The drivers of total factor productivity in catching-up economies

The pace of total factor productivity (TFP) convergence in the euro area slowed down in the mid-1990s. This mainly reflects poor TFP growth in the euro areaís catching-up economies. Measured in terms of TFP, the technology gap between leaders and laggards in a broad range of industries actually increased between 1994 and 2007. The persistence of the technology gap suggests that the causes are deeprooted and at least partly structural. Panel regression results based on an endogenous growth model indicate that the TFP divergence between euro area catching-up economies in the decade preceding the global financial and economic crisis can be partly explained by the weakening of the convergence channel, lower spending on innovation activities such as R&D and ICT, deteriorating government effectiveness, and faster population ageing. Throughout the crisis, a broad range of reforms aimed at improving framework conditions have been adopted in catching-up economies and are likely to raise TFP growth rates. However, since convergence is shown to be more difficult for economies getting closer to the technological frontier, the adoption of further structural measures would help ensure a faster TFP convergence process. In particular, policies that foster innovation activities, reduce further the restrictiveness of employment protection legislation, lower corporate tax rates and improve government effectiveness appear to support TFP growth.