Total Factor Productivity and the Significance of the Public Sector.

• Author: Wostner, Sonja Slander

1. Introduction

   In our paper, we address a specific topic in a small, extremely open economy, a member of the EU and the Eurogroup, which managed to restore economic growth during and after the 2008 financial crisis, despite more than halving bank loans to non-financial corporations to a level where these credits do not reach annual gross operating surplus--the sum of depreciation and profits (Bank of Slovenia, 2016, 2021; Statistical Office of the Republic of Slovenia, 2021). Our basic research question is 'can endogenous growth factors (investments in research and development, or more broadly in intellectual products and in human capital) compensate for the effects of the credit supply restriction by influencing total factor productivity (TFP)?' The Slovenian example shows that it can. The paper analyzes what prompted the corresponding increase in TFP and endogenous growth factors during this period in Slovenia.

   Slovenia is at a post-industrial stage of development. In 2019 the GDP per capita reached 23,165 euros or 25,934 dollars (Statistical Office of the Republic of Slovenia, 2021). Institutions related to the economic development of Slovenia have evolved using the process of imitation of the continental European development model (Krizanic and Vojinovic, 2019). It consists of a 'diffusion oriented' technology policy linked to an educational push, in which the development of new technologies takes place in small and medium-sized enterprises (Ergas, 1987). Slovenian companies use their own resources, EU funds, co-financing of customers, services of public research institutes, benefits of tax releases, etc. to finance their development and related research, but they do not share the results of developmental knowledge with each other (Prokop and Stejskal, 2017).

   In the great global financial and economic crisis from 2008 to 2013, Slovenia's GDP fell by 9% in real terms (Table 1). The initial decline in GDP was associated with a collapse in export demand (exports of goods and services fell by 17% in 2009), and the continuation of the crisis in 2012 and 2013 was the result of inadequate (restrictive) fiscal policy associated with strong economic pessimism. Slovenian exports of goods and services began to grow in 2010. From 2010 to 2019, the share of exports of goods and services in GDP increased from 64% to 84% (Table 1). Stable export growth also enabled the start of real GDP and employment growth in 2014. Finally, in 2017, a fiscal balance was also established (Krizanic and Vojinovic, 2019).

   The results in Table 1 also show a reduction in the deficit (2009), the establishment of balance (2010 to 2012), and then the strengthening of the current account surplus of the Slovenian balance of payments; between 2017 and 2019 it reached 6% of GDP. The unemployment rate was 4.4% in 2008, rising to 10.1% during the financial crisis until 2013 and then falling again to 4.5% by 2019. Inflation approached 6% in 2008, but declined rapidly during the financial crisis. In 2015 and 2016, there was even deflation in Slovenia.

   In July 2010, the Bank of Slovenia increased the required capital adequacy ratio of banks and this, together with the tightening of criteria for assessing the creditworthiness of bank receivables, led to a gradual reduction in the volume of loans from foreign owned or domestic owned banks in Slovenia. Until September 2016, they declined continuously and decreased by 58% (Bank of Slovenia, 2016, 2021).

