Reduced to numbers, labor productivity is just a ratio: a measure of output relative to input (in this case, GDP per hour worked, or per worker). But that little ratio sends powerful signals. It drives growth in output, wages and living standards. More broadly, it says a great deal about whether prosperity can be sustained over the long run. It also serves as a benchmark measure of an economy’s capacity for innovation and its ability to adapt.

Productivity growth, then, is the fuel that makes the economic engine hum. It means getting more from work and more from investments – and even in nations that are already sufficiently productive to provide a decent life for all, it’s needed more than ever to meet very modern challenges. For example, it’s the best antidote to the asset price inflation of the past two decades, which has created about $160 trillion in paper wealth and even larger amounts of new debt while leaving housing and infrastructure in short supply in many places. And it’s our best hope for funding the transition to net-zero emissions, eliminating remaining poverty and covering the cost of supporting aging populations without triggering generational conflict.

Ideally, all countries would manage sufficient productivity growth to raise living standards in line with popular expectations. Arguably as important to global social stability, economies with lower productivity would narrow the gap – that is, converge – with higher-productivity countries as they incorporate better technology and enjoy the higher initial returns on capital anticipated with burgeoning opportunities.

But that’s the aspiration, not the reality. Productivity growth has, in fact, been slowing worldwide for years now. Our latest research looks at the causes of that slowdown and the prospects for reversing it. We also identify a group of emerging economies that are pulling ahead in the race to catch up with advanced economies and consider what sets apart these star performers.

The Biggest Picture

From 1997 to 2022, median country productivity growth was 2.3 percent. But that aggregate figure conceals a world of differences. While the wealthiest economies have long been leaps and bounds ahead of everyone else in productivity, their pace of advancement has slowed dramatically in recent years for a variety of reasons.

Given that trend, what are the prospects for the rest of the world to catch up? We classify 91 emerging countries into the fast, middle and slow lanes of convergence, considering both their starting points and their rates of progress over the past 25 years. Some initial conclusions:

Advanced economies are still at the cutting edge. Twenty-seven wealthy countries – home to about one billion people – have averaged 1.0 percent productivity growth over the past 25 years. This makes for a relatively unambitious goal for others to exceed. But keep in mind that advanced economies are still moving forward and capturing the fruits of compounding – 1 percent growth in productivity on a base of, say, $130,000 per worker generates more output per worker in absolute terms than 3 percent growth on a $30,000 base.

China, India, most of Central and Eastern Europe, and a handful of other countries are in what we call the fast lane. Thirty countries representing 3.5 billion people are in the top third of performance among emerging economies. On average, their productivity growth across the past quarter century was about 6 percent annually. And this achievement has lifted more than one billion people above the World Bank’s international poverty line in China and India alone. A fast-lane economy with an average productivity level of $34,000 per worker that maintained 6 percent growth would catch up to the advanced-economy average in 28 years. In Europe, fast-lane countries include Romania, Poland, Estonia, Lithuania and Latvia. Along with China and India, Asian fast-lane countries include Vietnam, Bangladesh and Cambodia. Rounding out the group: a few top performers from sub-Saharan Africa, notably Ethiopia and Rwanda.

The middle lane includes countries from every region that are (very) slowly converging with advanced economies. In 30 countries with 1.2 billion people, productivity change has been broadly in line with the global mean. Between 1997 and 2022, they averaged 2.1 percent productivity growth – twice the rate of advanced economies. At this pace, a country with the average middle-lane productivity of $36,000 per worker in 2022 would take about 130 years to converge with the advanced economies. Emerging Asia dominates this lane. But it also includes Tanzania, Kenya and Uganda, as well as some relative outperformers in Latin America and the Caribbean (Peru, Costa Rica and the Dominican Republic).

Countries in the slow lane, largely in Latin America and the Caribbean, Sub-Saharan Africa, the Middle East and North Africa, have not converged at all. These 31 countries are home to 1.4 billion people, almost one-third of whom live in poverty. Their productivity has grown at a dismal average annual rate of 0.3 percent. That implies that they have not only failed to narrow the gap with advanced economies over the past few decades, but slipped further behind.

What do these numbers mean for specific countries? If fast-lane Poland kept the average pace of productivity growth of the past quarter century, it would fully close the gap with the average advanced economy in 11 years. China, for its part, would get there in 16 years. But middle-lane Indonesia would take 135 years – and slow-lane Argentina would never get there at all.

