Sources And Remedies - World Bank

2y ago
8 Views
3 Downloads
462.69 KB
36 Pages
Last View : 18d ago
Last Download : 2m ago
Upload by : Macey Ridenour
Transcription

Public Disclosure AuthorizedPublic Disclosure AuthorizedPolicy Research Working Paper9177Subdued Potential GrowthSources and RemediesPublic Disclosure AuthorizedPublic Disclosure AuthorizedSinem Kilic CelikM. Ayhan KoseFranziska OhnsorgeProspects GroupMarch 2020

Policy Research Working Paper 9177AbstractGlobal potential output growth has been flagging. At 2.5percent in 2013–17, post-crisis potential growth is 0.5percentage point below its longer-term average and 0.9percentage point below its average a decade ago. Comparedwith a decade ago, potential growth has declined 0.8 percentage point in advanced economies and 1.1 percentagepoint in emerging market and developing economies. Theslowdown mainly reflected weaker capital accumulationbut is also evidence of decelerating productivity growthand demographic trends that dampen labor supply growth.Unless countered, these forces are expected to continue andto depress global potential growth further by 0.2 percentagepoint over the next decade. A menu of policy options isavailable to help reverse this trend, including comprehensive policy initiatives to lift physical and human capitaland to encourage labor force participation by women andolder workers.This paper is a product of the Prospects Group. It is part of a larger effort by the World Bank to provide open access to itsresearch and make a contribution to development policy discussions around the world. Policy Research Working Papers arealso posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at skiliccelik@worldbank.org,akose@worldbank.org, and fohnsorge@worldbank.org.The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about developmentissues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry thenames of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely thoseof the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank andits affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.Produced by the Research Support Team

Subdued Potential Growth:Sources and RemediesSinem Kilic Celik, M. Ayhan Kose, and Franziska Ohnsorge *JEL Classification: O40, O47, E20Keywords: Potential growth, potential output, advanced economies, emerging market anddeveloping economies*Kilic Celik (Prospects Group, World Bank; skiliccelik@worldbank.org), Kose (Prospects Group, World Bank;Brookings Institution; CEPR; CAMA; akose@worldbank.org); Ohnsorge (Prospects Group, World Bank; CEPR;CAMA; fohnsorge@worldbank.org. We thank Martin Bailey and Zia Qureshi for their detailed comments. Weappreciate feedback from Eduardo Borenzstein, Kevin Clinton, Brahima Coulibaly, Antonio Fatas, Thomas Helbling,Homi Kharas, Ugo Panizza, and Jonathan Temple. Xinghao Gong provided excellent research assistance. Thefindings, interpretations and conclusions expressed in this paper will be entirely those of the authors and should notbe attributed to the World Bank, its Executive Directors, or the countries they represent.

