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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!