World Must Prioritize Productivity Reforms to Revive Medium-Term Growth

The Challenge of Global Economic Growth

The world economy faces a sobering reality. The global growth rate—stripped
of cyclical ups and downs—has slowed steadily since the 2008-09 global
financial crisis. Without policy intervention and leveraging emerging
technologies, the stronger growth rates of the past are unlikely to return.

Faced with several headwinds, future growth prospects have also soured.
Global growth will slow to just above 3 percent by 2029, according to
five-year ahead projections in our latest World Economic Outlook. Our analysis shows that growth could drop by about a percentage point
below the pre-pandemic (2000-19) average by the end of the decade. This
threatens to reverse improvements to living standards, and the unevenness of
the slowdown between richer and poorer nations could limit the prospects for
global income convergence.

A persistent low-growth scenario, combined with high interest rates, could
put debt sustainability at risk—restricting the government’s capacity to
counter economic slowdowns and invest in social welfare or environmental
initiatives. Moreover, expectations of weak growth could discourage
investment in capital and technologies, possibly deepening the slowdown. All
this is exacerbated by strong headwinds from geoeconomic fragmentation, and
harmful unilateral trade and industrial policies.

Hope for the Future

However, our latest analysis shows that there’s hope. A variety of
policies—from improving labor and capital allocation across firms to
tackling labor shortages caused by aging populations in major
economies—could collectively rekindle medium-term growth.

The Importance of Resource Allocation

The key drivers of economic growth include labor, capital, and how
efficiently these two resources are used, a concept known as total factor
productivity. Between these three factors, more than half of the growth
decline since the crisis was driven by a deceleration in TFP growth. TFP
increases with technological advances and improved resource allocation,
allowing labor and capital to move toward more productive firms.

Resource allocation is crucial for growth, our analysis shows. Yet, in
recent years, increasingly inefficient distribution of resources across
firms has dragged down TFP and, with it, global growth.

Much of this rising misallocation stems from persistent barriers, such as
policies that favor or penalize some firms irrespective of their
productivity, that prevent capital and labor from reaching the most
productive companies. This limits their growth potential. If resource
misallocation hadn’t worsened, TFP growth could have been 50 percent higher
and the deceleration in growth would have been less severe.

Two additional factors have also slowed growth. Demographic pressures in
major economies, where the proportion of working-age population is
shrinking, have weighed on labor growth. Meanwhile, weak business investment
has stunted capital formation.

Medium-Term Pressures

Demographic pressures are set to increase in most of the major economies,
according to United Nations projections, causing an imbalance in world labor
supply and dampening global growth. The working-age population will increase
in low-income and some emerging economies, whereas China and most advanced
economies (excluding the United States) will face a labor squeeze. By 2030,
we expect the growth rate of the global labor supply to slide to just 0.3
percent—a fraction of its pre-pandemic average.

Some resource misallocation may correct itself over time, as labor and
capital gravitate toward more productive firms. This will go some way toward
mitigating the TFP slowdown even as structural and policy barriers continue
to slow the process. Technological innovation may also lessen the slowdown.

The Future of Total Factor Productivity

But overall the pace of TFP growth is likely to continue to decline, driven
by challenges such as the increasing difficulty of coming up with
technological breakthroughs, stagnation in educational attainment, and a
slower process by which less developed economies can catch up with their
more developed peers.

Absent major technological advances or structural reforms, we expect global
economic growth to reach 2.8 percent by 2030, well below the historical
average of 3.8 percent.

Reviving Global Growth

Our analysis evaluates the impact of policies on labor supply and resource
allocation, set against the backdrop of the rapid advance of

artificial intelligence, public debt overhang, and geoeconomic fragmentation.

We examine scenarios featuring ambitious, but achievable, policy shifts that
address resource misallocation by improving the flexibility of product and
labor markets, trade openness, and financial development. We also consider
policies aimed at enhancing labor supply or productivity by reforming
retirement and unemployment benefits, supporting childcare, expanding
re-training and re-skilling programs, and improving integration of migrant
workers, as well as the removal of social and gender barriers.

Our findings indicate that the benefits of increasing labor force
participation, integrating more migrant workers into advanced economies, and
optimizing talent allocation in emerging markets are comparatively modest.

By contrast, reforms that enhance productivity and fully leverage AI are key
for reviving growth in the medium term. Our analysis suggests that focused
policy actions to enhance market competition, trade openness, financial
access, and labor market flexibility could lift global growth by about 1.2
percentage points by 2030. The potential of AI to boost labor productivity
is uncertain but potentially substantial as well, possibly adding up to 0.8
percentage points to global growth, depending on its adoption and impact on
the workforce.

In the long run, innovation-driven policies will
be crucial to sustaining global growth.SDGs, Targets, and Indicators