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Productivity Report 2021: productivity growth in the period of post-covid economic recovery

The Institute of Macroeconomic Analysis and Development, as the National Productivity Board, produced the third Productivity Report. This year's content was marked by the COVID-19 crisis in the light of the economic recovery. We point out the impact of the COVID-19 epidemic on the financial situation of companies and, in this context, the importance of intervention measures. We analysed in more detail which are the fastest growing companies in terms of productivity in Slovenia. The report focuses on key aspects of productivity growth identified in previous reports. We analysed the current situation and long-term trends, from investment to innovation, digital transformation and knowledge, including social and institutional capital. We paid particular attention to digitalisation and all aspects of intangible capital, as they are increasingly important for productivity. The three key factors for the successful transition to the new normal highlighted in the report are the development of the human resources and skills of the future, the role of public finance and the sustainable transformation to a low-carbon and circular economy.

The analysis of the situation shows that the situation is still relatively favourable, e.g. with regard to digitalisation or the innovation activity of large companies. However, compared to other countries, Slovenia is slowly narrowing the productivity gap, which is why the report calls for an acceleration of smart and sustainable transformation to a low-carbon and circular economy in the context of digital innovation. Modest productivity growth after the global financial crisis was due to low investment. Given the long-term potential for the transition to an innovation-based, highly productive and low-carbon circular economy, particular mention should be made of the decline in investment in various forms of intangible capital (R&D, ICT, design, participation in lifelong learning), which will become an increasingly important factor in the productivity of modern economies in the long term. The report underlines the need to accelerate the introduction of structural adjustments in the face of the challenges ahead, which is justified and presented below.


WHAT: current situation and trends ...

... in Slovenia’s productivity and competitiveness

The decade before the COVID-19 epidemic was characterised by faltering productivity growth, and after a sharp decline in 2020, it again exceeded pre-epidemic levels in 2021. In Slovenia, the average annual labour productivity growth (measured as GDP per person employed) slowed from 3% in 2000–2008 to 0.6% in 2009–2019 (or to 1.4% in times of buoyant economic growth between 2014 and 2019). The outbreak of the COVID-19 epidemic led to a sudden decline in economic activity, especially in the early period, while employment remained at a relatively high level, partly thanks to government measures. This led to a sharp (temporary) decline in the labour productivity index measured as GDP per person employed, which exceeded pre-epidemic levels in 2021. With the deceleration of productivity growth, the pace of convergence with economically more advanced countries has also slowed since 2008. In 2020, Slovenia reached 89% of the EU average in GDP per capita in purchasing power standards. The gap is mainly due to lower productivity, as the employment rate was above the EU average throughout the period analysed. 

With the exception of ICT services and construction, long-term trends in most business sector activities are relatively favourable, but they should be accelerated to close the productivity gap more quickly.

In the case of the COVID-19 epidemic, the impact of the crisis on export competitiveness has so far been less severe than in the previous crisis, but there are signs of pressure on competitiveness building up in 2021.

... in productivity and business performance

Enterprises with high productivity growth are more profitable, their profitability increases faster, they invest more, they have 23% higher wages on average and increase their wages twice faster than other companies, and they are above-average employers.

In 2020, despite the outbreak of the COVID-19 epidemic, the financial situation of companies was relatively favourable thanks to government measures (low indebtedness and high liquidity despite a sharp decline in profitability), but the situation has deteriorated significantly in service activities, which were most severely hit by the epidemic.

The solvency of Slovenian companies did not deteriorate in 2020 and 2021, but there is a risk that the number of insolvent business entities will increase after all the measures to mitigate the impact of the epidemic expire and that the share of the most problematic over-indebted and zombie companies will rise.


WHY: key factors of productivity growth 

... in terms of investment

The low level of investment was a key factor in the decline in trend productivity growth even before the COVID-19 epidemic.

In terms of productivity, in addition to investment in human resources and softer forms of intangible capital, cumulative investment in research and development, ICT, and other machinery and equipment is crucial. Here, Slovenia was among the top performers in the EU before 2009 but has ranked only around the EU average since 2014.

These findings are supported by the dynamics of public investment in smart, digital-innovation transformation, on which Slovenia spends 0.5 p.p. of GDP less than the EU average and 2 p.p. of GDP less than the five leading countries, with the gap widening over time.

... in terms of structural changes 

Global changes are reflected in rapid changes in the demand for new knowledge and skills, which is already changing in the short term, but to which Slovenia is not responding adequately.

Although the corporate sector is still in a relatively favourable position in terms of digitalisation, it is gradually losing its comparative advantages and, above all, is too slow to respond to the changing nature of innovation, especially in the introduction of new business models and breakthrough and disruptive innovations.

The functioning of institutions remains a challenge: people’s attitudes towards entrepreneurship and digitalisation are becoming more positive, but at the same time, Slovenian society’s openness to change, new ideas and globalisation remains relatively low, as is the government’s effectiveness in promoting development.


HOW to move forward: through smart and sustainable transformation

Priority government measures

I.    Active PROMOTION OF CHANGE:

1.    Raising awareness of the consequences of global megatrends and pointing out that a proactive and timely response, supported by welfare state measures, can lead to an increase in the quality of life. 
2.    Promoting greater openness to change, which is an increasingly important factor for development in the context of globalisation and, for example, the intense struggle for talent or the green transition. 
3.    Managing the transformation and strengthening safety nets, adapting social security systems to the new realities, striking the right balance between security and flexibility of work, and providing adequate remuneration and access to lifelong learning, all based on close dialogue with social partners and civil society. 

