Productivity, innovation and ICT in old and new Europe

Bart van Ark, Department of Economics, University of Groningen

This paper looks at the convergence process between Central and Eastern Europe (CEE) and the European Union (EU) since 1990, and the possibilities for future catch-up of the former group on the latter. The paper begins with a macro perspective on the trade-off between productivity growth and labour input growth. The paper then zooms in on the role of technology, in particular ICT, by first looking at the macro-contributions of ICT capital to productivity growth. An industry perspective is then adopted to concentrate on the producing vs. diffusion effects of ICT. For lack of ICT capital data at industry level, industry are categorized into ICT-producing, ICT-using and non-ICT industries, for which labour productivity trends are analysed. The paper ends by comparing the productivity results with a set of “new economy indicators” for CEE. The main outcomes of the paper are that (1) much of the catch-up process during the past decade has been driven by cost-savings on labour and restructuring, in particular in the manufacturing sector; (2) ICT capital has played relatively large role in recovery of productivity growth in CEE, but there is no evidence of related total factor productivity growth; (3) although ICT-producing industries are relatively important in some of the CEE countries (in particular in Hungary), production concentrated in typical end products and not in the most technology-intensive products like semi-conductors; (4) the potential for exploiting the growth potential in the ICT-using sector has been realized to some extent in ICT-using manufacturing but not in ICT-using services. The latter is strongly dependent upon the development of market opportunities (product markets), the role for FDI, the drive to build strong innovation systems and, ultimately, create more competition. In conclusion, once the effects of direct restructuring in CEE have been realized, the more difficult process of reforming markets, strengthen innovation capacity and creation of networks will become the key to realizing the remaining catch-up potential vis-à-vis the present membership of the European Union.

Date: 10 February-00 0000