The IMF projects global growth below 3% by 2030 due to low productivity

He International Monetary Fund (IMF) warned today that global economic growth could slow, reaching a modest 2.8% by 2029. And despite modest growth in Europe of 0.5%, achieving high growth rates seems difficult. Expansive fiscal and monetary policies, investment in infrastructure, promotion of innovation, support for SMEs, boost international trade, development of human capital and focus on sustainability to stimulate economic recovery in a sustainable manner.

The figure revealed by the IMF is one percentage point below the average recorded before the pandemic, during the period 2010-2019. The agency highlights the urgent need to implement significant reforms and adopt new productivity-boosting technologies to counter this worrying trend.

The newly published report highlights the notorious resilience of the global economy in the face of recent turbulence, however, future projections have been constantly revised downwards since the 2008-2009 crisis. This trend is attributed to the slowdown experienced by advanced countries in the early 2000sas well as by emerging and developing nations after 2008. It is highlighted that changes in the growth of total factor productivity (TFP) have been a determining factor in this decline, explaining more than half of the decline in advanced and emerging economies, and virtually all of the reduction in low-income countries.

“This slowdown was due, in part, to a increasing misallocation of capital and labor between companies in different sectors. The general decline in private capital formation after the crisis and the lower growth of the working-age population in the main economies exacerbated the slowdown,” the institution notes.

These trends pose serious challenges not only to improving people’s living standards, but even to maintaining them, and could widen the development gap between rich and poor countries, making it difficult for the latter to reach the income levels of the former. Besides, Labor force growth is projected to be significantly lower by 2030, which further aggravates the situation.

The IMF warns that a prolonged period of low growth, coupled with high interest rates, could compromise debt stability, thus limiting the ability of governments to respond to economic slowdowns and to invest in social programs or in the transition to a more sustainable economy.

Leverage AI

The organization also indicates that there is an “urgent need” to adopt policies and structural reforms that will boost growth by allocating capital and labor towards the most competitive companies, improving labor force participation and taking advantage of of the potential of artificial intelligence (AI). The IMF analysis also suggests that the implementation of specific policies aimed at improving competition in the markets, Promoting trade openness, expanding financial access and increasing labor market flexibility could increase global economic growth by around 1.2 percentage points by 2030. Furthermore, The potential of artificial intelligence (AI) to boost labor productivity is highly uncertain, but it could have a substantial impact, adding up to 0.8 percentage points to global growth, depending on its adoption and labor market effects.

In situations of inefficient allocation, although this may temporarily worsen during sudden macroeconomic shocks, most of this inefficiency is due to structural factors. This means that appropriate policies could drive productivity growth and correct this situation in the long term.

The IMF emphasizes that reforms are critical, especially given high public debt rates and growing geoeconomic fragmentationwhich threaten to further restrict economic growth if adequate measures are not taken.

In this sense, remember that recent initiatives such as the CHIPS Act and the United States Inflation Reduction Acthe Green Pact Industrial Plan in the European Union, the New Direction of Economics and Industrial Policy in Japan and the K-Chips Law in Korea, “share a strong emphasis on innovation in specific sectors.”

“Most packages include tax incentives for innovation in green and advanced technology sectors (such as AI and semiconductors), with a heavy reliance on costly subsidies,” notes the Washington-based institution.

The report highlights that the right mix of innovation policies can generate significant economic growth and considerable tax benefits. According to the analyzes carried out, these policies can increase the gross domestic product (GDP) in the long term in a range of 3 to 4 dollars for every dollar invested in fiscal costs.