The Growth of Total Factor Productivity in Slovenia

Computing accurate estimates of total factor productivity (TFP) is important for testing economic theories as well as for designing efficient and effective economic policies. In this study we measure the dynamics of TFP in Slovenia by assuming a Cobb-Douglas production function and using the aggregate data on employment, net investment and real GDP. The level of the initial stock of capital, whose measurements are unreliable, is estimated by equating the user cost of capital to the marginal productivity of capital. This condition gives us a range of estimates for the initial capital stock, and the two extreme points in this range are used to compute the evolution of TFP in Slovenia from 1992 to 2000. The results show that TFP in Slovenia grew fast in the early 1990s, and that the growth slowed significantly and reached negligible annual rates in the second half of the 1990s. The growth in real GDP in the late 1990s was mostly a result of capital deepening and increases in labour participation. This implies that if the Slovenian economy is to grow rapidly and on a sustained basis, policy makers have to focus on policies which promote economic efficiency, that is, they have to stimulate TFP growth.