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Are digital technologies the new Holy Grail ?

By Stéphane Sorbe, Peter Gal, Giuseppe Nicoletti and Christina Timiliotis

Digital innovations are everywhere, in our pockets, cars and homes. However, while digital technologies seem to offer great potential to enhance firm productivity, productivity growth has slowed sharply in most OECD countries over the past two decades (Figure 1).

Source: OECD Productivity Statistics

One explanation to this puzzle is that digital
technologies are spreading out across firms less rapidly than we think.
Moreover, digital adoption has not been equally effective across all types of
firms.

As more productive firms have tended to adopt
digital technologies faster and more efficiently, their performance has improved
relative to less-digitalised, less-productive firms, contributing to a widening
gap in productivity performance. This has far-reaching implications, as it
contributes to widening wage dispersion and income inequalities.

Recent
OECD work
focusing on EU countries suggests that
policies have a key role to play to enable efficient adoption of digital
technologies across firms, industries and countries, potentially yielding substantial
productivity gains and helping less productive firms to catch up.

A first paper (Andrews et al., 2018)
suggests that a set of structural and policy factors can affect firms’
capabilities and incentives to adopt a selection of digital technologies (e.g.
cloud computing, back and front-office integration software). These factors
include the availability of enabling infrastructures (such as high-speed
broadband internet), managerial quality and workers skills, and product,
labour and financial market settings that enable an efficient reallocation of
ressources across firms. Importantly, there are strong complementarities between
these factors.

A second paper (Gal et al., 2019) confirms that the adoption of digital technologies supports firm productivity. The benefits tend to be higher among more productive firms, presumably because they have more access to the technical and organisational skills that are crucial to adopt and use digital technologies efficiently. Indeed, the presence of skill shortages in an industry is found to reduce the benefits of digitalisation, mainly among the least productive firms. As a result, digitalisation may explain about half of the rising gap between best performing firms and the rest of firms observed over recent years.

The main findings of these two papers are combined and summarised in Sorbe et al. (2019). The analysis confirms that improving policies in a range of areas can support digital adoption and thereby substantially lift firm productivity (Figure 2). Thus, if widely adopted and well used, digital technologies could indeed help overcoming the headwinds that drive the global productivity slowdown.

Source: Sorbe et al. (2019)

While policies to make the best of digital technologies should be tailored to country specificities, the following priorities emerge across the OECD:

  • Implementing regulatory frameworks that support investment in
    broadband and pro-competition reforms in telecommunication sectors to enable
    broader and cheaper access to high-speed internet;
  • Increasing participation in training – especially of low-skilled
    workers – and its quality, as well as promoting good cognitive, organisational
    and managerial skills;
  • Enabling the efficient reallocation of labour and capital across
    firms and industries by reducing administrative burdens on start-ups,
    facilitating job transitions and improving the efficiency of insolvency
    regimes;

In addition to stimulating productivity, some of these policies can support inclusiveness to the extent that they help lagging firms to catch up, displaced workers to find other jobs and support wage growth. Upgrading skills is particularly important in this respect.

References:

Andrews, D., G. Nicoletti and C. Timiliotis (2018), “Digital
technology diffusion: A matter of capabilities, incentives or both?
”,
OECD Economics Department Working Papers, No. 1476, OECD Publishing, Paris

Gal, P., G. Nicoletti, T. Renault, S. Sorbe and C. Timiliotis (2019), “Digitalisation and productivity: In search of the holy grail – Firm-level empirical evidence from EU countries”, OECD Economics Department Working Papers, No. 1533, OECD Publishing, Paris.

Sorbe, S., P. Gal, G. Nicoletti and C. Timiliotis (2019), “Digital dividend: Policies to harness the productivity potential of digital technologies”, OECD Economic Policy Paper No. 26, OECD Publishing, Paris.




Statistical insights: Are international productivity gaps as large as we thought?

by Nadim Ahmad, OECD Statistics and Data Directorate

Labour productivity is a key indicator of economic wellbeing, and
raising it – producing more goods and services from the same or less work (labour
input) – is one of the main drivers of sustainable economic growth.

Historically, comparisons of productivity across countries have shown substantial
gaps, even between similar-sized economies at a similar stage of development – leaving
many analysts struggling to understand the causes. However, a new OECD study has
found that at least a part of these gaps disappears once we adjust for differences
in how countries measure labour input.

In the case of the United Kingdom for instance, the study reveals that
the gap in labour productivity levels with the United States, is around 8
percentage points smaller than was previously thought – closing from 24% to
16%. The gap with Germany shrinks from 22% to 14% and with France from 20% to
11%.

How is labour input measured?

