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The potential growth of the Belgian economy and its determinants

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  • C. Rigo

    (National Bank of Belgium, Research Department)

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    Abstract

    The potential growth path of the economy is at the centre of various fundamental economic questions, particularly in connection with the conduct of monetary policy and the management of public finances. It also determines the progress of living standards, so that the adverse population prospects confronting the European economies have rekindled interest in the subject. The first chapter of the article reports on the developments recorded over the past twenty years, using a method derived from the one adopted by the EC and based on the use of a production function. The role played by the three determinants – labour, capital and total factor productivity – is discussed, focusing on the case of the Belgian economy while comparing the results with those recorded in the EU-15. With potential growth averaging 2.2 p.c. for the private sector and 2.1 p.c. in the whole economy, Belgium is in the middle group of European countries. A growth breakdown between labour volume and labour productivity is proposed in chapter 2. Belgium’s advantages and disadvantages are assessed, not only in comparison with the EU-15 average but also in relation to the United States. Particular attention is drawn to the divergent picture in terms of productivity on the two continents. The improving performance in the United States in this respect contrasts with the deceleration recorded in Europe. The slowdown was also experienced in Belgium although, in the past ten years, the weaker growth in labour productivity here was due essentially to a slower increase in capital intensity. Having diminished between 1985 and 1995, the growth of total factor productivity, which in principle measures the overall productive capacity of the economy, stabilised at a level above the European average and close to that of the United States. This relatively good performance could be due to the fairly widespread use of ICT, as Belgium’s investment expenditure on this item is greater than that of the majority of European countries. The highly skilled labour force provides additional support for total factor productivity, although its impact has not been quantified in the case of Belgium. Expenditure on research and development could also yield substantial productivity returns. Particular efforts in these three fields, in a context within which market forces provide appropriate incentives to the economic agents, could hold possibilities for enhancing productivity growth. This could contribute to stimulate growth in view of the anticipated adverse demographic developments in the coming decades, that will also require raising the rates of participation in the labour market.

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    Bibliographic Info

    Article provided by National Bank of Belgium in its journal Economic Review.

    Volume (Year): (2005)
    Issue (Month): III (September)
    Pages: 45-64

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    Handle: RePEc:nbb:ecrart:y:2005:m:september:i:iii:p:45-64

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    Keywords: potential output; labour productivity; growth accounting; total factor productivity;

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