Productivity Growth Reconsidered

Productivity growth reconsidered Nicholas Crafts This paper reviews European experience in productivity advance since the war in the light of new growth theory, rent-seeking and catch-up explanations of growth performance. The evidence is analysed using a mixture of regression analysis, case studies and a modified form of growth accounting. Policy implications are derived relating both to Western and Eastern Europe in the 1990s. It is argued that the concentration of new growth theory on factor accumulation proves of only limited use in explaining growth differences within the OECD and that it is crucial to investigate rent-seeking and institutional differences as well In particular, it is important not to exaggerate the role of physical investment in explaining why growth rates differ. Similarly, it is stressed that catching-up of advanced countries by followers is by no means an automatic process and has proceeded unevenly. Recent ideas in growth economics are shown to require urgent revision of traditional growth accounting analysis. Supply-side policy including institutional design is seen as the key to rapid catch-up but political constraints in this area are highlighted. Accordingly, the policy recommendations in the paper emphasize the role of pre-commitment through international agreements as an important growth-promoting factor in 1990s Europe.