Working papers published by IMAD ISSN: 1318-1920 ... - UMAR

An analysis of past and future GDP growth in Slovenia
Povzetek/Summary
Working paper 3/2004
IMAD
11
Summary
Following a strong contraction, GDP per capita has grown at a brisk pace since the
early 1990s in Slovenia. Over the period 1993-2002 the average annual growth
rate was 4.1%. To determine the main driving forces behind this high growth rate
we construct series for physical and human capital. Our preferred series for physical
capital grows at an annual rate of 6.8% over the period 1993-2002, suggesting
substantial capital deepening. Our preferred series for human capital grew at an
annual rate of 1.6% over the same period, where human capital is broadly defined
so as to include skill biased technological change.
Using our constructed series for physical and human capital, and data on employment
and output growth, we then use growth accounting to determine the contributions
of these inputs to output growth over the period 1993-2002, and the growth in the
residual or ‘total factor productivity’ (TFP). Using our preferred series we find
that (on average) employment, human capital, physical capital and TFP accounted
for 0.1, 1.1, 2.0 and 0.8 percentage points of output growth. The contribution by
employment is low because there was almost no growth in labor input over the
relevant period. Human capital grew not as fast as physical capital, but human
capital gets a higher weight in output growth. As a result, human capital growth
comes in second after physical capital growth in the growth decomposition. TFP is
third after human capital growth. However, our preferred series of human capital
includes skill biased technological change. When we use an index of average years
of schooling instead, which excludes skill biased technological change, the
contribution by human capital drops to 0.3 and the contribution by TFP rises to 1.6
percentage points.
In the process we further find that we do not reject that the substitutability between
labor and capital, and between low- and high-skilled workers in Slovenia, is in line
with international findings. Skill biased technological change seems to be a bit
lower.
Using an educated guess for the inputs in the future, we make a base projection
for the growth in GDP per capita over the period 2002-2013. Employment growth
is expected to be even lower than in the past, and we project a slowdown and
eventual end to capital-deepening in Slovenia. However, the growth in human
capital is expected to pick up. Combined with a slightly lower growth in TFP in the
future we project an average annual growth in GDP per capita of about 3.6%
over the period 2013. The base projection further has higher average wage growth
than in the previous period, a fall in the wage of high- relative to low-skilled workers
and (on average) a slight drop in the investment-output ratio.
Next, we present a sensitivity analysis of the base projection. Regarding
developments in the past, we find that the base projection is the most sensitive to
past capital growth. The impact of an alternative series for past human capital
growth on future growth is to a large extent offset by an opposing change in
projected TFP growth. Regarding future developments, for reasonable lower and
upper margins for the growth in the inputs the projected growth rate stays in a
band of 3.1% to 4.0%. This is in line with the findings of (most) other studies that
make a projection for Slovenia. Their projections range from 3% to 4%.
We conclude with an analysis of convergence to the EU average in terms of GDP
per capita. Using an extrapolation of growth rates in the EU-15 over the past 30