erkki liikanen : competition and productivity speech by mr erkki liikanen, governor of the bank of finland, at the european productivity conference, espoo, 30 august 2006. * * * as prime minister just said, competitiveness and productivity are closely linked. in the first half of the 1990s, it was still common " knowledge " that productivity was growing since the oil crisis of the early 1970s, much faster in europe than in the united states. the situation changed in the middle of the 1990s ; it was not noticed until later. in the united states economic growth surged, mainly because of an acceleration of productivity growth. in europe economic growth was slowing down. one reason was a slowing of the flow of workers into the labour market. but even more important was a slowing of productivity growth. turning points are seldom detected until later on. time lags are in fact a great challenge for policymakers. at the lisbon summit in march 2000, there was no mention of the problems of slow productivity growth. nor was the asian challenge discussed. nowadays, neither of these topics can be brushed aside. since 2000, the european commission and also the ecb have been putting much effort into finding the reasons for the difference in productivity growth between europe and the united states. research has revealed that the difference is related to the development of information and communication technology. this development is as important as the electrification that started about 100 years ago. there are two reasons why ict development explains the difference between productivity growth in europe and in the united states. first, the ict industry is more important in the us economy than in europe. therefore, favourable productivity developments in ict are reflected much more clearly in the leading indicators for the us economy. in fact, one of the reasons why productivity figures in finland are high compared with europe as a whole is the weight of ict in the finnish economy. the second important factor is developments in services. information costs plunged when it became possible to distribute databases cheaply from anywhere. in the usa, productivity growth has been highest in retail and wholesale trade, but financial services have also experienced a robust improvement. the same has not happened in europe. what can be done? as regards private services, only competition can encourage companies to innovate and spur productivity increases. when competitive pressure strengthens in the market, it forces companies to make full use of the opportunities created by ict to raise productivity. competition drives innovation and productivity growth. competition also leads to lower prices, which in turn boosts

approximately 80 % – very rapid increase in welfare. some countries did even better : in poland and estonia corresponding increase in economic welfare 1 / 2 bis central bankers'speeches was approximately 170 %. research from the ebrd shows that the countries that joined the eu have also been better in ensuring that growth is inclusive. rapid economic growth in the region, integration with the older eu countries and convergence towards them has been an economic success story for the whole continent, showcase example of economic reforms yielding benefits that can be and are shared widely. many eu member countries that joined in 2004 are now integral parts of eu - wide production networks. i was happy to witness the arrival of the new member states and also new members to the european commission 1. 5. 2004 before moved to the bank of finland and to the ecb governing council in july of the same year. as we celebrate these achievements, we need to remember their prerequisites. global economy is full of sad examples of countries failing to catch up, failing to improve welfare of their citizens. if institutions are not stable and credible, and if the rule of law is not respected, then it is not possible to attract investments and not possible to ensure sustainable economic convergence in the longer term. in this regard performance of the countries in the region was helped by the european union, which was the anchor. it offered both economic assistance and also a model of democracy, which respected rule of law and separation of powers. while this model of independent institutions and rule of law has been successful, many see it now challenged in various parts of the world, and the issue is not unknown here, either. every country and every nation has her right to choose their political leaders and political tendencies. but membership in the european union, which is based on common values and respect of the rule of law, brings also its obligations. the question is : how to preserve the rule of law, how to preserve independence of public institutions, including central banks and financial supervisors, from undue political influence? economic literature and history tell how important the role of institutions is for sustainable economic growth. countries that are able to share increasing prosperity and, for example, ensure education opportunities are better placed to uphold functioning institutions in the long - run. however, countries with good economic performance are not immune to temptations of various degrees of populism. one type of populism is that establishment and the forces in power is challenged. this is a challenge everyone in power must accept and can be