TFP Growth in Old and New Europe Michael C. Burda Humboldt-Universität zu Berlin 14th Dubrovinik Economic Conference Dubrovnik, June 2008

Summary The European Integration Episode and Paths of Integration TFP and Measurement Issues Alternative TFP measurements in Old and New Europe Findings

How to achieve most efficient use of resources among the European regions? Solow growth Migration Capital mobility Factor proportions (Heckscher-Ohlin) trade Adoption of leading edge technologies Elimination of inefficiencies; establishment of property rights and rule of law The Great European Integration Episode

Remember: Ultimately, growth in total factor productivity (TFP) is the source of all per capita economic growth The role of product and labor market regulations for the form and speed of implementation of new innovations, especially ICT (van Ark et al. 2008) TFP and Measurement Issues

Old Europe v. New Europe Now, you're thinking of Europe as Germany and France. I don't. I think that's old Europe. If you look at the entire NATO Europe today, the center of gravity is shifting to the east. And there are a lot of new members. And if you just take the list of all the members of NATO and all of those who have been invited in recently -- what is it? Twenty-six, something like that? -- you're right.

Cost of starting businesses, regulation Employment protection, firing costs Result: Different internet penetration levels, ICT adoption, especially in retail services, communication, business services Old Europe v. New Europe What about Central and Eastern Europe? Old Europe v. New Europe

29 countries “Old Europe”=Austria, Belgium, France, Germany, Greece, Italy, Portugal, Spain, Switzerland “New Europe”=Denmark, Finland, Ireland, Netherlands, Norway, Sweden, UK “Eastern (CEE) Europe”=Albania, Bulgaria,Croatia Czech Republic, Estonia,Hungary,Lithuania,Latvia, Russia, Slovakia, Slovenia, Poland, Romania US, other OECD excluded Old Europe v. New Europe

Solow residual measure of TFP growth In words: What´s left of real growth after observable reasons for growth are subtracted Problems with Solow residual: Capital stock measurement (Burda/Severgnini 2008) Measurement of TFP Growth

Capital Stock Measurement Capital stock: Never really observed Starting condition: a wild guess

Synthetic Data: DSGE Model subject to K 0 given and, for t  0 Households choose sequences of consumption, labor supply, future capital and current utilization of existing capital to maximize expected utility : Firms maximize profits, renting capital and hiring labor supplied by the households using a standard neoclassical CRS production function Equilibrium achieves the social planner‘s optimum

Sample Size (quarters) RMSE Measurement error: Results from a Monte-Carlo Study Source: Burda/Severgnini (2008) Sample Size (quarters)

General idea: Can we remove capital entirely from the calculation? Two proposed solutions: –Direct Substitution: –Generalized Differences (recursive): Measurement of TFP Growth TFP growth GD TFP growth DS

STDSGDSTDSGD Old Europe New Europe CEE Summary: Averages of TFP Growth Estimates

STDSGDSTDSGD Old Europe New Europe CEE Summary: Standard Deviation of TFP Growth Estimates

Summary of Results Impact effect of PMR on TFP growth is always negative Impact effect of EPL on TPF growth is always insignificant Long-run effect of both PMR and EPL on TFP is always negative, not always significant Interactions not significant More to be done, but consistent with evidence of Nicoletti and Scarpetta and others

Old Europe v. New Europe World Bank Project Doing Business around the World – Starting a business indicators Number of procedures Durations in days for approval Cost in GNI per capita Avg. Old Europe Avg. New Europe

Old Europe v. New Europe World Bank Project Doing Business around the World – Starting a business indicators Number of procedures Durations in days for approval Cost in GNI per capita Avg. Old Europe Avg. New Europe Avg. CEE Europe

Old Europe v. New Europe World Bank Project Doing Business around the World – Starting a business indicators Number of procedures Durations in days for approval Cost in GNI per capita Avg. Old Europe Avg. New Europe Avg. CEE Europe Croatia Estonia572.0

Conclusions Large TFP growth gains in CEE, against trend of both Old and New Europe Should be interpreted as low-lying fruit after transformation, moving to the frontier Quo vadis, Central and Eastern Europe? Benefit of competition via entry from established (Old and New) European firms Backwash to Old Europe? Let´s hope so