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Measuring Progress in the Spanish Economy:
a World KLEMS - Ivie Approach
Francisco Pérez
University of Valencia & Ivie
Madrid May 24th, 2016
2
Growth, accumulation and productivity in Spain
• During the last decades Spanish growth has been intense, but the
evolution of its productivity has been negative
Source: AMECO, BBVA-Foundation-Ivie, EU KLEMS, TCB and own elaboration.
Figure 1. Contributions to GDP growth. 1995-2012 (percentage)
-1
0
1
2
3
4
France Germany Italy Spain UK US
Net Capital Capital quality Hours worked Labour quality TFP GDP
3
Labour productivity in Spain
• The evolution of productivity per hour in Spain has been moderate
during decades when compared with that of most developed areas.
Source: AMECO, World Bank, EU KLEMS, TCB and own elaboration.
Figure 2. GDP, GDP per capita and labour productivity. Growth rate. Spain, 1995-2015
(percentage)
-6
-4
-2
0
2
4
6
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199
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199
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201
5
GDP GDP per capita Labour productivity
4
Labour productivity in Spain• Labour productivity and the difficulty of creating new jobs have
contributed to Spain´s stagnant convergence with advanced
economies
Figure 3. GDP per capita and labour productivity. Convergence, 1960-2015 (US=100)
30
40
50
60
70
80
90
100
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0
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Spain EU15
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Spain EU15
Source: AMECO, World Bank, EU KLEMS, TCB and own elaboration.
a) GDP per capita b) Labour productivity
5
Capital deepening
• The investment effort of the Spanish economy has been strong,
increasing capital endowments per worker
Figure 4. Investment effort (GFCF/GDP) and convergence in net capital per person
employed
Source: AMECO, BBVA-Foundation-Ivie, EU KLEMS, TCB and own
elaboration.
a) GFCF/GDP. Spain, 1960-2015
(percentage)b) Net capital per employed person,
Spain and EU15, 1970-2014 (US=100)
10
15
20
25
30
35
40
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Source: BBVA-Foundation-Ivie, INE and own elaboration.
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Spain UE15
6
Improving human capital• Improvements in educational levels have been substantial, but labour
productivity stagnated from 1985 until the arrival of the crisis.
Figure 5. Employment and labour productivity. Spain, 1980-2015
Source: AMECO, BBVA Foundation-Ivie, EU KLEMS, TCB,
World Bank and own elaboration.
b) Labour productivity (1980=100)a) Employed population by educational
attainment
0
10
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Until lower secondary education Upper secondary education
Non university terciary education University education
Source: INE and own elaboration
60
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Labour productivity (Y/Hours worked)
Labour productivity (Y/Labour services)
7
Looking into the capital productivity in Spain• The fall in capital productivity starts earlier and becomes more intense than in
other economies when the productive capital measurement is considered
20
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Capital productivity (Y/Net capital)
Capital productivity (Y/Capital services)
a) Capital productivity. Spain, 1980-2014
(1980=100)
Figure 6. Capital productivity
Source: AMECO, BBVA Foundation-Ivie, EU KLEMS, TCB, World Bank and own elaboration.
b) Capital productivity. Growth rates.
International comparison, 1995-2012
(percentage)
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
France Germany Italy Spain UK US
Y/Net capital Y/Capital services
8
TFP growth in Spain: two estimates
• Growth rates of TFP are close to zero when quality improvements of factors
are not accounted for, and negative when these are considered
Figure 7. TFP. Growth rate. Spain, 1980-2014
(percentage)
Source: AMECO, BBVA Foundation-Ivie, EU KLEMS, TCB, World Bank and own elaboration.
-3
-2
-1
0
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TFP (Inputs: Net capital and hours worked) TFP (Inputs: Capital services and labour services)
9
Inputs contributions and TFP growth: international perspective
• Improvements in the quality of labour and capital services increase
the contributions of factors but, despite these changes, many
countries present significant TFP growth rates in recent decades.