Countries do change lanes, however. China and India seem like miraculous success stories, but they were once slow growers. Indeed, they are following a trail blazed by countries such as Japan and South Korea. And they are not the only ones changing trajectories. From 2014 to 2019, for example, productivity growth in the Philippines averaged 4.5 percent, while Thailand (3.7 percent), Malaysia (3.0 percent), Tanzania (4.7 percent), Cameroon (4.2 percent) and Kenya (4.0 percent) each achieved fast-lane status.

Why Did Productivity Growth Tail Off In Advanced Economies?

Many factors affect productivity growth, but two of them largely explain the recent slump in advanced economies. First, the forces that had powered a wave of innovation in manufacturing around the turn of the century were shut down along with the economy in the 2008 financial crisis. Second, these countries experienced a decline in investment across multiple sectors as expected returns fell and investors eschewed risk.

Drilling down a bit, manufacturing posted rapid productivity growth until the mid-2000s. This surge was fueled by the persistence of Moore’s Law (the doubling of the number of transistors in a microchip every two years, which translated into a whole lot more bang for a buck). At the same time, the automation, restructuring and offshoring of labor-intensive production boosted the amount of capital per worker in manufacturing, while advanced economies retained primarily capital-intensive (and knowledge-intensive) activities.

But both of these effects waned over time – and as they did, so did productivity growth. In the United States, productivity growth in electronics manufacturing fell from a jaw-dropping 24 percent annually to a down-to-earth 5.4 percent, explaining about two-fifths of the slowdown in all of manufacturing productivity gains and one-fifth of the economy-wide decline. In our European sample, average growth in electronics productivity declined from 8.9 to 2.4 percent; in Japan, from 12.6 to 3.7 percent. This subsector may represent only a sliver of employment and value-added, but it had an outsized effect.

The second factor – a marked and persistent decline in the growth of capital per worker – marks the other leg of the post-financial crisis productivity slowdown in the United States, Germany, the United Kingdom and Japan. The slump in capital investment spanned almost all sectors. Slowing growth in tangible capital (machines, equipment and buildings) explains almost 90 percent of the drop in the United States and 100 percent in Europe. From 1997 to 2019, gross fixed for-mation of tangible capital fell from 22 to 14 percent of gross value added in the United States and from 25 to 17 percent in Europe. Growth in intangible capital (think R&D and software) was more resilient, but could not make up for what was happening on the material side.

A mini-slump occurred after the dot-com bubble burst in 2000, and then a bigger collapse followed the global financial crisis in 2008. To date, none of the advanced economies we analyzed has seen its investment rate recover to precrisis levels. In the wake of both shocks, an uncertain macroeconomic outlook and weak demand lowered productivity growth. Even when conditions improved, these shocks appeared to have left enduring scars.

Over the longer term, other macro trends such as a global savings glut linked to population-aging, and widening income inequality may have added to the problem, driving advanced economies into secular stagnation. These longer-term effects and the timing of the slowdown suggest that sluggish demand played a strong role in slowing productivity growth, which contrasts with the more common view that the slowdown was entirely supply-side driven.

Economists and technologists alike have been scratching their heads at the fact that the sweeping and profound digital revolution we’re experiencing hasn’t moved the needle on productivity beyond the tech sector itself. There are multiple theories, but the most convincing is that technological adoption takes time – lots more time than expected. In fact, a new technology may actually serve as a drag on productivity growth in its early years as producers struggle to adapt, with productivity following a J-shaped trajectory.

Digitization has also led to duplication of online and offline distribution channels. This has given customers more choice, but compa- nies only see the productivity benefits when their offline channels are rationalized or discontinued. Finally, diffusing digital technologies across small businesses can be slow and difficult.

In our view, the best way for advanced economies to jumpstart productivity growth would be to boost incentives for investment and focus on getting the most out of digital technologies, including AI. Some other solutions that are commonly suggested, such as reshoring manufacturing or trying to influence the sector mix by favoring leading industries, seem less promising – or frankly, steps in the wrong direction.

What Distinguishes Life In The Fast Lane?

Overthepastquartercentury,someemerging economies have been catching up inproductivity. China and India have, of course, been at the forefront – and rapidly rising living standards in these countries demonstrate what’s at stake. But what sets the top performers apart?

Is it possible for other countries to replicate what they’ve pulled off? To answer these questions, we looked at sector data for 54 countries that represent 87 percent of emerging economies’ GDP.