For productivity
measures, labour input is most appropriately defined by the total number of hours actually worked by all persons
engaged in production, i.e. employees and self-employed (OECD, 2001). Hours
worked include all hours effectively used in production, whether paid or not, but
they exclude hours not used in production (e.g. annual and sickness leave),
even if some compensation is received for them. In practice, countries adopt
one of two methods to estimate average hours worked for productivity estimates:

(i) the direct method, which takes actual hours
worked reported by respondents in surveys, generally labour force surveys (LFS);
and

(ii) the component method, which starts from  contractual, paid or usual hours per week from
establishment surveys, administrative sources or, indeed, the LFS, with
adjustments for absences and overtime and indeed other adjustments that are
necessary to align with concepts of output in the national accounts, for
example concerning cross-border workers.

What impact do these different approaches have on international comparisons?

Whilst the
‘direct’ approach appeals due its simplicity, it depends heavily on respondent
recall, cannot account for response bias, and, moreover, assumes a perfect
alignment of workers and measures of output. The component approach is more
complex, but it systematically attempts to address these issues. To give some
sense of the potential impact of these different approaches on the
international comparability of hours worked, the OECD has used the LFS and
complementary sources to estimate national hours worked using both a direct
approach and a (simplified) component
method
.

Our results provide
strong evidence that response bias and a lack of exhaustive adjustments to
align with the underlying conceptual boundary GDP, lead to systematic upward
biases in estimates based on the direct method, which are, in turn, always higher
than those compiled using the simplified component approach.

Figure 1 presents official estimates of hours worked in countries’ national accounts, and compares them with the OECD simplified component method estimates for those countries that currently use a direct method with minimal or no adjustments in their official statistics.

The corollary
of lower hours worked of course, is higher labour productivity levels. Figure 2
shows labour productivity levels, referenced to the United States, using official
national accounts average hours worked estimates, comparing them with new
results from the OECD simplified component approach for countries using the
direct method.

Overall, the results point to a reduction in relative productivity gaps of around 10 percentage points compared with current official estimates in many countries. While the broad picture is maintained, notable international ranking changes see the United Kingdom outperforming Italy, and Austria moving ahead of France, the Netherlands, Switzerland and Germany.

The OECD revised hours worked estimates explained

The simplified
component method used in the paper takes usual weekly hours worked in a
person’s main job from the EU Labour Force Survey (EU LFS) and the Current
Population Survey of the United States (CPS), as its starting point.
Adjustments for the key components of weekly working time are made using
self-reported data on overtime, flexible hours and hours on additional jobs.
Finally, the method accounts for weeks not worked, i.e. holiday and vacation
weeks, full and part-week absences for non-holiday reasons, and absences due to
sickness and maternity.

Statutory leave entitlements are used as a proxy for actual annual leave taken in this paper. It is important to note that this implicitly assumes that workers in all countries take, on average, all the leave to which they are entitled. However, this is not necessarily the case, as among other factors, actual take-up rates are likely to reflect differences in working cultures across countries. For this and other reasons, these new estimates should be considered only as a stop-gap for those countries currently using a direct method with minimal or no adjustments. In this respect it is important to note that most countries are already beginning to work towards improving their methodologies in line with the recommendations made as part of this research exercise, and others will begin to do so.

What’s the impact on growth rates?

While the
approach recommended in the paper clearly highlights the current bias in
international comparisons of productivity
levels,
it does not follow that the same holds for international
comparisons of productivity growth rates;
growth estimates would only be distorted if the impact of the adjustments
required showed significant disproportional change over time. Indeed,
implementing the simple component approach reveals no systematic bias in growth
rates.

Minor differences do occur however, and, so, to avoid introducing differences with national estimates of productivity growth (and those that can be derived from the OECD’s national accounts data), the OECD will take estimates of average hours actually worked (levels) using the simplified component method in 2016 as a benchmark, and  project  series forwards and backwards using official (national) productivity growth rates.

How will these results be incorporated into the OECD’s productivity database?

At this stage, based on the data available to the OECD, the implementation of the simplified component method will apply to the following countries: Austria, Estonia, Finland, Greece, Latvia, Lithuania, Poland, Portugal, Sweden and the United Kingdom. It is important to stress that the use of the simplified component method is intended to be only a stop-gap until such a time that these countries are able to align their estimation methods and estimates with the underlying national accounts concepts  and that correct for self-reporting bias; indeed  many countries are already moving in this direction.

Current efforts of the OECD are necessarily restricted to comparisons of labour productivity levels for the whole economy, but future work will look to explore whether and how labour input measures at the industry level can also be improved. In the meantime, for the 10 countries listed above, estimates of hours worked by sector will be constrained (pro-rata) to those at the whole economy level.

These changes will be incorporated into the OECD Productivity Statistics database and the OECD Average annual hours actually worked per worker dataset by the end of January 2019, along with corresponding metadata.

