i.4 factors determining real convergence

I.4 Factors determining real convergence

Productivity, competitivenessand economic performance

Competitiveness is often viewed as a key indicator ofthe success or failure of policy. The term literally re-fers to producers competing with each other in thesame market. However, there is a related concept ofthe economic performance of regions and countries,which can also be termed ‘competitiveness.’

Despite the fact that there are competitive and un-competitive firms in every region, there are commonfeatures which affect the competitiveness of all firmslocated there. These features include physical andsocial infrastructure, the skills of the work force, an in-stitutional framework and a culture conducive (or notconducive) to innovation and the efficiency of publicinstitutions (especially managerial capacity at the re-gional level). In addition, success breeds success;the presence of strongly competitive firms in a regiontends to stimulate other firms and to encourage fur-ther investment.

Over recent years, a standard definition of regionaland national competitiveness has begun to emerge,which relates to the achievement of ‘high and risingstandards of living and high rates of employment on asustainable basis.’1 Although traditional measures ofcompetitiveness tend to focus on GDP per head,there are other important factors affecting economicperformance. The Lisbon summit underlined the cru-cial link between Europe’s economic strength and itssocial model. Effectively targeted social protectionhelps economies adapt to change. By promotinggreater social cohesion it can help reduce the under-use of human resources. It is also important to keep inmind the contribution of other factors such as thequality of the natural environment, quality of

healthcare, social services and so on. Indicators ofthis type help enrich our understanding of economicdevelopment, though further work is needed to de-velop better measures of progress in these areas.

In practice, GDP per head can be broken down intotwo main components: the employment rate, or theproportion of working-age population in work, andproductivity, or GDP per person employed. Since ahigh level of one does not necessarily go with a highlevel of the other, they are considered separately be-low, both in aggregate and by sector, before examin-ing investment and other key factors underlyingproductivity.

Trends in regional economic performance

For the EU as a whole, economic performance overthe past 25 years has tended to be stronger in termsof productivity and often weak in terms of employ-ment. This has sometimes led to concerns about ‘job-less growth’, though, in practice, employment hasalways increased when GDP growth has been morethan 2% a year or so. The problem has been maintain-ing this rate of growth over the long-term. Over the de-cade 1989 to 1999, for example, annual growthaveraged 1.9%, but because GDP per person em-ployed rose by 1.4%, employment increased by only0.5% a year. In the long-term, achieving high employ-ment growth and high productivity growth are notnecessarily in conflict with each other. Indeed, to theextent that productivity growth increases competi-tiveness and, therefore, enables higher growth ofGDP to be achieved, they are complementary. Thechallenge in lagging regions, however, is to developa mix of policies which boost productivity without ad-versely affecting levels of employment.

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While in most, but not all, lagging regions, employ-ment levels are less than in the rest of the EU, in all ofthem, productivity is below average. Two maingroups can be distinguished:

• those with employment rates similar to, or in a fewcases above, the EU average, which need tocatch up in terms of productivity, measured byGDP per person employed. These are mostly inPortugal, Greece and the eastern part of Ger-many, where in the first, productivity is typicallyonly around 40% of the EU average and in theother two, around 60% of the average.

• those lagging in terms of both productivity andemployment. These include most regions inSpain and southern Italy, where employmentrates can be as low as 40% as against an EU av-erage of over 60%. In these cases, low employ-ment is, exceptionally, a more important reasonfor low GDP per head than low productivity.

Sectoral analysis: low productivity in agriculture

The sectoral structure of economic activity shows aninteresting pattern, if sectors are divided into agricul-ture; industry (mainly manufacturing); distribution,transport and hotels and catering; business and fi-nancial services and non-market and other services(principally health, education and public administra-tion) (see Table A.18 and Map 8). Productivity is high-est in business and financial services, grossvalue-added per person employed in the EU beingover twice the average for the economy as a whole.2 Itis slightly above average in industry and just belowaverage in distribution, transport and hotels and innon-market and other services.3 In agriculture, pro-ductivity is only around half the average for allsectors.

Poor performance often linked toconcentration in less productive sectors

In all three of the cohesion countries, overall employ-ment rates are low to a large extent because of lowemployment in business and financial services,where productivity is relatively high (though thisshould be interpreted with caution because of highvalue-added in the protected financial services sec-tor). On the other hand, the share of employment indistribution, transport and hotels and in non-marketand other services is similar to the EU average, as is

the level of productivity. Employment is much higherthan elsewhere in agriculture where productivity isvery low.

