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CHAPTER 3
GLOBAL PRODUCTIVITY
FIGURE 3.5 Correlations between war frequency and productivity growth In advanced economies, an increased annual frequency of wars from 1960-89 to 1990-2018 was accompanied by lower labor productivity growth; corresponding correlations seem weak for EMDEs and LICs. The correlations between the frequency of war episodes and TFP growth appear negative for advanced economies and EMDEs, but they are mixed for LICs. A. Average number of war episodes per country per year and average labor productivity growth
B. Average number of war episodes per country per year and average TFP growth
Sources: Correlates of War (COW); Peace Research Institute Oslo (PRIO); World Bank. Note: War episodes include intrastate, interstate and extrastate armed conflicts (COW and PRIO; annex 3A). An episode dummy for a specific type of event is 1 if the event occurs at least once (≥1) in a country-year pair and 0 otherwise. The sample includes 170 economies: 35 advanced economies and 135 EMDEs, of which 27 are LICs. EMDEs = emerging market and developing economies; LICs = low-income countries; TFP = total factor productivity. A.B. Correlations between the average number of war episodes per country per year and (A) average growth of labor productivity (output per worker), and (B) average growth of TFP over two 30-year periods (1960-89 and 1990-2018).
and, in some cases, productivity growth (Blanchard, Cerutti, and Summers 2015; Cerra and Saxena 2008, 2017). In the years since the GFC and subsequent global recession, a broad range of countries has experienced significant and sustained slowdowns of productivity growth (Kose et al. 2020). Financial crises have often originated from the excessive accumulation of public or private sector debt and the associated development of mismatches in balance sheets. Debt accumulation increases risks to productivity growth not only by increasing the risk of crises in the short term but also by tending to lead to the misallocation of resources toward low-productivity sectors and depressing investment and technological innovation in the long term (Blanchard and Wolfers 2000; Bulow and Rogoff 1989; Hall 2014; Schnitzer 2002). Three broad types of financial crises are considered: sovereign debt crises, banking crises, and currency crises (annex 3A). This section emphasizes the role of government debt accumulation, financial crises, and productivity losses, because of concerns about elevated debt levels in many countries. Sovereign debt crises. These can be particularly detrimental to output and productivity. They generally originate from the excessive accumulation of government debt. Before a crisis occurs, higher government debt tends to increase the burden of interest payments in the government budget and to raise borrowing costs, which may crowd out private investment (Kose et al. 2020; Oulton and Sebastiá-Barriel 2017; Reinhart and Rogoff 2010). Excessive growth of government debt erodes the country’s ability to borrow,
