Challenges in Measuring Productivity and Growth: Insights from European Commission

1. NTTS 2017 Satellite event Challenges in measuring productivity, growth and intangibles…Europe's growth and productivity issues:A view from the European Commission European Commission, DG ECFIN Mary Veronica TovšakPleterski Brussels, 17 March 2017

2. Productivity and growth • Economic growth is closely related with growth in living standards • Output growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity arising from technological innovation • In the light of limited natural resources, an aging overall population and sluggish investments in Europe, productivity growth becomes ever more important • However, although some substantial technological progress (e.g. due to IT revolution and the emergence of a duly knowledge-based economy), we widely observe a deceleration of productivity growth across most of the industrialized countries…

3. Chart: Labour- and total factor- productivity (TFP) growth, EU-15, EU-27 and US[trend; 1980-2016] Source: Own calculations by DG ECFIN based on AMECO data Notes: Potentiallabour productivity is based on output per hour worked; growth rates are percent changes; the TFP trend was calculated on the basis of Kalman filter; the EU-27 average refers to the EU members states excluding Croatia

4. Possible explanations • reduced ability of some of the advanced economies to benefit from technological advances, i.e. problems in terms of technological diffusion (e.g. OECD) • technological innovation has become marginally less important (e.g. Gordon) • TFP slowdown owes more to a declining efficiency in combining factors of production than to a diminishing pace of technological progress (e.g. IMF, WP 15/116) • misallocation of resources (esp. capital) which are somehow not being allocated to the "right" (most productive) sectors, thus impeding productivity growth (e.g. Haskel) • back to 'normal': recent subdued pace of productivity growth might be merely the return to more normal rates of growth following extraordinary gains from the information technology revolution (e.g. Fernald) • Measurement errors / data problems and conceptual issues, e.g. with regard to capturing intangible assets (esp. in the light of the emerging knowledge-economy) • … • In fact, all points have some merits…

5. Policy response • Europe 2020: Europe's growth Strategy (> smart, sustainable, inclusive growth) • Commission's Work Programme: "A New Boost for Jobs, Growth and Investment" (incl. Single Market- and Digital Single Market Strategy) • European Semester (many CSRs direct or indirectly aim at stimulating growth) • Horizon 2020: 60% budget increase compared to FP7 • Juncker Plan / EFSI • Innovation Union • … Analytical work: At ECFIN we have several ongoing research activities which aim at providing relevant insights and contribute to the debate, for instance with a special focus on investments in intangible assets.

6. Related analytical work at ECFIN • Developments and determinants of trend total factor productivity growth (TFP): • Convergence towards the US in trend TFP levels is very weak; some convergence in terms of trend TFP growth rates • Ageing workforce, stringent employment protection legislation and skill mismatch (under-qualification), negatively related with trend TFP growth • Positively related with trend TFP growth: education (quality and quantity), R&D spending, trade openness and investment in intangible assets • Unlocking investment in intangible assets: • Includingintangiblesin source-of-growth framework changes growth pattern: GVA grows more rapidly and capital deepening becomes dominant source of growth • TFP variance diminishes when including intangibles, i.e. looking at intangibles improves our understanding of TFP differentials • Investment in intangibles likely to be affected by similar barriers and drivers as tangible assets (regulations, public investment, human capital, access to finance); structural factors matter generally more for intangibles whereas cyclical factors matter more for tangibles

7. Typicaldatasourcesandgaps Official statistics • National accounts, balanceofpayments • Business statistics • Socialstatistics (LFS, SILC) => Provide high qualityoffcialdata, but gapsforlong time series, industrydetailandasset-type breakdowns Academic data • e.g. EU-KLEMS, WIOD, INTAN/SPINTAN => helptofilldatagaps, testingandprovidingestimates on concepts not yetcoveredbyofficialstatistics (e.g. "newintangibles"), but ofrelevanceforpolicymaking.

8. Take-away messages • Looking at intangibles is needed for a comprehensive understanding of the supply-side components of growth, especially in the light of the emerging knowledge-based economy • Complementarities matter: it is not about investing either in certain types of tangible or intangible capital rather than arriving to a well balanced mix of all of them • For sound policy-making we need robust data / comprehensive evidence, i.e. work on both the statistical and the analytical fronts are needed. • Beyond intangibles, we need further research on the driving forces behind the observed deceleration of productivity growth • Eventually we need to rethink the approach towards productivity (measurement) and improve the statistics we are thus relying on…

9. To be discussed today… • Conceptual issues: Is there more than just inappropriate measurement/analytical scope? How can we ultimately explain the observed deceleration of productivity growth? • Are there any practical proposals to improve the way we measure productivity and economic growth? • Are our existing empirical measures of GDP, productivity, corresponding growth, etc. fit for comprehensively approximating economic activities in times of digitalization and knowledge–economy? • What kind of (further) data should we look at and what can be provided by statistics?