Evaluating policies to improve TFP in low productivity growth: Spain and Italy

This paper develops a framework to analyze the potential of different variables to increase total factor productivity (TFP) growth in countries with poor productivity performance. The analysis is carried out in two stages. Firstly, we make use of a regression framework to estimate the main determinants of TFP growth for a benchmark of countries: Austria, Denmark, Finland, France, Germany, Italy, Netherlands, Spain, Sweden and the UK. In the second stage we make use of the coefficients estimated in the first to measure the impact that the selected variables would have on improving TFP growth in Italy and Spain.

It takes an industry level approach using the classification of 24 sectors of the market economy. The information comes from the EU KLEMS database covering the period 1998-2007. Once this influence is measured, the difference in the scores of each variable in Italy and Spain with respect to the benchmark is used to test their potential to increase productivity growth.

To the traditional determinants highlighted by the literature we have added three variables related to the working of institutions (labor market, organization of firms as reflected in their size, and regulations), together with a wider set of variables capturing the extension and use of ICT by firms and households. The econometric estimations allow the distance of the two laggard countries to the benchmark to be computed and to propose measures for improvement.

Results show that in both countries it is important to improve the size of firms, increase R&D investment, ICT (information and communication technologies) investment and the use of new technologies by individuals. In Spain it is also important to reduce labor temporality, whereas Italy should reduce barriers to entry in services and improve the endowments of Internet infrastructures.

Keywords: growth, total factor productivity, ICT, institutions.