Global economic mystery holds back growth

Could simple accounting issues be the source of our reported productivity problem?

Productivity growth is slowing almost everywhere.

It’s a common story. Government critics point out how poor productivity growth has been over the past decade compared with the nation’s long-run average over the past 50 years. The surprising thing: this critique is true for most countries outside India and China.

The productivity slowdown has been particularly noticeable in developed European economies such as Italy, Norway and Germany (see graph below).

It has also hit “tiger” economies such as Taiwan and South Korea. Australia, Canada and New Zealand have recorded very similar performances. 

Productivity is, famously, the single biggest driver of long-run economic growth, so the slowdown matters.

Difference in annual labour productivity growth per person employed. 2005-2015 vs 1955-2004What is causing it? No-one knows for sure. INTHEBLACK has, in the past, explored the idea that we’re running out of important innovations, a theory pushed by economist Robert Gordon.

Most economists favour other explanations: a hangover from the global financial crisis (GFC), a lack of worker education or a failure to invest in new equipment.

Since the GFC, China has been driving world capital expenditure, while elsewhere it’s at its lowest level in decades.

Yet another explanation comes from the Organisation for Economic Co-operation and Development, whose analysts have suggested that over-regulation and other government policies could be slowing the rate at which innovations spread through economies.

Meanwhile, a number of economists point out that economic output is increasingly made up of things such as education and health, which we don’t measure well. Could simple accounting issues be the source of our reported productivity problem?

Read next: Why economic growth is still stuck in the slow lane

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