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An analysis of past and future GDP growth in Slovenia Base projection for the period 2002-2013 Working paper 3/2004 IMAD 39 to use 0.5% of TFP growth in the future when using the CES-weighted human capital index, 0.3% when using the average wages human capital index, and 1.3% when using average years of schooling. Hence, I exclude the ‘outlier’ 1994, but do not assume a downward trend. We consider the impact of lower and higher TFP growth in the sensitivity analysis below. 4.6. Base projection for output Using the projected inputs above we make a projection for GDP growth. For the period 2002-2013 we project an average annual growth in labour of 0.12%, in the capital-output ratio of 1.05% (i.e. we project capital to grow 1.05% faster than GDP annually), and in TFP of 0.5% when we use the CES-weighted human capital series, 0.3% when we use the average wages relative to the wages of the least-skilled human capital series, and 1.3% when we use average years of schooling for human capital. Furthermore, we expect the CES-weighted index of human capital to grow at 2.3% per year, the average wages relative to the wages of the least skilled to grow at 2.5% per year and the average years of schooling index to grow at 0.5% per year. We assume that the production function is Cobb-Douglas with constant returns to scale and the elasticity of output with respect to labour is 0.7. GDP growth is projected to be somewhat lower, 3.6%, mostly due to lower capital deepening than in the past Using the CES-weighted composite of low- and high-skilled labour for the human capital index, we then project an average annual GDP growth of 3.6% over the period 2002-2013. Using the average wage relative to the least skilled gives 3.5% and using average years of schooling gives 2.9%. In the last case, the drop in capital accumulation is only partly compensated for by the higher human capital growth. Hence, we project GDP growth to slow down somewhat compared to the period 1993-2002. This is the result of lower projected capital deepening in the future than in the past, this drop dominates the projected increase in the growth rate of human capital. The projected growth rates are still impressive though. Using our preferred CES-weighted human capital series, Figure 12 puts the contributions of Figure 12: Growth accounting of past and projected GDP growth Contribution to annual GDP growth rate 0.06 Past TFP Past human capital Past Labor Past physical capital 0.05 Projected TFP Projected labor Projected human capital Projected phy sical capital 0.04 Past GDP Projected GDP 0.03 0.02 0.01 0.00 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 -0.01 Source: Own calculations using growth accounting.
40 IMAD Working paper 3/2004 An analysis of past and future GDP growth in Slovenia Base projection for the period 2002-2013 Figure 13: Projected wages Wages high-skilled/wages low-skilled 2.30 2.20 2.10 2.00 1.90 1.80 1.70 Past wage high-/low-skilled (lef t axis) Projected wage high-/low-skilled (lef t axis) Past growth rates of real wages (right axis) Projected growth rates of real wages (right axis) 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 Annual growth rate 1.60 0.00 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Own calculations. the various factors in projected GDP growth in a historical perspective. Note that the smooth patterns after 2002 are an artefact of transforming year-to-year growth rates up to 2013 into an average annual growth rate for all the inputs. Figure 12 illustrates the reversing roles of human and physical capital accumulation in the past and in the projected future (with human capital including skill-biased technological change). Wages of highskilled workers are projected to fall relative to low-skilled workers The investmentoutput ratio can be a bit lower than in recent years Figure 13 puts the projection for average real wage growth and the ratio of wages of high- to low-skilled workers into a historical perspective. Over the period 1993- 2002 wages grew at 3.1% per year 54 , for the future we project wages to grow at 3.5%. 55 Figure 13 further shows that we project a reversal in the trend of high- to low-skilled wages. In the past, skill-biased technological change outpaced the increase in the relative supply of skilled workers. In the future we project that the rise in the growth of high-skilled workers will dominate the effect of skill-biased technological change. Finally, Figure 14 gives a projection of the investment-output ratio (in real terms, both series are expressed in 1995 SIT). We can compute the corresponding projected investment-output ratio from the capital accumulation equation, using the fact that for simplicity we assume growth rates to be constant. Capital accumulation follows from (see Section 2.4.1) K ( t) = (1 − δ ) K ( t −1) + I ( t), Rewrite this to investment to obtain I ( t) = K ( t) − (1 − δ ) K ( t −1). Noting that capital grows g ö faster than output we can rewrite this to I( t) = K( t)(1 − (1 − δ ) /((1 + g y )(1 + gϕ ))). g ö 54 Over the 1993-2002 period, wages grew less than output per worker. 55 In the Cobb-Douglas case the growth rate of wages is the growth rate of output minus the growth rate of employment.
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