1. IntroductionThe global economy regained some strength over the period between mid-2016 and 2018but potential output growth—the rate at which an economy would grow when labor andcapital are fully employed—has continued to remain weak (Figure 1). Post-crisis (201317), global potential growth fell short of its long-term average and was well below its precrisis average. This weakness was broad-based, affecting both advanced economies, whereit was evident even before the financial crisis, and emerging market and developingeconomies (EMDEs), where there was a short-lived pre-crisis uptick.Since the growth rate of per capita potential output is the overriding long-run force forsustained reductions in poverty, this trend is also cause for concern about the internationalcommunity’s ability to meet broader development goals. 1 In some regions, especiallycommodity-exporting ones, such as Eastern Europe and Central Asia, and the MiddleEast and North Africa, the post-crisis slowdown in potential growth could set back percapita income convergence by more than a decade.Against this backdrop, this paper addresses the following questions. First, how haspotential growth evolved since the turn of the century? Second, what have been the driversof potential growth? Third, what are the prospects for potential growth? Fourth, whatpolicy options are available to lift potential growth?To help answer these questions, the paper examines the evolution of potential growth ina large sample of countries, with a strong regional focus. Since potential output is notdirectly observable, economists estimate it from long time series of actual output,employment, capital stocks, and productivity. The paper uses a comprehensive databaseof potential output growth by Kilic Celik et al. (forthcoming). 2 For clarity, and in keepingwith a longer-term focus, this study uses the production function approach. 3This paper makes several contributions to the large literature on potential growth. First,the focus in this study is on the broader EMDE universe, whereas other studies havedocumented a potential growth slowdown in advanced economies and Asian economies.(IMF 2015; Dabla-Norris et al. 2015; Asian Development Bank 2016; and OECD 2014).Second, the paper examines global trends in the structural drivers of potential growth,including total factor productivity (TFP) growth, labor supply growth, and investmentin human and physical capital. Third, it explores policy options to lift potential growth.These include measures to improve education and reforms to health care and labor1Research suggests that two-thirds of cross-country differences in growth of the poorest households’ income areaccounted for by differences in average income growth (Dollar, Kraay, and Kleineberg 2013; Barro 2000).Mechanisms by which overall growth helps reduce inequality differ but include its impact in raising the demand foragricultural output which helps poor land holders, as well as rising urbanization and higher wages (Yankow 2006;Gould 2007; Ravallion and Datt 2002).2Most of the existing literature on potential growth involves estimating the role of output gaps in driving inflation ordomestic monetary policy in the context of individual countries (in about half of 67 publications for individual EMDEssurveyed by the authors).3Other measures of potential growth incorporate short-term supply shocks that dissipate over time (Kilic Celik et al.forthcoming).2

markets. In contrast to earlier studies, the discussion of policy options to lift potentialgrowth is directly derived from the empirical exercise. 4The paper’s principal conclusions are as follows. First, the global financial crisis hasushered in a period of persistently weak potential growth. During 2013-17, global potentialgrowth (2.5 percent a year) fell 0.5 percentage point below its longer-term (1998-2017)average, and even further below its average a decade ago (2003-07). Potential outputdecelerated in advanced economies to 1.4 percent a year during 2013-17, which is 0.5percentage point below its long-term average. Similarly, EMDE potential growth slowedto 4.8 percent a year, 0.6 percentage point below its longer-term average. This weaknessin potential growth has been broad-based, affecting almost half of EMDEs and 87 percentof advanced economies in the sample, together representing 69 percent of global GDP.Second, a host of factors have contributed to this post-crisis shortfall in potential growthbelow longer-term averages. Half of the deceleration reflects weaker-than-average rates ofcapital accumulation. Just over one-quarter of the slowdown is due to weaker total factorproductivity (TFP) growth while just under one-quarter of the moderation is attributableto demographic trends.Third, the slowdown in potential growth may extend into the next decade. Trends in itsfundamental drivers suggest that global potential growth may slow further by 0.2percentage point on average over 2018-27. While the decline in potential growth isexpected be 0.1 percentage point a year in advanced economies, EMDE potential growthcould ease much more, by 0.5 percentage point. The projected slowdown from 2013-17would affect EMDEs and advanced economies that account for 73 percent of global GDP.Fourth, policies could help reverse these trends and boost global growth. For advancedeconomies, labor market reforms (especially targeting pension systems) may have thehighest potential to stem the decline in potential growth. Among EMDEs, in particular,education, health, and labor market reforms could significantly increase potential growth.A combination of these policies could lift potential growth in EMDEs over the next decadeby 0.8percentage point, and more in EAP and ECA.To sustain higher potential growth, countries need to reform labor and product markets,strengthen human and physical capital and build conducive environments for businessand households to invest. The onus is particularly on the largest emerging markets andadvanced economies, whose growth momentum generates spillovers for other EMDEs.This paper draws on a comprehensive database that estimates potential growth using allstandard approaches for up to 181 countries for 1980-2017 (extending to 2027 for 80countries) based on Kilic Celik et al. (forthcoming). For clarity, the remainder of thepaper presents only results using a production function approach for 30 advancedeconomies and 50 emerging market and developing economies for 1998-2027 that together4Other studies have investigated the link between actual growth or productivity growth and structural reforms,focusing on the near-term benefits (Prati, Onorato, and Papageorgiou 2013), productivity effects (Dabla-Norris, Ho,and Kyobe 2015; Adler et al. 2017) or a sample consisting of mostly advanced economies (Banerji et al. 2017; IMF2015 and 2016b).3

