Productivity Growth Challenges: The Case of Spain

PRODUCTIVITY GROWTH CHALLENGES: THE CASE OF SPAIN
Mario Izquierdo
Lisbon, 7-8 July 2016
2016 Conference of the Global Forum on Productivity
DIRECTORATE GENERAL ECONOMICS AND STATISTICS

DIRECTORATE GENERAL ECONOMICS, STATISTICS AND RESEARCH
POTENTIAL GROWTH WEAKNESS
2
 Productivity growth decreased notably during the expansion and despite a
recent improvement its growth remains subdued.
 This is mostly related to a worsening in terms of the reallocation of resources
among firms within sectors.
 Growth prospects constrained by lasting effects of the crisis and other
structural factors. Productivity growth is the only long lasting factor that might
compensate the existing limitations on the growth of employment and capital.
100
150
200
250
300
350
400
83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 23 25
POTENTIAL GDP OBSERVED GDP EXTRAPOLATION OF TREND
GDP AND POTENTIAL GDP IN SPAIN
1982 = 100

DIRECTORATE GENERAL ECONOMICS, STATISTICS AND RESEARCH 3
MISALLOCATION OF RESOURCES PLAYS A KEY
ROLE
Allocative efficiency (covariance between productivity and the market share)
declined significantly during the expansion (García-Santana, et al (2015))
Although it has improved since 2008, allocative efficiency in Spain is low in
international standards.
0,20
0,23
0,26
0,29
0,32
0,35
1,3
1,4
1,5
1,6
1,7
1,8
1995 1997 1999 2001 2003 2005 2007 2009 2011
ACCORDING TOTFP ACCORDING TOAPPARENT LABOUR PRODUCTIVITY
YEAR-TO-YEAR EFFICIENCY OF THE ALLOCATION OF RESOURCES
0.0
0.5
1.0
1.5
2.0
2.5
Spain Italy Germany United
Kingdom
France
AVERAGE EFFICIENCY OF THE ALLOCATION OF RESOURCES AMONG
COMPANIES BASED ON TFP FROM 2004 TO 2012

EFFICIENT ALLOCATION OF RESOURCES
4
Productivity slowdown signal that the allocation of resources in the Spanish
economy shows deficiencies which may be related to the pattern of business
dynamics.
We focus on two aspects of business dynamics:
• Characterisation of business dynamics in Spain.
• Evidence on the relationship between business dynamics and some factors that
may be affecting it: finance, regulations and the low productivity growth at the firm
level.

OUTLINE
5
• Characterisation of business dynamics in Spain in the international setting
• Evidence on the relationship between business dynamics and factors
• Finance
• Regulations
• Low productivity growth at the firm level
• Concluding remarks

EMPIRICAL DIAGNOSIS: BUSINESS START-UPS
AND EXITS
6
High cyclical component of start-up and exit rates. Once we discount this
cyclicality:
• During the upswing, Spain’s start-up rate was in line with the one observed in
other European countries, whereas the exit rate was lower.
• During the recession, the start-up rate fell disproportionately whereas the failure
rate recovered to levels in keeping with international evidence.
0
2
4
6
8
10
12
14
16
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
START-UPS FAILURES
% of active firms
BUSINESS START-UP AND FAILURE RATES IN SPAIN
-4 -3 -2 -1 0 1
2001
2003
2005
2007
2009
2011
2013
DIFFERENCE BETWEEN ACTUAL AND CYCLICALLY ADJUSTED
FAILURE RATE
% of active firms
-4 -3 -2 -1 0 1
2001
2003
2005
2007
2009
2011
2013
DIFFERENCE BETWEEN ACTUAL AND CYCLICALLY ADJUSTED START-
UP RATE
% of active firms

AND FAILURES
7
Business start-ups and exiting firms are less productive than established firms:
• During the recession, the productivity of newly created firms improved, while the
least productive firms disappeared.
BUSINESS DEMOGRAPHY AND
PRODUCTIVITY
%
Total
1998-2007 2008-2012
Relative levels of apparent labour productivity
Total firms 100.0 100.0
Newly created firms 83.4 88.5
Incumbent firms 111.9 111.8
Exiting firms 73.1 57.2
Contributions to apparent labour productivity
growth
Newly created firms -- --
Incumbent firms -6.2 -2.2
Exiting firms 3.2 7.4

AND FAILURES
8
Business start-ups in Spain are smaller and with a lower survival rate than their
Euro area counterparts.

EMPIRICAL DIAGNOSIS: FEW HIGH-GROWTH
FIRMS AND LOW PRODUCTIVITY
9
Moreover, the number of high-growth firms is low compared with other
industrialised countries.
0
2
4
6
8
10
12
14
RO HU FI PL EE PT DE SK SI BE IT MT HR LT FR ES AT
DURING THE CRISIS BEFORE THE CRISIS
% of active firms
PERCENTAGE OF HIGH-GROWTH FIRMS

EMPIRICAL DIAGNOSIS: PRODUCTIVE SYSTEM
MADE UP OF SMALL LOW-PRODUCTIVITY FIRMS
10
Small and low productivity firms predominate in Spain.