Further reading

OECD (2001), Measuring
Productivity – OECD Manual: Measurement of Aggregate and Industry-level
Productivity Growth
, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264194519-en.

Ward, A., M.
Zinni and P. Marianna (2018), “International productivity
gaps: Are labour input measures comparable?”, OECD Statistics
Working Papers, No. 2018/12, OECD Publishing, Paris, https://doi.org/10.1787/5b43c728-en.




The output cost of the global financial crisis

By David Turner and Patrice Ollivaud, OECD Economics Department

Assessing the damage from the Global Financial Crisis (GFC) is not straightforward, even with the benefit of hindsight provided by ten years of history, because the counter-factual of what might have happened in its absence is unknowable. However, a simplistic, but commonly adopted approach, of comparing the post-crisis path of GDP with the pre-crisis trend exaggerates the cost and can lead to misleading policy conclusions. Such an approach is akin to treating the GFC as a meteorite from outer space which is completely unrelated or ‘exogenous’ to preceding macroeconomic developments. This is implausible because the pre-crisis trend in GDP involved unsustainable trends in asset prices, most obviously house prices, driven by a long period of rapid excessive credit growth across most of the advanced economies. Similarly ageing has started to progressively reduce the contribution from labour in many economies, so reducing their growth capacity. Hence, the counter-factual represented by the extrapolation of the past trends in GDP was never realistically attainable. A more plausible basis for a counter-factual is an extrapolation of pre-crisis trends of potential output, where potential output is an estimate of a sustainable measure of GDP [1]. The difference between these two approaches is first illustrated by considering the OECD countries as a group and using aggregated measures of potential output that are regularly published in the OECD Economic Outlook. A simple-minded extrapolation of OECD-wide GDP per capita implies an ever-widening loss, which is currently more than 10% of GDP, whereas compared to a pre-crisis extrapolation of potential output per capita implies a smaller loss of around 2-3 percentage points of GDP (Figure 1).

eoturnerdec2018

However, the estimated cost of 3% of GDP for the OECD as a whole hides large variations across countries. Among the 19 OECD countries that experienced a banking crisis, following the same approach, the median loss in output is more than double that, at around 6%.

The estimates of potential output also provide an estimate of how the loss was incurred and some clues as to some policy lessons that might be drawn. Perhaps surprisingly, in nearly all OECD countries, aggregate employment rates have recovered and are close to, or have even surpassed, the pre-crisis levels, although some groups (for example young workers) have suffered more permanent losses than these aggregate calculations suggest.  A notable exception is the United States, where the aggregate employment rate is still more than 3% below the pre-crisis level, which may be partly explained by the effects of opioid addiction [2].

Instead, the main lasting macroeconomic damage from the GFC is accounted for by lost productivity. OECD estimates suggest that for a majority of OECD countries experiencing a banking crisis, most of this lost productivity is accounted for by lower growth in capital per worker, rather than lower total factor productivity (tfp) (Figure 2). The loss in capital per worker illustrates how a severe adverse demand shock can be transformed into an adverse supply shock via an accelerator effect on investment that then reduces the capital stock [3]. In addition, increasing evidence, including from firm level studies, suggests that many countries where interest rates were particularly low in the pre-crisis period, especially in Southern Europe, experienced a substantial misallocation of capital. These countries are also among those that experienced a more abrupt post-crisis adjustment in capital stock growth. The fall in capital stock growth was also exacerbated in some countries by cutbacks in public investment after the crisis.

eoturnerdec2018fig2

Conversely, much of the loss in tfp can be traced back to weakening trend tfp growth that pre-dates the Global Financial Crisis. This in turn would suggest that policy may be better directed to addressing more long-standing causes, such as the increasing divergence between productivity performance of frontier and laggard firms, which may be symptomatic of rising entry barriers and reduced contestability [4].

References:

[1]  The approach described here represents an update of the calculations presented in:

Ollivaud, P., and D. Turner (2015),”The effect of the global financial crisis on OECD potential output“, OECD Journal: Economic Studies, OECD Publishing, vol. 2014(1), pages 41-60.

[2]  A more in-depth analysis of post-crisis trends in employment and labour force participation in the United States, including the effect of the opioid crisis, is provided by:

OECD (2018), OECD Economic Surveys: United States 2018, OECD Publishing, Paris, https://doi.org/10.1787/eco_surveys-usa-2018-en.

[3]  A more detailed analysis of the effect of the crisis on productivity in OECD countries, in terms of its effects on capital per worker and tfp, is provided by:

Ollivaud, P., Y. Guillemette and D. Turner (2018), “Investment as a transmission mechanism from weak demand to weak supply and the post-crisis productivity slowdown“, OECD Economics Department Working Papers, No. 1466, OECD Publishing, Paris, https://doi.org/10.1787/0c62cc26-en.

[4]  Evidence on the difference between the productivity performance of firms at the global frontier and laggard firms, as well as possible causes and policy responses, is provided by:

Andrews, D., C. Criscuolo and P. Gal (2016), “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy“, OECD Productivity Working Papers, No. 5, OECD Publishing, Paris, https://doi.org/10.1787/63629cc9-en.




The UK productivity puzzle through the magnifying glass: A sectoral perspective

Rafał Kierzenkowski, Gabriel Machlica and Gabor Fulop, Economics Department.

Labour productivity has flatlined since the global financial crisis, which contrasts with its recovery profiles from past recessions over the last decades (Figure 1).  The productivity shortfall, defined as the gap between actual productivity and the level implied by its pre-crisis trend growth rate, reached nearly 20% at the end of 2016. This unprecedented levelling off represents the so-called productivity puzzle, with the level of output being surprisingly weak relative to high total hours worked in the economy. At the aggregate level, the weakness in productivity is driven by subdued investment developments and total factor productivity, and this underperformance appears to be mainly structural rather than cyclical.

Fig1.JPG

Using disaggregated data at the sectoral level provides additional insights about the determinants of the productivity puzzle, as shown in a recent OECD Economics Department Working Paper (Kierzenkowski et al., 2018). There has been a marked increase in the dispersion of productivity performance across UK sectors since the crisis, with sectors lagging behind becoming even more disconnected from the best-performing sectors (at a given point in time). Moreover, the aggregate productivity slowdown appears to be mainly driven by the weakness in productivity within each sector, which suggests sector-specific determinants of the productivity shortfall.

To investigate the issue further, it is possible to calculate the contribution of each sector to the aggregate productivity shortfall since 2007. Such calculation shows that half of the gap is explained by non-financial services (with information and communication being the largest contributor), a fourth by financial services, and another fourth by manufacturing, other production and construction (Figure 2). All but non-financial services and the construction sectors contribute disproportionately to the productivity shortfall compared to their shares in overall output and hours worked of the UK economy.

Fig2.JPG

In non-financial services, large increases in self-employed with no employees may have reduced the economies of scale and scope of organised work (Figure 3, Panel A), while the production of the sector has become less capital-intensive at the same time. Greater mismatches between changing skills and created jobs may have also curbed productivity growth, in particular in the information and communication sector where many high-skilled occupations have been created but where increases in labour quality have been comparatively weak.

In financial services, stagnant labour productivity is mainly linked to reduced risk-taking and leverage, as reflected by the decline in total factor productivity following its steep increases in the run-up to the crisis (Figure 3, Panel B).  Although the measurement of output of the financial sector is difficult, this finding is corroborated by the relative size of the financial sector, which was expanding quickly to become significantly larger than in the rest of the G7 in the run-up to the crisis. Looking ahead, the key issue is the extent to which the financial sector can add to productivity growth of the UK economy without undermining financial stability.

In manufacturing, low accumulation of the capital stock (Figure 3, Panel C), suggests a greater substitution from capital towards labour in the production process and a drag on the productivity of the sector. Also, there are indications that weak corporate restructuring may have been another driver, with company exits being smaller than in the overall economy (Figure 3, Panel D). Particularly, in low-tech manufacturing , the percentage of capital and labour that is held up by zombie firms (defined as firms which persistently fail to cover their interest payments from current profits) is estimated to be respectively at around 18% and 13% (OECD, 2017).

The UK productivity puzzle is also partly explained by pre-crisis developments, which include a low tangible investment in comparison with other OECD countries, a too rapid expansion of the financial sector despite the comparative advantage of the City, productivity gains in the manufacturing sector that were insufficiently “offensive” (driven by innovation), and a secular decline of the oil and gas sectors with dwindling resources in the North Sea.

Fig3.JPG

References:

Kierzenkowski R., G. Machlica and G. Fulop (2018), “The UK productivity puzzle through the magnifying glass: A sectoral perspective”, OECD Economics Department Working Papers, No 1496, OECD Publishing.

OECD (2017), OECD Economic Surveys: United Kingdom 2017, OECD Publishing.

 




Unblocking the productivity potential of local businesses in Ireland

By Yosuke Jin and Ben Westmore, Ireland Desk, OECD Economics Department.

Irish GDP growth made headlines recently due to enormous upward revisions (e.g. + 25.6% for the sole year of 2015) related to the activities of a small group of multinationals. This raises the question of how much Irish productivity relies on multinational companies alone. In fact, while it has not made headlines as much as the GDP revisions, the divergence in productivity performance among firms in Ireland over recent years is particularly striking. This matters a lot for the sustainability of Irish living standards.

