A new World Bank report says that by 2030, the “speed limit” of the world economy – the maximum long-term rate at which it can grow without causing inflation – will fall to its lowest level in 30 years. So an ambitious policy push is needed to increase productivity and labor supply, increase investment and trade, and harness the potential of the service sector.
The report titled “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies” presents the first comprehensive assessment of potential growth rates for the long-term production after the Covid-19 pandemic and the Russian invasion of Ukraine.
The report documents a worrying trend: “Almost all of the economic forces that have driven progress and prosperity over the past three decades are dissipating. Consequently, it is expected that between 2022 and 2030 the average potential growth of the world gross domestic product (GDP) will decrease by approximately one third compared to the rate observed in the first decade of this century and will be around 2.2% per year”.
And in the case of developing economies, the decrease will also be pronounced, going from 6% per year between 2000 and 2010 to 4% per year for the rest of this decade, in addition to the fact that these falls could be much more pronounced in the event of of a global financial crisis or recession.
“Soon we could be looking at a lost decade for the global economy,” said Indermit Gill, chief economist and senior vice president for development economics at the World Bank. “The current decline in potential growth can have far-reaching implications for the world’s ability to address the growing array of challenges specific to our time: persistent poverty, divergent incomes, and climate change.”
Fortunately, the decline can be reversible, according to the WB: “The speed limit of the world economy can be raised through policies that encourage work, increase productivity and accelerate investment.”
The analysis shows that potential GDP growth can increase by up to 0.7 percentage points and reach an average annual rate of 2.9%, if countries adopt sustainable and growth-oriented policies.
The report offers options that can help promote long-term growth prospects, for example:
– Align the monetary, fiscal and financial frameworks, with the application of sound macroeconomic and financial policy frameworks to mitigate the ups and downs of economic cycles.
– Increase investment in areas such as transportation, energy, climate-smart agriculture, manufacturing, land management systems, and water resources.
– Reduce the costs of trade, mostly associated with transportation, logistics, and regulations that double the costs of goods traded internationally today.
– Capitalize on services and turn the sector into the new engine of economic growth, since exports of professional services related to information and communication technology and provided through digital media increased to more than 50% of total exports of services in 2021.
– Increase participation in the labor force. In some regions, such as South Asia and the Middle East and North Africa, increasing female labor force participation rates to bring them in line with the average for all emerging market and developing economies could accelerate potential GDP growth to 1.2 percentage points per year between 2022 and 2030.
The report underscores the need to strengthen global cooperation: “It is essential to restore that integration to harness trade, accelerate climate action and mobilize the investments needed to achieve the Sustainable Development Goals.”
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