economic Co-operation and Development, Paris.

— (2016): “OECD Compendium of Productivity Indicators 2016,” Organisation for Economic Co-operation and Development, https://www.oecd-ilibrary.org/sites/pdtvy-2016-4-en/index.html?itemId=/content/component/pdtvy-2016-4-en.

Qureshi, Z (2020): “Technology, Change and a New Growth Agenda,” Growth in a Time of Change: Global and Country Perspectives on a New Agenda, H-W Kim and Z Qureshi (eds), Washington, DC: Brookings Institution Press.

Van, Ark B (2016): “The Productivity Paradox of the New Digital Economy,” International Productivity Monitor, Vol 31 Fall, pp 3–18.