account for 91 percent of global GDP. 52. Evolution of Potential Growth: What Happened?2.1. Slowdown in global potential growthGlobal potential growth fell to 2.5 percent a year during 2013-17. This is below its longerterm (1998-2017) average of 3 percent a year and even further below its average a decadeearlier (2003-07; Figure 2). The potential growth weakness was broad-based and robustto the specific choice of potential growth measures. During 2013-17, potential growth wasbelow its longer-term average in 87 percent of advanced economies and in almost half ofEMDEs. Economies with potential growth below its longer-term average accounted forroughly 70 percent of global GDP.Per capita estimates also show a trend deceleration. These estimates suggest that therewas a persistent slowdown in global potential growth beneath the temporary cyclicalshocks that appear to have been the main reasons for the post-crisis slowdown in actualgrowth from elevated pre-crisis levels. In advanced economies, the potential growthslowdown set in before the global financial crisis whereas EMDEs enjoyed a short-livedpre-crisis surge in potential growth that subsequently faded.Among advanced economies, following a sharp decline during 2008-12—the period of theglobal financial crisis, the Euro Area crisis, and pronounced investment weakness—potential growth stabilized in 2013-17 as investment growth recovered. 6 However, at 1.4percent a year over 2013-17, potential growth in advanced economies remains about 0.5percent-age points below its longer-term average. The decline was particularly pronouncedin some countries in Asia.In EMDEs, in the initial wake of the global financial crisis, a surge in public investmentunderpinned EMDE potential growth, offsetting softening productivity and labor supplygrowth. As EMDE policy stimulus was unwound, and as investment growth plummetedin commodity-exporting EMDEs following the oil price slide in mid-2014, EMDE potentialgrowth slowed sharply to 4.8 percent a year in 2013-17, 0.6 percentage point below itslonger-term average. 75The 50 EMDEs include 4 economies in East Asia and the Pacific, 9 economies in Europe and Central Asia, 15economies in Latin America and the Caribbean, 7 economies in the Middle East and North Africa, 2 economies inSouth Asia and 13 economies in Sub-Saharan Africa (Kilic Celik et al. forthcoming). Please see Table 1 for the list ofcountries in each group and region. Data for more than one-third of them (and about half of the sample’s EMDEs inEurope and Central Asia and Sub-Saharan Africa) is missing before 1997 and no data for EMDEs is available before1991. Hence, to ensure broad country coverage, the sample period is restricted to 1998-2027.6As in the broader set of advanced economies, potential growth in G7 economies—Canada, France, Germany, Italy,Japan, United Kingdom, and United States—was, at 1.5 percent on average in 2013-17, 0.3 percentage points belowits longer-term average.7The potential growth slowdown from pre-crisis rates was also evident in EM7 economies—Brazil, China, India,Indonesia, Mexico, Russia, and Turkey. On average during 2013-17, EM7 potential growth slowed to 5.4 percent.Almost three-quarters of this decline in EM7 potential growth between 2003-07 and 2013-17 reflected slowingpotential growth in China.4

