Productivity differences in Hungary and mechanisms of TFP growth slowdown
Slow post-crisis total factor productivity (hereafter TFP) growth is a significant policy challenge for many European countries in general and for Hungary in particular. This report aims at providing a comprehensive analysis of the processes behind productivity growth slowdown in Hungary based on micro-data from administrative sources between 2001-2016. In particular, the report aims to contribute to four ongoing debates. First, it attempts to document the productivity growth slowdown in detail to uncover potential sources of heterogeneity. Besides documenting differences across industries, it... also makes an effort to identify how the whole shape of the productivity distribution evolved along different dimensions. A focus on the whole distribution is motivated, inter alia, by recent findings that in many countries productivity slowdown has resulted from a combination of healthy productivity growth of frontier firms coupled with an increasing gap between frontier and non-frontier firms (Andrews et al., 2017). Interestingly, this does not seem to be the case in Hungary (OECD, 2016), where frontier firm productivity growth has actually been similar to or slower than that of other firms. Understanding the exact detail of this phenomenon is of much interest given that slow frontier firm productivity growth necessitates different policies from those that intend to close the gap between frontier and non-frontier firms. The second overarching question, related to frontier and non-frontier firms, is the idea of the so-called duality in Hungary. The concept of duality emphasises the large differences in terms of productivity and wages between globally oriented, often foreign-owned, large firms and the rest of the economy. Duality also refers to the lack of interconnectedness between these two groups of firms, in terms of supplier-buyer linkages and worker flows, which limits positive intergroup spillovers. One version of the duality concept also asserts that the ‘global’ sector is as productive as the global frontier. In this report, we will use a number of methods and perspectives to provide evidence for the different dimensions of this duality and investigate whether there is evidence for a narrowing gap. Duality is an important concept motivating many economic policy decisions, therefore understanding its causes and evolution is of considerable policy interest. The third group of questions relates to how efficiently resources are allocated across firms. Similarly to other countries, within-industry productivity differences are at least a magnitude larger than between-industry differences. This implies that the efficiency of the allocation of resources within an industry (i.e. whether more productive firms have access to more labour and capital) matters much for aggregate productivity. Two recent developments might have affected allocative efficiency. First, the crisis put an immense pressure on financial intermediation, which could have distorted capital allocation decisions (Gopinath et al., 2017). Second, Hungary has introduced a number of new policy tools, some of which are size-dependent or target only a subset of firms within an industry. Finally, the report is interested in the extent to which sectors and industries differ in terms of productivity and firm dynamics. One useful distinction here is between the traded and non-traded sectors of the economy. In traded sectors international competition can provide powerful incentives for firms to invest into more productive technologies and competitive pressure can also drive a more efficient allocation of resources by providing opportunities for more efficient firms to grow and by forcing less efficient firms out of the market. Another operative distinction between industries is the role of knowledge in production. Knowledge-intensive sectors may exhibit different dynamics thanks to the more significant role of technological differences and change.