Figure 5.7 Drivers of productivity growth in EAP

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FIGURE 5.7 Drivers of productivity growth in EAP

Fundamental drivers of productivity have improved more rapidly in EAP than in the average EMDE. Compared to many other EMDEs, productivity growth in EAP economies benefited from high investment and trade integration.

A. Index of productivity drivers

Index, 1 = EMDEs in1980s 3.5 3.0 2.5 2.0 1.5 EAP EMDE average

1.0 0.5 0.0

1980s 1990s 2003-08 2013-18

B. Drivers of productivity growth, 2017

Index, 100 = advanced economies 140 120 100 80 60

Demography Investment Trade Gender equality Education Innovation Geography Urbanization EAP

Complexity Institutions

Sources: Freedom House; Haver Analytics; International Country Risk Guide (ICRG); Organisation for Economic Co-operation and Development; Observatory of Economic Complexity; Penn World Table; United Nations Educational, Scientific, and Cultural Organization (Institute for Statistics); United Nations Population Prospects; World Integrated Trade Solution; World Bank (Doing Business, Enterprise Surveys, and Global Financial Development Database). Note: EAP = East Asia and Pacific; EMDEs = emerging market and developing economies. A. For each country, index is a weighted average of the normalized value of each driver of productivity. Refer to chapter 2 for weights. Drivers include the ICRG rule of law index, patents per capita, nontropical share of land area, investment as percent of GDP, ratio of female average years of education to male average years, share of population in urban area, Economic Complexity Index, years of schooling, share of working-age population, and inflation. Regional and EMDE indexes are GDP-weighted averages. Sample includes 7 EAP economies and 54 EMDEs. B. Unweighted average levels of drivers normalized as an average of advanced economies as 100 and standard deviation of 10. Blue bars represent average within EAP economies. Orange whiskers represent the range of the average drivers for the six EMDE regions. Horizontal line indicates 100. Variables are defined as follows: Education = years of education, Urbanization = share of population living in urban areas, Investment = investment as share of GDP, Institutions = government effectiveness, Complexity = Economic Complexity Index of Hidalgo and Hausmann (2009), Gender equality = share of years of schooling for females to males, Demography = share of population under age 14, Innovation = log patents per capita, and Trade = (exports+imports)/GDP. Sample includes 7-16 EAP economies and 65-127 EMDEs, depending on the driver, and 32 advanced economies.

Macroeconomic stability encouraged investment, while trade and investment openness and R&D above the EMDE average supported innovation (Kim and Loayza 2019).

Growth of the drivers most strongly associated with productivity growth, including labor force growth and investment, slowed in EAP after 2008. The slowdown in investment growth in the largest EAP economies was policy-led and aimed at moderating credit expansion. In addition, earlier favorable demographic trends in China, Thailand, and Vietnam have waned as populations have started to age. Other factors that previously helped to spur EAP productivity growth have also deteriorated since the GFC. For example, the trend toward broadening production to a more diverse range of products at more upstream stages of the value chain slowed partly because of a stagnation in GVCs after 2008 (World Bank 2019c).

Prospects for productivity growth. Productivity gaps were still substantial between advanced economies and EAP countries in 2018, suggesting potential for further significant productivity gains. However, although EAP productivity growth remained solid in 2013-18 relative to long-run historical rates, it is likely to soften further in the future as some fundamental drivers of productivity become less favorable (figure 5.8).