1

Catching-Up or Getting Stuck? Europe’s Troubles to Exploit ICT’s Productivity

Potential 

Bart van Ark & Robert InklaarUniversity of Groningen

and The Conference Board

Presentation for EU KLEMS Public Session on”The Determinants of Europe’s Productivity Revival”

13 May 2005Bank of Finland

Helsinki

This project is funded by the European Commission, Research Directorate General as part of the 6th Framework Programme, Priority 8, "Policy Support

and Anticipating Scientific and Technological Needs".

2

Pre-EU KLEMS Databases Used(http://www.ggdc.net/dseries/)

GGDC/TCB Total Economy Database: GDP, Employment, Hours, Labour Cost 100 countries, 1950-2004 (link to Maddison’s historical

data) PPP-converted (2002 EKS PPP & 1990 GK PPP) The Conference Board, Performance 2005

GGDC 60-Industry Database Value Added, Employment, Hours 58 industries, +/- 25 OECD countries, 1979-2003 (linked

to OECD STAN) Harmonized deflation for ICT production and aggregation Van Ark, Inklaar & McGuckin (GD-60) and EU Report

(O’Mahony and van Ark, 2003)

3

Pre-EU KLEMS Databases Used(http://www.ggdc.net/dseries/)

GGDC Total Economy Growth Accounting Database Macro growth accounting, incl. ICT breakout in capital

and TFP EU-15 countries and US, 1980-2004 Timmer, Ypma and van Ark (GD-67); forthcoming in

Oxford Economic Papers (2005)

Industry Growth Accounting Database Industry growth accounting, incl. ICT breakout in capital

and labour quality France, Germany, Netherlands, UK, US, 1979-2003 EU Report (O’Mahony and van Ark, 2003) and Inklaar,

O’Mahony and TImmer (GD-68)

4

EU labour productivity and hours growth slowed further down since 2000 – and U.S.

is in stronger lead

US EU-15 EU-10 US EU-15 EU-10 US EU-15 EU-10

1987-1995 2.7 2.2 2.6 1.6 0.0 -0.5 1.1 2.3 3.11995-2004 3.4 2.2 3.8 0.9 0.7 -0.6 2.5 1.5 4.3of which:

1995-2000 4.1 2.7 4.0 1.9 0.9 0.0 2.1 1.8 4.02000-2004 2.5 1.4 3.4 -0.4 0.4 -1.3 2.9 1.0 4.7

of which:2004 4.4 2.1 4.8 1.4 0.8 0.4 3.0 1.3 4.3

acceleration 2000-2004 over1995-2000 -1.6 -1.3 -0.6 -2.3 -0.5 -1.3 0.8 -0.8 0.7

University of Groningen and Conference Board, 2005

Real GDP Total Hours Labour productivity

Germany: until 1991 only West Germany; from 1991 All Germany

5

The slowdown is EU productivity growth is of a structural nature

Trend growth of annual growth in GDP per hour worked, US and EU-15, 1979-2004 with Hodrick and Prescott (1997) filter

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

US EU15

U.S.

EU-15

6

Macro growth accounting

7

Does ICT Matter?

Three channels through which Information and

Communication Technology (ICT) impacts on productivity growth: 1st channel: Effect of ICT investment on labour

productivity growth through ICT capital deepening

2nd channel: Rapid technological change in ICT producing industries leading to TFP growth

3rd channel: Total Factor Productivity (TFP) growth in industries that make intensive use of ICT (knowledge spillovers)

8

The Impact of ICT on Economic Growth

1: investment channel

3: spillover

channel ??

2: technology channel

© Erik Bartelsman/Jeroen Hinloopen

Sources of Labour Productivity Growth, Total Economy (Macro-Measured)EU-15 and U.S., 1987-1995 and 1995-2004

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

EU-15 EU-15 U.S. U.S.

1987-1995 1995-2004 1987-1995 1995-2004

ICT capital deepening Non-ICT capital deepening ICT-production TFP Non-ICT TFP

Slowdown in ‘non-ICT’ capital and ‘non-ICT’ TFP are major drivers of EU15 slowdown since 1995

Since 2000, ICT capital deepening slowed to pre-1995 levels, but U.S. shows acceleration in ‘non-ICT’ TFP

Sources of Labour Productivity Growth, Total Economy (Macro-Measured)EU-15 and U.S., 1995-2000 and 2000-2004

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

EU-15 EU-15 U.S. U.S.

1995-2000 2000-2004 1995-2000 2000-2004

ICT capital deepening Non-ICT capital deepening ICT-production TFP Non-ICT TFP

Focus on market sector of economy accentuates EU4-US gap further

Sources of Labour Productivity Growth, Market Economy (Aggregated from Industry Level), EU-4 and U.S., 1995-2000 and 2000-2003

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1995-2000 2000-2003 1995-2000 2000-2003

EU-4 (DE,FR,NL,UK) U.S.

