Long-Term Growth and Productivity Trends: Secular Stagnation or Temporary Slowdown?

Economic growth in advanced countries has slowed in successive stages since the 1970s and, since the crisis, has fallen to a historical low compared with the 20th century. This slowdown is mainly attributable to weaker growth in total factor productivity. In emerging countries, the situation varies: in some countries, such as South Korea and Chile, GDP per capita have been converging for several decades; in others, such as Argentina, Brazil and Mexico, relative GDP per capita has stagnated or even declined. While weak long-term growth in these latter countries can be attributed to a lack of appropriate institutions, the widespread slowdown observed in advanced countries is more difficult to interpret. One possible explanation that we explore is the decline in real interest rates since the 1990s. A circular relationship appears to exist between interest rates and productivity: productivity determines long-term returns on capital and thereby interest rates; interest rates in turn determine the minimum productivity expected from investment projects. The decline in real interest rates, which is in part attributable to demographic factors, may have led to a slowdown in productivity by making an increasing number of unproductive companies and projects profitable. We illustrate this circular relationship using a cross-country panel regression. One way of breaking out of the circular relationship would be via a new technological revolution linked to the digital economy, or, in countries where there is still room for convergence, via structural reforms to improve the diffusion of Information and Communication Technologies (ICT).