Press release - Productivity slowdown: findings and tentative explanations
The cumulative effects of productivity are the only source of long-term growth. However, all the advanced economies, including Belgium, have seen a general slowdown in productivity growth since the start of the 2000s, and it has been more pronounced in Belgium than in the EU.
This study sheds some microeconomic light on the analysis of the trend in productivity in Belgium, supplementing the macroeconomic analyses that indicate Belgium’s position compared to that of the other advanced economies. This microeconomic analysis tells us more about the sources of productivity growth and reveals some of the causes of the slowdown by means of a series of growth breakdowns.
The analysis uses the concept of total factor productivity (TFP) that reflects the efficiency with which a set of inputs (such as capital and labour) is turned into outputs (such as value added). It represents the change in value added which cannot be explained by changes in the quantities of capital and labour. TFP is estimated by using microeconomic data obtained from the annual accounts filed by Belgian firms for the 1996-2016 period.
Throughout the period analysed, TFP growth was higher in industry than in market services. Given the shift in economic activity towards the services sector, that implies lower aggregate productivity growth. Revitalising the economic fabric in that sector could therefore prompt a reallocation of resources more favourable to growth.
Moreover, during much of the period analysed, internal growth – i.e. the intrinsic rise in productivity in existing firms – was the principal component of aggregate productivity growth. Conversely, in recent years, the reallocation of resources within a branch or between two branches has been the main factor in TFP growth, primarily owing to a more favourable allocation of resources in industry. External growth has had only a very minor impact on aggregate TFP growth, as a result of the low rates of business creation and closures.
Although Belgian firms are still among the most efficient in Europe, they recorded very heterogeneous productivity developments. First, we find that productivity gains are almost entirely attributable to firms at the technological frontier, more often subsidiaries of foreign companies. Technological diffusion towards relatively less efficient businesses is inadequate. Also, “zombie firms” exhibit weak productivity (growth). These firms, which are relatively more numerous in Belgium than elsewhere, slow down aggregate productivity growth and also have an adverse impact on the economy’s growth potential. Reducing their number, especially the worst performing ones, e.g. by restructuring, could therefore be good for the Belgian economy.
A multivariate analysis of productivity determinants was also conducted. It showed that a firm’s productivity is linked to its age, which could indicate that a high level of productivity is essential for long-term survival. High productivity also appears to facilitate direct trade with the rest of the world. The quality of human capital and more intensive use of intangible capital (innovation) could likewise boost the efficiency of firms.
However, the wide variations in the performance of individual firms show that there is no blueprint for generating high productivity levels. There are many factors which may influence a firm’s efficiency, whether they be firm-specific or macroeconomic.
First, firms need to make use of all the internal growth levers. For example, apart from the aspects listed above, firms may become more efficient by investing in staff training. Greater integration in the domestic production network, particularly by outsourcing secondary tasks such as support activities, may similarly help to enhance productivity.
There are also other ways of boosting productivity: stimulating the creation of businesses with high-potential growth and the exit of the less efficient firms, is relevant to improving aggregate productivity. That is particularly important for services, where there is less scope for internal growth. An appropriate regulatory framework is likewise important for promoting competition and innovation, which will encourage the creation of new businesses and enable existing firms to develop efficiently.
Overall, Belgium needs to remain attractive, from an international point of view, in order to pull in the maximum foreign direct investment, a factor driving the spread of technology. High-quality infrastructure and efficient health care and education systems are vital assets for the sustainable, efficient development of our economy. It will be necessary to use these various levers simultaneously and in a complementary way to enhance productivity in order to keep Belgian firms at the forefront of European businesses.