Prodding productivity is pivotal to procuring prosperity
One of the keys to understanding the very sluggish recovery from the Great Recession of 2008-09 is the slowdown in productivity growth. Total factor productivity — a measurement of how much economic output is produced from a given amount of labor and capital — has almost stopped growing over the last 10 years.From the International Monetary Fund:
Without increased productivity, our economy can only grow if we add more labor and capital. Rapid growth requires both increased productivity and increased growth in employment and investment in capital.
A new study by Gee Hee Hong, Romain Duval and Yannick Timmer of the IMF offers strong evidence that a big part — perhaps one-third — of this productivity slowdown can be attributed to the inability of a damaged financial sector to support businesses in the rest of the economy....MORE
Financial Frictions and the Great Productivity Slowdown
IMF Working Papers
Electronic Access:Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.Summary:We study the role of financial frictions in explaining the sharp and persistent productivity growth slowdown in advanced economies after the 2008 global financial crisis. Using a rich cross-country, firm-level data set and exploiting quasi-experimental variation in firm-level exposure to the crisis, we find that the combination of pre-existing firm-level financial fragilities and tightening credit conditions made an important contribution to the post-crisis productivity slowdown. Specifically: (i) firms that entered the crisis with weaker balance sheets experienced decline in total factor productivity growth relative to their less vulnerable counterparts after the crisis; (ii) this decline was larger for firms located in countries where credit conditions tightened more; (iii) financially fragile firms cut back on intangible capital investment compared to more resilient firms, which is one plausible way through which financial frictions undermined productivity. All of these effects are highly persistent and quantitatively large—possibly accounting on average for about a third of the post-crisis slowdown in within-firm total factor productivity growth. Furthermore, our results are not driven by more vulnerable firms being less productive or having experienced slower productivity growth before the crisis, or differing from less vulnerable firms along other dimensions.
Series:Working Paper No. 17/129Subject:
