Europe leads in productivity potential, US strong in innovation

The most productive countries in the world are in Western Europe, according to the Productivity Potential Index (PPI), created by global consulting firm Strategy& and the World Governments Summit. The index shows European innovation to be strong, but the US is also a force to be reckoned with.

National productivity is crucial for economic health, determining growth, and keeping up competitiveness. With global productivity slowing, many governments are seeking new ways to boost economic progress.

The PPI offers a modern definition of productivity, incorporating institutions, social capital, and natural capital alongside other more traditional factors. While human and physical capital both remain crucial parts of the puzzle, the PPI highlights the increasing importance of strong institutions and targeted innovation for long-term competitiveness.

Luxembourg and other European countries

Luxembourg was judged the most productive country, ranking in the top five for all pillars. It ranked first in labor and human capital, physical capital, innovation and intangible capital, and institutions. In social capital and natural capital it ranked second and fourth, respectively.

Other European countries that ranked near the top of the various pillars were: Norway, second in labor and human capital; Denmark, second in physical capital; Belgium third in natural capital; and Turkey, first in social capital.

And indeed, several of the aforementioned countries, along with other Western European nations, are at the top of the overall ranking. The top 10 countries are, in this order: Luxembourg, Norway, Denmark, Switzerland, Belgium, Austria, Sweden, the Netherlands, Germany, and Iceland.

The index scores represent a hypothetical hourly wage, the ‘Productivity Potential’ in USD, reflecting the potential economic gains an average person can derive from their country’s productivity. Luxembourg has a Productivity Potential of $123.70 per hour worked, the rest of the top five are above $90, and from 6th to 10th place are between $84 and $89 per hour worked.

It may not come as a surprise that Western European countries were judged to have the best productivity potential, considering their high GDPs, high ranking on human development indexes, and high level of development in general. But they still can do better in some areas, notably in natural and physical capital, where some Middle Eastern countries did better.

G20 countries and social capital

Trust, the cornerstone of social capital, ranks as the eighth most influential factor in productivity potential among G20 economies. Despite the importance of trust, data points related to the amount of and quality of social relationships are often overlooked in economic policymaking.

Higher levels of social trust are linked to more equity and inclusion. It also reduces transaction costs and facilitates collaboration with diverse stakeholders resulting in more efficient knowledge sharing. Societies with higher levels of trust among its citizens also report greater well-being.

US shines in innovation and institutions

In the innovation pillar, European countries like Luxembourg, Norway, Denmark, and Switzerland were all in the top five, though the United States was notably ranked a very close third. The European Union has been struggling to stay relevant in the area of innovation, where it has fallen significantly behind the US.

Innovation is crucial for productivity growth, with leading economies like Austria and Singapore leveraging intellectual property to drive it. Policymakers and employers prioritize technology adoption, digital literacy, and continuous learning – though a balanced amount of regulation is also essential.

While innovation adoption can be slow, governments should focus on responsible, inclusive modernization rather than aggressive acceleration, exemplified by frameworks like the UK’s Model for Responsible Innovation and the EU’s Responsible Research and Innovation principles.

The AI Action Summit in Paris in February 2025 featured European leaders taking stage to emphasize the crucial role of innovation in AI development and its impact on economic growth. French President Emmanuel Macron stressed the need for rapid innovation alongside responsible development and international cooperation.

With many European leaders worried about competition with the US, a key moment in the summit came when guest speaker US Vice President JD Vance rebuked the EU for excessive regulation, provocatively insisting the US would remain on top.

GCC countries and physical capital

In contrast to European countries, countries in the GCC region ranked the highest in physical capital, meaning they have good infrastructure, which helps spur high productivity. Bahrain, Saudi Arabia, Qatar, and the UAE are all in the global top 10 for physical capital.

Thanks to targeted policies and investments in manufacturing, logistics, and internet infrastructure, these countries have very fast-growing economies. High performers Qatar and Saudi Arabia were able to successfully leverage advanced technologies to bolster their infrastructure through major events, including international sporting competitions like the 2022 FIFA World Cup in Qatar.

While countries in Europe ranked highly in other very important metrics, they can still do better in areas like physical capital, learning from successful and fast-developing regions like the GCC. Natural capital was also a strong suit of the GCC nations, though most of that is linked to the energy industry – especially fossil fuels – which are not sustainable.

“Our analysis shows that non-traditional measures of productivity are shaping the direction of change regionally and globally,” said Dima Sayess, partner at Strategy&.

“Social trust, the quality of institutions and environmental indicators all play a role in driving, or hindering, economic growth. Understanding these mechanisms can enable policymakers to develop effective and targeted solutions.”