Fast-Lane Economies Invest More

Growth in capital per worker accounted for about four-fifths of productivity growth in most emerging regions over the past 25 years – and most fast-lane countries managed to sustain investment at 20 to 40 percent of their GDP over thewholeperiod.China,Ethiopia,India,Poland, Turkey and Vietnam are prime examples.

These countries channeled capital into the vestment in R&D and other intangibles enables manufacturing to diversify and become more sophisticated. It also raises productivity in services – everything from health care to retail distribution.

Fast-lane countries set policies with strong, reliable incentives for private investment. They have opened markets to introduce some level of competition and foreign investment, created more efficient financial sectors with transparency rules, and established legal systems to protect ownership rights and minimize the cost of settling business disputes. Central and Eastern European economies that were integrated into the European Union, for example, drew in foreign investment to modernize Soviet-era factories and production methods. Their production of cars and trucks more than doubled between 2000 and 2011, while employment in the sector rose only 60 percent, implying substantial productivity increase.

Large companies can generally use capital more efficiently, making it important to allow firms to scale up quickly. Larger entities have more capacity to invest and export, to adopt new technology, to develop talent, to pay their workers better wages and to adapt to shocks. Many emerging economies hit a speed bump here since they are dominated by small, informal businesses.

Fast-Lane Countries Focused on Infrastructure and Urbanization

Fast-lane countries were also willing and able to plow resources into critical infrastructure such as road and railway networks, power and telecom systems, and health and education facilities. Ethiopia, for example, clocked impressive gains on the back of public investment – a strategy similar to China’s. However, the returns to public investment eventually start to decline. China has already boosted its public capital stock to levels of rich OECD countries, suggesting that its next wave would need to come largely from continued increases in private capital per worker if the economy is to stay on the fast track. Slow-and middle-lane countries did not enjoy this pace of either public or private investment growth.

Progress in emerging economies has also been marked by urbanization. The growth of cities has meant a major shift in the composition of employment, away from agriculture and into construction and service-sector jobs. The urban share of the population in emerging economies has increased on average by nearly 10 percentage points over the past quarter century, with some remarkable outliers. China’s share grew by 31 percentage points, Costa Rica’s by 26 points, Albania’s by 24 points and Botswana’s by 22 points.

But it’s not only the pace of urbanization that matters. Many middle- and slow-lane economies urbanized, too. The key is whether urbanization has been managed well enough to incorporate the expanding workforce efficiently. Fast-lane countries developed infrastructure and housing in their cities to accommodate growth.

Urbanization’s productivity boost in emerging economies is due both to (a) the arithmetic reality that when workers leave low-productivity agriculture for high-productivity manufacturing and services, output per worker rises, and (b) the rising productivity in agriculture as it mechanized and pushed redundant labor to the cities. In fast-lane countries, agriculture contributed roughly one-third of all productivity growth from 1997 to 2018. In these countries, the employment share in agriculture (and often even total employment in agriculture) fell, yet value-added by agriculture nearly doubled.

Fast-Lane Economies Made Strides in Both Manufacturing and Services

Fast-lane emerging economies found ways to make manufacturing more sophisticated and more responsive to demand. They plugged into global supply chains and produced more complex products. In China, manufacturing was the single most important driver of productivity, adding a remarkable 2.6 percentage points to average annual growth. Manufacturing also contributed strongly to productivity growth in fast-lane Central and Eastern European countries including Romania, Slovakia and Poland.

Whether low- and middle-income countries can still industrialize their way to prosperity – as East Asia did in the past – is the subject of tense debate among development economists. Our findings suggest that manufacturing, including export-oriented manufacturing, continues to be a viable way to raise productivity. It provides a channel for the kind of investment in R&D and innovation that drives overall productivity growth, while trade in manufactures within global supply chains accelerates that growth. A strong manufacturing sector also enables economies to produce the basic materials and capital goods needed for urbanization, infrastructure and mechanization that are part and parcel of development.

Many slow-lane economies are major exporters, but rely heavily on sales of commodities. On average, 78 percent of the goods exported by slow-lane countries fit this category, about double the share of fast-lane countries and advanced economies. This dependence makes slow-laners more vulnerable to global shocks – commodity prices are highly volatile – and impedes their industry-driven productivity growth.

High-value commodity exports also put upward pressure on exporters’ exchange rates during global booms, making other exports less competitive. This, in turn, discourages investment in manufacturing and accelerates the growth of non-tradable services. The phenomenon even has a name: “Dutch Disease,” after the damage done to the Dutch economy when the boom in natural gas exports in the 1960s distorted the exchange rate.

