Slowing productivity growth in developed countries
The slowdown in international trade flows is constraining productivity growth in developed countries. In particular, subdued export growth limits the benefits derived from economies of scale and the acquisition of knowledge associated with a closer interaction with international markets.
Improved momentum in the Chinese economy in the first half of this year due to rising domestic demand has reassured the global growth, but structural reforms are still needed in alignment with growth supportive fiscal policies to enhance productivity and potential growth across the countries.
Technological change seems to be happening faster than ever. These advances should raise our standard of living by allowing us to produce more goods and services with less capital and fewer hours of work- that is, to be more productive. But we can see the effect of technology everywhere but in the productivity statistics. Productivity growth has slowed down across nearly all the advanced economies, as well as some of the developing countries over the past decade, especially since the 2008-09 global financial crisis. Recent innovations have not yet substantially boosted the measured productivity growth.
Productivity is the most important determinant of economic growth, and in turn, of living standards more generally. The challenge for policymakers is to focus on the long run and to identify the market frictions that are causing most firms to lag behind. India’s Union Minister’s latest statement at the annual meetings of International Monetary Fund and World Bank on low productivity in advanced economies being worrisome, has brought the focus back on this issue.
According to IMF, if productivity had maintained its pre-2008 crisis trend, the advanced economies could be about 5 per cent higher today. Advanced economies have seen productivity growth dropping to 0.3 per cent, from an average of about 1 per cent. Apart from low productivity growth, there are increasingly more doubts about the benefits of economic integration in developed countries.
While this productivity slowdown could be attributed to several reasons like wrong quantification or lack of innovations, one factor that has received relatively less attention is the slowdown in international trade. In recent years, the downtown shift in world trade growth has been significant. Prior to the global financial crisis, the average growth of the volume of world trade was about 7 per cent, but it slowed down to below 3 per cent between 2012 and 2016. High productivity exporting firms survive and expand, while low productivity non-exporting firms shrink or exit the industry.
The slowdown in international trade flows is constraining productivity growth. In particular, subdued export growth limits the benefits derived from economies of scale and the acquisition of knowledge associated with a closer interaction with international markets. New exporting firms become more productive once they start exporting as a result from a learning process.
The recent idea of protectionism looming over world trade will further exacerbate the low productivity. The protectionist stance by many developed nations in the international trade environment observed recently, including not only a slowing pace of trade liberalization but also rising protectionist measures, will restrain productivity growth even further in the coming years.