Productive Equity The Twin Challenges of Reviving Productivity and Reducing Inequality A report by the scholars at the Brookings Institution and the Chumir Foundation The Brookings Institution is a nonprofit organization devoted to indepen- dent research and policy solutions. Its mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. The conclu- sions and recommendations of any Brookings publication are solely those of its author(s), and do not reflect the views of the Institution, its manage- ment, or its other scholars. The Chumir Foundation for Ethics in Leadership is a non-profit founda- tion that seeks to foster policies and actions by individuals, organizations and governments that best contribute to a fair, productive, and harmoni- ous society. It works to facilitate open-minded, informed and respectful dialogue among a broad and engaged public and its leaders to arrive at outcomes that help to create better communities. PRODUCTIVE EQUITY THE TWIN CHALLENGES OF REVIVING PRODUCTIVITY AND REDUCING IN EQUALITY iii Contents Foreword vii joel bell and Kemal DerviŞ Acknowl edgments xv Technology, Productivity, and Distribution: A Framework for an Informed Dialogue xvii joel bell ONE Overview: Booming Technology, Slowing Productivity, and Rising In equality 1 Paradoxes, Prob lems, and Policies zia qureshi and kemal derviș TWO The Evolution of Growth, Productivity, 43 and Income In equality karim foda THREE The Economy Is about Firms 81 Productivity Slowdown and Divergence dany bahar v vi Foreword FOUR The Technology- Productivity Paradox 101 Why Has Productivity Growth Slowed? dany bahar and karim foda FIVE Rising In equality 141 Is There a Technology- Productivity- Distribution Nexus? zia qureshi SIX Boosting Productivity and Reducing In equality 191 An Interconnected Policy Agenda zia qureshi SEVEN International Cooperation and Global Governance 233 kemal derviŞ Contributors 261 Index 263 Foreword The Dynamics of Productive Equity In many countries, vis i ble and growing disparities, both economic and po- liti cal, have been fueling social discontent. As some employment opportuni- ties dis appear and income disparities grow in the face of modern automation and globalization— and, as wages, particularly for low- skilled workers, stagnate— fear about decent jobs is understandable, and the optimism needed for investing in one’s future is undermined. The discussion that follows focuses on the last few de cades. It does not try to predict the future, although some trends are evident. Indeed, in late 2017 and early 2018, GDP growth in the world economy accelerated, due mainly to employment growth. Whether this acceleration will be lasting and bring with it the long awaited acceleration of labor productivity growth remains to be seen. However, as yet there are no significant signs that growth is becoming more inclusive, particularly in advanced economies. The in- creasing high incomes at the very top of the distribution and the stagnation in median incomes in many countries have become major po liti cal prob lems. This all could place a serious brake on deriving the full potential benefits of dramatic new technologies. The loss of societal cohesion and the erosion of trust in demo cratic institutions have led to significant hurdles for the kind of policymaking that could allow the benefits of frontier technologies to be reaped more rapidly and more equitably. It is impor tant to distinguish between income distribution across coun- tries and income distribution within countries. Starting in the 1990s, a pro cess of convergence began, with the per capita income of developing countries in the aggregate beginning to grow faster than those of advanced countries. While a large part of this convergence pro cess was due to China, vii viii Foreword with its huge weight skewing the developing country average, it has not been just a “China phenomenon” but a more general trend, making the global income distribution less unequal. Nevertheless, there remain numerous countries not yet experiencing the narrowing of inter- country differentials, so this continues to be an international issue. At the same time, income distributions within major economies became more unequal. The po liti cal debate inside countries naturally deals primarily with this fact. This foreword provides a brief outline ofthese issues and summarizes the dynamics affecting con temporary growth and distribution patterns. It is followed by an Introduction, “Technology, Productivity and Distribu- tion: Framework for an Informed Dialogue,” that sets out a framework as well as a discussion of observed market per for mance, analyses, and policy considerations regarding the identified constituent ele ments affecting the results. The chapters beyond report on the research to document and ana- lyze the trends and their implications in more detail. Technology and Competition as Determinants: New technologies have long been understood— and empirically observed—to be the funda- mental driver of increased productivity and greater output from their ap- plication. Progressive dissemination of such advances under a competitive need to “keep up,” to thrive, or even to survive, enhances cumulative output, aggregate productivity, growth, and living standards. Greater worker pro- ductivity, supply and demand for skills, and the ensuing growth all drive compensation, and with some public policy adjustment help where necessary, as frequently was the case in the past, it led, also, to wide sharing of the income gains. Adjustment Policy: To facilitate the transition for those displaced by innovation—if they are not re- employed in a timely manner, often in higher paying jobs— some level of publicly provided adjustment and re- training support, social ser vices, pensions, and similar public policies have smoothed the way toward sharing the gains. The absolute levels of such support are quite dif­fer ent by country, depending on the nation’s state of development and industrialization as well as po liti cal pro cesses. It is prob- able that displaced workers will be calling upon these considerations in significant numbers and with increased frequency in the con temporary world of technological change. Technology Pro cess, Economic Growth, and Income Distribution: Both the growth of output and the distribution of the value created vary Foreword ix across sectors and cycles of the economy. The economic sequence and our use of the terminology of the technological pro cess starts with basic scien- tific research, then is followed by applied R&D, to produce new technolo- gies. Subsequently, their productive application in the adoption of innova- tion requires investment that disseminates the new capacities. The sum of the uses aggregates to overall productivity of an economy. The dynamics produce economic output/growth and a pre- fiscal and social ser vice distri- bution of the gains, evolving over each technology’s life cycle. A new tech- nology is typically launched in the market in which it was developed, de- ployed by early adopters at relatively high price levels, and later disseminated for more widespread adoption, larger scale, and lower cost production, in- cluding manufacturers/producers seeking out lower cost production loca- tions, either at home or abroad. Reasonable incomes, distribution that funded demand, and the appeal of new goods and ser vices have generally maintained demand and social support for the pro cess despite there being winners and losers from the changes brought by new technologies—and, for that matter, by international rationalization and trade. Growth and Distribution Per for mance: Mea sured per for mance of productivity, growth, and income distribution have changed materially over recent de cades, generating less economic gain than pos si ble and greater disparities of income within countries; and even more significant disparities of wealth. The magnitudes and trends are socially damaging, divisive, and destabilizing. These two developments, affecting both -in come distribution and output, affect all categories of the population— and output foregone reduces the resources with which to address income issues as well. This should command the attention of all segments of the citizenry in virtually all countries. Common Principal Causes: The two broad per for mance and policy issues addressed here— economic advance/output and socio- political sat- isfaction and stability from the distribution of its benefits— have impor- tant determinants in common; and several of the same policy provisions would enhance output and produce less extreme disparities than those seen over recent periods. A challenge lies in the fact that the correctives must come from the societal institutions and actors that gave rise to the current conditions. But it is worth noting that it does not take long for other wise foregone productivity and output, if captured and compounded, to benefit all, despite some costs being made to be borne by the “winners” x Foreword to offset the impacts on the “losers” and to remedy the displacement of those who are faultless and unable to recoup the loss. There are some characteristics of the sequence from R&D, to economic output, and income distribution that are noteworthy for the discussion. Regarding R&D, the government’s direct role in expenditure and se- lection has declined (from 1.2 percent of GDP in the early 1980s to 0.6 percent in 2015 in the United