Franco-German Conference. Paris. July 2016

Productivity, Investment,

and Growth – Where we

stand, What we know

Alexander Schiersch & Martin Gornig

07.07.2016

Motivation

Real GDP, 1995-2015

Source: AMECO database

60.00

70.00

80.00

90.00

100.00

110.00

120.00

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95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

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20

06

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07

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20

09

20

10

20

11

20

12

20

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20

14

20

15

2010=

100

Germany France Italy Spain UK Japan USA

Alexander Schiersch & Martin Gornig, DIW Berlin Franco-German Conference CEPII-CESifo-DIW-OFCE 2

Motivation


“Productivity isn’t everything, but in the long run it is almost

everything. A country’s ability to improve its standard of living

over time depends almost entirely on its ability to raise

its output per worker.”

Paul Krugman

1. Trends in productivity

2. Private sector investments and development of capital stocks

3. Investment restraint in the public sector


1 Trends in Productivity


Labour productivity, annual growth, 1976-2014

Source: SVR, 2015; HP-Filter, 𝜆 = 100

-1

0

1

2

3

4

5

19

76

19

78

19

80

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82

19

84

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86

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98

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14

perc

enta

ge p

oin

ts

Germany France Italy Spain UK Japan USA



TFP growth, 10y averages, 1976-2015


-1

-0.5

0

0.5

1

1.5

2

2.5

Germany France Italy Spain UnitedKingdom

Japan United States

perc

enta

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poin

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76-85 86-95 96-05 06-15



Some reasons for the slowdown of productivity growth:

a. Structural change toward services and public sectors

(SVR, 2015)

b. End of productivity gains from outsourcing/reorganizing value

chains; one of the main drivers of productivity between 1995 and

2005 (SVR, 2015)

Country

1995 – 2004 2005 – 2014 Share of

manufacturing

in total value

added Total LP

growth

LP

growth

manufact

uring

LP

growth

service

sectors

Total LP

growth

LP

growth

manufact

uring

LP

growth

service

sectors 1995 2014

Germany 1.9 3.1 1.3 0.8 1.6 0.6 22.8 22.6

France 1.8 4.4 1.2 0.8 2.4 0.7 16.2 11.2

Italy 0.5 0.9 0.3 0.1 1.0 – 0.3 20.9 15.4

Spain 0.0 1.1 0.0 1.6 2.0 1.0 17.6 13.2

UK 2.2 3.6 2.1 0.4 1.7 0.6 19.0 9.5

USA 2.3 5.9 1.2 0.9 2.3 0.4 15.9 12.0

Source: SVR, 2015, Tab. 26




c. Rising productivity gap between global frontier firms and laggard

firms – hampered diffusion of technology (Andrews et al. 2015;

OECD 2015)

Source: Andrews et al., 2015, Fig.1

Percentage difference in labour productivity levels from their 2001 values (2001=0)




d. Increasing skill mismatch due to rigidities in labour markets (OECD,

2015)

e. Hampered reallocation of resources from aging and less productive

incumbents toward dynamic thriving new entrants (OECD, 2015)

f. Time lag (up to 30 years) between path braking innovations and its

widespread use (Brynolfsson & Andrew, 2015)

g. Rapid implementation of new technological innovations hampered

by insufficient investment


2

Private sector investments and

capital stocks

2 Private sector investments and capital stocks


80

85

90

95

100

105

110

115

120

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

2007=

100

Germany France UK USA

Growth of private non-residential gross fixed capital formation (real)

Source: OECD Economic Outlook 98 Database, Main Economic Indicator database



90

92

94

96

98

100

102

104

106

108

20

07

20

08

20

09

20

10

20

11

20

12

20

13

2007=

100

Germany France UK USA

Growth of (real) net capital stock in manufacturing

Source: destatis, BEA, ONS, INSEE; own calculations



-25 -20 -15 -10 -05 00 05 10 15 20 25

Electrical equipment (C27)

Computer, electronic and optical products (C26)

Pharma and Chemical products (C20t21)

Machinery and equipment (C28)

Motor vehicles & transport equipment (C29t30)

percentage points (cumulative, 2007-2013), real net capital stock

USA UK France Germany

Change in (real) net capital stock of

R&D-intensive manufacturing industries, 2007-2013

Source: destatis, BEA, ONS, INSEE; own calculations



What can generally be done to stimulate private sector investments

(OECD 2015):

a. Reduce political uncertainties

b. Ease entry and exit

c. Strengthen antitrust policy, enhancing competition

What can be done (from a German perspective):

a. Reform depreciation methods (DIW, 2016a; DIW & HRI, 2014 )

