The global productivity slowdown: Five hypotheses
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Since Robert Solow identified technology as a driver of growth in the 1950s,1 productivity has been developing hand in hand with innovation. In recent years, innovations such as big data, FinTech, the sharing economy, and other ICT-enabled services, and also advances in science and technology, including in biotechnology, new materials, and artificial intelligence, are expanding. Yet, in the vast majority of global regions, productivity growth has slowed since the global financial crisis: the last decade was the first since World War II where productivity growth stagnated or declined, as shown in The Global Competitiveness Report 2015–2016. What could explain this paradox? There are five main hypotheses.
- Technology has yet to show its full impact on productivity. We need time to re-invent our organizations, laws, and rules to fully leverage new technologies. For investments in digital technologies to be viable, firms need to simultaneously reform many business processes and equip workers with new skills; it they do not, the combination of new technologies and insufficient people who can use them will create new inefficiencies. In some cases, a governance vacuum prevents some of the more advanced technologies, such as self-driving cars and drones, from being translated into reality. In other cases, we recognize the potential of new technologies but do not yet know how best to deploy them. Only now are companies emerging with new business models for goods and services in fields such as transportation, energy, and healthcare; truly reinventing fields such as banking and education will take more time.
- The way we measure productivity underestimates improvements. Productivity measurements capture only monetary transactions, so non-monetary transactions (e.g., those initiated in the sharing economy) may not be captured. We may not be able to measure spreading free digital services correctly—how do we account for the output of companies such as Google or Wikipedia or for the matchmaking efficiency achieved by Etsy or Airbnb? And how do we measure cross-border trade in data? In the same way, qualitative improvements to products and services are equally inherently difficult to capture in national accounts and have arguably been taking place faster in recent years. However, recent research highlights the idea that mis-measurement is not telling the whole story.2
- Innovation today may not be as all-encompassing and or groundbreaking as it has been in the past. Economist Robert Gordon argues that, compared with innovations in the 19th century (such as the steam engine, electric lights, and sewerage) that had a quick and pervasive impact on people’s lives, today’s innovations (such as social media and smartphones) may not yet have a similar level of impact and hence their impact on productivity is incremental.3
- Hysteresis effects may have emerged following the financial crisis. As outlined by economist Nouriel Roubini, protracted recessions—such as the one the global economy has been experiencing since 2007—can slow productivity growth for two reasons: because people who remain unemployed for a long time lose their skills and because slowing investment prevents the latest technologies embedded in capital goods from being used.4
- Rising inequality could slow down productivity growth. The rising inequality observed in past years could slow productivity growth further. If rising inequality reduces demand (the wealthy tend to spend less and the poor have less to spend), then productivity improvements will not lead to rising sales, and no resource re-allocation toward more productive sectors will take place. As a result, average productivity will not increase—it may even decrease.
More research is needed to understand the reasons behind the slowdown in productivity growth. Whatever the reasons, however, there is widespread agreement that productivity remains a key driver of growth and prosperity, which remain important for citizens’ well-being. When growth is balanced and inclusive, pro-competitiveness reforms are key to ensuring rising standards of living and social stability.