New firm-level analysis undertaken in tandem with the OECD Economic Survey of Ireland 2018 finds that the majority of businesses in Ireland have actually experienced falling productivity since the mid-2000s (Department of Finance, 2018). This analysis also identifies rising dispersion in the productivity between top-performing firms and other firms in most industries (Department of Finance, 2018: Figure 1), with most top-performing firms being multinational enterprises (MNEs). Indeed, a rise in aggregate productivity observed in official statistics has relied on a small group of very large successful firms, most likely the same ones whose activities have been chiefly responsible for the eye-catching GDP outturns of recent years.

Capture.JPG

At first glance, the efficiency of resource allocation in Ireland appears to be very high (Figure 2). However, this result owes largely to the presence of MNEs that can raise a huge amount of resources from different channels. Once the MNE-dominated sectors have been excluded, the efficiency of resource allocation in the Irish economy is greatly reduced and is close to the average of other OECD countries (Figure 2).

Ireland.JPG

Recent OECD studies show that non-viable firms (i.e. those kept alive by forbearance loans but otherwise insolvent) have reduced the investment and employment growth of healthy businesses in many OECD countries over the past decade (Adalet McGowan et al., 2017). In Ireland, SME default rates are among the highest in the euro area countries, while forbearance has frequently been granted to defaulted loans, which instead could be reallocated to enable highly-productive businesses to expand (OECD, 2018). This could be a major explanation of the lower productivity of domestic firms.

Another key channel through which productivity gains occur is via knowledge spillovers from top, “frontier” firms. Given Ireland’s high share of multinational enterprises, there is potential for virtuous productivity spillovers from high-productivity foreign firms to local businesses. However, such spillovers cannot be taken for granted. Other firm-level empirical analysis undertaken in tandem with the OECD Economic Survey of Ireland 2018 finds that such knowledge spillovers are overall limited in Ireland and local firms are even crowded-out by MNEs in some instances (Di Ubaldo, Lawless and Siedschlag, 2018).

What explains these limited spillovers? First, trade linkages, expressed as the intensity of supply chains between foreign- and locally-owned firms, are weak (OECD, 2018). Moreover, the productivity gains of such linkages can only be fully realised if local firms have the capacity to absorb the new ideas and technologies utilised by frontier firms, which requires investment in knowledge-based capital and human capital by local firms. For example, the above mentioned analysis shows that trade linkages produce positive productivity spillovers for those local firms that exhibit high absorptive capacity, captured by R&D investment (Di Ubaldo, Lawless and Siedschlag, 2018).

Could local firms take greater advantage of the performance of multinational enterprises? Policymakers should promote reforms that encourage the absorptive capacity of local businesses. At present, the capacity of local firms to absorb and implement new technologies is impeded by relatively weak managerial skills. This partly reflects the low proportion of workers participating in lifelong learning activities. With burgeoning skill demand, there should be an increase in the share of training funding to those in employment. Innovation and the ability for Irish firms to fully utilise new technologies is also weakened by low research and development activities. There is scope to reorient innovation policy to better promote the research intensity of local firms. In particular, targeted public grants for business research and development could be increasingly used, as it would better reach local entrepreneurs that may be in a loss-making position and hence less swayed by tax exemptions on research funding.

Finally, the OECD Economic Survey of Ireland 2018 argues that, beyond spillovers, the productivity potential of local businesses can be raised through reducing regulatory barriers to entrepreneurship and the costs of business failure. Access to finance for young firms needs to improve as well and will benefit from further efforts that mend the health of the banking sector and raise the efficacy of state-supported lending initiatives. Further improvements in Irish infrastructure will also promote firm growth. The government plans to increase capital spending significantly over the coming four years and the projects undertaken must continue to be carefully prioritised through evidence-based evaluation of those with the highest returns. To do this more effectively, systematic collection of information on the performance of existing assets is crucial.

References:
Adalet McGowan, M., D. Andrews, and V. Millot (2017), “The Walking Dead?: Zombie Firms and Productivity Performance in OECD Countries”, OECD Economics Department Working Papers, No. 1372, OECD Publishing, Paris.
Department of Finance (2018), “Patterns of firm level productivity in Ireland”.
Di Ubaldo, M., M. Lawless and I. Siedschlag (2018) “Productivity spillovers from multinational activity to indigenous firms in Ireland”, ESRI Working Paper 587, March 2018.
OECD (2018), OECD Economic Surveys: Ireland 2018, OECD Publishing, Paris.

 




Thailand 4.0: boosting productivity

By Hidekatsu Asada, Head of South East Asia Desk, Economics Department.

Thailand has made commendable socio-economic progress since the 1970s and has set itself the goal of joining the group of high-income countries by 2036. To make that happen, the government has spelled out a Thailand 4.0 vision that involves a transformation to a more productivity- and technology-driven economy. This is the next step – after Thailand 1.0 (accumulation of capital and labour inputs led by the agricultural sector), Thailand 2.0 (light industry) and Thailand 3.0 (heavy industry).

