Productivity and the business environment Giuseppe Nicoletti OECD Economics Department Growth strategies Czech ambition and OECD experience OECD, 11 January 2006

The Czech Republic had a large productivity gap in 2004

The CR has been converging to best practice … but very slowly 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 andbringing competition even in non-tradable sectors and creating technological spillovers on domestic firmscreating 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 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 –Low border barriers 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