The causal impact of material productivity on macroeconomic competitiveness in the European Union

Interdisciplinary scholars and policy makers have claimed that increasing material productivity not only reduces environmental pressures but also improves the competitiveness of economies. This is particularly relevant in the context of the European Union (EU) since it motivates its resource efficiency and circular economy agenda by referring to this assertion. However, two limitations in the literature cast doubt on the validity of the claim. First, the literature fails to clarify the concept and measurement of macroeconomic competitiveness. Second, it lacks to take the endogeneity of material productivity into account. Addressing both shortcomings, this paper reviews the concept of macroeconomic competitiveness and identifies six conventional macroeconomic indicators to approximate it. Moreover, using panel data of the 28 member states of the EU between 2000 and 2014, the causal impact of material productivity on the six indicators is estimated, instrumenting material productivity with the number of deaths from natural hazards. The results provide evidence for a positive and causal impact of the material productivity rate on the wage rate and, with lower confidence, on the current account rate, while the remaining macroeconomic indicators are not significantly affected. Overall, these results suggest to be cautious with the claim that increasing material productivity improves macroeconomic competitiveness in the EU. Particularly the positive effect on the wage rate calls for considering possibilities to channel gains from increasing material productivity into eco-innovations to reduce the magnitude of potential rebound effects and thus environmental pressures.