Fact of the Week: Lack of IT Management Know-How Accounted for up to 67 Percent of the Divergence in Productivity Gains Between Germany and Southern European Countries between 1995 and 2008

Leading up to the IT revolution, most of Western Europe experienced similar rates of productivity growth. But as the IT revolution spread across the developed world, some countries adopted these new technologies to greater benefit than others. For example, from 1995 to 2015, productivity grew by about 1.1 percent annually in Germany and 1.0 percent in France, but only 0.5 percent in Portugal and 0.1 percent in Italy and Spain. Over this same period, Germany’s IT capital stock rose four-fold, while Italy’s only increased by one-and-a-half times.

Two European economists identify inadequate IT-management knowledge as a key factor that prevented the three Southern European countries from maximizing the returns on their IT investments, which then led to widening productivity gaps between them and Germany. By analyzing firm-management data from these countries for 1995 to 2008, the economists attribute 28 percent of Italy’s gap, 39 percent of Spain’s gap, and 67 percent of Portugal’s gap to weak IT management skills. Exacerbating this problem, the European Union’s free movement of human labor resulted in a “brain drain” effect during the IT revolution, because when countries such as Germany and France grew much faster, companies in those countries could offer much higher wages to skilled IT professionals.