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

for unskilled workers has decreased and unemployment correspondingly increased. the higher the education level of the workforce, the lower the level of unemployment. a closer look reveals that the connection between education and it utilisation is more complex. higher education is very important when we are talking about companies that have made substantial investments in research and development. this is especially true of the ict industry and of innovation activities. but when we consider ict utilisation and application, the matter is not so straightforward. still 20 years ago, a worker was a physical part of the process and performed mechanical tasks. these days workers monitor and oversee processes via computer terminals. the processes themselves have not changed very much, and therefore the worker must master them. the advantage of the new computer applications is that the software assists in controlling and monitoring the overall production process. they collect information on the whole process and present it for user viewing. this enables the user to get a broader overview at a glance. the main characteristic of the most advanced companies is that they have shifted the focus of work, education and training from mechanical tasks to problem - solving and communication skills. previously when a problem arose, the worker told his superior. today he is more likely to try to solve the problem himself, in order to avoid having a small problem become a large one. as i noted earlier, since the adoption of it, productivity has increased most in the service sector. what is paramount for productivity growth is that all employees involved in a given process be able to use the required it. the best solution to accelerate the implementation of changes is that the staff is involved in any project where new it and related management systems are developed and applied. the employees know the products and services and their flows. as regards ict based management systems, the overall process becomes more transparent and more easily visualised. the same work is performed – but with more efficiency, and possibly also with more pleasure. when a company is operating in a competitive environment, the pressure to be competitive is an important incentive to the company ’ s management. if the company is unable to raise its productivity, new competitors will pose the threat of driving it out of the market. but on the other hand, raising productivity requires investment, organisational change, restructuring of processes, training of personnel, and a broad - based commitment. how can this be made to work? it is vital that the entire staff know and understand the market situation and the in - herent challenges so that they will share the company