Annual Conference of the global forum
on productivity co-organised by the Italian G20 Presidency
Welcome address by Luigi Federico Signorini
Senior Deputy Governor, Bank of Italy
8 July 2021
Ladies and gentlemen,
• I am happy to welcome you to this conference, promoted by the OECD Global Forum
on Productivity and the Italian G20 presidency. I am sure today's contributions will
increase our understanding of productivity growth and distribution, especially in light
of the changes brought about by the pandemic.
Productivity gaps are ubiquitous. There are always substantial differences across firms
•
in terms of both productivity levels and dynamics. The most innovative firms can
sometimes realise enormous efficiency gains in a short period. Significant gaps exist
even within narrowly defined sectors in almost all advanced economies.
Italy is no exception: over the last 20 years, firms in the top decile of productivity
•
distribution have accounted for roughly 50 per cent of Total Factor Productivity growth
in manufacturing, and for more than 80 per cent in services.
• Productivity dynamics (and differentials) may even be underestimated in many
industries, because measuring output in physical or constant price terms is often
challenging in view of continuous quality improvements that are not fully accounted
for by market prices.
• Productivity gaps reflect differences in firms' propensity to innovate, to hire skilled
workers and to adopt new advanced technologies. Such propensities tend to come
together. Let me take another piece of evidence from my country: in Italy, firms in the
top decile of the labour productivity distribution are about 60 per cent more likely to
adopt advanced digital technologies than those at the bottom. They also employ at
least twice as many graduates, as a share of the workforce, as all other firms up to the
7th decile.
• The digital transformation has accelerated in recent years, changing the way firms
produce, grow and compete. The pandemic has supplied further proof of how essential
digital assets and skills are to our economies and societies. Human and physical capital
has allowed work and (crucially) education to continue throughout lockdowns.
• Pushed even further by the exigencies of the Covid crisis, businesses are going digital
faster than ever before. According to Italian survey-based data, during the last year one
out of five firms has adopted for the first time digital systems of internal communication
or improved them, one out of ten has introduced or expanded on-line sales, and one out
of seven has invested in cloud services and infrastructures to support remote working.
• During the lockdowns, many of us worked from home. Central banks, including my
own, mostly followed this trend. I must say that I was genuinely surprised, first, by
the way we were able to engineer an almost instantaneous, seamless transition to
remote working arrangements; and second, by the fact that many tasks could in fact be
performed remotely in such an efficient way. While there are pros and cons to remote
working, and some degree of physical interaction is likely always to remain valuable for
most tasks, the 'new normal' will surely see a different mix of home and office hours
with respect to the old.
This was one clear instance where investment in digital technologies had not yet
•
released all its potential. I should add in passing that certain society-level efficiency
gains (e.g. fewer hours wasted in commuting, less traffic congestion, less pollution)
may never show in productivity statistics at the firm level.
• Swift technological progress can have disruptive effects on market dynamics. New
leaders emerge and incumbent firms are often displaced in a relentless process of
creative destruction.
• Market leaders pave the way for progress by pushing the frontier. There are two ways
for society as a whole to reap the full productivity benefits of innovation: diffusion from
pioneers to followers, and resource reallocation from laggards to front-runners. Both
are likely to be necessary. Regulation and public policies can make a lot of difference
on both counts. I shall touch very briefly on some potentially policy-relevant issues,
among the many for which today's discussion will certainly provide valuable and
thought-provoking material.
• Rapid innovation usually requires a certain amount of resource reallocation to deploy its
potential. Physical and financial capital, entrepreneurship and labour should therefore
find ways to move across firms and industries without unjustified friction. Rules and
institutions are extremely important in this respect.
• Let me make first one comment on the capital market. Given the vital role of business
birth and growth for employment creation and innovation, institutions are needed that
can efficiently channel resources towards promising, high-potential firms. As
growthoriented finance requires specialised skills and contracts, the activity of dedicated
financial intermediaries is important. It needs strengthening, especially in Europe, where,
despite some significant growth in the last decade, the presence of such intermediaries
is still too thin. Venture capital and private equity can sustain business dynamism by
selecting valuable projects, financially supporting entrepreneurial activities and helping
start-ups to navigate the early stages. Their development can be supported by policies,
such as tax breaks; one must acknowledge, however, that here policy can do little, at
least directly, if firms continue to have little appetite for such services.
• Reallocation inevitably also depends on the process of creative destruction that pushes
unviable firms out of the market. Sound insolvency regimes are required to ensure
fast, effective and fair liquidation and reorganisation procedures, thus preventing
assets from becoming trapped in unproductive uses. This is a difficult issue, as in many
societies financial default is traditionally associated with social stigma and a sense of
personal failure. The length and wastefulness of bankruptcy procedures is also an issue
in some jurisdictions; Italy is a well-known example. Minimising the trauma and cost of
bankruptcy for both debtors and creditors should be the key priority for any insolvency
law reform. In an ideal world, default would be synonymous, not with failure, but with
a fresh start and a clean slate.
• Labour market institutions are also central to ensuring that the reallocation of labour
resources can happen in a reasonably smooth way, while protecting workers from
socially unacceptable insecurity. Societal values may differ somewhat in this respect
across the world; we Europeans pride ourselves on a model that offers a high degree of
social protection. This need not be a brake on labour reallocation, however, if protection
is properly designed. The key is finding the right mix between protecting workers
and protecting existing jobs. In societies that treasure social protection, effectively
and reliably ensuring the welfare of workers that lose their jobs, while preserving the
incentives for them to search for new job opportunities, is an essential precondition for
allowing the labour market to adapt.
While some reallocation across firms and industries is necessary for increasing
•
productivity economy-wide, the diffusion of innovation among existing firms is also
extremely important. In many cases, it can be less disruptive, painful and polarising
than reallocation.
• Fast technological progress, especially if coupled with network externalities, can easily
generate winner-takes-all dynamics, which in turn may further increase productivity
gaps across firms and raise difficult competition issues. Laggards may be discouraged
from investing in R&D, since they lose the hope of competing with the top performers;
leaders may divert resources from innovation to unproductive uses, such as defensive
strategies for maintaining their rent. Under the right conditions, diffusion can mitigate
such effects.
One key element for the diffusion of innovations is the availability of adequate human
•
capital, especially in view of the markedly knowledge-intensive nature of the current
innovation process. A highly skilled and well-trained workforce is not just a productivity
driver per se. It is a necessary condition both for the adoption of new technologies in
the first place, and for the effective unfolding of their effects on firms' productivity.
• Supporting investment in human capital is therefore another crucial policy aim. The
education system needs to provide students with a continuously updated set of skills;
to make them alert and adaptable to knowledge-based innovation; and to enable
them, ultimately, to make the most of the fast changing demands of the labour market.
Designing an effective education system, including lifelong learning opportunities, and
providing the right incentives to teachers and students alike, should also therefore be
very much on everybody's agenda.
Designed by the Printing and Publishing Division of the Bank of Italy