2.2. Regional heterogeneityPotential growth has fallen furthest in EMDE regions that had benefited from rapid percapita income convergence or that hosted many commodity-exporting EMDEs (Figure 3).The shortfall of potential growth during 2013-17 from its longer-term (1998-2017) averagewas one of the sharpest in the Middle East and North Africa (MNA, 1.2 percentage point)where investment growth plunged amid the oil price drop of mid-2014, a period of violentconflict and policy uncertainty in parts of the region.During 2013-17, potential growth also fell 0.5 and 0.2 percentage points, respectively,below its longer-term average in Europe and Central Asia (ECA) and Latin America andthe Caribbean (LAC). The ECA region’s past two decades of rapid integration intoEuropean production networks has gradually diminished its potential for further catchupproductivity growth. The region also hosts several energy exporters which suffered deeprecessions or slowdowns following the mid-2014 decline in oil prices. Weak productivitygrowth and less favorable demographics reduced potential growth in LAC. 8In EAP, in 2013-17, potential growth in China fell 1.3 percentage points below its longerterm average as policy efforts succeeded in rebalancing growth away from investmenttowards more sustainable growth engines, combined with slowing productivity andworking-age population growth. Elsewhere in EAP, potential growth rose 0.7 percentagepoint on robust capital accumulation and strengthening TFP growth.During 2013-17, favorable demographics have helped lift potential growth in South Asia(SAR) and Sub-Saharan Africa (SSA). In SAR, potential growth was negatively affectedby investment weakness such that growth in 2013-17 broadly matched its longer-termaverage. In SSA, potential output accelerated by 0.4 percentage point during 2013-17compared to its longer-term average. This demographic dividend was complemented byrapid capital accumulation over the past two decades as resource discoveries weredeveloped into operating mines and oil fields, and governments undertook large-scalepublic infrastructure investments. The commodity price slide after 2011 has raisedconcerns about the sustainability of such potential growth.3. Drivers of the Slowdown in Potential GrowthOf the 0.5 percentage-point shortfall in post-crisis (2013-17) global potential growth belowits longer-term (1998-2017) average, about one-half can be attributed to weaker capitalaccumulation (0.2 percentage point) and the remainder to weaker TFP growth and slowerlabor supply growth (0.1 percentage point, respectively; Figure 4). Weak global capitalaccumulation mainly reflected investment weakness in advanced economies, in the wakeof financial crises in the United States and Europe, and a policy-driven rebalancing awayfrom investment in China. Unfavorable demographics and slowing TFP growth werefeatures of both advanced economies and EMDEs (Figure 4).8In contrast to production function-based potential growth measures, potential growth estimates based on filteringtechniques have slowed sharply in LAC and SSA. The predominantly host commodity exporters, where actual growthdecelerated steeply in the commodity price slide from 2011.5

3.1. Total factor productivity growthBy allowing output to expand with a given amount of factor inputs, TFP growth hashistorically been the critical driver of sustained growth in per capita output and prosperity(Romer 1986; Lucas 1988; Grossman and Helpman 1991). TFP growth can rise with theadoption of new technologies, adaptation of existing technologies, introduction of moreefficient processes, or changes in management practices (EBRD 2014). Differences in TFPaccount for about two-thirds of the variation in per capita income across the world (Jones2016). Higher productivity lifts firms’ marginal product and reduces their marginal cost,which allows firms to increase their demand for factors of production. Technologicaladvances reduce the price of capital equipment, encouraging further capital accumulationwhich, in turn, embodies further improvements in productivity (Greenwood, Hercowitz,and Krusell 1997; Sakeflaris and Wilson 2004).Global potential TFP growth—the part of TFP growth that is stripped of its wide cyclicalswings—slowed from about 1.3 percent a year a decade ago to about 1 percent a yearduring 2013-17, but with wide heterogeneity (Figure 5). In advanced economies,productivity growth showed signs of flattening well before the global financial crisis. Forsome advanced economies, the productivity growth slowdown during the early 2000s hasbeen described as a return to productivity growth before the surge of information andcommunications technologies in the mid-1990s (Gordon 2013; Cette, Fernald, and Mojon2016). 9By contrast, TFP growth in EMDEs surged to 2.5 percent a year a decade ago (2003-07),reflecting productivity-enhancing investment, partly financed by capital inflows. 10Reforms of policy frameworks after EMDE financial crises in the late 1990s and early2000s and greater integration into global value chains provided a conducive environmentfor rapid productivity growth. However, since the global financial crisis, TFP growth inEMDEs has slowed to 1.9 percent a year in 2013-17.Some drivers of the TFP growth slowdown are likely to be structural and persistent. TFPgrowth may have slowed as a wave of information and communications technologiesmatured. The pace of cross-country diffusion of technology may have diminished as globalvalue chains stopped growing. Aging workforces may have impeded the adoption of newideas. In commodity exporters, a downgrading of expectations for long-term profitabilityof resource projects would have reduced investment and, with it, embodied productivitygains. Finally, the large-scale factor reallocation, especially from agriculture tomanufacturing, that has supported robust EMDE productivity growth over the past twodecades appears to be slowing.Over the past three decades, TFP growth in EMDEs has been supported by growinghuman capital. Among a better-educated and healthier working-age population, both TFPgrowth and labor force participation rates tend to be higher. EMDEs have made rapid9Baily and Montalbano 2016 attribute (some of the) surge in the US productivity growth in the mid-1990s toimprovements in productivity measurement especially in services sector.10The regression results suggest that for many EMDEs, catchup productivity growth is a key driver of overall TFPgrowth

