Download 1. Output gaps and productivity slowdown

Macroeconomic vs. structural policies:
Which one can do the trick?
Dubrovnik Economic Conference, 14 June 2016
Vedran Šošić, vice governer
e-mail: [email protected]
“I don’t know about you people, but I don’t want to live in a
world where someone else makes the world a better
place better than we do.”
Character of Gavin Belson, Silicon Valley TV series
Three main points

Output gaps vs. Productivity slowdown



Low potential growth creates adverse feedback loops with
macro-policies


In a very short term output gaps dominate the impact of
productivity slowdown;
However, over the medium to long-term, impact of productivity
differentials dwarfs any output gap of reasonable magnitude.
Standard approach to policy-making with (largely) independent
instruments and goals need to be rethought.
Macro-policies need to be supplemented by structural
policies in order to generate traction

Still, structural policies are a complex set of instruments – enabling
relocation of resources within the efficiency frontier probably easier
to do than moving the frontier outwards.
1. Output gaps and productivity
slowdown

Productivity has been slowing for a several decades now,
both in the developed and more recently in the emerging
markets.


Muted productivity growth does not provoke immediate
policy reaction – short term impact of productivity slowdown
is rather low, it does not cause much pain.


Lower contributions of capital investments and TFP, while ICT
investments and investments in human capital fail to reverse the
trend.
However, the impact of weak productivity dynamics cumulates
quickly – compounding.
Output gaps provoke much stronger (macro) policy reaction,
while their magnitude remains limited in most cases.
Labor productivity slowing down across
all dimensions
Sources of GDP growth, average annual contribution % change
USA
TFP
Cap excl. ICT
Lab hours
EU17
EU10
2009-2014
2001-2008
1995-2000
2009-2014
2001-2008
1995-2000
2009-2014
2001-2008
1995-2000
2009-2014
2001-2008
1995-2000
6
5
4
3
2
%
1
0
-1
-2
-3
-4
Croatia
ICT cap
Lab compos.
Labor productivity per person
Note: In case of Croatia, capital does not differentiate between ICT capital and capital excluding ICT, but is entirely valued under
capital excluding ICT.
Source: The Conference Board Total Economy Database (September 2015).
TFP slowdown (and in some cases
decline) visible across all groups of
countries
Trend growth of total factor productivity using HP filter
5
4
3
2
% 1
0
-1
-2
World
Euroarea
Croatia
Emerging markets
Japan
India
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-3
USA
China
Note: Total factor productivity growth accounts for the changes in output not caused by changes in labor or capital
inputs.
Source: The Conference Board Total Economy Database (September 2015).
Counterfactuals for output with no
productivity slowdown
200
175
150
125
% 100
75
50
25
0
-25
-50
100
0
Actual GDP growth
Simulated GDP growth
15
-40
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
-20
Actual GDP growth
Simulated GDP growth
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
20
Switzerland
% 30
0
40
0
45
20
60
20
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
%
%
40
60
Italy
80
60
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Slovenia
100
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
%
40
Austria
80
Actual GDP growth
Simulated GDP growth
60
Actual GDP growth
Simulated GDP growth
Actual GDP growth
Simulated GDP growth
Labor productivity
gap
Poland
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Croatia
200
175
150
125
100
% 75
50
25
0
-25
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Actual GDP growth
Simulated GDP growth
100
85
70
55
40
% 25
10
-5
-20
-35
-50
Estonia
Germany
Actual GDP growth
Simulated GDP growth
Actual GDP growth
Simulated GDP growth
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Ireland
90
75
60
% 45
30
15
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Actual GDP growth
Simulated GDP growth
200
180
160
140
120
% 100
80
60
40
20
0
US
Actual GDP growth
Simulated GDP growth
Actual GDP growth
Simulated GDP growth
260
240
220
200
180
160
% 140
120
100
80
60
40
20
0
China
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
90
75
60
% 45
30
15
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Japan
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
90
75
60
% 45
30
15
0
Actual GDP growth
Simulated GDP growth
Note: Labor productivity gap implies a loss in GDP rates due to lower contribution of labor productivity. It is a difference between the actual GDP accumulated
growth rates (contribution of employment and labor productivity) and simulated GDP accumulated growth rates. Simulation is based on keeping contribution
of labor productivity constant in the period 2001-2015 on the average value recorded between 1995 and 2000. Data for 2016 refers to The Conference Board
forecasts.
Source: The Conference Board Total Economy Database (May 2016).
Counterfactuals for output with no
productivity slowdown
Accumulated labor productivity gap between 2001 and 2016
40
20
0
% -20
-40
-60
-80
-100
Slovenia
China
Germany
Japan
Switzerland
USA
Italy
Austria
Poland
Ireland
Croatia
Estonia
-120
Note: Labor productivity gap implies a loss in GDP rates due to lower contribution of labor productivity. It is a difference between the actual GDP accumulated
growth rates (contribution of employment and labor productivity) and simulated GDP accumulated growth rates. Simulation is based on keeping contribution
of labor productivity constant in the period 2001-2015 on the average value recorded between 1995 and 2000. Data for 2016 refers to The Conference Board
forecasts.
Source: The Conference Board Total Economy Database (May 2016).
Longer data series produces even more
dramatic results
600
Japan
500
500
in %
Labor productivity gap
400
Labor productivity gap
400
300
200
200
100
100
0
0
Actual GDP growth
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
300
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
in %
Germany
600
Simulated GDP growth
Actual GDP growth
Simulated GDP growth
US
250
in %
200
Labor productivity gap
150
100
50
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
0
Actual GDP growth
Simulated GDP growth
Note: Labor productivity gap implies a lose in GDP growth rates due to decreasing contribution of labor productivity. It is a difference between the actual GDP
accumulated growth rates (contribution of employment and labor productivity) and simulated GDP accumulated growth rates. Simulation is based on keeping
contribution of labor productivity constant in the period 1971-2016 on the average value recorded between 1951 and 1970.
Source: The Conference Board Total Economy Database (May 2016).
-10
-12
-12
-14
Greece
Ireland
Portugal
Spain
Estonia
Italy
Slovenia
USA
Iceland
Finland
Hungary
OECD - Total
EA15
Turkey
Denmark
UK
Croatia
Netherlands
Sweden
Canada
Austria
Slovak Rep.
Japan
Czech Rep.
France
Switzerland
Australia
New Zealand
Mexico
Chile
Germany
Norway
Belgium
Poland
Korea
Israel
-4
Average output gap 2009-2015
-2
%
-8
2
4
0
2
-4
-4
-6
-6
Ireland
Iceland
Greece
Spain
Estonia
Canada
Croatia
Denmark
Hungary
Finland
Slovenia
Austria
Portugal
Italy
EA15
France
USA
UK
Netherlands
Sweden
New Zealand
OECD - Total
Belgium
Australia
Switzerland
Mexico
Korea
Czech Rep.
Germany
Norway
Turkey
Chile
Israel
Japan
Poland
Slovak Rep.
Output gaps in most cases modest compared to
implicit output losses due to productivity slowdown
8
6
Average output gap between 2000 and 2008
4
% 2
0
-2
0
-2
%
-8
-10
Output gap forecast for 2016
Note: Values for 2016 are forecasts. Output gap represents a deviation of actual GDP from potential GDP as % of potential output.
Source: OECD.
2. Spillovers and adverse feedback loops
between policy instruments
Traditionally, one policy instrument – one policy
goal.
 More recently, policy spillovers and feedbacks are
getting acknowledged.
 Still, policies are expected to produce expected
outcomes if potential spillovers are properly taken into
account.

