Slowdown in productivity jeopardizes financial and social stability, IMF chief says
The global slowdown of productivity since the Great Recession has negative consequences for growth and income that look hard to unwind, warned International Monetary Fund managing director Christine Lagarde in a speech in Washington Monday.
Productivity, which in its simplest terms measures the amount of output per hour of work, “is the most important source of higher income and rising living standards over the long term,” said Lagarde. That’s because productivity is a cornerstone of GDP, as an increase in productivity means that firms are creating more output, i.e. goods or services, with the same amount of input, i.e. capital and labor. “It allows us to substantially grow the economic pie, creating larger pieces for everyone.”
While productivity had been gradually slowing for years in many advanced economies, the global financial crisis tanked productivity across advanced, emerging and low-income economies. And the downturn in productivity has persisted, providing all countries with a smaller slice of economic pie.
“Another decade of the similar trend that we’re observing at the moment, that sort of low productivity, would seriously undermine the rise in global living standards,” said Lagarde. “And we believe that slow growth could also jeopardize the financial and social stability of some countries by making it just more difficult to reduce excessive inequality and sustained private debt and public obligations.”
Governments will need to act, Lagarde said, if productivity is going to increase.
Prior to the crisis, productivity in advanced countries was 1 percent. Today, it’s a mere .3 percent, according new research from the IMF released Monday.
“If total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today,” said Lagarde, presenting the research at the American Enterprise Institute. (Total factor productivity measures the total contributions to growth of the so-called “factors” of production — labor, capital and technological innovation.)
Lagarde highlighted three headwinds nations face to increasing productivity:
- an aging population
- a slowdown in global trade and
- “the unresolved legacy of the global financial crisis.”
The global financial crisis led to weak demand as people, frightened of the future, held onto their money instead of spending it. Weak demand has been “a key driving force behind sluggish investment,” states the IMF report. With economic uncertainty, businesses prefer low-risk projects, which in turn slows technological progress and productivity, the report explains.
“Market forces alone will not be sufficient to deliver that boost to productivity,” said Lagarde. Governments will have to spend public dollars to invest in research and technology as well as unleash the entrepreneurial spirit by “removing unnecessary barriers to competition, cutting red tape, investing more in education and providing tax incentives for research and development.”
Lagarde also pointed to the gradual increase in trade restrictions to explain the slowdown in trade growth in recent years. Trade has “served all economies, not just some to the detriment of others,” said Lagarde.
While she did not mention Trump by name, the statement contradicts the American president’s claims that the United States is losing to Mexico and China on trade and comes as he has lauded an “America first” plan for more protectionist trade policies.
Policymakers should nurture open trade and migration policies, states the IMF study, “which have delivered sizeable [total factor productivity] gains in past decades.” High-skilled immigrants have brought “diverse skills and innovation to their new home countries,” increasing technological innovation and thus total factor productivity.
Immigration can also mitigate the effect of an aging workforce. The IMF report states that a 1 percentage point increase in migrants raises productivity in that country’s economy by up to 3 percent in the long term.
“For countries that have received large numbers of refugees, effectively integrating immigrant workers would contribute to a younger and more dynamic workforce, with growth and productivity dividends,” Lagarde said.
An aging workforce generally leads to lower productivity as workers’ skills tend to increase then decline as they get older, lowering innovation. Lifelong education and continuous training can combat the erosion of skills.
But training for all workers is a remedy to productivity slowdown that policymakers need to pursue, Lagarde said. She cited the case of Germany, which during the height of the global financial crisis continued to have a steady unemployment rate while other countries’ unemployment skyrocketed. Why? German firms and trade unions agreed that workers would get paid less and reduced hours while demand was low in exchange for continued employment and training.
The one thing policymakers can’t do is sit back and wait, said Lagarde.
“We believe policymakers must actually take action to address the forces that are holding back innovation and technological diffusions,” she said.