# I. Introduction

Over the period 2011-21, global potential output growth declined 0.9 percentage point per year below its 2000-10 average, to 2.6 percent a year on average (Kilic Celik et al. 2023). The weakening of growth was widespread, occurring in both advanced economies and emerging market and developing economies (EMDEs). The trend decline raises concerns about the underlying strength of the recovery from the pandemic over the next several years. In addition, climate change is expected to increase the frequency of natural disasters, which could further weaken global potential growth unless policy action is taken.

Potential output refers to the output an economy could sustain at full capacity utilization and full employment. The growth rate of potential output is a critical determinant of a wide range of macroeconomic and development outcomes, including sustained improvements in living standards and poverty reduction.<sup>2</sup> In some EMDEs, especially commodity-exporting economies in Europe and Central Asia (ECA) and the Middle East and North Africa (MNA), the slowdown in potential growth could set back per capita income convergence with advanced economies by more than a decade (figure 1). The possibility of a continuation of the trend decline in potential growth is a major concern for future growth and convergence prospects in EMDEs and a formidable challenge for the international community’s ability to meet its broader development goals.

This study addresses three questions. First, what are the prospects for potential output growth? Second, what are the main risks that could lower future potential growth? Third, what policy options are available to lift potential growth?

To help answer these questions, this study utilizes estimates of potential growth in a large sample of countries from the comprehensive database presented in Kilic Celik et al. (2023). For clarity, and in keeping with a longer-term focus, this study uses the production function approach, whereas other measures of potential growth often incorporate shortterm impacts of supply shocks.

This study makes three major contributions to the literature on potential growth.

Prospects for potential growth. The study presents the first comprehensive set of projections of potential output growth for the largest sample of countries for which data are available—83 countries (30 advanced economies and 53 EMDEs) accounting for 95 percent of global GDP. The use of potential growth estimates based on the production function approach permits a detailed analysis of the structural drivers of potential growth, which in broad terms are total factor productivity (TFP) growth, labor supply growth,

> 2 Research suggests that two-thirds of cross-country differences in income growth for the poorest households are accounted for by differences in average income growth (Barro 2000; Dollar, Kleineberg, and Kraay 2013). Sustained growth can also help reduce inequality, including by raising the demand for agricultural output which helps poor land holders (Christiaensen, Demery, and Kuhl 2011; Pham and Riedel 2019; Ravallion and Datt 2002), and by expanding urbanization which disproportionately lifts wages for poorer workers (d’Costa and Overman 2014; Gould 2007; Yankow 2006).