Thailand’s historical competitive advantage in labour-intensive manufacturing is being eroded by higher wage costs that partly reflect the acceleration of ageing. Gains from imported technology are contributing less to productivity growth, while high-technology and knowledge-intensive activities, domestic innovation, investment in knowledge-based capital and human resource development have become increasingly important, as discussed in the Initial Assessment Report of the Multi-dimensional Review of Thailand (OECD, 2018).

Since the first half of the 2000s, Thailand’s labour productivity growth has averaged 3%. However, in recent years, like in many OECD countries, it has not quite recovered to pre-global financial crisis rates (Figure 1), partly due to weak demand arising from lacklustre global trade, which slowed capital formation and the associated productivity gains. Intensified competition for foreign direct investment from China, the Philippines and Viet Nam has also held back investment, as have domestic political uncertainty, delays in public investment projects and widening skills gaps.

Thailand 2.JPG

Historically, structural reforms have played an important role in Thailand’s economic transformation, with trade and investment liberalisation and business-friendly regulatory reforms encouraging participation in global value chains. However, over the past decade, limited structural reform and capital investment have held back productivity growth and improvements in well-being.

In recent years, economic growth has started to regain momentum, helped by a pick-up in global trade, which has supported exports, and by a substantial public infrastructure investment programme. This upturn is expected to continue in the near future, presenting a great opportunity to firmly implement extensive structural reforms to boost Thailand’s economic potential. These reforms need to include:

  • Developing human capital by improving education performance and strengthening technical and vocational education and training, as well as encouraging life-long learning and training to address skills mismatches.
  • Promoting innovation by enhancing collaboration between the government, the business sector and academia.
  • Improving the policy framework to encourage entry of innovative entrepreneurs and medium-sized enterprises by facilitating access to finance, streamlining licensing procedures and reducing transaction costs by increasing the use ICTs such as the QR payment system.
  • Furthering regional integration by reducing barriers to the entry of foreign firms, such as caps on the foreign ownership in services sector.

The government has recognised the importance of these structural reforms, all of which are enshrined in Thailand 4.0. However, to adequately implement these reforms and address these cross-cutting issues, improved co-ordination and rigorous performance evaluations are needed across all planning and implementation agencies.

Reference
OECD (2018), Multi-dimensional Review of Thailand: Volume 1. Initial Assessment, OECD Development Pathways, OECD Publishing, Paris.




Mind the gaps: boosting productivity and reducing inequality in Chile

Antoine Goujard and Paula Garda, OECD Economics Department, Chile/Colombia desk

Chile has been one of the fastest-growing economies in the OECD in recent decades. Sound macroeconomic management, bold structural reforms, such as trade and investment liberalisation, and buoyant natural-resource sectors, supported fast convergence in living standards (Panel A). However, progress has slowed: declining productivity gains are limiting prospects for rising incomes and better-quality jobs; and inequality remains stubbornly high (Panels B and C).

Chile2018productivity blog.png

Chile is at a turning point if it is to continue raising the living standards of all. The 2018 OECD Economic Survey of Chile projects a solid expansion of the economy by 2.9% in 2018 and in 2019. Chile will benefit from more favourable global economic conditions and stronger world trade. The rebound in copper prices will also support short-term growth.

The cyclical recovery offers a key opportunity to address the country’s low and stagnant productivity and its persistently high inequality. An ambitious reform agenda could increase GDP per capita by over 5% in ten years and lower inequality, notably through better-quality jobs, according to OECD estimates. This calls for increasing competitive pressures and incentives for innovation, reducing the administrative burden, improving labour market regulations and raising social spending and the employability of all by more training.

Greater productivity would be a major boost for broader-based export growth (Chapter 1 of the Survey). Competition and simplified administrative procedures, notably licences and permits, are key for better competitiveness. The simplification process should include more stakeholders and stronger ex-ante and ex-post evaluations (OECD, 2016). Systematic reviews of competitive pressures and additional technical assistance and mentoring for young and smaller firms would support entrepreneurship and ease access to export markets. Together with higher and well-targeted support for R&D, this will raise innovation and productivity growth. At the same time, further infrastructure investment, notably in intermodal connections, railways and digital networks (OECD, 2017a), are needed to bridge remaining connectedness gaps and to reduce congestion.

Chile has to do more to realise the full potential of its people. Productivity boosting reforms need to go hand-in-hand with measures to raise skills and make the labour market more inclusive (Chapter 2 of the Survey). The recent education reforms will support teaching quality and skills, lowering inequalities (OECD, 2017b). However, continuing to strengthen the quality of education and developing apprenticeships would improve opportunities for all. Female employment and the skills of the youth would benefit greatly from better access to early childcare and extended daycare opening hours. Providing additional relevant training for vulnerable workers would support productivity and employment, notably for women, the lower skilled and the youth. Lower restrictions on permanent contracts and broader access to unemployment insurance would also ease labour market adjustment for workers and firms and increase quality-jobs, thereby reducing informality and boosting well-being.

