IMF chief warns slowing productivity risks living standards drop

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(Reporting by David Lawder; Editing by Lisa Shumaker)

Living standards around the world could fall unless governments invest more in research and education that can help revive weak productivity growth, International Monetary Fund Managing Director Christine Lagarde warned on Monday.

Lagarde said in a speech in Washington that the private sector alone will not be able to generate enough innovation to lift productivity to acceptable levels without government help.

Her remarks were accompanied by release of an IMF study that found that the 2008-2009 financial crisis and deep recession played a bigger role in slowing productivity than previously thought, stifling global demand and investment. (bit.ly/2nCMDqd)

“Another decade of weak productivity growth would seriously undermine the rise in global living standards,” Lagarde told an audience at the American Enterprise Institute, a pro-business think tank in Washington.

“Slower growth could also jeopardize the financial and social stability of some countries by making it more difficult to reduce excessive inequality and sustain private debt and public obligations,” she added.

Economists have long viewed productivity gains as essential for sustaining higher wages and living standards, but have struggled to explain a protracted slowdown in productivity growth since the early 2000s.

Lagarde said the post-crisis recession has left a “permanent scar” on output per worker and total factor productivity, a broad measure of innovation that includes both labor and capital inputs.

“We estimate that, if total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today,” Lagarde said. “That would be the equivalent of adding another Japan — and more — to the global economy.”

She said that all governments should do more to unleash entrepreneurial energy, including cutting barriers to competition, investing in education and providing tax incentives for research and development.

“One thing is clear: we need more innovation, not less. Market forces alone will not be able to deliver that boost, because innovation and invention are to some degree public goods.”

Lagarde said smartphone technologies have hugely benefited from large-scale state spending on developing the internet and global positioning satellite system, while defense spending often creates new technologies that have civilian uses.

She cited IMF research last year showing that an increase of private research spending by 40 percent in advanced economies could increase their GDP by 5 percent in the long term.

Lagarde said a critical improvement in education and worker retraining programs was needed to aid those displaced by the effects of technological change, trade and structural reforms.