17/12/2014
Before the performance of apparent productivity of labour, which in some countries, including Spain, is enhanced by a simple economic downturn, one could also wonder about Total Factor Productivity (TFP), also called Multifactor Productivity, which measures the technological efficiency of the economy. A positive development would send signals that the improvement of competitiveness could be sustainable in the long term.
The TFP not only depends on existing technology and innovation, but also on the quantity and quality of physical and human capital, as well as infrastructure and business strategies, i.e., the way in which the various production factors are combined. Precisely the elements lying behind the PTF and the inability to improvise them lead us to consider these factors as drivers of productivity and competitiveness growth in the long run.
A quick analysis of the behaviour of TFP allows us to state that, as in the case of apparent labour productivity, total factor productivity also seems to have a counter-cyclical behaviour, besides being the only country among those considered showing such a behaviour. The decline in TFP during the growth period prevented Spain from converging in productivity and competitiveness with its neighbouring countries, which are also its main trading partners.
However, despite the negative behaviour showed by the TFP during the boom years, the crisis seems to have reversed this trend. Thus, between 2008 and 2013 the TFP registered a positive behaviour, contrary to what is happening in other countries of the European Union. The fact that something similar was observed in the case of the apparent productivity of labour leads us to wonder if the growth experienced during the crisis will lay the foundations to correct the competitive gap generated during the boom phase. In this sense, the decomposition of TFP in its cycle and trend, see graphic below, shows us not only the counter-cyclical nature of TFP, but also a shift towards competitiveness increases which will be maintained over time, as the trend reflects its behaviour in the long run.
Decomposition of TFP series in its trend and cyclical component
But on what is the current growth of TFP based? If lying behind this growth is an accumulation of productive capital, a better training of the workforce, a better organisation of business, or a structural shift towards sectors with a higher TFP growth, productivity will be sustainable, and eventually gains in competitiveness will be observed, but if not, everything will have been a mirage.
Contributions of labour and capital to TFP growth (1990-2013)
In this regard, we note that of all the factors able to boost TFP, it is human capital that is playing a major role in the growth of our productivity, because although during the expansion private productive investment was significant, especially in information and communication technology (ICT), the destination of this, as the BBVA Foundation states (2010), has not been adequate, which now prevents having a return on investment. The negative contribution of the capital seen in the chart above points in this direction.
Inadequate investment in productive capital, technological backwardness and limited organisational changes implemented during the expansion, limit, at least in part, the current TFP growth in the Spanish economy. Although the underlying cause of all this is none other than the production structure of our economy. The heavy weight of low-skilled intensive labour sectors, such as construction and some services, does not support the increasing technological investment, nor does it encourage organisational restructuring within the company, very stagnant in old ways. In addition, our industrial production, based on mature activities and with little technological content, is not helpful either. In short, Spain has a delay in incorporating technology and has a production structure that has become a drag on sustainable productivity and competitiveness growth.
Achieving a greater long-term productivity should be one of our goals to increase competitiveness and exports of the Spanish economy. This would result in an overall benefit to the country, as the inflation rate would decrease, the standard of living of the population would increase, more job opportunities would be created and social conflicts would be removed. But, as Cuadrado and Maroto (2012) state, there would also be other beneficiaries: workers (higher wages, better working conditions, job security, professional skills development . . .), consumers (better prices and higher quality products) companies (better competitive position and greater opportunities for investment and job creation) and government (greater resources for social programs).
These benefits, which should be deepened, are more than sufficient to justify, on the one hand, a modernisation of the productive structure delivering a higher weight to capital-intensive sectors and skilled labour and, on the other hand, a change in the business structure, with larger companies, which are the ones that spend more on R & D, and also the most agile and flexible in adopting technology, diversifying production and improving business organisation.
References
Cuadrado y Maroto (2012), El problema de la productividad en España: causas estructurales, cíclicas y sectoriales, Ed. Fundación de las Cajas de Ahorro, Madrid.
Fundación BBVA (2010), “La productividad en España: crecimiento y crisis”, Serie Capital y crecimiento nº 3 de la Fundación BBVA.