Further reading:

OECD (2018), OECD Economic Surveys: Chile 2018, OECD publishing.

OECD (2017a), Infrastructure Governance Review: Chile – Gaps and governance standards of public infrastructure, OECD publishing.

OECD (2017b), Education in Chile, Reviews of National Policies for Education, OECD publishing.

OECD (2016), OECD Reviews of Regulatory Reform – Regulatory Policy in Chile, Government Capacity to Ensure High –Quality Regulation, OECD publishing.




Switzerland’s productivity puzzle: Being a leader and an underperformer

by Patrice Ollivaud, Economist, Switzerland Desk, OECD Economics Department

Switzerland is among the leaders in many global rankings including on R&D, innovation, infrastructure, universities and competitiveness. It is well integrated in global value chains, specialised in some high-value-added activities and home of many large multinationals. These factors should contribute to high, and rising, labour productivity. However, it has been falling behind other OECD countries, including the United States (Figure 1). Switzerland’s labour productivity still ranks amongst the top-10 OECD countries, but its growth performance has been poor in recent decades. During the 2000s its GDP per capita growth was driven mainly by an increasing employment rate, which reached record highs. That no longer has much scope to continue, which calls for focusing policy efforts on bolstering productivity to sustain Swiss living standards.

swissproductiv

The recently published OECD Economic Survey of Switzerland (OECD, 2017) studies Swiss labour productivity from a firm-level perspective using the KOF Swiss Innovation Survey database. The results point to a growing gap between Swiss frontier firms and the rest (Figure 2), similar to the pattern observed in other OECD countries (Andrews et al., 2016). This is particularly the case in the services sector.

Labour productivity growth is higher in firms that have introduced innovations and those with a larger share of high-skilled employees. However, fewer and fewer firms conduct R&D, while they spend more and more francs on it. This accentuates the concentration of R&D in a limited number of firms (around two-third of patents over 2006-11 originated from just 20 firms) and in pharmaceuticals (which accounted for nearly 30% of Switzerland’s business R&D in 2013). In addition, small firms report facing constraints in finding workers with needed skills.

This suggests the existence of a two-speed economy. A small segment of firms does extremely well. Others are suffering, driving the weak overall labour productivity growth outcome.

Swissprod2

Facilitating firm entry and exit are key ingredients for business dynamism and boosting productivity growth. Furthermore, entrepreneurship is not very high for the 18-24 year-old population. Several recommendations would boost the creation of innovative start-ups:

  • Promoting incubators at higher education institutions
  • Increasing the share of academic staff with entrepreneurial skills
  • Facilitating collaboration between firms through universities and research laboratories.

Risk-taking would also be facilitated – pushing up start-up rates – if Switzerland implemented a personal bankruptcy regime, allowing honest, hard-working entrepreneurs to have a second chance.

Bibliography:

Andrews, D., C. Criscuolo and P. Gal (2016), “The Best versus the Rest: The Global Productivity Slowdown, Divergence across Firms and the Role of Public Policy”, OECD Productivity Working Papers, No. 5, OECD Publishing, Paris, http://dx.doi.org/10.1787/63629cc9-en

OECD (2017), OECD Economic Surveys: Switzerland 2017, OECD Publishing, Paris, http://dx.doi.org/10.1787/eco_surveys-che-2017-en




Zombie firms and weak productivity: what role for policy?

by Dan Andrews, Müge Adalet McGowan and Valentine Millot, Productivity Workstream, OECD Economics Department

Weak productivity growth is a major problem afflicting our societies. It curbs growth in incomes and endangers the sustainability of our social security systems. An important, but often ignored, source of the productivity slowdown is the increasing prevalence of weakly productive firms and, among them, “zombie firms” – i.e. firms that would typically exit or be forced to restructure in a competitive market. In this context, a new OECD study shows that this prevalence is closely related to weaknesses in the banking system and insolvency regimes. It argues that reviving productivity growth will partly depend on the policies that restore banking health and effectively facilitate the exit or restructuring of weak firms, while simultaneously coping with any social costs that arise from a heightened churning of firms and jobs.

The problem

The prevalence and productive resources sunk in “zombie” firms – defined as old firms that have persistent problems meeting their interest payments – have risen since the mid-2000s in a number of OECD countries (Figure 1). In Italy, for example, the share of the industry capital stock sunk in zombie firms rose from 7% to 19% between 2007 and 2013. Zombie firms represent a drag on productivity growth as they congest markets and divert credit, investment and skills from flowing to more productive and successful firms and contribute to slowing down the diffusion of best practices and new technologies across our economies.

zombie congestion 12-2017

Data from figure available here.

