Stuck in a Rut

• Author: Gustavo Adler and Romain Duval

Stuck in a Rut Finance & Development, March 2017, Vol. 54, No. 1

Gustavo Adler and Romain Duval

To revive global productivity, start by addressing the legacies of the financial crisis

Technological change seems to be happening faster than ever. The prospect of such inventions as driverless cars, robot lawyers, and 3D-printed human organs becoming commonplace suggests a new wave of technological progress. These advances should raise our standard of living by allowing us to produce more goods and services with less capital and fewer hours of work—that is, to be more productive. But, to paraphrase Nobel laureate Robert Solow, we can see it everywhere but in the productivity statistics.

The vexing truth is that output per worker and total factor productivity—which measures the overall productivity of both labor and capital and reflects such elements as technology—have slowed sharply over the past decade, and especially since the 2008–09 global financial crisis. This phenomenon is evident in advanced economies and seems to extend to many developing economies as well (see Chart 1).

Of course, productivity is inherently difficult to measure, but there is no good reason to suspect that measurement error has increased over the past decade—and even if it has, it would hardly account for the bulk of the slowdown, as recent studies show (Svyerson 2016).

If sustained, sluggish productivity growth will seriously threaten progress in raising global living standards, the sustainability of private and public debt, the viability of social protection systems, and economic policy’s ability to respond to future shocks. It would be unwise to sit around and wait for artificial intelligence and other cutting-edge technologies to spawn a hypothetical productivity revival. But, to cure the affliction, we must first diagnose its root causes.

Lasting scars Productivity growth comes from technological innovation and diffusion, and there is no shortage of explanations for why either or both may have slowed. Some blame a fading information and communication technology boom (Fernald 2015; Gordon 2016); lethargic businesses and insufficient labor and product market reforms (Andrews, Criscuolo, and Gal 2015; Cette, Fernald, and Mojon 2016); the rise of specific-knowledge-based capital and winner-take-all market dynamics; mismatched and deficient skills; demographic factors such as aging populations; or slowing global trade integration (IMF 2016).

Many of these factors have played a significant role and may well remain a drag on productivity. But the abruptness, magnitude, and persistence of the productivity slowdown in the aftermath of the global financial crisis suggest that these slow-moving forces are not the only, or even the main, culprits. The crisis itself is a first-order factor.

Unlike typical economic slowdowns, deep recessions—often associated with financial crises—involve large and persistent declines in output. Such output losses reflect not only continuing declines in employment and investment but also a permanent drop in productivity (see Chart 2). The dynamics following the global financial crisis were no different.

How could a major—but seemingly temporary—financial shock have such large and persistent effects on productivity?

Much can be attributed to the interplay of weak corporate balance sheets, along with tight credit conditions, weak aggregate demand, and the economic and policy uncertainty that characterize the postcrisis environment. These factors...