Manufacturing is critical to the overall productivity of most economies, and not surprisingly it is typically the focus of development economics. But it’s worth remembering that most of the workers leaving agriculture in the past quarter century found work in services, not manufacturing – and fast-lane economies also invested to make services more productive. This includes modernizing traditional areas such as retail distribution as well as betting on the expansion of higher-productivity sectors such as financial services. India’s early upgrading of digital infrastructure and specialized workforce skills in the 1990s enabled it to become a global leader in IT – in particular, in software production where physical capital mattered less.

The Building Blocks Must Align

Effective investment leading to productivity growth must be built on a sustainable foundation. Indeed, figuring out how to build that foundation is the great challenge of development economics. The drivers are many, and their exact contributions are hotly debated. But it’s clear that productivity growth is harder without effective public and private institutions that reduce risk, deliver public goods efficiently and minimize free-riding.

The World Economic Forum’s Global Competitiveness Index measures this with a composite score reflecting government performance, property rights, transparency, security and avoidance of corruption, among other things. On a scale from 0 to 100, the average score of advanced economies is 71. Fast-lane countries have an average of 56, middle-lane countries 52 and slow-lane countries 48.

Fast-lane countries also stay that way by developing the capacity to innovate. China has dramatically increased investment in R&D, from 0.6 percent of GDP in 1997 to 2.2 percent in 2019, matching the advanced-economy average in that latter year. Countries in Central Europe lifted their R&D investment from 0.8 percent to 1.2 percent over that quarter century. Countries in Latin America, many of which are in the slow lane, invest only 0.4 percent of GDP in R&D. So it’s not surprising that the region accounts for less than 2 percent of the world’s patent applications.

Another important enabler of productivity growth is education. Looking at learning-adjusted years of schooling in the working population, advanced economies average about 11.0 years, fast-lane countries 9.0 years, middle-lane countries 7.5 years and slow-lane countries 6.0 years. Investing to industrialize and urbanize is key, but not at the neglect of human capital.

What Will Set The Pace of Productivity Growth?

The way economies invest, deploy technology and respond to the challenges on the horizon will determine whether they can accelerate productivity growth, and continue to raise living standards in the process.

First, the seemingly chronic slowdown in productivity growth – the “secular stagnation” that Lawrence Summers and others worried about – may be behind us. Although it’s too soon to be sure, some signs appear positive at least in the United States. To sustain momentum, advanced economies could tilt regulation in favor of innovation by reducing unwarranted burdens on investors and innovators – for example, in permitting renewable energy projects – and more aggressively enforcing competition policies that give outsiders a chance to displace incumbents.

Emerging economies need to direct public and private investment into urban infrastructure and worker skills. While migration from farms to cities has been a major driver of productivity growth, that formula works best when urban areas have the right mix of infrastructure to facilitate the flow. Yet this is a difficult time to fund people-focused regional investment, with many nations facing growing debt distress and investors drawn to the higher interest rates available in advanced economies after decades of paltry returns on low-risk projects. This makes it all the more critical for emerging economies to establish attractive, stable business environments.

Second, more companies are putting new technology to work in earnest. Just a few years ago, we estimated that digitization and other tech advances could add 0.5 to 1.0 percentage points to annual productivity growth in advanced economies. Now it looks like generative AI alone could enhance productivity growth by a half percentage point as it rapidly transforms the way jobs are done. While the ultimate impact of AI is uncertain – and big claims about new technologies don’t always pan out – several AI applications hold significant productivity potential and seem to be catching on rapidly.

In emerging economies, there is also room to continue making gains through the diffusion of existing technologies. Latin America, for instance, has generally been a latecomer to the technology party. But the pandemic boosted the penetration of digital payments and e-commerce, which could trigger catch-up growth in many sectors. Africa could also boost productivity through wider diffusion of legacy technology. Investment in irrigation and fertilizer, for example, promise much for African agriculture.

Finally, there are multiple structural challenges looming – and the way countries respond to them could fuel or hinder productivity growth. These include aging populations, the ongoing shift to remote and hybrid work, the need to deliver services more productively, the fraying of global cooperation and the energy transition. While each of these constitutes a challenge, the right policy responses and business strategies could transform them into opportunities.

Paul Krugman once quipped that “productivity isn’t everything, but, in the long run, it is almost everything.” It’s certainly the key to the success of individual enterprises and a necessary ingredient to sustain rising living standards. But productivity growth tends to be episodic. And while the last wave crested some time ago, there are real opportunities to invest in ways to catch the next one.