Capital Accumulation and the Productivity Slowdown Matilde Mas Universitat de València and Ivie The Mystery of Low Productivity Growth in Europe 8th Annual NBP Conference on the Future of the European Economy (CoFEE) October 26th 2018, Warsaw

What is the productivity puzzle? The slowdown of productivity growth since the beginning of the Great Recession (and its worsening after) In a context of strong technological growth (AI, ML, I o T, Robotisation) Is it a global phenomenon? It affects all mature economies (e.g. most of EU countries, US, and Japan) Except for China and India, which have experienced a Golden Age over the 2005-2010 period. Annual growth rate of productivity per hour worked,1995-2017. Percentage and 1995=100 Note: China and India with productivity per person employed measure Source: European Commission (AMECO) and The Conference Board Total Economy Database, Nov 2017 (TCB) Source: European Commission (AMECO)

Potential explanations Supply shocks affecting potential output through the production function components: capital, labor or technical progress. Bloom, Jones, Van Reenen and Webb (2017): Are ideas harder to find? Do we only need new ideas, or also new ways of combining existing ones? 2. Measurement problems based on the suspicion that the instruments available to measure output, and therefore also productivity, are not ready for the digital revolution. They do not seem to explain the puzzle. On the contrary, its explanation becomes more complicated 3. Time lags in the diffusion of technical progress (as it happened in previous revolutions). Solow's paradox "ICT is everywhere but in statistics" is back, not due to computers but to a new wave of innovations associated to the revolution of Artificial Intelligence, Machine Learning, and the IoT.

Labour productivity growth. The long-run perspective From 1975 onwards we have gone through two technological revolutions: computers (Solow’s paradox) and AI (actual productivity paradox) If we switch the headlights, from low to high beams, most of the countries (specially Poland; Italy the exception) show an acceptable labour productivity performance. Labour productivity 1975-2016; 1975=100 and 1995=100 Source: The Conference Board Total Economy Database, Nov 2017 (TCB)

Capital productivity growth. The long-run perspective Capital productivity showed a negative performance for all countries due to: Look for short-run profits instead of long-run productivity gains Wrong investment decisions more likely in times of strong technical progress Two technological revolutions (computer’s and AI) requiring important adjustment costs, and also Requiring complementary investments, basically on intangible assets Productivity of capital 1975-2016; 1975 = 100 and 1995=100 Source: The Conference Board Total Economy Database, Nov 2017 (TCB)

The sources of productivity growth. The long-run perspective Capital deepening has been strong in all countries (specially Spain & Poland) Capital/labour ratio 1975-2016; 1975=100 and 1995=100 Source: The Conference Board Total Economy Database, Nov 2017 (TCB)

The sources of productivity growth. The long-run perspective And also Total Factor Productivity (exceptions Spain & Italy since 1995) Total Factor Productivity (TFP) 1975-2016; 1975=100 and 1995=100 Source: The Conference Board Total Economy Database, Nov 2017 (TCB)

The sources of productivity growth. The long-run perspective ICT capital was the main source of productivity growth since the beginning of the nineties. ICT is behind Solow’s paradox. ICT accumulation needed to reach a sufficient critical mass before making the results on productivity visible ICT Capital 1975-2016; 1975=100 and 1995=100 Source: The Conference Board Total Economy Database, Nov 2017 (TCB)

    The productivity puzzle in historical perspective   Why is the initial impact of the General Purposes Technologies (GPTs) relatively modest? - Because of the time it takes to improve technology enough to be worth putting it into practice. - Although it may grow a lot initially, at the beginning its weight in aggregate capital is small. - It also takes time for the population (workers) to know how to extract its full potential. - And for firms to introduce changes in the working of their organisations

The ICT revolution(s) requires… To introduce changes - often drastic - in the organization of the company: To increase sophistication via the design of new products To create brand image that distinguishes them from mere commodities; To improve customer loyalty; To have qualified and trained workers at the workplace That is, to invest in intangible assets

Investment in tangible and intangible assets In all countries, investment in intangible assets has gained weight on total investment at the expense of tangible assets In USA, UK and France, investment in intangible assets is already higher than in tangible assets Tangible investment over expanded GDP (AT/GDP). Percentage Intangible investment over expanded GDP (AI/GDP). Percentage Note: Real estate activities, public administration, education, health and social services are excluded. Average 1997-2014 for the United Kingdom. Source: INTAN-Invest, EU KLEMS, Eurostat, F. Cotec and FBBVA

Final Remarks With the term productivity puzzle we are referring to a phenomenon similar to Solow's (1987) paradox: Strong growth of technical progress that does not translate into productivity growth. The deceleration of labor productivity has been accompanied by negative rates of change in the productivity of capital; deceleration in the capital / labor ratio; and also of TFP. From a long-term perspective, the only persistent phenomenon is the negative rate of change in capital productivity in all countries. We agree with Brynjolfsson, Rock and Syverson (2017) and Crafts (2010) making time lags the main explanatory factors of the productivity paradox. At present, the impressive improvements associated with the AI and the ML have not yet been sufficiently spread out throughout the economy. Like many other GPTs, their full effects can not be observed until new waves of complementary innovations take place. Investment in Intangible Assets aimed at reducing adjustment costs, to introducing organizational changes and to improving workers’ performance through continuous training is a necessary condition for extracting the full potential of new technologies.

Capital Accumulation and the Productivity Slowdown Matilde Mas Universitat de València and Ivie The Mystery of Low Productivity Growth in Europe 8th Annual NBP Conference on the Future of the European Economy (CoFEE) October 26th 2018, Warsaw