Morning Knowledge /7. Productivity

GIANMARCO OTTAVIANO SAYS THAT RESOURCE MISALLOCATION IS AT THE ROOT OF ITALIAN SLUGGISH PRODUCTIVITY AND EXPLAINS WHY THE REALLOCATION OF RESOURCES INSIDE AND NOT BETWEEN INDUSTRIES OR GEOGRAPHICAL AREAS IS THE BEST SOLUTION


Since the financial crisis of 2007, with no seeming reason, productivity growth has been slowing down in all the major economies. Part of the explanation of this productivity puzzle in advanced economies may lie in a generalized difficulty of reallocating resources between firms in the same industry and in the same geographical area, a new study by Gianmarco Ottaviano, Professor of Economics at Bocconi University, and colleagues, finds. Surprisingly, more difficulties have been recorded in reallocating resources in industries where technology has been changing faster rather than between sectors with different speeds of technological change.
 
Even though a decade of sluggish productivity is a heavy burden for the countries involved, it hasn’t produced enough data to explain the roots of the phenomenon. The country to ideally observe to have a long-enough series of data is Italy, with its 25 years of stagnating productivity growth. A crucial problem with productivity, the Italian case suggests, is resource misallocation: the fact that resources don’t smoothly flow from less productive to more productive uses is an important reason for the slowdown.
 
Misallocation is stronger «within» industries and geographical areas than «between» industries and areas. The most effective policies, in other words, don’t promote reallocation of resources from less productive sectors to more productive ones, but from worse to better performing firms in each sector or geographical area.

by Fabio Todesco