I want to follow up my article from yesterday. It`s about Germany which has a huge problem with GDP at -0,1. Aging population. Lack of innovation, investments, R&D, and growth. But Germany is not the only country with problems like that.
Many countries in the world have the same problems. But there is a great solution to this problem, and Paul Krugman wrote about it in his book, «The Age of Diminished Expectations.» He said; «Productivity isn`t everything, but in the long run it is almost everything.»
Productivity is a foundation of prosperity, and the only way a country can raise its standard of living sustainably is to produce more with existing or fewer resources. You cannot do that without improving productivity. It`s that simple, Gita Bhatt wrote in an article at IMF.
We know that productivity must play a more important role in driving sustained growth as our societies age. But there`s no consensus on how to reverse the broad slowdown in productivity growth seen across almost all countries over the past 20 years.
Especially vexing is the sluggish growth of what economists call total factor productivity. A way of measuring how efficiently businesses turn capital and labor into output. The part that basically captures innovation and technology.
Slower gains in total factor productivity account for more than half the deceleration in economic growth since the global financial crisis, IMF-analysis shows. Another decade of weak productivity growth could seriously erode living standards and threaten financial and social stability.
Small companies can drive productivity gains, writes the University of Chicago`s Ufuk Akcigit. He shows how small firms are more innovative relative to their size, suggesting that they use R&D resources more efficiently.
As companies grow and dominate their markets, they often shift to protecting their market position, rather than fostering innovation, he said.
Policies matter too. Measures should encourage more effective reallocation of resources away from low-productivity firms and support smaller businesses and start-ups. Not just large incumbents. This could include targeted tax credits, grants for early-stage innovation, workforce retraining, and policies that encourage competition and reduce barriers to entry for new players.
Understanding productivity growth more fully is crucial because it plays such an outsize role in economic growth, which, as Daniel Susskind of King`s College London writes; also demands a renewed approach to help improve people`s lives.
Ultimately, as Nobel laureate Edmund Phelps writes; a productive society should allow people to enjoy «mass flourishing» from the grassroots up.
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