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CHAPTER 2
GLOBAL PRODUCTIVITY
EMDEs. Although these developments may be seen as discouraging, they also indicate continuing potential for major productivity gains if the right reforms are implemented. Climate change and agriculture. Climate change is expected to continue to adversely affect productivity, partly because natural disasters have become more common (chapter 3). The agriculture sector may be particularly affected if higher temperatures decrease crop yields in some countries (Fuglie et al. 2020). Agriculture currently accounts for 32 percent of GDP in low-income countries, compared to just 9 percent in EMDEs excluding low-income countries. In 2018, agriculture accounted for half of all employment in SSA and 44 percent in SAR. Less favorable demographics. The share of the working-age population rose by 13 percentage points between 1995 and 2008 in MNA, and by 3.0 percentage points in SSA. In the coming years, populations in these regions are set to age. From 2018 to 2030 the share of the working-age population is expected to decline by 4.0 percentage points in advanced economies and 2.5 percentage points in EMDEs (figure 2.11). In EAP and ECA, the share of the working-age population is expected to decline by 3-4 percentage points by 2030, the reversal of a previous demographic dividend. In other regions—LAC, MNA, SAR, and SSA—the share is expected to be broadly stable. Increased macroeconomic crisis risk. The COVID-19 pandemic could increase the vulnerability of many EMDEs to a macroeconomic crisis, perhaps linked to sovereign and private sector debt (World Bank 2020b; chapter 3). New pressures on the financial sector could also play a role. Previously, from the mid-1990s onward, EMDEs had made progress in achieving low inflation and macroeconomic stability (figure 2.4). In most cases, the scope for further improvement is limited (Ha, Kose, and Ohnsorge 2019). More EMDEs have adopted floating exchange rates and inflation targeting. Output volatility has declined in many countries (Ćorić 2014, 2019). It may be difficult to maintain that lower volatility given the pandemic, and, more generally, productivity gains from greater stability may be even harder to achieve.
Policy priorities The new analysis presented in this chapter, and its review of the literature, suggests that a comprehensive policy approach is needed to raise productivity growth. Such an approach could have three main strands, recognizing that the productivity slowdown of the past decade has multiple sources. First, governments should aim to stimulate private and public investment, and improve human capital. Second, policies should be designed to ensure a growth-friendly macroeconomic and institutional environment (Cirera and Maloney 2017). Third, governments should promote productivity growth at the firm level, by ensuring that enterprises are appropriately exposed to trade and foreign investment, and encouraging investment in human capital, including management as well as technical training. Within these three strands, priorities will depend on the context. Countries with large unmet needs for infrastructure could seek to expand fiscal resources to finance more and
