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TFP Growth in Old and New Europe

TFP Growth in Old and New Europe. Michael C. Burda Humboldt-Universität zu Berlin 14th Dubrovinik Economic Conference Dubrovnik, 25-27 June 2008. Summary. The European Integration Episode and Paths of Integration TFP and Measurement Issues

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TFP Growth in Old and New Europe

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  1. TFP Growth in Old and New Europe Michael C. Burda Humboldt-Universität zu Berlin 14th Dubrovinik Economic Conference Dubrovnik, 25-27 June 2008

  2. Summary • The European Integration Episode and Paths of Integration • TFP and Measurement Issues • Alternative TFP measurements in Old and New Europe • Findings

  3. The Great European Integration Episode How to achieve most efficient use of resources among the European regions? • Solow growth • Migration • Capital mobility • Factor proportions (Heckscher-Ohlin) trade • Adoption of leading edge technologies • Elimination of inefficiencies; establishment of property rights and rule of law

  4. TFP and Measurement Issues • Remember: Ultimately, growth in total factor productivity (TFP) is the source of all per capita economic growth • The role of product and labor market regulations for the form and speed of implementation of new innovations, especially ICT (van Ark et al. 2008)

  5. Old Europe v. New Europe Now, you're thinking of Europe as Germany and France. I don't. I think that's old Europe. If you look at the entire NATO Europe today, the center of gravity is shifting to the east. And there are a lot of new members. And if you just take the list of all the members of NATO and all of those who have been invited in recently -- what is it? Twenty-six, something like that? -- you're right.

  6. Old Europe v. New Europe • Cost of starting businesses, regulation • Employment protection, firing costs • Result: Different internet penetration levels, ICT adoption, especially in retail services, communication, business services • Old Europe v. New Europe • What about Central and Eastern Europe?

  7. Old Europe v. New Europe • 29 countries • “Old Europe”=Austria, Belgium, France, Germany, Greece, Italy, Portugal, Spain, Switzerland • “New Europe”=Denmark, Finland, Ireland, Netherlands, Norway, Sweden, UK • “Eastern (CEE) Europe”=Albania, Bulgaria,Croatia Czech Republic, Estonia,Hungary,Lithuania,Latvia, Russia, Slovakia, Slovenia, Poland, Romania • US, other OECD excluded

  8. Measurement of TFP Growth • Solow residual measure of TFP growth • In words: What´s left of real growth after observable reasons for growth are subtracted • Problems with Solow residual: Capital stock measurement (Burda/Severgnini 2008)

  9. Capital Stock Measurement Capital stock: Never really observed Starting condition: a wild guess

  10. Synthetic Data: DSGE Model Households choose sequences of consumption, labor supply, future capital and current utilization of existing capital to maximize expected utility : subject to K0 given and, for t0 Firms maximize profits, renting capital and hiring labor supplied by the households using a standard neoclassical CRS production function Equilibrium achieves the social planner‘s optimum

  11. Measurement error: Results from a Monte-Carlo Study RMSE RMSE Sample Size (quarters) Sample Size (quarters) RMSE RMSE Sample Size (quarters) Sample Size (quarters) Source: Burda/Severgnini (2008)

  12. Measurement of TFP Growth • General idea: Can we remove capital entirely from the calculation? • Two proposed solutions: • Direct Substitution: • Generalized Differences (recursive): TFP growthDS TFP growthGD

  13. Summary: Averages of TFP Growth Estimates

  14. Summary: Standard Deviation of TFP Growth Estimates

  15. Summary of Results • Impact effect of PMR on TFP growth is always negative • Impact effect of EPL on TPF growth is always insignificant • Long-run effect of both PMR and EPL on TFP is always negative, not always significant • Interactions not significant • More to be done, but consistent with evidence of Nicoletti and Scarpetta and others

  16. Old Europe v. New Europe • World Bank Project Doing Business around the World – Starting a business indicators

  17. Old Europe v. New Europe • World Bank Project Doing Business around the World – Starting a business indicators

  18. Old Europe v. New Europe • World Bank Project Doing Business around the World – Starting a business indicators

  19. Conclusions • Large TFP growth gains in CEE, against trend of both Old and New Europe • Should be interpreted as low-lying fruit after transformation, moving to the frontier • Quo vadis, Central and Eastern Europe? • Benefit of competition via entry from established (Old and New) European firms • Backwash to Old Europe? Let´s hope so

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