The new Country Reports of the European Commission for 2018 has been released in the last week. In the report about Hungary, one of the boxes is based on the draft report of Balázs Muraközy, Márta Bisztray and Balázs Reizer named “Productivity differences in Hungary and Mechanisms of TFP-growth Slowdown”.
In the box, the effects of interfirm productivity differences and the duality of the economy on the slow aggregate productivity growth in Hungary over the last decade is explained. According to Muraközy et al., large and persistent within-industry productivity differences can explain low aggregate productivity growth via two channels. First, this pattern may imply that low-productivity firms are not upgrading their technology to catch up with their more productive peers. This is certainly a possibility in Hungary, where the share of innovative SMEs is one of the lowest in the EU (see section 3.5). Second, persistent differences may also imply that the economic environment does not facilitate the reallocation of resources to more efficient firms.
Therefore, based on the paper, the importance of within-industry productivity heterogeneity suggests that policies supporting productivity growth and reallocation within sectors can be more effective than policies aiming at inter-industry reallocation.
The European Commission’s Country Reports for 2018 are available here.