What can policy do?

New OECD indicators suggest that there is much scope to improve the design of insolvency regimes to accelerate the restructuring or exit of weak firms and thus revive productivity growth (Figure 2). For example, insolvency reforms that reduce barriers to corporate restructuring and the personal cost associated with entrepreneurial failure could translate into a decline in the zombie capital share of at least 9 percentage points in Spain, Italy or Portugal – countries where the zombie capital share stood at 28%, 19% and 16% in 2013, respectively.  The good news is that in recent years insolvency reforms have already taken place in a number of countries, which are likely to partly achieve some of these gains.

Barriers to exit 12-2017

Data from figure available here.

Zombie firms are more likely to be connected to weak banks, suggesting that zombie congestion partly stems from bank forbearance – i.e. the tendency for weak banks to bet on the resurrection of failing firms. This underscores the importance of a more aggressive policy to resolve non-performing loans, but this can only be truly effective if accompanied by complementary reforms to insolvency regimes. Distortions in the banking sector also highlight the importance of market-based financing instruments for productivity growth, with the inherent debt bias in corporate tax systems and the lack of venture capital financing emerging as key barriers to technological diffusion.

Finally, reforms that accelerate corporate restructuring should be coupled with policies to manage the social costs of worker displacement. Job search and retraining programs turn out to be effective in returning workers displaced by firm exit to work, particularly in environments where barriers to firm entry are low as this stimulates job creation.


References

Adalet McGowan, M., D. Andrews and V. Millot  (2017), “Confronting the Zombies: Policies for Productivity Revival“, OECD Economics Department Policy Papers, No. 21.

Andrews, D. and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD Economics Department Working Papers, No. 1433.

Adalet McGowan, M., D. Andrews and V. Millot  (2017), “Insolvency Regimes, Technology Diffusion and Productivity Growth: Evidence from Firms in OECD Countries“, OECD Economics Department Working Papers, No. 1425.

Adalet McGowan, M., D. Andrews and V. Millot (2017), “Insolvency regimes, zombie firms and capital reallocation”, OECD Economics Department Working Papers, No. 1399.

Adalet McGowan, M., D. Andrews and V. Millot (2017), “The Walking Dead?: Zombie Firms and Productivity Performance in OECD Countries”, OECD Economics Department Working Papers, No. 1372.

Andrews, D. and A. Saia  (2017), “Coping with creative destruction: Reducing the costs of firm exit“, OECD Economics Department Working Papers, No. 1353.

Adalet McGowan, M. and D. Andrews (2016), “Insolvency Regimes And Productivity Growth: A Framework For Analysis”, OECD Economics Department Working Papers, No. 1309.




Brighter futures or dashed expectations? The global recovery needs to deliver gains for all

By Lukas Lehner and Dorothée Rouzet, OECD Economics Department

Global growth has gained momentum in 2017 and the economic recovery is moving forward, as shown in our latest Economic Outlook. Labour productivity is improving from its decade-long sluggishness. Yet, expected productivity gains still lag far behind pre-crisis norms, and will not be sufficient to set the stage for long-term improvements in living standards (Figure 1, Panel A). Multiple structural obstacles –  including a lack of competition and business dynamism and high shares of “zombie” capital – slow down the investment, innovation, and technology diffusion that are crucial for productivity growth.

EO-2-12-2017

Slow labour productivity growth has been a driver of slow increases in real wages, alongside remaining hidden labour market slack, a rise in non-standard forms of employment and weakened labour market institutions (Figure 1, Panel B). This means that in most advanced economies, incomes are unlikely to rise in line with the pace that households experienced in pre-crisis decades, and that they have come to expect for the future.

Without stronger and more widely shared productivity, wage and income growth, promises to younger generations will not be kept. In the past, each generation used to enjoy rising incomes over their working lives and higher living standards than their elders. These trends have slowed or even reversed in the last decade for generations currently in their prime working age (Figure 2). Real incomes have decreased for people born in the 1970s, feeding into public dissatisfaction. Ensuring that this lost decade does not become a “lost generation” is a call for deeper policy changes.

EO-2-2-12-2017

To raise prospects for better living standards for their populations, policymakers need to take action to catalyse more robust investment and productivity gains towards higher wages and incomes for all. Reform packages should focus on promoting competition and trade, improving active labour market policies and social protection, and developing human capital to seize the opportunities of the future. The short-term momentum provides a window for bold action that could and should promote stronger and more inclusive growth.

References

OECD (2017), OECD Economic Outlook, Volume 2017 Issue 2, OECD Publishing, Paris.

OECD (2017), Preventing Ageing Unequally, OECD Publishing, Paris.
http://dx.doi.org/10.1787/9789264279087-en