Policy Research Working Paper 9177 Global potential output growth has been flagging. At 2.5 percent in 2013–17, post-crisis potential growth is 0.5 percentage point below its longer-term average and 0.9 percentage point below its average a decade ago. Compared with a decade ago, potential growth has declined 0.8 per-

Related Documents:

Northern Bank & Trust Co. Patriot Community Bank People's United Bank Pilgrim Bank Radius Bank RTN Federal Credit Union Santander StonehamBank TD Bank The Cooperative Bank The Savings Bank The Village Bank Walpole Cooperative Bank Wellesley Bank Winchester Co-operative Bank Abington Bank Bank of Canton Blue Hills Bank Boston Private Bank & Trust

M/s G.M. Kapadia & Co., Chartered Accountants Bankers HDFC Bank Ltd. (Primary Banker) Axis Bank Ltd. Bank of Baroda Bandhan Bank Ltd. Citibank N.A. CSB Bank Ltd. DCB Bank Ltd. Deutsche Bank ESAF Small Finance Bank ICICI Bank Ltd. IDFC Bank Ltd. Indian Bank RBL Bank Ltd. Saraswat Co-op Bank Ltd. State Bank of India Suryoday Small Finance Bank Ltd.

10. HDFC Bank Limited 11. ICICI Bank Ltd 12. Indian Overseas Bank 13. ING Vysya Bank 14. Kotak Bank -Virtual card 15. Shivalik Bank 16. Standard Chartered Bank 17. State Bank of Bikaner and Jaipur 18. State Bank of India 19. State Bank of Mysore 20. State Bank of Travencore 21. Syndicate Bank 22. The Federal Bank Ltd 23. The Karur Vysya Bank Ltd

commerce bank eastern bank-east west bank everbank firstbank first hawaiian bank-first horizon bank firstmerit bank-first national of. nebraska first niagara flagstar bank f.n.b.corp. frost national bank fulton financial hancock bank iberiabank m b financial new york community banks old national, bank one west bank people's united bank raymond .

State Bank of India State Bank of Mysore State Bank of Patiala State Bank of Travancore Syndicate Bank Tamilnadu Mercantile Bank TNSC Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank YES Bank . Instruction to follow during first time use of Karur Vysya

Deka Bank Deutsche Girozentrale Deutsche Bank AG DNB Bank ASA DZ BANK AG Helaba (Landesbank Hessen-Thüringen) HSBC ICBC (London) plc ING Bank Intesa Sanpaolo Investec Bank plc KBC Bank KfW IPEX-Bank KommunalKredit Austria AG Landesbank Baden-Württemberg (LBBW) Macquarie Group mBank SA Mizuho Bank National Australia Bank National Bank of Abu Dhabi

Access Bank Acleda Bank Agricultural Bank of China ANZ Arab International Bank Banco Sabadell Bank ABC Bank Alfalah Bank Islam Brunei Darussalam Bank of America Bank of Baroda Bank of China BankUnited Banorte Barclays BBVA Belsize BMCE Bank BMO Capital Markets BNL - BNP Paribas BNP Paribas BNY Mellon Bpifranc

Bank of Baroda. 31: Bank of Beirut (UK) Limited . 32: Bank of China. 33: Bank of Communications (UK) Limited. 34: Bank of Cyprus UK Limited. 35: Bank of East Asia Limited. 36: Bank of India. 37: Bank of Montreal . 38: Bank of New York Mellon (UK Group) 39: Bank of Nova Scotia, The . 40: Bank of Taiwan - Lon