1. MEASURING PRODUCTION FACTOR CONTRIBUTIONS TO GROWTH: A NOVEL EXPENDITURE-BASED SECTORAL PPP APPROACH Saša Drezgić, PhD University of Rijeka Faculty of Economics 16 th Dubrovnik Economic Conference

2. CONTENTS INTRODUCTION DATA CONSTRUCTION OF SECTORAL PPPs ESTIMATION RESULTS CONCLUSION

3. INTRODUCTION MOTIVATION FOR THE RESEARCH VAST EMPIRICAL RESEARCH: PRODUCTION FACTOR CONTRIBUTIONS ON AGGREGATE LEVEL, LEVEL ACCOUNTING (Jorgensen, Kuroda, Nishimizu (1987), Jorgensen, Kuroda), SECTORAL CONVERGENCE (Bernard and Jones, 1996, Arcelus and Arocena, 2000) PROBLEMS: LACK OF DATA, COVERSION FACTORS

4. DATA 10 OECD COUNTRIES AUSTRALIA, AUSTRIA, DENMARK, FINLAND, ITALIA, JAPAN, KOREA, NETHERLANDS, UNITED KINGDOM AND UNITED STATES 1980 - 2005

5. DATA – VARIABLES USED GROSS OUTPUT AT CURRENT BASIC PRICES GROSS VALUE ADDED AT CURRENT BASIC PRICES TAXES MINUS SUBSIDIES ON PRODUCTION NET CAPITAL STOCK GROSS FIXED CAPITAL FORMATION TOTAL HOURS WORKED BY PERSONS ENGAGED TOTAL HOURS WORKED BY HIGH-SKILLED PERSONS ENGAGED GROSS OUTPUT PRICE INDICES GROSS VALUE ADDED PRICE INDICES REAL GROSS FIXED CAPITAL FORMATION GROSS FIXED CAPITAL FORMATION PRICE INDICES

6. DATA - INDUSTRIES

7. CONSTRUCTION OF SECTORAL PPPs CONVERSION FACTORS FOR SECTORAL EMPIRICS: EXCHANGE RATE, AGGREGATE PPP - Dollar and Wolff (1988), Bernard and Jones (1996), Arcelus and Arocena (2000), Malley et al. (2003), SECTORAL CONVERSION FACTORS – Hooper and Larin (1989), Van Ark and Pilat (1993), Hooper (1996), Pilat (1996), Harrigan (1999), Van Biesebroeck (2007)

8. DEBATE ON SECTORAL CONVERSION FACTORS Van Biesebroeck (2007) – SECTORAL PPPs ARE NOT APPROPRIATE!!! Sorensen and Schjering (2008) – PROBLEM OF THE BASE YEAR, DO SECTORAL PPPs FOLLOW SECTORAL PRICE CHANGES? Bernard, A. B. and Jones C. I., “Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries”, American Economic Review 86 (5), (1996, December): 1216–38. Sørensen, A., “Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries: Comment”, American Economic Review 91 (2001):1160–7. Bernard, A. B. and Jones C. I., “Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries: Reply”, American Economic Review 91 (4), (2001, September): 1168–69.

9. Sorensen, Schjerning (2008) Sørensen, A., Schjerning, B., “Productivity Measuring in Manufacturing and the Expenditure Approach”, Review of International Economics, 16(2), (2008): 327–340 SECTORAL CONVERSION FACTORS INNAPROPRIATE: “relative measures of productivity depend significantly on the choice of base year and change systematically as the base year changes”… “Therefore, rethinking the methods for developing conversion factors for sectoral productivity comparisons is needed ”… “a consequence of that is the fact that international comparisons based on such measures potentially lead to false results and conclusions”!!!

10. METHODOLOGY 1) 2)

11. … 4) 3)

12. … 5)

13. BASE YEAR EFFECT

14. STATIONARITY AND COINTEGRATION Levin, Liu and Chu (LLC) test, Im, Peseran and Shin, (IPS) test, ADF, PP test VARIABLES INTEGRATED OF ORDER 1 NO CLEAR-CUT ANSWER ON THE COINTEGRATION (PEDRONI TESTS)

15. MODEL ARDL (1,1,1,1,) PMG AND MG ESTIMATION PMG ALLOWS FOR INTERCEPTS, SHORT-RUN COEFFICIENTS AND ERROR VARIANCES TO DIFFER ACROSS GROUPS – BUT, IMPOSES LONG RUN HOMOGENEITY

16. RESULTS LONG TERM GROWTH COMES FROM THE CAPITAL ACCUMULATION AND GROWTH OF HUMAN CAPITAL – SHORT RUN – EMPLOYMENT AND CAPITAL COEFFICIENTS OF CONVERGENCE RELATIVELY HIGH CAPITAL ACCUMULATION THE MOST IMPORTANT FACTOR IN MAJORITY OF INDUSTRIES HUMAN CAPITAL SHOWS DIFFERENT DYNAMICS IN MANY INDUSTRIES

17. CONCLUSION MAIN CONTRIBUTION – SECTORAL PPP CONVERSION FACTORS DIFFERENT FACTOR DYNAMICS AT INDUSTRIAL LEVEL – NEED FOR MORE RESEARCH QUALITY OF INDUSTRIAL POLICY? SUBSTANTIAL HETEROGENEITY ACROSS COUNTRIES AND INDUSTRIES FURTHER RESEARCH: NUMEROUS APPLICATIONS OF THE METHODOLOGY…