Policy Update 028 Pre-event Interview No.1

EU Playing Catch-up with Productivity Growth

Assistant Professor, Department of Economics, University of Groningen

As Japan emerges from recession and its economy approaches cruising speed, the potential growth rate of the Japanese economy is an increasingly important factor in determining the path to restore fiscal health and conducting monetary policy. It has been recognized that the main source of growth for Japan, which faces serious population decline in the coming years, is the increase in total factor productivity (TFP). Therefore it is urgent to recover Japanese TFP growth, which has been at a standstill since the 1990s. This stagnation in productivity growth and its increasing gap with the U.S. are globally recognized, and also not unique to Japan. Europe is experiencing a similar phenomenon. The RIETI Policy Symposium, "Determinants of Total Factor Productivity and Japan's Potential Growth: An International Perspective," on July 25, 2006 will be based on the results of its projects on industry- and firm-level productivity and international comparison of productivity in East Asian and other countries. In the symposium, Japanese and overseas experts on TFP will provide insight on the future strategy of Japan's economic growth and productivity. RIETI interviewed symposium presenter Dr. Marcel TIMMER about his involvement in the EU KLEMS project, and on the factors behind the EU's stagnant productivity growth and possible measures to improve it.

Marcel Timmer has served as an Assistant Professor in the Faculty of Economics of the University of Groningen since 1999. Much of his work is based in the Groningen Growth and Development Centre where he coordinates the international productivity program. From 1994-1999, Dr. Timmer worked at the Faculty of Technology Management of the Eindhoven University of Technology on his study of "The Dynamics of Asian Manufacturing." He is also a member of the Groningen SOM (Systems, Organization and Management) research school and the N.W. Posthumus Institute, an interuniversity research institute on economic and social history. His research interests include the study of economic growth, technological change, and international comparisons of prices and productivity with a special emphasis on Asia and Europe. Dr. Timmer earned his M.A. in Philosophy and Econometrics from the University of Groningen and Ph.D. from the Eindhoven University of Technology. His recent works include "Does Information and Communication Technology Drive EU-US Productivity Growth Differentials?," (with Bart van Ark) Oxford Economic Papers, vol.57 no.4, 2005; "The 'Appropriate Technology' Explanation of Productivity Growth Differentials: An Empirical Approach," (with B. Los) Journal of Development Economics, 77(2), 2005; "ICT and Europe's Productivity Performance: Industry-level Growth Account Comparisons with the United States," (with R. Inklaar and M. O'Mahony) Review of Income and Wealth, Vol.51, 2005.

RIETI: You have conducted extensive research on international comparisons of productivity and greatly contributed to the EU KLEMS project, which aims to create a database of industry-level total factor productivity (TFP) for all EU member countries from 1970 onward. How does your research tie in with this project?

Timmer: The EU KLEMS project is led by a three-person management team: Bart van Ark (University of Groningen), Mary O'Mahony (National Institute of Economic and Social Research, London) and myself. I am responsible for the day-to-day construction of the EU KLEMS database by guiding the consortium partners in the preparation of the national datasets, and making sure that these datasets are internationally comparable. To this end, we have frequent contact about methodologies, classifications and data issues with all our partners. Part of the project will be to prepare a book which outlines the database and first results to accompany the public launching of the data in 2007. Apart from management, my own research for EU KLEMS is mainly in developing relative prices for output and inputs across countries, in order to make international-level comparisons alongside growth accounts.

RIETI: In your research, you have analyzed the effects of the information and communication technology (ICT) revolution on EU labor productivity growth from 1995-2001. What are the major factors that explain the EU's lagging behind the U.S. in productivity growth during this period?

Timmer: When looking at the effects of ICT on growth, one has to make a distinction between three channels: productivity growth in ICT production, investment in ICT-goods, and productivity growth in sectors using ICT. In all three sources, the EU is lagging behind the U.S. ICT production is lower in the EU, but not by so much, due to a relatively large ICT services sector in Europe (telecommunication and computer services). ICT investment levels are typically half the U.S. levels, as they have been for a long time. Finally, ICT is a so-called general purpose technology which enables a new wave of innovations based on ICT. Most of these innovations are non-technical, in the sense of organizational improvements, e.g. new ways of organizing retailing (see Wal-Mart and Tesco for examples). In the U.S., these ICT-enabled innovations have progressed much faster, especially in market services (e.g. in retail and wholesale trade, in finance and in business services). This underlines the importance of industry-level studies in trying to understand what is driving worldwide growth patterns.

RIETI: What was accountable for intra-EU differences in productivity growth from the 1990s?

Timmer: The European Union is not a homogeneous area in terms of economic structure and performance. Currently, there is a major difference between growth in the so-called new EU-countries in the East (such as the Czech Republic, Slovenia, Hungary) which grow much faster than the "old" EU-15. But even within the EU-15 there are fast growers like Ireland, Finland and Greece, alongside slow-growers like France, Germany and the UK. Drivers of growth differ. For example, growth in Eastern Europe and Greece, initially poor countries, is of the catch-up type and based on rapid increases in inputs. On the other hand, growth in Finland is much more based on productivity growth and ICT production

RIETI: Other than in ICT, in what areas will the EU need to take measures to catch up with the U.S. in productivity growth?

Timmer: The most important issue today is the opening up of the market service sector. Recently, the European Parliament accorded the so-called Services Directive in which some service sectors were opened up to international competition. But much more remains to be done in this area, as large parts of national service sectors are still protected through an array of regulations. In this way, it is hard to realize the gains from economies of scale which are offered by ICT. Another area for action is the higher education system, which is still under-funded and could benefit from much more cross-border cooperation. Europe's diversity can be a hotbed of new ideas and technologies, and once proved successful its spillovers should not be constrained by national regulations.

Interview conducted by Takako Kimura, online editor, on July 4, 2006.

Pre-event Interview No.1
"EU Playing Catch-up with Productivity Growth" by Marcel TIMMER, Assistant Professor, Department of Economics, University of Groningen

Pre-event Interview No.2
"TFP and Prospects for the Japanese Economy" by Dale W. JORGENSON, Samuel W. Morris University Professor, Department of Economics, Harvard University

July 4, 2006

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