   Difficult access to capital has particularly affected the digitalization process in Slovenia. The net real value of ICT equipment as a part of stocks and fixed assets fell by 47% from 2008 to 2014 and was still 44% lower in 2019 than in 2008 (Statistical Office of the Republic of Slovenia, 2021). Since 2014, the Slovenian economy has barely compensated the depreciation of ICT assets. In contrast, intangible assets or intellectual property assets (research and development, computer software and databases), as they are newly marked in the statistics, increased by 13% in net real value from 2008 to 2019. This is a consequence of the process of increased development intensity in the Slovenian economy, when an even more pronounced 59% increase in the number of higher educated employees was observed in the same period (Statistical Office of the Republic of Slovenia, 2021). The increase in intellectual property products (intangible assets) and the increase in human capital (employees with higher education) were the results of market conditions that caused the need to achieve higher quality standards followed by higher market shares. Furthermore, this process was also influenced by the Slovenian development policy measures related to the absorption of EU funds and loans from the State Export and Development Bank. The Structural and Cohesion EU Funds grants increased by 176% from 2008 to 2019. They peaked in 2014 when they were four and a half times larger than in 2008 (Republic of Slovenia, GOV.SI, 2020). From 2008 to 2019, the Slovenian Export and Development Bank's (SID) development loans increased by 43% in real terms (SID, Slovenian Export and Development Bank, 2010, 2012, 2014, 2017, 2018, 2019). Part of these loans was financed by the European Investment Bank. With an intensive development policy, the share of R&D in Slovenia's GDP increased from 1.6% in 2008 to 2.6% in 2013 and then decreased to 2% (Statistical Office of the Republic of Slovenia, 2021). Fluctuations in investments in R&D were related to Slovenia's difficulties in the ongoing implementation of development policy during the transition from the EU financial perspective 2007-2013 to the new EU financial perspective 2014-2020. If Slovenia had relied solely on its own resources to promote the introduction of new technologies, companies, and business practices, it would have found itself in much greater difficulties during the financial crisis of 2008 and later, than the temporary decline in R&D investment after 2013. A study by Santos-Arteaga et al. (2020) shows that the deterioration of financial stability in EU member states that are followers of technological progress has a strong negative impact on their innovation capacity.

   Slovenia has clearly succeeded in taking advantage of international (EU funds), national and regional entrepreneurship factors (Fortunato et al., 2017). By increasing investments in intellectual property products it achieved a higher level of competitiveness in the global market. In 2014, Slovenia was among the top eight EU member states (Kraftova and Kraft, 2018) with more than 1.5% of business investment in R&D in GDP. During the analyzed period, Slovenia was able to increase its exports of goods and services owing to the EU's market of around 500 million inhabitants in the dominant middle class with differentiated product needs (Jung, Seo and Jung, 2018). The structure of the paper is as follows. First, the introduction with an incorporated description of the Slovenian economy, and after that, the theoretical framework, explanation of methodology, and data used, including the presentation of empirical results. The final part of the paper provides the conclusion, literature, and data sources.

2. Theoretical framework

   On one hand, total factor productivity (TFP) shows the part of the output that is not explained by the amount of inputs used in the production process, and on the other hand, TFP also shows how efficiently and intensively the inputs are used in this process. TFP is an important factor of long-term economic growth as well as short-term fluctuations in this growth (Tsounis and Steedman, 2021). TFP or the productivity of capital (including natural resources) and labor together change with economies of scale, improvements in productive factors allocation, and technological progress (Akkaya and Guvercin, 2018; Kim and Loayza, 2019). The latter are the three components of TFP.

   The components of TFP vary from country to country according to their economic development. Developing countries are moving from factor-driven economies to investment-driven economies and further to innovation-driven economies (Porter, 2003; Lopez-Carlos, 2009). In this process, the importance of TFP increases. TFP was first analyzed econometrically by Moses Abramovitz (1956) and Robert Solow (1956) as a constant in the Cobb-Douglas production function. The first calculations already showed that TFP explains about three quarters of US economic growth (Metcalfe, 1991).

   Various studies, particularly including Grossman and Helpman (1991), Aghion and Howitt (1992), Coe and Helpman (1995) and also their reassessment with more modern econometric techniques (Coe, Helpman and Hoffmaister, 2008) have shown that TFP is influenced by domestic R&D and the R&D of trading partners, human capital, business cycle, infrastructure, openness of the national economy (share of exports and imports to GDP), foreign direct investment and direct investment of a given national economy abroad. The impact of R&D on TFP is heterogeneous. It is different for large and small countries, but also dependent on institutions (Acemoglu, Aghion and Zilibotti, 2006). Similarly, Kim, Loayaza and Meza-Cuadra (2016) classified the determinants (drivers) of productivity growth into five groups: (1) innovation (creation of new technologies), (2) education (the ability of the workforce to absorb the knowledge of new technologies), (3) market efficiency (promoting efficient and...