Two percent per year may not seem an impressive number, but when compounded over a century it results in more than a sevenfold increase. The sustained and significant increases in productivity of industrialized countries beginning in the latter part of the 19th century were one of the most momentous developments in modern history, and it became much more widely diffused in later decades.

Why did the acceleration begin in the late 19th century? The great improvements in transportation and communications that were made possible by the inventions of the steam and internal-combustion engines and the telephone and wireless communications led to a major expansion of trade, both domestic and international. The British example of free trade led to some liberalization by other countries. By the turn of the century, an increasing number of large companies were beginning to conduct purposeful programs of research and development so that invention and innovation became commonplace and even expected. Educational levels rose, and business schools were founded to teach the new science of management. The growth of per capita income itself tended to raise saving rates, and investment in new plants, equipment, and natural resource development rose substantially. Finally, the growth of productivity in agriculture and increased labour mobility made possible the enormous expansion of manufacturing and, later, the service industries.

Growth of productivity in countries other than the United States accelerated greatly after World War II. The five-country average rate of growth in labour productivity (Table 1) more than tripled in the 1950–73 period compared with the preceding 80 years. After 1973 productivity growth fell by almost half in the five countries, on average, but remained well above the earlier rate. The deceleration was greater in the United States.

Before trying to explain these trends, see Table 2, which summarizes productivity changes from 1950 through a more recent year for a larger number of industrialized countries, and then see Table 4, which shows estimates for groups of countries composing most of the world.

In the 12 countries other than the United States shown in Table 2, real GDP per employed person grew between 1950 and 1973 at an average rate of about 4 percent, about double the rate for the United States. From 1973 to 1979 the average rate decelerated to 2.2 percent a year for the 12 industrialized nations and to virtually zero in the United States. But after 1979 (and especially after 1981) the U.S. rate accelerated significantly, while the 12-nation average rate fell further to 1.8 percent, which was nevertheless still well above the U.S. rate of 0.8 percent a year.

During the entire period after 1950 there was a significant convergence of rates of productivity growth among the industrialized nations, as shown in Table 3. The average real GDP per person for the 11 countries rose from about 44 percent of that in the United States in 1950 to almost 80 percent in 1986. Furthermore, there is a significant negative correlation between the 1950 levels and the 1950–86 rates of productivity growth—those countries that started farthest behind grew most rapidly in productivity. There had already been some tendency toward convergence among the industrialized nations before 1950, but it was much stronger during the golden quarter-century following World War II.

Of even wider importance, most nations outside the original industrialized group also began to record substantial increases in labour productivity beginning around 1950 (see Table 4). What fragmentary information is available indicates that generally low rates of productivity growth were the norm in those countries before 1950. So World War II was a true watershed, in that after the immediate postwar period of reconstruction, most nations were able to accelerate their productivity gains markedly.

The country data underlying Table 4 do not indicate a worldwide convergence of productivity levels, although some tendency toward convergence within the several groups is evident. Note that the group of low-income countries had the lowest rates of productivity advance, while the oil exporters and relatively industrialized middle-income countries had the highest rates. Whereas the centrally planned economies had above-average rates of productivity growth in the period 1950–70, after 1970 they fell below average.

Multinational corporations, typically based in the United States, diffused capital and managerial and technical know-how and helped train nationals of their host countries for jobs, often including upper-level positions. International licensing of patents also helped diffuse technology. An increasing proportion of students in U.S. universities, particularly in business and engineering, came from developing countries. International professional associations and journals also aided in the diffusion of knowledge.

An important reason for the narrowing of the productivity gap between the United States and other industrialized nations after 1950 was the differential rates of saving, investment, and growth of capital per worker. In Japan the ratio of gross saving to GDP was nearly one-third, double that in the United States, and in western Europe it averaged nearly one-fourth (due in part to favourable tax laws). This higher rate of saving, creating capital for both private and public investing, was associated with a rapid decline in the average age of structures and equipment in those countries until 1973. The growth of domestic and foreign trade opened up more opportunities for achieving economies of scale in those countries as well. They also benefited more from resource reallocations, particularly the shift of labour out of agriculture and self-employment where the rates of return were lower.

After 1960 the achievement of technological parity with the United States in the ways noted above became the most important factor promoting productivity advance in the other industrial nations and in an increasing number of advanced developing countries. But, as other nations continued to approach the U.S. level of real product per person, there would tend to be greater convergence in levels and rates of growth of productivity. This would be so because innovations requiring those countries to invest in their own research and development would be more costly than technology transferred from abroad.

The slowdown in productivity growth after 1973 was almost universal. The oil-price shocks of 1973 and 1979 contributed to accelerating inflation in most countries, reducing economic profits and the rate of saving and investment. Some energy-intensive equipment was rendered obsolete. The growth of real research and development expenditures slowed, as did the pace of technological innovation. The beneficial effects of interindustry shifts of resources became less marked. The changing age-sex mix of the labour force tended to reduce productivity growth in the short run, especially in North America. And government regulations to protect the environment and promote health and safety proliferated in the ’70s, increasing costs and inputs but not output as it was usually measured.

The reversal in the 1980s of most of those negative factors helped to accelerate productivity growth in the United States. The continued deceleration in other industrialized countries noted above probably reflected a decline in technology transfer from abroad. There appeared to be no reason, however, why the advance of productivity in the developing countries with adequate absorptive capacity might not continue for years to come.