Emerging and developing market economies (EDMEs) can implement structural policies that can unlock productivity gains, including those fostering productivity by exposing firms to trade and foreign investment, according to the World Bank (WB).
A WB Group flagship report titled “Global Economic Prospects Slow Growth, Policy Challenges” said specific policy priorities will depend on individual country characteristics and circumstances.
It underscored four broad strands of policy options which can boost output, as a broad-based slowdown in labor productivity growth has been underway since the global financial crisis.
In EMDEs, the slowdown has reflected weakness in investment and moderating efficiency gains, as well as dwindling resource reallocation between sectors.
The report said the pace of improvements in key drivers of labor productivity –including education, urbanization, and institutions– has slowed or stagnated since the global financial crisis, and is expected to remain subdued.
“Countries with lethargic innovation may want to expose their private sectors to foreign knowledge and technologies through greater trade and foreign direct investment,” it said, noting the need to also strengthen human capital and upgrade workforce skills, including that of firm managers.
But the report said policy interactions can lead to unintended consequences.
For instance, trade liberalization reforms can increase the exposure of private sector firms to foreign knowledge and frontier technologies, and boost productivity.
Citing earlier studies, the report said trade liberalization, however, can also be associated with greater informality in the short-run if labor markets are not flexible, thus counteracting policies that aim at facilitating the reallocation of resources towards more productive sectors.
“Therefore, these potential interactions should be accounted for when designing a policy mix for a country,” it said.
The report also tackled policies that can raise labor productivity economy-wide by stimulating private and public investment, and improving human capital.
To rekindle productivity growth, it said a comprehensive approach is necessary that also includes facilitating investment in physical, intangible, and human capital; and promoting a growth-friendly macroeconomic and institutional environment.
For countries with large unmet investment needs, the paper further said they may want to prioritize expanding fiscal resources to achieve more and better public investment.
“Countries with anemic private investment may want to prioritize business climate and institutional reforms, reduce support for state owned enterprises, and broadening access to finance to allow private sector investment to flourish,” it said.
Countries with predominantly low skilled workers, on the other hand, may want to improve health and education for workers and managers alike, it added.