José Luis Escrivá: Growth and competitiveness
Speech by Mr José Luis Escrivá, Governor of the Bank of Spain, at the Santander
International Banking Conference, Madrid, 30 October 2024.
* * *
First of all, I wish to express my deep condolences to the people affected by the storms
in Valencia, and especially to the families who have suffered losses. I also want to
express my gratitude to all people working on the land, to the firefighters, to the police
and to all those who are doing their very best in trying to help with this tragedy.
Christine Lagarde asked me to convey her condolences and solidarity, and she told me
that the ECB is flying the Spanish flag at half-mast in front of the main building of the
ECB.
I wish to thank Ana Botín and the Banco Santander team for their invitation to this
International Conference. It is a pleasure to be here with you today.
Let me start by formulating a question: Why is long-term Growth and Productivity of
particular importance for a central bank? And why then does it make sense for me to
address you today on this issue. The reason is primarily two-fold:
First, because in the implementation of monetary policy we need to assess the
cyclical position of the economy, and this requires to estimating the gap between
actual and trend growth. Moreover, in pinpointing the desirable monetary policy
stance, a view on the natural interest rate has proved important, a key
determinant of which is long-term growth and productivity.
And second, in the specific case of European monetary union, secular weak
growth and productivity, as at present, could complicate the conduct of monetary
policy going forward. This low growth environment stresses fiscal policy hinders
social cohesion and makes it difficult to advance on real convergence and on all
those elements that are crucial for a well-functioning monetary union.
How can we raise long-term growth?
In this presentation, I would like to emphasise what we can do to enhance growth
potential, rather than at European level, especially at the national level.
For a few months now we have been discussing the Letta and the Draghi reports,
and the potential actions to be adopted at the European level. These solutions are
clearly desirable and need to be promoted, but some will require time and a
difficult political consensus before they can be effectively implemented.
In my view, individual Member States have significant scope at the same time to
promote potential growth and contribute to this global goal.
In other words, recognising the importance of European-wide measures should in no
way inhibit the ambition of national policies.
Economic growth drivers
To address this topic, let me go back to basics. Let's look at the three factors of
the production function: human capital, physical and technological capital, and
productive efficiency in the combination of these factors.
I want to highlight the significant differences in key inputs affecting long-term
growth among European partners. This could be useful to identify best performers
that could become valuable case studies for countries that lag behind.
Let me illustrate the differences across countries in these crucial inputs, starting
with human capital.
The importance of human capital
When analysing differences in labour input, we consider not only headcount or
hours worked, but also human capital aspects. This encompasses investments in
schooling, on-the-job training and learning about the economic system. These
investments directly improve individuals' knowledge and productivity, and can also
enhance the efficiency of others through productive interactions.
From a business perspective, research shows that firms' productivity is highly
correlated with their staff's educational attainment level. Specifically, firms at the
productivity "frontier" have a higher proportion of high-skilled workers than firms at
the median of the productivity distribution. Interestingly, while firms at the
productivity frontier systematically differ in the use of general skills (as measured
by educational attainment), they differ even more in their use of specific skills
such as management, communication and ICT. Indeed, ICT skills are particularly
valuable in the current technological transformation. However, there are
significant differences in how European tertiary education systems attract
students into these new skills.
Differences in the share of tertiary education students in STEM fields
To illustrate this point, note the substantial differences shown in Figure 1
regarding the share of tertiary education students in STEM fields. This difference
is particularly concerning because it reflects a disparity in the flow of young people
enrolling in the educational system, not just in the stock of students.
The importance of physical and technological capital
Improving human capital benefits growth not only directly, by increasing
productivity, and indirectly, via interactions, but also through its complementarity
with capital. There is a wealth of literature documenting the complementarity
between human capital and new technologies ("skill-biased technical change"),
suggesting that increasing human capital could positively impact technical
change. Specifically, there is a clear relationship between human capital and
technology diffusion (e.g. the adoption of information and communications
technology).
Differences in the use of AI
Focusing on the physical capital aspect, we observe big differences in the
adoption of new technologies in Europe.
I illustrate this point with a chart showing the percentage of firms using artificial
intelligence technologies. Other metrics can be even more striking, such as the
adoption of cloud computing services.
Total factor productivity]
Lastly, we need to examine the third element, the interplay of factors that cannot
be explained by increases in human, physical or technological capital.
Difference in venture capital financing
Let me also stress that apart from the interaction between human capital and
technology adoption, it is also likely that human capital influences innovation, adding
another layer of heterogeneity. Indeed, there is evidence that supporting universities
and reducing barriers to STEM education, especially for under-represented groups, has
significant long-term effects on innovation and growth.
While educational disparities undeniably play a significant role in shaping
innovation, economists have identified several other critical factors that influence
this dynamic. Notably, high-skilled migration presents substantial challenges. And
we also see marked differences among European countries.
Additionally, the reliance on bank or market financing varies greatly among firms
in different countries, impacting their ability to innovate and grow. Furthermore,
inefficient insolvency rules can stifle entrepreneurial ventures by creating an
environment where failure is overly punitive, thereby discouraging risk-taking and
innovation. Addressing these multifaceted issues is essential to understand
differences in innovation across countries.
On this issue, the transfer of knowledge and the diffusion of innovation to the
entire economy, are particularly important. In this mechanism, venture capital
markets have proved very relevant.
And here, differences on venture capital investment also differs among European
countries, as can be seen in this chart.
Quality of institutions
An additional element that is sometimes overlooked is the quality of institutions,
and more specifically the efficiency with which public administrations operate
including the quality of the legislation and implementing agencies.
There is broad consensus in the academic literature that the institutional
framework, and more specifically the quality of institutions and the degree of trust
they instil among economic agents, is crucial in determining long-term growth.
This hypothesis, which earned Acemoglu, Johnson and Robinson this year's
Nobel Prize in Economics, is illustrated by the correlation between an index of
government effectiveness, constructed by the World Bank, and GDP per capita.
Besides the notable correlation of 74%, it is interesting to observe the significant
heterogeneities in government effectiveness across European countries.
Conclusion
To conclude, allow me to stress that understanding and implementing best
practices in Europe is crucial for fostering long-term growth.
In particular, understanding the institutional frameworks of high-performing
European countries can provide valuable insights for the rest.
The advantage of adopting best practices from within Europe is that our
institutions are more comparable and relevant to our own context than those of
the United States or China.
By aligning our policies and institutions with those of our successful neighbours,
we can create a more cohesive and effective economic environment, driving
sustainable growth and prosperity across the continent.
And as a bottom line let me leave you with the following takeaways:
There is ample room for leveraging best practices across European
countries to enhance aggregate trend growth and productivity.
In addition to badly needed European-wide initiatives, there is substantial
homework to be done at the national level.