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Luiss Open: the IT revolution and Southern Europe’s two lost decades

A reflection from Fabiano Schivardi, Luiss Deputy Rector for Research and Tom Schmitz, Bocconi Professor of Economics, on the relationship between IT and productivity

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Since the middle of the 1990s, productivity growth in Southern Europe has been substantially lower than in other developed countries. Panel A of Figure 1 illustrates this by plotting aggregate productivity, measured as real GDP per hour worked (net of non-IT capital deepening), for six OECD countries. The data comes from the OECD Productivity Database, which decomposes growth in real GDP per hour worked into changes in total factor productivity (TFP), IT capital deepening and non-IT capital deepening. Our preferred measure of productivity growth is the sum of the two former components. This measure has the advantage to abstract from changes in the non-IT capital stock, while still taking into account the effect of IT capital. Between 1995 and 2015, productivity grew by only 0.1% per year in Italy and Spain and by 0.5% per year in Portugal, while it grew by 1.1% per year in Germany and by 1.4% per year in the United States.

Figure 1: Productivity growth and IT capital across the OECD

Figura 1B

A: Productivity growth

Figura 1A

B: Growth in the real IT capital stock

Source: OECD and EU KLEMS. See Schivardi and Schmitz (2019).

These trends represent a challenge for the survival of the monetary union. While a common currency can function well with geographical differences in productivity levels, it is much harder to accommodate persistent differences in productivity growth, particularly when inflation is low.  A line of research claim that inefficient management practices have kept Southern European firms from taking full advantage of the IT revolution (Bloom et al., 2012; Pellegrino and Zingales, 2017). In a recent paper (Schivardi and Schmitz, 2019), we investigate this argument in greater detail. In particular, we seek to identify its main mechanisms, to determine their quantitative importance, and to discuss some policy implications.

We note that the striking divergence of Southern Europe coincides with the diffusion of information technology (IT) in the mid-1990s, which was a major driver of productivity growth in the leading economies. In Southern Europe, this IT revolution made relatively little headway. Panel B of Figure 1 indicates that between 1995 and 2014, the real stock of IT capital increased by a factor of 4.6 in the United States and by a factor of 4 in Germany, but only by a factor of 1.5 in Italy, 2.6 in Portugal and 3.7 in Spain. Thus, IT diffusion in Southern Europe was limited, and even in countries that had somewhat faster growth in IT capital (such as Spain), IT had a negligible impact on productivity. Why was this the case?

An extensive empirical literature documents that IT adoption requires changes in firm organization and that it induces higher productivity gains in better-managed firms, because management practices and IT are complements. However, Southern European firms perform systematically worse in terms of management efficiency. Figure 2 illustrates this by using data from the World Management Survey (WMS), developed by Nick Bloom, Raffaella Sadun and John Van Reenen. The WMS is an innovative survey that allows to score firms in terms of the quality of their managerial practices. It has been applied to more that 20.000 firm in 35 countries. Figure 2 plots country (standardized) averages of this measure for industrialized economies, showing that Southern European countries such as Italy, Spain, Portugal and Greece have substantially lower scores than Northern European countries, the United States, Canada and Japan.

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