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CHAPTER 5
GLOBAL PRODUCTIVITY
Capital deepening vs. TFP growth, by region. Productivity growth can be decomposed into factor inputs (human and physical capital) and the effectiveness of their use (TFP; figure 5.1). In EAP and ECA, the post-GFC slowdown in productivity growth reflected both a slower pace of capital deepening and weaker TFP growth, albeit to varying degrees. Two-fifths of the slowdown in EAP reflected slowing capital deepening, and the remainder the result of slowing TFP growth. In EAP, a policy-guided move toward more sustainable growth in China and trade weakness weighed on investment and capital deepening. In ECA, about two-thirds of the productivity growth slowdown reflected a collapse in investment growth as conflict erupted in parts of the region, sanctions were imposed on the Russian Federation, political and economic shocks unfolded in Turkey, financial systems transformed after the euro area debt crisis, and the commodity price collapse hit commodity exporters (Arteta and Kasyanenko 2019). The slowdown in labor productivity was the least pronounced in MNA and SAR. In SAR, TFP continued growing at roughly the pre-GFC pace, but capital deepening slowed sharply. Persistent post-GFC investment weakness—in part due to disruptive policy changes and a slowing pace of foreign direct investment (FDI) inflows—was offset by productivity-enhancing sectoral reallocation, as labor moved out of agriculture into more productive sectors amid rapid urbanization. In MNA, TFP stabilized after earlier contractions, whereas capital deepening reversed. The oil price collapse of 2014-16 weighed heavily on investment in oil exporters, and political tensions discouraged investment in commodity importers. However, macroeconomic stabilization and structural reform efforts helped stem pre-GFC contractions in TFP. Conversely, in LAC and SSA, TFP contracted during the post-GFC period. In major LAC economies, continued credit extension or intensifying economic distortions (such as trade restrictions and price controls) allowed unproductive firms to survive to a greater extent than before the GFC. In SSA, the contraction in TFP was partly offset by accelerating capital deepening as a number of countries invested heavily in public infrastructure. Across EMDE regions, the COVID-19 pandemic is likely to erode investment prospects further amid substantial uncertainty and, for energy exporters, the unprecedented collapse in oil demand and prices (IEA 2020; World Bank 2020a).
Sources of, and bottlenecks to, regional productivity growth Various factors have weighed on productivity growth since the GFC, but their relative roles differ across regions. In most regions, productivity gains from reallocation from low-productivity (usually agriculture) sectors to high-productivity sectors slowed, as did the pace of improvement in various aspects of the supporting environment for productivity growth. Productivity levels in all regions remained less than half of those in advanced economies, providing significant scope for faster productivity growth. Significant bottlenecks to productivity convergence remain, many of which differ across regions and are expected to be exacerbated by the COVID-19 pandemic.