Is it really the case?
Structural dimension of macro-policies
getting stronger
Source: The transmission mechanism and Financial Stability Policy, Ministry of Finance of the Kingdom of Sweden, June
2015.
Monetary policy and structural policies

While low policy rates may have been consistent with low
inflation, they might have contributed to excessive credit
growth, build-up of asset bubbles and misallocation of
resources


Unprecedent monetary accomodation (NIRP, QE) – helps
to keep output gaps at bay, but also has undesirable sideeffects


Adverse impact on productivity.
Low or negative real interest rates reduce corporate debt burden
and in many cases keep the “zombies” alive (or undead), inhibiting
resource relocation.
Spillovers also work the other way around – low
productivity growth reduces equilibrium interest rates and
also the room for monetary policy to act.
Fiscal policy and structural policies


Fiscal policies traditionally has major structural
dimension – taxing and spending decisions shape
incentives for work and consumption.
Now even macro-dimension is getting “structural”


Imprudent fiscal policies - procyclicality and adverse feedback
loops between the sovereign risk, financial system and nonfinancial sector.
Low potential growth – major implications for debt sustainability.
3. Getting structural policies right


Two dimensions of structural reforms:

Adjustment capacity of the economy relocation of resources
(‘restructuring of the economy’) – inputs used more efficietly, gets
the economy closer to the efficiency frontier.

Potential growth rate – expanding the efficiency frontier.
But many policies:

Product market reforms, Competition policy, Labor market reforms,
Public finance and taxation (including Social security system),
Human capital development, Innovation policy, ...
Some estimates of potential gains
(IMF REI)
Potential Efficiency Gains from Structural Reforms (% of GDP)
Source: IMF’s „Regional Economic Issues Report on Central, Eastern and Southeastern Europe”, May 2016.
The Ricardo conundrum
Export growth
115
1,2
1,0
0,8
0,6
0,4
0,2
0,0
-0,2
-0,4
-0,6
-0,8
-1,0
-1,2
110
index, 2012=100
q-o-q, % change, seasonally adjusted
Real GDP growth
105
100
95
90
85
80
2011
2012
2013
EA19
Source: Eurostat.
2014
Spain
2015
2016
2012
2013
2014
Belgium
Germany
Spain
Italy
Netherlands
Portugal
Source: Eurostat.
2015
2016
France
Improvement in labour cost efficiency
- wage restrain not predominant
Sources of improved labour cost efficiency
14
percentage points
12
10
8
6
4
2
0
-2
2009
2010
2011
2012
2013
2014
2015
Total ULC improvement relative to euroarea average
Contribution of compensation per hour
Contribution of output per hour
Note: Cumulative difference between Spain and euroarea in ULC growth (in
%)
Source: OECD.
Key takeaways...

Delaying structural reforms initially seem not to cause
great pain – but compounding can work miracles over the
medium to long term.

Failure for a policy realm to shoulder the burden can
render other policies disfunctional – as well as
overreliance on a policy


Need to avoid policy errors and coordinate policies.
Structural policies are many and diverse in their effects

In principle, it should be easier to move closer to the efficiency
frontier than move the frontier itself.

The worse your initial position is, reaping the reform effects should
be easier.
Thank you!