International Monetary Fund (IMF) Managing Director Christine Lagarde delivered a grim warning on Monday: Unless every government urgently invests more in education and research to boost weak productivity growth, living standards around the world, efforts to reduce inequality and social stability could all be jeopardized.
In a speech delivered at the American Enterprise Institute, Lagarde reminded her Washington audience that productivity growth is the “most important source of higher income and rising living standards over the long term.” However, the slowdown over the last decade has been so severe and the consequences so damaging that the world cannot afford to sit back and wait for private sector innovation to trigger a revival without government action.
The problem, according to Lagarde, is that innovation should lead to productivity growth, as more efficient systems allow workers increase their output. However, the faster-than-ever technological breakthroughs we’re seeing today are “everywhere except productivity statistics.”
According to new research by the IMF also published Monday, the overall gross domestic product (GDP) in advanced economies would be abut 5 percent higher today if total factor productivity growth had stayed on the same trajectory it was on before the 2008 financial crisis.
“That would be the equivalent of adding another Japan – and more – to the global economy,” Lagarde said.
Instead, the financial crisis left “permanent scars,” she said, forcing many companies to sell assets at heavily discounted prices and make “deep cuts deep cuts in physical and intangible investment – with lasting effects on productivity.”
Before the crisis, for example, the average productivity growth rate was about 1 percent in advanced economies. Now, it is a mere 0.3 percent. Emerging and developing countries, including China, have not been immune to this decline, either.
Additionally, populations are aging in most advanced economies, which leads to lower productivity as most research suggests worker skills increase up to a certain level and then decline. Countries like Japan and South Korea are facing this problem in particular, with the lowest birth rates globally.
According to Lagarde, countries that are taking in large numbers of refugees actually have a significant leg-up in this regard if they effectively integrate immigrants into the workforce. This solution has been proposed for Japan, for example, but cultural stigma against immigrants has kept its refugee intake among the lowest in the world, accepting only 28 in 2016.
Finally, Lagarde pointed to a global downturn in trade as another significant “headwind” to reviving productivity growth. As countries around the world turn inward, adopting more protectionist policies and shunning globalization, incentives to innovate and share technology across borders have also diminished. All this has contributed to a downturn in productivity and hurt the living standards of everyone.
“One thing is clear: We need more innovation, not less,” she said. “Market forces alone will not be able to deliver that boost, because innovation and invention are to some degree public goods.”
“We at the IMF therefore believe that all governments should do more to unleash entrepreneurial energy. They can achieve this by removing unnecessary barriers to competition, cutting red tape, investing more in education, and providing tax incentives for research and development,” she added.
According to IMF analysis, an increase in private research and development by 40 percent in advanced economies would increase GDP in those countries by 5 percent in the long term.
But technology and automation are also among the biggest factors driving inequality, as lower skilled workers are pushed out of shrinking sectors – like coal, for example. The dissatisfaction of these workers has pushed populist leaders and movements to the forefront of today’s political landscape.
In turn, those populist policies, like trade protectionism or refugee bans, are perpetuating the slowdown in productivity, decline in living standards and rise in inequality. It can also be said that inequality contributed to the global downturn in productivity long before Trump and Brexit.
Lagarde’s most urgent advice, therefore, is for all governments to invest in more and better education. Targeted education programs, skills training and employment incentives – as well as extended tax credits – can help disenfranchised workers almost immediately.
But according to IMF estimates, a slowdown in educational attainment in advanced and emerging economies has lowered labor productivity growth by 0.3 percentage points annually since the 1990s. The education of younger generations, therefore, is critical both for productivity growth and reducing inequality in the long run.
“Today, we are witnessing a technological revolution that holds the promise of higher productivity and better living standards,” Lagarde said. But governments must adequately equip their citizens to see it through.