Labour Q&R ICT capital deepening Non-ICT capital deepening ICT production TFP Non-ICT TFP

Pre-2000 leading ICT capital deepening for a small number of EU member states

ICT capital deepening contribution, 1995-2000 (Channel 1)

0.00 0.20 0.40 0.60 0.80 1.00

US

EU-15

Sweden

Belgium

Denmark

UK

Ireland

Portugal

Austria

Germany

Netherlands

Finland

Luxembourg

Italy

Greece

France

Spain

Post-2000 slowdown of ICT capital deepening across the board

ICT capital deepening contribution, 1995-2000 & 2000-2004

0.00 0.20 0.40 0.60 0.80 1.00

US

EU-15

Sweden

Belgium

Denmark

UK

Ireland

Portugal

Austria

Germany

Netherlands

Finland

Luxembourg

Italy

Greece

France

Spain 2000-2004

1995-2000

Post-2000 slowdown in TFP from ICT production bigger in U.S. than in EU countries

ICT TFP contribution, 1995-2000 & 2000-2004 (Channel 2)

0.00 0.50 1.00 1.50 2.00

US

EU-15

Ireland

Finland

Sweden

UK

France

Austria

Italy

Germany

Portugal

Spain

Belgium

Netherlands

Denmark

Greece

Luxembourg 2000-2004

1995-2000

Since 2000 only UK, Sweden and US show improvement in “non-ICT” TFP, and Finland and Greece also remain high

Non-ICT TFP contribution, 1995-2000 & 2000-2004 (incl. channel 3)

-1.50 -1.00 -0.50 0.00 0.50 1.00 1.50 2.00 2.50

US

EU-15

Finland

Ireland

Greece

Luxembourg

Belgium

Austria

France

Sweden

Portugal

Germany

Denmark

Netherlands

UK

Italy

Spain 2000-2004

1995-2000

Before 2000 no evidence of spillovers from ICT use to TFP

ICT and "Non-ICT" TFP growth, 1995-2000

GRC

SWE

US

FIN

UK

IRE

FRA

NLD

ESP

PRT

EU-15

DEU

AUTBEL

DNK

LUX

ITA

TFP=-0.14*ICT + 1.05(-0.16 ) ,

R2 = 0.0017

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2

ICT capital deepening contribution to labour productivity growth

"No

n-I

CT

" T

FP

gro

wth

Development since 2000 are suggestive of the possibility of spillovers from ICT use to TFP

ICT and "Non-ICT" TFP growth, 2000-2004

ITA

LUX

DNK

BELAUTDEU

EU-15

PRTESP

NLD

FRAIRE

UK

FINUS

SWEGRC

TFP= 3.91*ICT - 1.12(1.91) ,

R2 = 0.19

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

0.1 0.2 0.3 0.4 0.5 0.6

ICT capital deepening contribution to labour productivity growth

"No

n-I

CT

" T

FP

gro

wth

Alternative specifications show similar results

Dependent variable: TFP growthICT contribution 0.18 0.26 4.79 4.77

(0.14) (0.20) (2.08) (2.20)TFP level -0.02 -0.02

(-1.04) (-1.74)

Dependent variable: Non-ICT TFP growthICT contribution -0.14 -0.10 3.91 3.88

(-0.16) (-0.11) (1.91) (2.17)TFP level -0.01 -0.03

(-1.01) (-2.42)

2000-20041995-2000

1995-2000 2000-2004

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Sectoral Decomposition

Services industries are key to faster productivity growth in U.S. over Europe

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1995-2000 2000-2003 1995-2000 2000-2003

EU-15 U.S.

Other industries &reallocationBusiness services

Securities trade

Banking

Retail trade

Wholesale trade

ICT production

Contribution of major industry group to labour productivity growth of market economy, 1995-2003

Contributions of service industries is low across countries, except Sweden, UK, Greece and Ireland

Industry contributions to aggregate labour productivity growth, 2000-2003

-2.00 0.00 2.00 4.00 6.00 8.00 10.00

US

EU-15

Ireland

Greece

Sweden

UK

Austria

Finland

Denmark

France

Belgium

Germany

Spain

Netherlands

Portugal

Italy

Luxembourg

ICT production Wholesale trade Retail trade Banking Securities trade Telecommunications Other industries & reallocation

Europe’s productivity advantage in telecommunication is gone but it remains mostly TFP driven

Telecommunications

-0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

Fra

nce

Ger

man

yN

ethe

rland

sU

KU

.S.

Labour quality contribution ICT deepening contribution Non-ICT deepening contribution TFP growth

In retail trade US and UK show clear advantage over Germany, France and Netherlands; IT capital is limited

Retail trade

-0.10 0.00 0.10 0.20 0.30 0.40 0.50 0.60

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

Fra

nce

Ger

man

yN

ethe

rland

sU

KU

.S.

Labour quality contribution ICT deepening contribution Non-ICT deepening contribution TFP growth

In business services, TFP growth in many European countries is strongly negative; IT is a big part of growth

Business services

-0.60 -0.40 -0.20 0.00 0.20 0.40 0.60 0.80

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

2000-2003

1995-2000

Fra

nce

Ger

man

yN

ethe

rland

sU

KU

.S.

Labour quality contribution ICT deepening contribution Non-ICT deepening contribution TFP growth

U.S. shows acceleration of TFP growth in business services, but no further acceleration elsewhere

5-year moving average of U.S. TFP growth

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Wholesale trade Retail trade Financial intermediation Business services

In Europe TFP growth in market services is slower and shows no acceleration

5-year moving average of EU-4 TFP growth

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Wholesale trade Retail trade Financial intermediation Business services

27

Have things changed since 2000?

ICT capital deepening has slowed almost everywhere to pre-1995 levels

U.S. shows strong acceleration in TFP growth, with a slowdown in most European countries

There is some suggestive evidence that spillovers from ICT use are impacting TFP growth …

We need to look in services: European communication sector remains strong on TFP U.S. and UK retail are clearly ahead of rest of Europe Business services is taking off in U.S.

There are no signs that Europe is catching up on U.S. in ICT use and related productivity

28

Policy Questions

Is slow TFP the result of inadequate management of intangible capital or inflexible product and labour markets?

Are innovation policies of much help to drive innovation and productivity in many services?

Are reform & competition policies sufficiently focused on services?

Is Europe sufficiently exploiting comparative advantages across borders?

Are issues concerning reform management in Europe properly managed?

Should we focus on the TFP slowdown or also on causes for lack of capital deepening in non-ICT?