This pattern is reflected at the regional level (Map 9).Three sets of regions can be distinguished in the EUof 27 Member States (though not all fit the classifica-tion neatly):

• lagging regions with a high employment in agri-culture, often an above average share of employ-ment in industry and low employment in services.These are notably in the southern Member Statesand in Central European countries, except for theCzech Republic, Slovakia and Hungary. Whileagricultural employment in the EU is under 5% ofthe total, in some regions in Spain and Portugal, itis over 15% and in regions in Greece and themost eastern parts of the applicant countries,over 20%;

• regions with high employment in industry. Manyof these are concentrated in a central arc, stretch-ing from the West Midlands in England, easternFrance and northern Spain, through southernGermany and northern Italy to the Czech Repub-lic, Slovakia and Slovenia. Although many ofthese regions are prosperous, many are not, re-flecting the significant variation in value-addedbetween manufacturing industries;

• regions with high employment in services. Theseare regions where the share of employment in thissector is 70% or more. Most of these regions areprosperous and include a number of capital citiesin the north of the EU, but the group also includesregions in southern France, Spain and Italy,which have relatively low levels of GDP per headand where employment is concentrated in basicservices, many of them catering for the touristtrade.

The long-term trend towards services andthe restructuring required in lagging regions

Over many years, there has been a tendency in theUnion for employment in agriculture and industry todecline – though in the latter, the number employedhas stabilised in recent years, even if the share hascontinued to fall – and for employment in services toexpand. This trend, however, as noted above, hassome way to go in many regions, particularly in

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9 Regions with highest agricultural, industrial or service employment, 1999

lagging ones. Indeed, even in the most prosperousregions, employment in services is still growing. Be-tween 1990 and 1999, employment in services in theEU increased by some 12 million, while in the rest ofthe economy it declined by 9 million. Most of this de-cline occurred during the recession years of the early1990s, though during the recovery since 1994, agri-cultural employment has continued to fall (by around1.3 million), while employment in industry has re-mained broadly unchanged. In the lagging regions,there will be a continuing shift of employment out ofagriculture on a substantial scale in future years,though not necessarily job losses in industry. Indeed,in some regions, employment in manufacturing, es-pecially where it is still below the EU average, mightwell increase, as it has tended to do in recent years. Inthe central industrial regions, on the other hand, em-ployment in manufacturing in many cases could de-cline, at least as a share of the total, though in many ofthese a shift has already occurred to highvalue-added activities, as noted below.

The restructuring of employment in future years islikely to be even greater in the candidate countries,where jobs in many regions remain concentrated inagriculture and/or industry.

It should be noted in this context (see maps of em-ployment and productivity by sector) that the shift inemployment out of industry, and to a lesser degreeout of agriculture, in the more prosperous regions inthe EU has not necessarily been accompanied by asimilar decline in the share of value-added generatedin these sectors. Indeed, in many cases, productivityhas increased significantly in industry, as employ-ment has concentrated in high value-added activi-ties. This demonstrates the potential for maintaining asmall but highly competitive manufacturing sector asa key part of the regional economy.

Shifts of activity within sectors asimportant as shifts between them

An important aspect of lagging economic develop-ment in the less prosperous regions in the EU is theconcentration of activity in low value-added sectors(though, it should be emphasised, productivity in thesame sector can vary significantly across the Union).This reflects differences in both the efficiency of per-forming the same activities and the degree of

concentration in higher or lower value-added parts ofthe broad sectors concerned.

For example, business and financial services haverelatively high value-added per person employed inthe cohesion countries (as in some of the candidatecountries), which partly reflects high interest rates(which push up value-added in financial services)and low competition, but also perhaps the under-de-veloped nature of these services in relation to poten-tial demand. On the other hand, manufacturing,which has an above average level of value-added perperson employed in most countries, has relatively lowproductivity in the three cohesion countries (as wellas in most of the candidate countries). This differencein part reflects a tendency for high value-added andhigh-tech parts of manufacturing to concentrate inthe more prosperous Member States.4

In agriculture, value-added per person employed isaround 80-90% of the EU average for all sectors in themore prosperous countries, but only 40% of this inSpain, 25% in Greece and just 13% in Portugal (and16% in Austria). (In the candidate countries, the figureis even lower.) These figures reflect both the need fordiversification into higher value-added activities andthe long-term potential for significant productivitygrowth in the sector.

Demography and migration

Population in the EU is set to decline ...

At the beginning of 2000, the population in the EUstood at 376 million, substantially less than in China(1.2 billion) or India (1 billion), but significantly morethan in the US (272 million) or Japan (126 million). As-suming trends in birth and death rates and in migra-tion continue, EU population is projected to grow veryslowly between 2000 and 2005 (by only 0.2% a year)and then hardly at all (by under 0.1% a year) from thenuntil 2022, when it is expected to start declining. In2010, therefore, population is forecast to reach 385million and in 2025 to be only slightly higher (388 mil-lion). From 2008, population is set show a natural de-cline but this will be offset for a few years by netinward migration.

Trends in population, however, vary markedly be-tween different parts of the Union. While population is

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i.4 factors determining real convergence

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