Capital shallowing is emerging as a central explanation for the persistent decline in global labour productivity, particularly in economies that have struggled to return to their pre-pandemic performance. The term refers to a reduction in the amount of physical capital—such as machinery, infrastructure, and equipment—available per worker. This phenomenon stands in direct contrast to capital deepening, where increasing capital per worker drives productivity and economic growth. In the context of current global economic dynamics, capital shallowing helps explain why countries outside the United States are experiencing slower productivity recoveries, even as broader macroeconomic indicators stabilize.
At the heart of capital shallowing is the notion that workers become less productive when they have fewer tools and less infrastructure to support their output. According to the Solow Growth Model, capital shallowing translates into lower output per worker and, consequently, reduced GDP growth. Unless offset by improvements in technology or human capital, a decline in capital intensity per worker tends to slow economic momentum and, in some cases, trigger outright contraction.
Several structural and cyclical factors contribute to capital shallowing. A common cause is the failure to adequately replenish depreciated capital stock. As physical assets age and wear down, insufficient reinvestment erodes the productive capacity of the economy. Capital flight is another major driver. When investor confidence deteriorates due to rising political risk, policy uncertainty, or macroeconomic instability, both domestic and foreign capital tends to exit the economy. This not only leads to a decline in foreign direct investment but also weakens the domestic investment climate. In recent years, geopolitical conflict and natural disasters have also emerged as significant contributors to capital destruction. Additionally, policy frameworks that are unfriendly to investment—such as punitive tax regimes, currency restrictions, or weak legal protections—can deter capital accumulation. Rapid labour force growth without a proportional increase in capital formation also leads to capital dilution, as the same amount of capital is spread across a larger number of workers.
The macroeconomic effects of capital shallowing are profound and wide-ranging. As capital per worker declines, labour productivity drops, putting downward pressure on output and wages. This dynamic often leads to a widening of income inequality, as highly skilled workers who rely less on physical capital maintain or grow their earnings while lower-skilled workers face stagnation. From a broader macroeconomic perspective, declining productivity weakens GDP growth and exacerbates the output gap. Sectorally, capital-intensive industries such as manufacturing suffer disproportionately, given their reliance on machinery and infrastructure. In contrast, service industries that depend more on intangible or human capital may be less affected. Informal and labour-intensive sectors may see temporary expansion as firms pivot away from capital-dependent business models, but this shift typically comes at the cost of lower wages and diminished long-term productivity.
Real-world examples illustrate the disruptive effects of capital shallowing. Since the onset of the Russia-Ukraine war in 2022, both countries have experienced significant capital destruction. In Ukraine, the direct impact of warfare has decimated infrastructure and industrial assets, particularly in critical sectors such as defense, technology, and natural resources. In Russia, the imposition of international sanctions has led to capital flight, a collapse in foreign direct investment, and limited access to imported technologies—all of which have eroded the productive capital stock. Similarly, Zimbabwe’s economic decline in the 2000s was marked by aggressive capital flight driven by property expropriation, hyperinflation, and exchange rate instability. This period saw a dramatic collapse in investment and a prolonged erosion of capital per worker. Lebanon presents another recent case, where the post-2019 financial crisis crippled the banking sector, halted infrastructure projects, and led to a steep decline in capital intensity across the economy.
In conclusion, capital shallowing represents a critical headwind to global productivity and long-term economic performance. It often reflects deeper structural and institutional weaknesses that require comprehensive policy responses. Reversing the trend demands coordinated efforts to restore investor confidence, promote reinvestment, safeguard physical capital, and foster an environment conducive to sustainable capital accumulation. Without such measures, affected economies may continue to experience stagnating productivity and widening disparities in income and growth potential.
Written by Michael Ogunremi with assistance from AI technologies
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