DEVELOPMENT

4.4
Productivity and the economic structure
Uku Varblane, Urmas Varblane
In the long term, productivity 1 is the most important
competitiveness factor and source of economic growth.
It plays this role in both the national economy and in
individual companies. The stable growth of productivity
at the company level enables large profits to be earned,
real wages to be increased, new investments to be made
in technologies and product development, new channels
to be developed for entering foreign markets, etc. All the
aforementioned increase the competitiveness of business
enterprises in domestic and foreign markets. A competitive
business sector, in turn, forms a strong basis for the
national economy, and thereby, the growth of productivity
is directly related to the improvements in the standard of
living – when the real income growth of people allows
for an increase in the consumption of goods and services,
investment in education etc.
The level of productivity and its speed of growth are
affected, in turn, by many factors – both inside and outside
the business enterprises. The most important internal
factors are the range of products, equipment, materials
and energy used in production, as well as the human
resources and working methods involved. The external
productivity factors can be accommodated under the concept
of the economic environment (see chapter 4.1.) and
divided into institutions (e.g. infrastructure, legislation,
the education system) and socio-economic factors (e.g.
demographic changes, changes in the economic structure
and technological progress).
Countries are constantly competing to attract capital
and labour, by trying to provide more favourable business
environments based on a physical and institutional infrastructure
(Sinn 2002). In the same way, firms compete for
their major production factors. Their success depends on
how well they are able to sell goods and services and earn
a profit. However, the ability to earn a profit depends to a
great extent on the efficiency, or productivity, of utilising the
production factors. In this way, the connection between the
levels of competitiveness and productivity of both countries
and companies is revealed. Paul Krugman, a Nobel laureate
in economics, has stated that the concept of competitiveness,
which he believes is only a political concept, is used
excessively in the assessment of the economic competitiveness
of countries. Instead, the productivity levels of the
states should be compared, which he believes form the fundamental
content of competitiveness. However the equivalency
of productivity and competitiveness is a simplification,
because competitiveness, as a phenomenon, has several
levels, and the definition of the indicators that characterise
and impact it, depend on the level of the analysis, whereas
it is sensible to differentiate between direct and indirect
factors. For example, the productivity gap between the
European Union and the U.S., which has emerged since the
late 1990s, is often associated with the European Union’s
weak competitiveness, thereby recognising the connection
between the level of productivity and competitiveness. At
the same time, there is a need to go further with the analysis
and to explain the deeper reasons for this gap.
4.4.1
Measures of productivity
Why do we need to measure productivity? Measuring
productivity actually fulfils several important objectives.
• Assessing the standard of living. By measuring
productivity, we can provide an assessment of the
population’s standard of living in the given state.
Empirical studies have shown a close connection
between the income levels of a state’s residents and
the productivity indicators.
• Assessing technological change. By measuring
productivity, we can provide an assessment of the
state’s technological development – whether this has
resulted in shifts in various branches of the economy,
and whether progress is being made in the
direction of best practice.
• Assessing efficiency. In this case, we can provide
an assessment of whether the results have achieved
a sensible utilisation of resources in the economic
sense. This is also accompanied by the determination
of real costs savings (see OECD, 2001).
There are different possible ways of measuring productivity.
The choice of the indicators for measurement depends
on the level of analysis, the objectives of measuring the
1 The concept of productivity was probably used in scientific literature for the first time by French economist F. Quesnay, in 1766. Productivity is
a very broad concept, which includes several different aspects and levels. Most generally, productivity is understood as the ratio of output(s) to
input(s) (Syverson 2011). In this ratio, the denominator may be comprised of one input (partial productivity); two or more combined inputs (divisor
group productivity), or all the inputs (total productivity). The concepts with broader meaning that are related to productivity are profitability,
which considers the impact of price changes; and performance, which is the most general concept, and includes earning capacity and other factors
independent of price (quality, speed, distribution, flexibility). In Estonian, confusion has been cause by the interpretation of the closely related
concepts of effectiveness and efficiency. The first means “doing the right things”, i.e. the ability to reach a desired objective. The second concept’s
meaning is that “things must be done right”, and it characterises how well the existing resources are used to achieve the objectives, and whether
a saving of resources was achieved or an overrun developed. Therefore, the concept of effectiveness is used when one is focused on the outputs of
the production chain; and the efficiency concept is used to asses how well the production operation uses the inputs (Coelli et al., 2005).
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