Eroding Natural Capital: An Alternative Explanation for the Secular Decline in Productivity Growth

Labour productivity and multifactor productivity (MFP) growth rates have been declining in advanced economies for several decades, and the decline in labour productivity growth has extended to emerging economies over the past fifteen years. Global MFP growth has flatlined since 2007 in both advanced and emerging economies. While many explanations for these trends have been advanced, no clear consensus has yet emerged. However, the pervasive and persistent nature of the declines signals that factors of global scope and extended duration are likely implicated. This article presents an alternative explanation for declining productivity growth: that the erosion of natural capital has been occurring on a sufficiently large scale globally to exert significant and growing downward pressure on productivity growth. Accordingly, a fundamental transformation in the economic role of natural capital has taken place, from productivity accelerator to productivity decelerator. These effects have been obscured due to the absence of natural capital from conventional economic frameworks and production functions.