• switch from linear to decreasing balance method of depreciation

• overhaul of depreciation periods and depreciation factors

(reform of Afa-Tables)

b. Increase public sector investments to enhance demand and renew

capital stock (DIW, 2016b)


3

Investment restraint

in the public sector

3 Investment restraint in the public sector


Investment ratios by public authorities as percentage of gross domestic product, at current prices

Source: German Federal Statistical Office; own calculations

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

Overall

States

Federal level

Municipalities



Federal level Federal States Municipalities Overall

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

-5

0

5

10

15

Source: German Federal Statistical Office; own calculations

Net fixed capital formation by level of government In billion euros, current prices



(343,724]

(253.5,343]

(186,253.5]

[35,186]

No data

Investment at local levels Euro per capita, 2013

Source: DIW, 2015b, Abb. 2



0

50

100

150

200

250

300

350

400

Socia

l expenditure

s p

er

capita

0 100 200 300 400 500 600 700 800

Investment per capita

Correlation between social costs and public investments at municipality level Euro per capita, 2013

Source: DIW, 2015b, Abb. 5

3 Some suggestions from the German perspective


Some suggestions for strengthening municipalities in the Germany:

a. Municipality’s tax revenues:

• federal government has few options to directly support specific

municipalities (GRW)

• support via states; this would require modifying the horizontal fiscal

equalization scheme by fully including municipality tax income

(Länderfinanzausgleich) (DIW, 2015a)

b. Municipality’s expenditures: Reimbursement of (more) social

expenditures by the federal level (DIW, 2015c)

Vielen Dank für Ihre Aufmerksamkeit.

DIW Berlin — Deutsches Institut

für Wirtschaftsforschung e.V.

Mohrenstraße 58, 10117 Berlin

www.diw.de

Redaktion Dr. Alexander Schiersch, [email protected]

Literature


Andrews, D., E. Bartelsman and C. Criscuolo (2015), “Firm Dynamics and Productivity Growth in Europe”

Mimeo.

Arnold, F., R. Freier, R. Geissler, P. Schrauth (2015b): Große regionale Disparitäten bei den kommunalen

Investitionen, DIW Wochenbericht 43.

Brynjolfsson E. & A. McAfee (2015): The Second Machine Age: Work, Progress, and Prosperity in a Time of

Brilliant Technologies, Norton & Company.

Dreger, C., H.-E. Reimers (2016b): Welcher Zusammenhang besteht zwischen öffentlich und privaten

Investitionen?, DIW Wochenbericht 18.

Fratzscher, M., M. Gornig, A. Schiersch (2016a): Weak Corporate Investment Requires Immediate, DIW

Economic Bulletin 15.

Fratzscher, M., R. Freier, M. Gornig (2015c): Kommunale Investitionsschwäche überwinden, DIW

Wochenbericht 43.

Gornig, M., C. Michelsen, K. van Deuverden (2015a): Kommunale Infrastruktur fährt auf Verschleiß, DIW

Wochenbericht 43.

DIW & HRI (2014): Private Investitionen in Deutschland, Studie im Auftrag des Gemeinschaftsausschuss

der Deutschen Gewerblichen Wirtschaft.

OECD (2015): The Future of Productivity, OECD, Paris.

Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung (2015): Zukunftsfähigkeit

in den Mittelpunkt, Jahresgutachten 2015/16, Statistisches Bundesamt, Wiesbaden.



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any

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perc

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reduction in working hours

increase in value added

real labour productivity growth

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reduction in working hours

increase in value added

real labour productivity growth

Source: SVR, 2015, Abb. 90

Components of labour productivity change

1995-2004 2005-2014

A1 Trends in Productivity


TFP growth, 5y averages, 1976-2015


-1

-0.5

0

0.5

1

1.5

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Germany France Italy Spain UnitedKingdom

Japan United States

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poin

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71-75 76-80 81-85 86-90 91-95 96-00 01-05 06-10 11-15

Franco-German Conference. Paris. July 2016

Economy & Finance

Transcript of Franco-German Conference. Paris. July 2016