VARIO Advisory report 37: Towards higher productivity growth

VARIO worked on its own initiative on this advisory report from the assessment that our society faces complex and urgent challenges: climate change, an ageing population, and this under increasing geopolitical tensions and economic instability. Western governments are looking for effective solutions and tools to tackle these problems. This requires innovation, entrepreneurship, efficient regulation and resources. However, these efforts alone are not enough without a strong focus on productivity

‘Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker’ Paul Krugman wrote in his book “The Age of Diminished Expectations” in 1990. Achieving more output with the same input is essential. That means higher efficiency and thus productivity growth. Whereas Belgium still experienced productivity growth of 4-5% in the 1970s, this figure has now fallen to less than 1%. Productivity growth has also declined in other developed economies, but Belgium is among the countries with the lowest growth rates. This poses significant challenges for our welfare state. Indeed, our economy still has limited scope to grow through further employment, making the affordability of public spending, including rising ageing costs, largely dependent on further productivity growth. The downward trend must therefore be reversed.

In April 2024, 64 economists and policy experts released an open letter titled ‘Stronger productivity growth is what really matters’. And task forces around the world are focusing specifically on this issue. A clear consensus is growing that productivity growth is necessary to effectively address these challenges.

VARIO fully endorses this vision and welcomes the attention given to strengthening productivity in the Flemish Coalition Agreement 2024-2029. However, despite these positive initiatives, productivity growth must be given an even more central place in policy.

After situating productivity growth in Flanders and Belgium, an overview of policy advice around productivity in Sweden, Denmark, Finland, the Netherlands, the UK and Germany follows.

VARIO wants to help shape the Flemish productivity agenda with the following recommendations:

Recommendation 1: Study Flanders' productivity performance

Recommendation 2: Sharpen the R&D&I policy

• Recommendation 2.1: Watch over the public share of R&D spending
• Recommendation 2.2: Promote knowledge valorisation and diffusion
• Recommendation 2.3: Remain attractive to foreign investment in R&D and knowledge-intensive production and commit to internationalisation of our own companies
• Recommendation 2.4: Ensure maximum spillover effects to the local economy
• Recommendation 2.5: Ensure innovation-friendly regulations
• Recommendation 2.6: Weigh in at the European level
• Recommendation 2.7: Develop a Flemish strategy on intangible assets, including intellectual property, software and data
• Recommendation 2.8: Ensure state-of-the-art research infrastructure
• Recommendation 2.9: Evaluate productivity growth as one of the granting conditions in VLAIO projects
• Recommendation 2.10: Maintain tax incentives for innovation
  

Recommendation 3: Engage also other policy domains for transversal innovation policy

• Recommendation 3.1: Secure more STEM talent
• Recommendation 3.2: Ensure a smoothly functioning labour market
• Recommendation 3.3: Provide a higher share of public investment in infrastructure and digitalisation
• Recommendation 3.4: Do not fear creative destruction