Combat the global economy's major weakness before it's too late

Combat the global economy's major weakness before it's too late
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There is a concerning disconnect in the global economy. Innovation is producing rapid technological advances. At the same time, productivity growth is anemic in most major economies; it is averaging just 0.7 percent annually in the past five years, compared to 2.7 percent in the five years leading up to the global financial crisis.

This is odd, as applying new technologies is one of the primary means by which productivity gains are achieved. While it is important to understand this disconnect, the key to boosting productivity growth actually has little to do with technology — at least in the short term. 

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A couple of leading explanations exist for the paradox of rapid technological change coexisting with stagnating productivity growth. The first is that today’s technological advances are less transformational than those of the past.

 

The second industrial revolution of the early 20th century gave the world automobiles, telephones and electricity — all of which dramatically boosted productivity. By contrast, computers, the internet and smartphones have a much lesser effect on people’s lives and their work efficiency. 

The second explanation is more optimistic. The argument is that there is a lag between the invention and adoption of a new technology and its effect on productivity gains. This would mean that information and communications technology advances have been gestating in recent decades, setting up a forthcoming transformational phase of rapid productivity growth after an undefined waiting period.

It is difficult to draw attention to this issue given that the world economy is in the middle of first synchronous upswing since the global financial crisis. Global economic growth is widespread and robust. But it is primarily cyclical factors that are driving the current economic expansion.

Structural drivers continue to weigh on the long-term outlook. The most significant of these is weak productivity growth, which threatens to undermine future global economic growth potential and well-being. 

The two keys to sustained, long-term economic growth are increases in the number of workers and increases in workers’ productivity. Substantial increases in the number of workers is unlikely to provide the necessary fuel for the global economy: The world’s population is rapidly aging, and the labor force participation rate is slowly declining.

That leaves productivity gains as the primary driver of long-term global economic performance. So, the current economic expansion cannot be sustained unless productivity growth accelerates.

If recent technological changes will soon unleash a productivity growth wave, then perhaps all that is needed is to wait for the revolution to begin. This solution is not particularly appealing, however, because improving productivity growth is a near-term imperative.

Accordingly, policymakers and business executives must look beyond technology for solutions to boost productivity. There are five key actions that they must take today that — regardless of the impact of technology — would strengthen productivity and therefore help to sustain the current global economic expansion.

1. Improve physical infrastructure.

Growth in public and private infrastructure investment averaged only 2.6 percent in the five years after the global financial crisis, compared with 5.2 percent in the preceding five years. Higher levels of investment in physical infrastructure, particularly transportation infrastructure, would boost productivity by improving the efficiency of business logistics and better integrating more remote, less productive areas. 

2. Invest in businesses.

IMF analysis suggests that declining levels of business may have lowered productivity growth in developed markets by 0.2 percentage points annually in the years since the global financial crisis. Higher levels of business investment in machinery and plants, employee training, and research and development could provide much-needed improvements in productivity at the firm level.

3. Better match skills with jobs.

The OECD estimates that about one-quarter of the world’s workers are in jobs not properly matched to their skills. Educational system reforms to better prepare students for the workforce and greater investments in career-long workforce training programs are needed to better equip workers with the skills to perform at their productivity potential.

4. Promote competition and entrepreneurship.

Competition has fallen as the digital revolution has empowered a small set of “superstar” companies, even as legacies from the global financial crisis have reduced the rate of entrepreneurship and new business creation. Higher levels of competition would incentivize firms to innovate their business processes and products, with positive spillover effects for economy-wide productivity.

5. Reinvigorate globalization.

Rising populist, nationalist and protectionist rhetoric and policies has contributed to slowing or stalling cross-border economic integration in recent years. Reversing the tide of globalization toward renewed openness would support productivity growth through diffusing technologies and knowledge across borders, heightening competition in globally-integrated economies and allowing for greater specialization. 

Some of these actions will be harder and costlier than others, but all are important to kickstarting global productivity growth. Without higher levels of productivity, long-term economic growth potential will stagnate.

Policymakers and business executives should capitalize on the current economic upswing to invest in future economic growth by boosting productivity — before it is too late. 

Courtney Rickert McCaffrey is a manager at A.T. Kearney’s Global Business Policy Council. A.T. Kearney is a global management consulting firm.