Why competitiveness is key to avoiding a lost decade

In the World Economic Outlook launched earlier this week, the International Monetary Fund (IMF) lowered the global growth prospects for 2014 and 2015. This downward revision affected many countries and reflects the sluggish and fragile nature of the current recovery. Both advanced and emerging economies are expected to grow more slowly than in previous years. Many risks loom on the horizon that could easily derail it. Concerns about the high level of debt or inflation as a legacy of the recent global financial crisis remain. Rising unemployment and widening income disparities in numerous economies fuel worries about social imbalances. At the same time, the geopolitical outlook gives rise for concern.

Yet in the long term, the biggest concern is that the IMF has over the past year reduced the potential growth for a number of economies. Lower potential growth means that actual growth will, on average, remain below levels in earlier decades. This is expected to happen in countries in all parts of the world, in key advanced economies and emerging markets, where it was reduced by 1.5 percentage points since 2011. Globally, this trend could depress GDP growth by 0.5 percentage points and could give rise to a prolonged period of low growth, low inflation and rising unemployment. Raising growth would be important to reduce debt and cut exposure to fiscal and financial vulnerabilities, as the IMF points out. Yet many, including former US Treasury Secretary Larry Summers, question if a return to pre-crisis growth rates is feasible and wonder whether we are not entering a lost decade.

One piece in the puzzle is productivity. Over the past years, many countries, including the United States, some European economies and emerging markets, have stagnated in terms of productivity growth. This is hardly a surprise as policy-makers’ priorities were dictated by the need to avert a deeper crisis and stabilize growth, so they (understandably) focused on short-term monetary and fiscal measures rather than building productive economies for the long term. Now, this goal has to shift if we want to maintain stable growth rates. Many countries will still need to address the legacy of the crisis and continue to clean up bank balance sheets and to support demand. But they will also need to decisively implement competitiveness-enhancing structural reforms to improve productivity growth.

The Global Competitiveness Report 2014-2015 gives a first indication on where priorities in individual countries or regions should lie. In the United States, which goes up in the Report from 5^th to 3^rd place , a comprehensive structural reform agenda is needed. Improving education and vocational training as well as investing in infrastructure are key, as are institutional reforms to strengthen governance to enable better decision-making.

In Europe, some countries – such as Spain, Portugal and Greece – have advanced on structural reforms and gone up in competitiveness rankings. Some, such as Italy or France, appear to be falling behind, while others, for example, Germany or Finland, need to avoid giving in to complacency to stay at the cutting edge. In Europe, the agenda should include enhancing product/service-market efficiency – for example, by advancing on the services directive – and reforms to make the labour market less rigid, as well as boosting innovation.

Many emerging markets seem to be reaching a plateau in terms of growth. Further focus on making product and services markets more efficient, and also on improving participation in education as well as its quality, is key. Many emerging markets also need to think about how they can encourage innovation, which will enable them to reach the next stage of development and spur growth.

A major push towards implementing a competitiveness agenda and raising productivity is needed in different countries to ensure that they continue on a path of sustainable growth and avoiding a lost decade. Higher growth would make it easier to handle the legacy of the global financial crisis, i.e. the fiscal and financial challenges. If it is inclusive, it would ensure healthy societies with less poverty and higher incomes.

Author: Margareta Drzeniek, Director and Lead Economist, Head of Global Competitiveness Risks, World Economic Forum

Image: People cross a bridge at Pudong financial district in Shanghai August 11, 2014. REUTERS/Carlos Barria