Human capital is one area that has been overlooked in
measuring productivity drivers
WASHINGTON, October 25, 2018 — Differences in productivity account for half the differences in GDP per capita across countries, so boosting productivity is critical to alleviating poverty and fulfilling the rising aspirations of global citizens. A new report launched today by the World Bank presents a range of new diagnostic and analytical tools for studying productivity – while challenging many established approaches and policy recommendations in the areas of trade, human capital, and innovation.
“If we’re going to understand why productivity has stalled in recent decades, despite spectacular advances in technology, we need to take a step back and look at what really drives productivity and how we can help developing countries move up the productivity ladder,” says Ceyla Pazarbasioglu, Vice President, Equitable Growth, Finance, and Institutions.
The report, Productivity Revisited: Shifting Paradigms in Analysis and Policy, finds that policies designed to drive private-sector growth need to ensure that resources get to the most productive firms, but also improve the productivity, quality, and the demand base of existing firms and cultivate new and dynamic startups. Policies also need to focus on improving the business environment as well as a range of types of human capital: numeracy, personal traits such as risk appetite, managerial and organization skills, and technological capabilities. For companies to continuously innovate and grow, they need individuals who are open to new ideas, can tolerate risk, and are driven to achieve results. These factors will either encourage or hinder a firm’s ability to adapt to policy, technological advancement, and competition.
“Traditionally, economics has shied away from opening the black box of the manager or entrepreneur—the individual who, on the ground, actually combines factors of production or decides to launch a firm,” explains report co-author William Maloney, Chief Economist, Equitable Growth, Finance, and Institutions. “Even if an operating environment is nearly perfect—with no distortions and with all market failures resolved—if there are no entrepreneurs with the necessary human capital to take advantage of it, there will be no growth.”
The report also asserts that governments need to boost their productivity and rethink the role they play in nurturing productivity. This includes setting the right framework of economic incentives, eliminating distortions, and resolving a broad set of potential market failures or distortions across areas ranging from infrastructure to innovation to education.