The recent World Bank (WB) report “Falling Long-Term Growth Prospects: Trends, Expectations, and Policies” has raised concerns about global economic growth potential. The report uses a comprehensive database of different measures of potential growth to assess trends and prospects for potential growth and investment over the 2020s.
Prolonged Decline in Potential Growth
The report indicates that nearly all economic forces that were previously driving economic progress are now retreating. There has been an extended, broad-based decline in potential growth and its fundamental drivers. This decline is anticipated to continue throughout this decade. A decrease in long-term growth prospects significantly affects the ability of Emerging Market and Developing Economies (EMDEs) to combat poverty, confront climate change, and meet other essential development objectives.
Causes of the Economic Slowdown
The predominant cause for the slowdown is an extended period of weakness within the EMDEs. The World Bank has examined a set of fundamental drivers of economic growth and found them all losing steam. These drivers include factors such as capital accumulation through investment growth, labor force growth, and the growth of total factor productivity, which results from a more efficient use of inputs often due to technological changes.
India’s Economic Performance
Despite losing some of its growth momentum over the past two decades, India remains a global leader when it comes to growth rates. India belongs to the South Asia Region (SAR), predicted to be the fastest-growing among emerging market and developing economies for the rest of this decade. SAR includes countries such as Afghanistan, Pakistan, Sri Lanka, Nepal, and Bangladesh. Regional output is estimated to grow by about 6.0% per year between 2022 and 2030, faster than the 2010’s annual average of 5.5%.
Strategies to Enhance Global Growth Potential
The World Bank report suggests several strategies for boosting the potential global growth. Robust macroeconomic and financial policy frameworks could curb business cycle volatility. Policymakers should focus on controlling inflation, ensuring financial-sector stability, reducing debt, and restoring fiscal prudence.
Increasing Investments
Investments in areas such as transportation, energy, climate-smart agriculture, manufacturing, and land and water systems need to be scaled up. These investments, aligned with key climate goals, could improve potential growth by up to 0.3% per year.
Reducing Trade Costs
Presently, trade costs effectively double the price of internationally traded goods. Countries with high shipping and logistics costs could reduce their trade expenses by adopting the trade-facilitation practices of countries with lower shipping and logistics costs.
The Role of Services Sector
The services sector is becoming a new engine for economic growth. Exports of digitally delivered professional services related to information and communication technology rose to over 50% of total services exports in 2021, up from 40% in 2019.
Expanding the Labor Force
About half of the expected slowdown in potential GDP growth through 2030 could be attributed to changing demographics, including a shrinking working-age population and declining labor force participation. Boosting overall labor force participation rates by the best ten-year increase on record could increase global potential growth rates by as much as 0.2 percentage point a year by 2030.