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Solving the productivity puzzle

This event featured the presentation of new research by the McKinsey Global Institute.

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Presentation by Jan Mischke


This event featured a keynote by Jan Mischke, presenting the latest McKinsey Global Institute study on the recent productivity-growth slowdown.
The study focuses on labour productivity differentials across France, Germany, Italy, Spain, Sweden, the United Kingdom, and the United States, and identifies three different dimensions of the slowdown:
• “wave 1”, when the productivity boom from the ICT revolution started waning;
• “wave 2”, a decline due to the aftermath of the financial crisis, in particular because of weak demand and uncertainty; and
• “wave 3”, which refers to delayed productivity gains of digitalization.
Cross-country differences were highlighted:
• Sweden and the US were mostly affected by the waning effects of the ICT revolution;
• the UK by a stop in its financial sector boom when the crisis hit;
• Germany and France (relatively less affected because starting from more moderate growth) by capital intensity;
• productivity growth in Italy and Spain was already stalling and did not decline further.
The study estimates potential future recovery in productivity growth of about 2%, of which a lot comes from unlocking demand growth and promoting digital diffusion. Downside risks lie mostly with long-term demand leakages.
He concluded by emphasising the need for policy makers to promote sustained demand and investment growth, as well as digital diffusion.
During the panel discussion, Dirk Pilat highlighted the importance of looking at micro-drivers of aggregate outcomes, and in this case at firm heterogeneity in terms of productivity growth, as while frontiers firms are performing well, the rest of the economy has found difficulty in catching up. Thus, he pointed out that promoting diffusion is fundamental. Moreover, he argued that innovation should not only be about technology, but also about organization and processes, and that in the EU stagnation in business dynamism also drags productivity growth down.
Janet Henry further highlighted that we may still suffering from a legacy of the financial crisis, as some laggard firms might still be a hangover from the lack of foreclosure by banks. Moreover, she stressed the issue of mismeasurement and that cheap labour may have been causing part of the slowdown, and that increasing wages might incentivize companies to invest more. She brought the example of fast-growing investment in robotics in China and in general that there is scope for catch up just by absorbing technology already used in the West.
Reinhilde Veugelers stressed that a major difference between today’s technological boom and the previous ones is that now China is a rising power in science and technology, and she wondered how this will affect the EU. She also highlighted that the EU partially failed to reap the benefits of the ICT boom because of lack of creative disruption, and that the EU model mostly allows for incremental growth rather than a disruptive one. She called for a single and open market not only for digital-producing sectors but also for all digital-using sector.
The discussion highlighted several issues including, among others, the need to build regulation in a way that allows for future technology, transition costs of digitalization, heterogeneity within and across sectors, and how to increase allocative efficiency while keeping social costs low.

Notes by  Francesco Chiacchio