-1
0
1
2
3
Germ
any
Arg
entina
Austr
alia
Chin
a
South
Kore
a
United S
tate
s
Spain
Fin
land
Fra
nce
India
Irela
nd
Italy
Japan
Mexic
o
Port
ugal
United K
ingd
om
Sw
ed
en
b) Growth rate of TFP
Note: for Argentina the period is 1985-2010
Source: AMECO, APO, BBVA Foundation-Ivie, EU KLEMS, TCB, Jorgenson and Vu (2016), OECD, World Bank and own elaboration.
a) Inputs contribution
Figure 8. Contributions to GDP, 1985-2012 (percentage)
DEU
ARG
AUS
AUT
BEL
CAN
CHN
KOR
DNK
USA
ESPPHL
FIN
FRA
INDIDN
IRN
IRL
ITA
JPN
MYS
MEX
NLD
PAK
GBR
THA
0
1
2
3
4
5
6
7
0 1 2 3 4 5 6 7
Inputs
(la
bou
r serv
ices a
nd c
apital serv
ices)
Inputs (hours worked and net capital)
10
Crisis, overcapacity and TFP divergence• The low level of activity has caused significant excess capacity in many
economies. However, in Spain this problem exists in the recent real
estate boom years and TFP has been diverging with developed
economies since 1995
-2
-1
0
1
2
Germ
any
Arg
entina
Austr
alia
Chin
a
South
Kore
a
United S
tate
s
Spain
Fin
land
Fra
nce
India
Irela
nd
Italy
Japan
Mexic
o
Port
ugal
United K
ingd
om
Sw
ed
en
a) TFP. Growth rate, 2007-2012
(percentage)
40
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80
90
100
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0
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Spain EU15
b) TFP. Levels, 1960-2015 (US=100)
Figure 9. TFP: Growth rate and levels. International comparison
Note: for Argentina the period is 2007-2010
Source: AMECO, APO, BBVA Foundation-Ivie, EU KLEMS, TCB, Jorgenson and Vu (2016), OECD, World Bank and own elaboration.
11
TFP vs Labour and Capital Productivity
• TFP can be expressed as the product of labour and capital
productivity raised to the power of their respective shares:
A = (Y/L)a (Y/K)b
• Thus, the evolution of TFP depends on the evolution of labour and
capital productivity, weighted by their shares:
DlnAt = 0.5·(at+at-1)·Dln (Yt/Lt)+0.5·(bt+bt-1)·Dln(Yt/Kt)
• If capital productivity is relatively constant, TFP follows a path that is mainly
determined by labour productivity
• If labour productivity is relatively constant, TFP follows a path that is mainly
determined by capital productivity
• Ceteris paribus, higher labour productivity contributes to higher TFP
growth. But, given the moderate labour productivity growth, lower
capital productivity results in an even lower TFP growth
12
A permanent excess of capacity in Spain?
• Capital productivity always contributes negatively to the evolution of
TFP and the evolution of TFP in the 21st century is increasingly
associated with capital productivity trajectory
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Y/Net capital Y/hours worked TFP
b) Spaina) US
Figure 10. TFP growth rates: contributions of capital productivity and labour
productivity, 1980-2014 (percentage)
-3
-2
-1
0
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Y/Capital services Y/Labour services TFP
Source: AMECO, APO, EU KLEMS, TCB, Jorgenson and Vu (2016), OECD, World Bank and own elaboration.
13
Which are the drivers of TFP:
Labour productivity or Capital productivity?• Compared with the US, the negative differential that the Spanish TFP showed
in the past was due to labour productivity differences.
