Productivity Growth: Patterns and Determinants across the World

Abstract

This is the background paper for the productivity extension of the World Bank's Long-Term Growth Model (LTGM). Based on an extensive literature review, the paper identifies the main determinants of economic productivity as innovation, education, market efficiency, infrastructure, and institutions. Based on underlying proxies, the paper constructs indexes representing each of the main categories of productivity determinants and, combining them through principal component analysis, obtains an overall determinant index. This is done for every year in the three decades spanning 1985-2015 and for more than 100 countries. In parallel, the paper presents a measure of total factor productivity (TFP), largely obtained from the Penn World Table, and assesses the pattern of productivity growth across regions and income groups over the same sample. The paper then examines the relationship between the measures of TFP and its determinants. The variance of productivity growth is decomposed into the share explained by each of its main determinants, and the relationship between productivity growth and the overall determinant index is identified. The variance decomposition results show that the highest contributor among the determinants to the variance in TFP growth is market efficiency for Organisation for Economic Cooperation and Development countries and education for developing countries in the most recent decade. The regression results indicate that, controlling for country-and time-specific effects, TFP growth has a positive and significant relationship with the proposed TFP determinant index and a negative relationship with initial TFP. This relationship is then used to provide a set of simulations on the potential path of TFP growth if certain improvements on TFP determinants are achieved. The paper presents and discusses some of these simulations for groups of countries by geographic region and income level. In addition, as a country-specific illustration, the paper presents simulations on the potential path of TFP growth for Peru under various scenarios. An accompanying Excelbased toolkit, linked to the LTGM, provides a larger set of simulations and scenario analysis at the country level for the next few decades.

Unleashing Central America’s Growth Potential

“…32 Enache, Ghani, and O'Connell (2016) and Kinfemichael and Morshed (2016) find that telecommunications, finance, IT and professional services are among them. 33 Cirera and Maloney (2017) and Kim and Loayza (2019).…”

“…49 Kharas et al (2008). 50 Refer to Kim and Loayza (2019) for a discussion justifying these factors as key determinants of productivity and explanation on how to develop composite indicators.…”

Disentangling food security from subsistence agriculture in Malawi

“…The modeling exercise does not consider how the 20-percent increases in sectoral total factor productivity that were used in the scenarios will be achieved. In the extensive research literature on the topic, the principal drivers of productivity growth commonly recognized are enhanced innovation to create or adopt new productive technologies; greater educational attainment so that workers are more productive; improved market efficiency to enable resources to be more productively allocated within the economy; infrastructure development to enable efficient production; and strengthening of institutions that guide economic policy, regulate economic activities, enforce laws, and safeguard rights (for example, Kim and Loayza 2019).…”

Malaysia's Economic Growth and Transition to High Income: An Application of the World Bank Long Term Growth Model (LTGM)

“…The simulations include a weak reform scenario which targets a low value over a long period, a strong reform scenario which targets a high value over a short period, and a moderate reform scenario in the middle. We assume each subcomponent index for innovation, education, market efficiency, infrastructure, and institutions, which are identified as main determinants of TFP based on a literature review (Kim and Loayza 2019), increase linearly to the 25 th , 50 th , and 75 th percentiles among high-income countries for the scenarios of weak, moderate, and strong reforms, respectively. The number of years to reach the target is 75th (long), 50th, and 25th (short) percentile, respectively, in the distribution of years that the high-income countries took from the Malaysia's current level (in 2018) to the target.…”

“…This paper simulates Malaysia's long-run growth prospects using the World Bank Long-Term Growth Model (LTGM), a suite of spreadsheet-based tools building on the celebrated Solow-Swan growth model (Loayza andPennings 2018, andHevia andLoayza 2012). The Long-Term Growth Model -Public Capital Extension (LTGM-PC) is used as the base model (Devadas and Pennings 2018), which allows for private and public investment to have different effects on growth.…”