Say Goodbye to the Wal-Mart Era Digitization, globalization and a unique demographic boom - the three drivers of the last productivity boom are in crisis.

From Europe’s Grexit drama to China’s stock market rollercoaster, the issue connecting economic crises around the globe can be described in one word: productivity. Low productivity places Greece at the bottom of competitiveness rankings and could hamper China’s ascent to the top.

Productivity growth has become a global issue. Last year, output per worker grew at its lowest since the start of the millennium. In the United States, annual productivity growth from 1995 to 2010 was 2.6%; it is now down to 0.4%. In the United Kingdom, productivity is even on the decline.

This is worrying. Productivity defines how rapidly an economy can grow without rampant inflation. Higher output per worker also is a precondition for more equitable growth as most people derive their income from work. Moreover, growth based on more rather than more efficient resources is the economic equivalent of empty calories: delicious but not nutritious, and with hidden health risks – think of excessive debt on the books and excessive carbon in the atmosphere.

What is causing the slump? Some point to a hangover from the global economic crisis, to the effect of past weaknesses on future potential, from talent to productive capital. Others suggest the problem is a statistical illusion. The way output is measured in national accounts, they argue, underrecords progress by failing to capture properly the increase in the range of products in the economy. Unfortunately, signals indicate that deeper-seated issues are at stake.

Two decades ago, the world’s most recent economic boom began. The productivity hike of the mid-90s had a name: Wal-Mart. According to some estimates, the American retail giant alone accounted for a significant portion of US productivity growth at the time. More than any, Wal-Mart understood how to exploit the growth drivers of a generation: digitization, globalization and a unique demographic boom in the global working-age population. All three factors are now under pressure.

The explosion of productivity growth back then captured peoples’ imagination, from the average home and stock owner to Alan Greenspan, the long-serving chairman of the Federal Reserve. The “New Economy” was believed to outdo the “Golden Age” of the post-war years. But then it didn’t. From today’s perspective, the hype of the 1990s was dangerously delusional. To economists like Robert Gordon or John Fernald, the drop in productivity growth just a decade later demonstrates that gains from the digital era were short-lived and much weaker than expected.

Not all agree, and new technology gurus from Erik Brynjolfsson to Jeremy Rifkin successfully resuscitated the idea of a new paradigm, this time driven by ubiquitous connectivity and machine intelligence. Yet, even if one does not subscribe to the “end of innovation” narrative, one cannot deny an inconvenient truth: much of the productivity gains of the digital age must be credited to the expansion of international trade and global production networks. This expansion has come to a halt.

Before 2007, trade grew twice as fast as GDP, stimulating technology transfer and economic diversification in rising export nations from Mexico to Turkey to China. Potential growth in these economies soared to 7.4%. Today, trade grows at only half this speed and so does total factor productivity, a measure of technological progress. According to the IMF, the post-crisis slump in technological progress could account for almost the entire decline of potential growth in emerging markets.

Despite ambitious initiatives from TPP to FTAAP, trade is unlikely to return to pre-crisis levels. First, with tariffs already radically reduced, most potential benefits of trade liberalization have already been grasped. Second, from Vietnam to Uganda, the populations of countries that still have room to integrate deeper are not even close to those of China or India. Third, a myriad of factors, from lagging consumer spending to geopolitical tensions and deliberate attacks on foreign multinationals, are hampering the enthusiasm for going global in boardrooms around the world.

The deceleration of trade expansion and the related slowdown in technology convergence pose significant problems to export nations like China. Premier Li Keqiang’s recent call for greater industrial cooperation to couple Western know-how and China’s industrial capacity is just one out of several initiatives to counteract China’s troubling productivity slump.

Another challenge is demography. China’s rise to an industrial powerhouse was largely enabled by rural labour flowing to urban factory floors. This flow is drying up. China’s demographic transition is compounded with the long shadow of its One-Child policy. It remains to be seen if the resulting upward pressure on wages will bolster consumption – or be consumed by caring for the elderly. Regardless, China will need to boost its productivity to continue raising its living standards and to maintain its competitiveness.

China is of course not the only country that needs to face up to changing demographics. Worldwide, an unprecedented boom in the working-age population is ending. Today, roughly four people of working age cover one person aged 60 or over. By 2050, the ratio will be two-to-one. In that regard, the growing concern from East to West that robots could steel our jobs is probably exaggerated: greater automation will be inevitable to sustain ageing populations.

Monetary and fiscal stimuli staved off the worst effects of the global economic crisis. Growth is back to pre-crisis levels, and employment rates have recovered. The world economy is afloat but its broken engines need repairing. This above all requires unlocking innovation. Scientific and technological breakthroughs not only hold the key to greater productivity but carry solutions for pressing global challenges from providing safe drinking water to countering antimicrobial resistance.

What drives innovation? This question is sparking renewed debate. Economists such as Nobel Laureate Edmund Phelps deplore corporatist values like “solidarity, security and stability”, dismiss industrial policy, and praise the spirit of private entrepreneurship. Economists like Marianna Mazzucato respond, the entity that often accounts for the boldest risks and the biggest breakthroughs is not the private sector but the state. All the technologies which make the iPhone ‘smart’, Mazzucato writes, are also state-funded, from the internet to the voice-activated personal assistant SIRI.

What counts in the end is the delicate interplay of all stakeholders. “Saying that governments should get out of the way and let the private sector do its thing”, writes the Harvard economist Ricardo Hausmann, “is like saying that air traffic controllers should get out of the way and let pilots do their thing”. Governments and the private sector need to collaborate which first and foremost requires trust – a scarce resource in a context of cyber-threats, surveillance attacks, public fear and misperceptions.

Building trust is also critical for spreading innovation across borders. With trade liberalization reaching its limits as a vehicle for technological progress the focus needs to shift from the globalization of production to the globalization of research and development – from corporate R&D centres to partnerships amongst leading academic institutions. This not only requires education and infrastructure but trusted collaboration on issues including regulation and intellectual property.

Science and technology remains the greatest agent of change in the modern world. In China, change is already underway with a new generation of digital entrepreneurs disrupting industries, and a new generation of researchers filing more patents than any other country in the world. But as the last productivity boom has shown, confidence must not turn into delusion. We need to rethink the productivity formula of the Wal-Mart era to chart a new course for growth.

Published: a version of this has been published on Forum Blog, August 26, 2015 under the title “Science, tech and a new course for growth”and in Harvard Business Review Chinese under the title “Charting a New Course for Growth”

About Sebastian Buckup