Aiyar, S., Duval, R. A., Puy, D., Wu, Y., and Zhang, L., “Growth Slowdowns and the Middle-Income Trap”, IMF Working Paper (2013), WP/13/71
Bernard, A. B. and Jones, C. I., “Comparing Apples to Oranges: Productivity Convergence and Measurement across Industries and Countries.” The American Economic Review (1996): 1216–38
Blanchard, O. J., Griffiths, M., and Gruss, B. “Boom, Bust, Recovery: Forensics of the Latvia Crisis.” Brookings Papers on Economic Activity 2013, no. 2 (2013): 325–388
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Congressional Budget Office. CBO’s Method for Estimating Potential Output: An Update. 2001
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Mankiw, N. G., Romer, D., and Weil, D. N., “A Contribution to the Empirics of Economic Growth.” The Quarterly Journal of Economics 107, no. 2 (1992): 407–437
Young, A., “Structural Transformation, the Mismeasurement of Productivity Growth, and the Cost Disease of Services.” The American Economic Review 104, no. 11 (2014): 3635–67
Prepared by Weicheng Lian
We estimate the output gap using a production function approach using a method similar to that used by the Congressional Budget Office of the United States (Congressional Budget Office (2001)). See chapter 1 of the 2012 Article IV of Latvia special issue papers for methodological details.
42 percent in 2012
One caveat is that some fast growing economies are dropped from the Table 1 as their DTF in available years was always smaller than 75 percent
Latvia’s population growth is projected to be close to zero over the next five years, so that real GDP growth and real GDP growth per capita are very similar.
A ten year time period is chosen to reflect medium-term trends, but the results are very similar if a five year period is chosen instead
For some countries, we cannot compute their speed of convergence, as their real GDPs are missing in the period of interest in the WEO dataset. Among countries for which we can compute the speed of convergence, about half outperformed the United States’ per capita real GDP growth by 2 percent or more.
The normalization captures the idea that the speed of convergence tends to be faster when the DTF is higher.
Sectors failing to converge all lie above the fitted line of sectors successful in convergence.
Weighted by employment.
In results not shown here, we found that sectors that failed to converge expanded more relative to those that converged successfully in 2007–12
They include all the European economies with sectoral information in the Eurostat. Some countries without data, such as Malta, are left out.
We define investment to GVA ratio as the average in the previous three years, and the productivity growth as the average in the next three years.
Our approach is in the same spirit of Mankiw, Weil and Romer (1992), by looking at conditional convergence.
We treat the transportation sector and the information and communication sector as one, and put several sectors together as the “other services” sector.
This value is different from the DTF defined using per capita PPPGDP relative to that of the United States.
One explanation for the lack of convergence in these sectors could be that there has been limited technology progress in them and the improvement in productivity relies investment. For example, Davis and Heathcote, (2005) shows that the productivity growth in the construction sector is negative in the United States.
This is in contrast with the small coefficient of investment to gross value added ratio when we estimate the regression among all the industries. The latter is consistent with what we see in Table 4, as in many industries, higher investment does not lead to an increase in the labor productivity. This however does not go against the idea that a higher capital to labor ratio should imply higher labor productivity, and the reason is that we did not control employment growth and other factors in the regression. A full exploration of this issue is beyond the scope of the current paper.
Annex I. Remittances in Latvia
Although migrants’ remittances to Latvia have grown considerably over the last two decades, reaching 2.5 percent of GDP, the country’s dependence on remittance inflows remains low by international standards. Remittances strengthen Latvia’s balance of payments by providing stable and countercyclical inflows of private capital. They may also have supported households’ living standards, in particular during the financial crisis.
Annex II. Econometric Analysis
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Prepared by Astou Diouf, Weicheng Lian, and Gabriel Srour.
There were large outflows as well as inflows of population prior to 1990, but the latter predominated over that period.
Although in principle a fraction of these positions, for instance related to self-employment, could be lost permanently.
Data on the prior employment status and education/skill level of Latvian emigrants is very limited. The analysis is further complicated by the simultaneity effects between unemployment, wages, and emigration.
Formal inward remittances are the sum of workers’ remittances, compensation of employees, and migrants’ transfers (The International Transactions in Remittances, Guide for Compilers and Users, IMF, 2009). Workers’ remittances refer to transfers in cash or in kind from migrants, i.e. workers staying abroad for one year or more. Compensation of employees refers to remuneration, in cash or in kind, paid to individuals who work in a country where they have stayed for less than one year. It also includes wages and salaries earned by the local staff of foreign institutions, such as embassies and international organizations, and companies based abroad but operating locally. Migrants’ transfers include flows of goods and financial assets linked to the migrants’ cross-border movements.