• However, from the beginning of the 21st century onwards the negative
differential in capital productivity has increasingly become more important
b) Differences between Spain and US
(Spain-US in %)a) Spain
Figure 11. TFP growth rates: contributions of capital productivity and labour
productivity, 1980-2014 (percentage)
-3
-2
-1
0
1
2
3
4
5
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1
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4
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7
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0
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1
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Y/Capital services Y/Labour services TFP
-3
-2
-1
0
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Y/Capital services Y/Labour services TFP
Source: AMECO, APO, EU KLEMS, TCB, Jorgenson and Vu (2016), OECD, World Bank and own elaboration.
14
Which are the drivers of TFP:
Labour productivity or Capital productivity?
• Compared with the US, the negative differential that the Spanish TFP showed in
the past was due to labour productivity differences.
• However, from the beginning of the 21st century onwards the negative differential
in capital productivity has increasingly become more important
Source: AMECO, APO, EU KLEMS, TCB, Jorgenson and Vu (2016), OECD, World Bank and own elaboration.
Table 1. TFP growth rates: contributions of capital productivity and labour
productivity, 1980-2014 (percentage)
1980-2014 1980-2000 2000-2014
Spain
TFP -0.17 0.14 -0.60
Y/Capital services -0.69 -0.50 -0.97
Y/Labour services 0.53 0.64 0.36
US
TFP 0.53 0.48 0.60
Y/Capital services -0.37 -0.47 -0.23
Y/Labour services 0.90 0.95 0.83
Spain-US
TFP -0.70 -0.34 -1.21
Y/Capital services -0.32 -0.03 -0.74
Y/Labour services -0.37 -0.31 -0.47
15
Why does capital productivity step back?: Hypothesis
• H.1: Real estate investment (including residential) crowds-out
investment in other assets Does it block the pace of capital
accumulation in machinery and equipment?
• H.2: Unproductive overinvestment in non-residential real estate assets
Is accumulation guided by profitability in the short-term and credit
facilities, and not by productivity?
• H.3: Insufficient investment in intangible assets Are they essential
to value other factors?
• H.4: Business sector structure in the economy Low weight of large
companies + weaknesses of micro enterprises?
16
H.1:Crowding out of machinery and equipment
investment?
• The accumulation rate of the most productive capital has been more
intense than that of real estate assets, residential and non-residential
0
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1000
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1400
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ResidentialNon-residential structuresTransport equipmentMachinery, equipment and other assets
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1400
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ResidentialNon-residential structuresTransport equipmentMachinery, equipment and other assets
b) Productive capital by assetsa) Net capital by assets
Figure 12. Capital stock by assets. Spain, 1965-2013 (1965=100)
Source: BBVA Foundation-Ivie.
17
H.2: Unproductive investments during the boom?
• The high capital gains of non-residential real estate assets in the last boom
resulted in negative costs of using warehouses, offices and premises: these
investments can be profitable in short term, but unproductive
Figure 13. User cost of capital and its components. Spain (percentage)
a) Private non-residential real estate capital,
Spain, 1995-2013
Note: Non-residential real estate capital includes land.
Source: Bank of Spain, BBVA Foundation-Ivie, ECB, INE and own elaboration.
0
2
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4
Spain USA Germany France
b) Total economy, international comparison,
1990-2014
Source: EU KLEMS and own elaboration
-15
-10
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User cost Nominal interest rate
Depreciation rate Capital gains
18
Evidence for the existence of unproductive investments
• TFP worsening in sectors more concentrated in real estate assets: it is more
likely that their investments have been guided by short-term profitability rather
than long-term productivity
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0 25 50 75 100
Con
trib
utio
n to
TF
P g
row
th
GVA share
Professional, scientific, technical, administration
and support service activities
Hotels and
restaurants
Arts, entertainment,
recreation and other
service activities
Transportation
and storage
Construction
Mining and quarrying; electricity,
gas and water
Financial and
insurance activities
Manufacture of transport equipment
Other manufacturing.