 

II.    Building KNOWLEDGE and skills of the population:

4.    Accelerating education and (re)training for the skills of the future, including digital skills and introducing the circular economy aspect, and promoting the inclusion of adults in education and training systems so that they are able to successfully meet future challenges, including workers whose jobs will be more exposed to automation and change.
5.    Based on modernised and future-oriented education and training systems, which must become more flexible in the future. To ensure complementarity of knowledge, interdisciplinary approaches and cross-cutting skills such as entrepreneurship, innovation and creativity are becoming increasingly important. Therefore more attention needs to be paid to both the content and methods of teaching, which should focus more on the skills of the future and be based on a responsive and partnership-based system for predicting future needs.

 

III.    Increasing general government sector INVESTMENT:

6.    In smart and sustainable transformation, including with EU funds: as Slovenia invests less than other countries, at least in the area of smart transformation, it should increase these key investments in order to increase productivity. The gap under the Recovery and Resilience Plan will not narrow, including due to the low intensity of EU aid, as Slovenia invests on average 0.7 p.p. of GDP less in digitalisation than other Eastern and Southern European countries. This makes it all the more important to increase the share of funds intended for smart transformation in the 2021–2027 cohesion policy and thus move closer to the advanced countries such as Ireland and Finland. Depending also on the strategic orientations of other countries, Slovenia would thus position itself around the EU average in terms of the intensity of investment in digitalisation and smart transformation as a share of GDP.
7.    Ensuring infrastructural conditions, especially those that have a strong medium-term impact on productivity in addition to the short-term impact. This includes in particular (i) digital infrastructure, both in terms of enabling digital accessibility in rural areas and in terms of the growing importance of next generation technologies; (ii) education and R&D infrastructure; and (iii) green infrastructure, including the transition to a low-carbon circular economy, e.g. through measures related to electricity production from renewable sources or the regulation of sustainable mobility infrastructure.

 

IV.    Further improvement of the BUSINESS and INNOVATION ENVIRONMENT:

8.    Further strengthening the scientific research, innovation and digital ecosystem, which promotes collaboration and leads to joint investment, risk sharing and more intensive international cooperation, which in turn leads to more innovation, including breakthrough innovations, and faster productivity growth. 
9.    Promoting a dynamic business environment that ensures efficient resource allocation. Future measures should be even more focused on stopping the financing and thus the preservation of zombie companies (so-called unhealthy cores of the economy), which hinders both productivity and economic growth, and on concentrating on healthy cores that are not over-indebted in the long term and have high growth potential.
10.    Improving the effectiveness of government in providing support services and promoting development, e.g. when it comes to enabling investment, the responsiveness and flexibility of the regulatory framework, a more open and joint action with social partners and experts, and coordination with the government’s development-related activities.

 

Priority business sector measures

11.    Accelerating investment in human resources, digital transformation and research, development and innovation, and machinery and equipment. Such investment is not just about investing in traditional modernisation, such as robotic production, but accelerating investment in a mix of key drivers for digital and innovative business transformation, from data and analytics, systems and technologies, to talent and organisational capital, which are key to advanced, smart, data-driven companies, an area that is particularly challenging for SMEs.
12.    Accelerating the introduction of new business models, breakthrough and disruptive innovations, and upgraded business processes and organisation, including domestic and international networking. Smart transformation means establishing a new, digital mindset, culture and organisation, with accelerated experimentation and a greater emphasis on agile, multidisciplinary and open, collaborative approaches. This is one of crucial dividing lines between successful and unsuccessful businesses, because only companies capable of such transformation can reap the benefits of the fourth industrial revolution through the introduction of new business models, mass customisation, servitisation, extremely rapid innovation, especially breakthrough and disruptive innovation, and rapid response to market changes.
13.    Reducing emission intensity, accelerating the circularity of the economy and developing green skills for new green jobs. The transition to a low-carbon circular economy is becoming an increasingly important factor in ensuring long-term productivity growth and resilience. Increasing efficiency and the circular use of energy and raw materials are crucial for reducing production costs, which is also linked to the rapid increase in the price of energy and raw materials, which is expected to continue in the future. The green transformation of the economy represents an opportunity to create new jobs through the systematic development of new skills, innovation and sustainable investment in clean technologies.
 

As in previous years, we organised a web conference on productivity growth in the period of post-covid economic recovery in the context of the publication of the Productivity Report 2021, with the aim of broadening the discussion on how to accelerate productivity and start the transition to a new normal. In the introductory part, views on the importance of productivity were presented by the Director of IMAD Maja Bednaš, Msc, the Head of the Representation of the European Commission in Slovenia Jerneja Jug Jerše, PhD, and the editor and co-author of the Productivity Report 2021 Peter Wostner, PhD (IMAD). This was followed by a discussion on various aspects of promoting productivity and competitiveness, with the participation of renowned experts Polona Domadenik, PhD, Tjaša Redek, PhD (Faculty of Economics, University of Ljubljana), Arjana Brezigar Masten, Phd (Bank of Slovenia) and Jasna Dominko Baloh (DOBA Faculty).

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Productivity Report 2021

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