lean cows ? by Jorgen Mortensen (CEPS) Kieran Mc Morrow DG ECFIN, - - PowerPoint PPT Presentation

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Comments on “Living standards in an ageing, greener, knowledge economy : Towards a period of lean cows ? “ by Jorgen Mortensen (CEPS)

Kieran Mc Morrow – DG ECFIN, European Commission

(INNODRIVE Final Conference : CEPS, Brussels – 22-23 February 2011)

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DG ECFIN

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Essential messages from paper

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TFP, rather that labour productivity, is the main driver of long run changes in living standards & TFP growth rates have been slowing down

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2010-2030 : Lower TFP growth rates, as well as higher dependency ratios, will mean that living standards in the developed economies will only grow, on average, by ½ % per annum

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Skeptical that the policy approach advocated by the « Brussels consensus » of protecting living standards via productivity increases will be successful

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Key conclusion is that a « prolonged period of lean cows » in the post-crisis world may warrant a broader reconsideration of economic & social policies based on more sustainable consumption patterns, quality of life & social capital issues

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Paper calls for more research on both the links between the evolution of living standards & TFP and on the prospects for a severe shock to living standards over the coming decades

DG ECFIN

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 Yes, on the basis of current policies  Effects can be lessened with appropriate

policies (« Brussels Consensus » has a definite role to play)

 Other factors which need to be considered

in assessing the likely shock to living standards Will the shock to EU living standards be so severe ?

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Shock to living standards will be severe if policies do not change

Euro Area & US TFP Growth Rates 1966-2020

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 1 9 6 6 1 9 6 9 1 9 7 2 1 9 7 5 1 9 7 8 1 9 8 1 1 9 8 4 1 9 8 7 1 9 9 1 9 9 3 1 9 9 6 1 9 9 9 2 2 2 5 2 8 2 1 1 2 1 4 2 1 7 2 2

US Euro Area

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Potential Growth

0,0 0,5 1,0 1,5 2,0 2,5 3,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Euro Area US

Labour Input

• 0,4
• 0,3
• 0,2
• 0,1

0,0 0,1 0,2 0,3 0,4 0,5 0,6 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Euro Area US

Labour Productivity

0,0 0,5 1,0 1,5 2,0 2,5 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Euro Area US

Capital Deepening

0,0 0,2 0,4 0,6 0,8 1,0 1,2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Euro Area US

TFP

0,0 0,2 0,4 0,6 0,8 1,0 1,2 1,4 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Euro Area US

US vs Euro Area

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Shock to living standards can be reduced with appropriate policies

Limitations of earlier models in explaining TFP growth (especially post-1995)

• 1. Neoclassical model
• 2. AK Models
• 3. New Growth Theories

based on « Schumpeterian » creative destruction mechanisms provide a better framework for understanding TFP Institutions + Policies are key drivers of TFP growth (Different focus for frontier

• vs. catching-up countries)

Shift in the conceptual framework for explaining TFP determinants

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Direct TFP Enhancing Policies Indirect TFP Policies (Essential Framework Conditions / Flanking Policies)

• 1. Action on

innovation / intangible investments (Scientific+Non- Scientific R&D) +(Computerised Info Systems)+ (Economic Competencies)

Need for a specific focus on TFP Enhancing Policies

(Boosting the 2 key drivers of TFP : Technology & Factor Efficiency)

• 2. Human

Capital Development 3.Exploitation

• f ICT
• 4. Encouraging

firm creation & entrepreneurship (Resource reallocation)

• 1. Sufficient

« demand » / « lead users » to reward successful innovators

• 2. Effective

Intellectual Property Rights (IPR) Schemes

• 3. Favourable

macro-economic environment 4.Effective levels

• f competition

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• 2. Euro Area TFP level differences (US=100)

EA Hourly Labour Productivity (US = 100)

70,0 75,0 80,0 85,0 90,0 95,0 1997 2000 2003 2006 2009 2012 2015 2018 Euro Area

EA Capital Intensity + TFP (US=100)

70,0 75,0 80,0 85,0 90,0 95,0 100,0 105,0 110,0 1997 2000 2003 2006 2009 2012 2015 2018 TFP Capital Intensity

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Large Euro Area – US TFP level differences in ICT production & Non-ICT Market Services

Euro Area TFP levels in 2005 (United States = 100)

Total Industries ICT Industry

(Electrical & Optical Equipment – ICT Goods) (Telecommunications – ICT Services)

Non-ICT Goods Producing Industries Non-ICT Market Services 85 72 86 78 Source : EU KLEMS

DG ECFIN

10 Specific hypotheses for explaining the US’s outperformance in market services

Inadequate Competition in EU Market Services Economies of scale in US market services Factor Efficiency Drivers

• 1. Tangible ICT

Investments Technology / Knowledge Investment Drivers 1+2+3 Total Knowledge Investments

• 3. Intangible Investments
• 2. Human Capital

Investments

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 Risk to living standards, especially in the

EU, is great over the coming decades

 However, the situation is not without hope  Policy response is crucial

Concluding Remarks