The head of the International Monetary Fund has issued a stark warning that living standards will fall around the world unless governments take urgent action to increase productivity by investing in education, cutting red tape and incentivising research and development.

Christine Lagarde used a speech in Washington to tell policymakers they could not simply wait for innovation to drive up productivity growth and help living standards recover from the legacy of the global financial crisis.

She highlighted a poor global record on productivity growth in recent years and said IMF analysis suggested GDP in advanced economies would be about 5% higher today if the pre-crisis trend had continued for total factor productivity growth – a broad measure of what goes into production, such as research spending.

“That would be the equivalent of adding another Japan – and more – to the global economy,” the IMF managing director in a speech to the American Enterprise Institute.

Legarde warned the world could not afford to leave productivity growth in the doldrums.

“Another decade of weak productivity growth would seriously undermine the rise in global living standards. Slower growth could also jeopardise the financial and social stability of some countries by making it more difficult to reduce excessive inequality and sustain private debt and public obligations.



“Leaning back and waiting for artificial intelligence or other technologies to trigger a productivity revival is simply not an option.”

Lagarde was speaking as the IMF published new research into the slowdown in productivity, a gauge of economic efficiency that is often measured by the output per hour worked in an economy. That paper highlighted three “headwinds” holding back productivity growth: ageing populations; a slowdown in global trade; and the “unresolved legacy” of the global financial crisis in some big economies.

In the UK, productivity growth has been sluggish for years and is behind most other big economies, prompting the chancellor, Philip Hammond, to pledge more investment in infrastructure and other areas with a £23bn national productivity investment fund.

Calling on all governments to do more, Lagarde sought to emphasise productivity as the most important source of higher income and rising living standards. “For example, the average American worker today works only about 17 weeks to live at the annual real income level of the average worker in 1915,” she said.

That kind of progress had been seen in many countries, she added.



“But this engine of prosperity has slowed down in recent years, with negative consequences for growth and incomes that look very hard to unwind.”



Lagarde said governments must use investment, education, regulation and incentives for business to ramp up productivity and “ensure that the next generation will be better off”.

She continued: “One thing is clear: we need more innovation, not less. Market forces alone will not be able to deliver that boost, because innovation and invention are to some degree public goods.

“We at the IMF therefore believe that all governments should do more to unleash entrepreneurial energy. They can achieve this by removing unnecessary barriers to competition, cutting red tape, investing more in education, and providing tax incentives for research and development.”



Lagarde did not mention the US president, Donald Trump, by name but she had a clear warning for him and other politicians who have pursued a more protectionist stance on global trade, seemingly to the approval of many voters who feel they have been left behind by globalisation.

Trade had “served all economies, not just some to the detriment of others”, Lagarde said. “I firmly believe that reinforcing trade as an engine of broadly shared growth will reduce uncertainty and boost productivity.”

The IMF chief urged countries that had received large numbers of refugees to integrate immigrant workers and help create a “younger and more dynamic workforce, with growth and productivity dividends”.



She also echoed concerns over how rapid changes in technology had cost jobs in some sectors, hitting lower skilled workers hardest. Governments must help such workers through targeted education programmes, Lagarde said. That in turn would help solve productivity problems and create more inclusive and sustainable growth.

“Above all, we need more and better education,” she said. “Education and training are the key policy actions to raise both productivity growth and reduce inequality.”