Increased productivity creates economic growth

This page summarises evidence on the relationship between increased productivity/revenues of firms and economic growth.

Increases in productivity allow firms to produce greater output for the same level of input, earn higher revenues, and ultimately generate higher Gross Domestic Product.

The economy grows following business environment reform

  • A cross-country study by Eifert (2009) finds that, in the year immediately following one or more ‘Doing Business’ regulatory reforms, investment rates of firms in relatively poor countries accelerate by about 0.6 percentage points and economies grow about 0.4 percentage points faster. This growth is likely to be associated with increased demand for investment goods by firms, given that the productivity gains associated with increased investment are typically assumed to lag by at least one year.

The economy grows following value chain or market systems interventions

There are many examples of how specific market interventions initiated by donors or businesses have led to higher productivity and revenues (see here), although few have explicitly calculated their contribution to aggregate growth. Specific evidence is available on the impact of labour productivity-enhancing irrigation technology on economic growth:

  • One example is research on the non-profit social enterprise KickStart, which has sold more than 335,000 human-powered irrigation pumps at low cost to farmers in Burkina Faso, Mali, Tanzania, Kenya and other countries. In Kenya, the additional revenue generated by users of the productivity-enhancing were estimated as equivalent to 0.6% of the country’s GDP in 2011.
  • A study of agriculture in Thailand and Indonesia by Warr (2006) shows that, between 1981 and 2002, productivity increases in the sector following the introduction of irrigation accounted for 5% of overall GDP growth in Thailand and 3.5% in Indonesia. Moreover, the productivity increases in agriculture freed up resources which could then be put to use in other sectors. This reallocation contributed 16% to overall GDP growth in Thailand and 24% in Indonesia.

Other studies look at the role of labour productivity for economic growth more broadly:

  • A global review by ILO (2013) finds that increases in labour productivity within economic sectors is the main driver of economic growth (rather than sectoral re-allocation). In particular, growth in industry and services plays an important role for aggregate economic growth.