Growth strategies
Czech ambition and OECD experience
OECD, 11 January 2006
Productivity and the
business environment
Giuseppe Nicoletti
OECD Economics Department
The Czech Republic had a large
productivity gap in 2004
Percentage point differences in PPP-based GDP per capita with respect to the United States
Percentage gap in GDP per capita
Effect of labour utilisation
Gap in GDP per hour worked
Turkey
Mexico
Poland
Slovak
Republic
Hungary
Czech
Republic
Korea
New
Zealand
EU-19
OECD
Euro-zone
Japan
Australia
Canada
Switzerland
-80 -60 -40 -20
0
-80 -60 -40 -20
0
-80
-60
-40
-20
0
The CR has been converging to best
practice … but very slowly
Average hourly labour productivity growth, 1995-2004
6.0
5.0
4.0
3.0
2.0
1.0
0.0
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At this rate, it would take more than 50 years to reach Eurozone
levels and more than 70 years to reach US levels!
What can be done to accelerate
productivity growth?
• Two general levers:
– Speed of catch up to best practice
– Rate of leading-edge innovation
• For country like CR speed of catch up is crucial and mainly
depends on:
– Ensuring fast rate of capital formation (capital deepening)
– Incentives to improve efficiency in use of inputs (eliminate x-inefficiency)
– Incentives to implement new technologies (enhance capital quality)
• Additional important elements are:
– Ensuring a smooth process of structural adjustment, i.e.
• Supporting changing patterns of manufacturing specialisation,
• Supporting move from manufacturing to (ICT-using) services
– Creating framework conditions for setting off innovation process
What can be done to accelerate
productivity growth?
• Creating conditions for an open, competitive and smooth
business environment is key for catch up because:
– Lower product market rents and adjustment costs encourage
domestic investment in crucial industries
– Peer pressures and rivalry step up efforts to improve efficiency
and incorporate new technologies (e.g. ICT)
– Firm turnover brings new vintages of technology and adds to
competitive pressures in the context of “creative destruction”
– FDI is attracted by competitive and low cost environments and, in
turn,
– establishment of foreign affiliates stimulates efficiency gains by
• bringing competition even in non-tradable sectors and
• creating technological spillovers on domestic firms
What can be done to accelerate
productivity growth?
• An open and competitive environment in the service
sector is particularly important for catch up
because:
– Efficiency gains in this sector propagate to other sectors
through input-output linkages
– Use of ICT can more than compensate for any “Baumol
disease” effect in the process of moving from
manufacturing to services
• Recent OECD research shows that such a business
environment can better reflect global productivity
improvements in periods of rapid technological
change
How can policies help?
1. Ensure rivalry among domestic firms
through:
– Appropriate competition policies: antitrust
law, enforcement and regulation of network
industries
• Here CR is close to best practice according
to comparative OECD indicators
– A level competitive playing field
•
Here CR has an unfinished privatisation
programme according to comparative OECD
indicators
How can policies help?
2. Encourage entry of new high productivity
firms through:
–
Low administrative and/or legal barriers to entry
•
–
Low border barriers
•
–
Here CR should further lighten costs for business
startups, streamline and simplify administrative
procedures and remove remaining legal barriers to entry
according to OECD indicators
Here CR is close to best practice according to OECD
indicators
Efficient and competitive financial markets
•
Recent OECD and other research find a link between
financial market development/competition and growth
How can policies help?
3. Support productivity-enhancing structural
adjustment through labour market policies
that:
–
facilitate implementation of new production
techniques
•
–
strict hiring and firing rules are harmful for new firm entry
and certain types of innovations
permit swift and efficient reallocation across jobs
and sectors
•
•
barriers to job mobility (e.g. rigid housing market) are a
hindrance
barriers to job search/matching (e.g. inappropriate income
support schemes) are a hindrance
How can policies help?
4.
Support productivity-enhancing structural adjustment
through education and training policies that upgrade
general purpose and specific skills of workers to
match skill-biased technical change
5.
Encourage leading-edge innovation through policies
in product, financial and tertiary education markets
that generate the right incentives/opportunities for
innovative firms and a critical mass of researchers
▼
But these issues will be explored in detail this
afternoon