OUTLINE
11
• Evidence on the relationship between business dynamics and factors
• Finance
• Regulations
• Low productivity growth idiosyncratic to corporations

DETERMINANTS (I): FINANCING
12
Bank loans are the main source of borrowed funds for Spanish firms.
• Credit conditions in expansion/recession affected creation/destruction of firms.
o Bentolila et al (2015), Alfaro, García-Santana and Moral (2016).
• The link between access to credit at the firm level and productivity improved after the
2008
o The Spanish banking sector has undergone a substantial change as a result of its process
of balance-sheet clean-up, recapitalisation and restructuring that might affect the
allocation

DETERMINANTS (I): FINANCING
13
Spanish bankruptcy system was characterized as highly inefficient leading to
large durations and a very high incidence of liquidations
Recent reforms of bankruptcy procedures have increased the probability of a
successful debt restructuring vis-à-vis liquidation by 5pp (something notable
departing from a 9% of bankruptcy reorganisations, see García Posada and
Vegas (2016)).
This impact has been higher for firms with a lower liquidation value (less
collateral), which implies higher ex-post efficiency.
They also decreased substantially the duration of the procedures (17%).
1 2 3
Variable dependiente Prob.Convenio (b) Prob.Convenio (b) Duración (c)
Reforma 2012 5,109** 12,305***
Reforma 2012*Inmovilizado material -0,216***
Reforma marzo 2014 -17,4**
RECUADRO x.xIMPACTO MARGINAL (%) SOBRELAPROBABILIDAD DEALCANZAR UN CONVENIO YSOBRELA DURACIÓN
DEL CONCURSO (a)
FUENTE: Banco de España.
a. (***) y (**) indican significatividad del coeficiente al nivel de confianza del 1% y del 5%, respectivamente.

DETERMINANTS (II): REGULATION
14
Entry costs for new firms have been reduced over the past years, but Spain still keeps a
lagging position in international rankings (Doing Business indicators). Also a great dispersion
of regional and municipal requirements to initiate a business is observed.
The growing heterogeneity of regional administrative formalities constrains the growth of
businesses through greater market fragmentation.
• Lacuesta and Santaló (2016) found a decreasing presence of firms in other regions at
the same time of increasing regional regulatory fragmentation.

DETERMINANTS (II): REGULATION
15
Tax and labour regulations based on size curb the growth of firms close to the
thresholds (Almunia, López-Rodríguez (2015)).

DETERMINANTS (III): PRODUCTIVITY
16
Higher productivity is an essential determinant of the growth in firm size whereas
growing in size is not a determinant of productivity (Moral (2016), and Guillamón,
Moral, Puente (2016)).
ESTIMATED EFFECTS ON EMPLOYMENT AND PRODUCTIVITY
After the number of periods indicated
1 2 3 4 5
After a productivity shock:
Employment growth
0.017***
(0.004)
0.012***
(0.004)
0.010**
(0.005)
0.004
(0.007)
0. 003
(0.006)
Cumulative employment growth
0.017***
(0.004)
0.037***
(0.005)
0.045***
(0.006)
0.075***
(0.007)
0.084***
(0.009)
After an employment shock
Productivity growth
0.017*
(0.009)
´-0.005
(0.005)
´-0.014
(0.020)
´-0.008
(0.009)
´-0.010
(0.014)
Cumulative productivity growth
0.017*
(0.009)
0.012
(0.012)
0.006
(0.017)
0.012
(0.008)
0.007
(0.031)
NOTE: * , ** and *** denote significance coefficients at 10%, 5% and 1%, respectively. Standard errors are in brackets.
See E. Moral-Benito (2016), Growing by learning, Working Paper, forthcoming. For more details see note to Table 4.2.

DETERMINANTS (III): PRODUCTIVITY
17
The economic literature underlines three internal factors conditioning business
productivity: human capital, business management and the ability to innovate.

OUTLINE
18
• Micro evidence on the relationship between business dynamics and factors
• Finance
• Regulations
• Low productivity growth idiosyncratic to corporations

CONCLUSIONS
19
Business start-ups and deaths in Spain seem to occur in a similar way as in other
countries.
• Nevertheless, firms created in Spain are characterised by their smaller size, lower
survival rate and lower productivity.
Productivity gains are an essential determinant of growth.
• However, the correlation between productivity and market share seems to be lower in
Spain than in other European countries.
These characteristics generate a distribution of firms biased towards the segment
of smallest firms and with a negative productivity gap with European counterparts.
This analysis emphasises the need to eliminate frictions and inefficiencies in
several financial and regulatory areas but, above all, to promote genuine
improvements in productivity at the firm level.
See http://www.bde.es/bde/en/secciones/informes/Publicaciones_an/Informe_anual/ and
references therein for addittional details

Productivity Growth Challenges: The Case of Spain

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