Machinery and equipment
Food products,
beverages and
tobacco
Trade
Agriculture&fishing
Information and
communication
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
0 25 50 75 100
Con
trib
utio
n to
TF
P g
row
th
GVA share
Financial and
insurance
activities
Arts, entertainment,
recreation and other
service activities
Basic metals and
fabricated metal products
Mining and quarrying;
electricity, gas and water
supply
Hotels and
restaurants
Transportation
and storage
Manufacture of transport equipment
Other manufacturing
Machinery and equipment
Construction
TradeFood products,
beverages and
tobacco
Professional, scientific, technical,
administration and support service
activities
Information and
communication
Figure 14. Harberger diagram of market economy TFP growth in Spain, 2000-2007 and
2007-2011 (percentage)
Source: BBVA Foundation-Ivie, INE and own elaboration.
b) 2000-2007 c) 2007-2011
19
H.3: Weak investment in intangible assets?• Intangible capital acts as a catalyst of potential productivity gains, but the
weight of intangible investment in Spain is still low
Figure 15. Intangible assets in the market sector. International comparison, 1995-2010
(percentage of GVA)
Notes: EU15 does not include Greece, Luxembourg and Portugal in panel b). Nordic
countries: Sweden, Finland and Denmark.
Source: INTAN-Invest, BBVA Foundation-Ivie, INE and own elaboration.
.
a) Tangible and intangible GFCF over GVA b) Intangible capital stock over GVA by
asset
17.014.5
12.915.4
18.4
10.2
17.2
14.2
12.1
11.612.6
9.86.7
14.2
6.5
9.5
0
5
10
15
20
25
30
35
Nordiccountries
France UnitedKingdom
EU15 Italy USA Spain Germany
Tangible assets Intangible assets
3.86.5 6.0 5.7
2.9 4.2 2.8 3.3
25.822.9
17.019.8
21.416.8
10.47.7
11.910.7
15.7 12.3
10.0
11.1
8.0
7.2
0
5
10
15
20
25
30
35
40
45
USA Nordiccountries
UnitedKingdom
France Germany EU15 Italy Spain
Software and databases Innovative property Economic competencies
20
H.4: Many inefficient firms?• The negative productivity trend reflects that capital and labour are used by
unproductive firms: the business sector structure favours the misallocation of
capitalsFigure 16. Employment and labour productivity by business size class. International
comparison, 2015 (percentage)
a) Employment by business size class
(percentage)
b) Labour productivity by business size
class (euros per person employed)
Note: Data refers to the market sector, without Agriculture and Financial sector.
Source: European Commission (2015).
.
0
10
20
30
40
50
60
70
80
90
100
Spain EU28 France Germany UnitedKingdom
Micro(0-9 empl.)
Small(10-49 empl.)
Medium-size(50-249 empl.)
Large(250+ empl.)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Micro(0-9 emp.)
Small(10-49 emp.)
Medium-size(50-249 emp.)
Large(250+ emp.)
Spain EU28 Germany France Italy United Kingdom
21
Future Challenges
• Improvements in TFP depend on the ability of capital and labour to generate more value per unit
used of equal quality factor
• The productivity of human capital must be driven in two ways:
• To improve educational skills to make education more effective:
• Reducing school failure and improving educational performance.
• Investing more in life-long learning: because the government spends little on unemployed
skills upgrading and companies on training employees (especially small ones, which are
the majority).
• To improve the use of human capital and to take advantage of it in enterprises, an issue which
is conditioned by the size of the company, occupations and specialization.
• Improving the productivity of capital: the big challenge is to reduce the consequences of
misallocation of investment:
• Changing business sector structure, composed of very inefficient units: it is necessary to
increase the size of firms and improve the quality of management, boosting its
professionalization.
• Reorienting the financial system practices, particularly of banks, looking to the productivity of
investment projects and the long term instead of the real estate collateral and the short term.
• Changing the institutional framework to promote competition and combat crony capitalism.
Measuring Progress in the Spanish Economy:
a World KLEMS - Ivie Approach
Francisco Pérez
University of Valencia & Ivie
Madrid May 24th, 2016
