Productivity – learning from experience

MATILDE MAS AND DIRK PILAT

The Importance of Productivity

Productivity is fundamental to economic growth and to the pursuit of economic policies. Without productivity growth, there is little room for increases in wages and incomes. Without productivity growth, governments don’t have fiscal space to pursue their policy objectives. It is therefore crucial that we understand what drives productivity and how we can influence it. A project by The Productivity Institute is currently learning about successful – and unsuccessful – pro-productivity policies by studying the experiences of 17 countries around the world. It finds that policy has played an important role in supporting productivity growth since the 1950s.

Important policies

Many types of policies were important. One was the expansion of education, first to primary, then to secondary and then to tertiary education, that gave people the skills to benefit from new ways of working and new technologies. Another was the opening up of economies to international trade and investment, that increased the size of markets, strengthened competition, and increased specialisation, all benefiting productivity. Yet another was public investment in infrastructure that helped connect countries and regions, created new opportunities and expanded the global market. Growing support for science and innovation also helped, creating knowledge that provided the basis for innovation in many areas. These and other policies supported productivity growth that was already benefiting from the potential for catch-up growth after the end of the second world war, as countries around the world drew on technology, knowledge and management experience from the United States to improve their productivity.

Productivity today

Today, it’s not so easy anymore. Productivity growth in the advanced economies has slowed down over the past few decades and is now even slowing down in emerging economies. The world economy is also facing headwinds to productivity growth, notably ageing populations, a retreat from globalisation, and fiscal constraints in many countries. There are also growing concerns about the state of competition and the dominance of large firms, which risks leaving many smaller firms and their workers behind.

Taking effective policy action has also become more difficult. Some of the policies that were so important in the past have run out of steam. Take education and training. When before it was about giving people more education, now it is about the quality of that education, specific skills, life-long learning and the allocation of skills in the economy. All areas where it is difficult to make progress and where the impacts on productivity are harder to realise. Or take public investment, which was an important driver of productivity in the past, but which in many countries is now caught up in concerns about costs, planning laws and fiscal constraints.

Productivity in the future

At the same time, there is hope that we might see a new wave of productivity growth. Artificial intelligence, in particular, is expected to strengthen efficiency in many areas and may also increase innovation, strengthening productivity growth. Climate change is a massive and costly global challenge, but also creates new opportunities, in particular through the growth of increasingly cheap renewable energy. And there is much technological change in other areas, such as health and materials, that could support future productivity growth.

The past can only tell us so much about the future. But it points to some of the fundamentals that we will need to keep in mind; investment in people, innovation, and infrastructure, and keeping markets open and competitive. While we may never return to the high rates of productivity growth in the 1950s and 1960s, even small increases in productivity growth count and help improve people’s wages and wellbeing. All countries can benefit from having a strategic productivity agenda that addresses areas such as investment, skills, innovation, regulation and competition. Productivity matters: it should not be ignored in the policy debate.

This is a translation of an article originally published in El País, available to read here.