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Saturday, January 24, 2004

THE EU COMMISSION ADMITS IT: THE ECONOMIC AND TECHNOLOGICAL GAP WITH THE US WILL AGGRAVATE BY 2010

The EU Commission --- 20 members currently, who are appointed for long terms by the 15 member-governments (Italy, Germany, France, and Britain get a second appointment and then there's the 20th, who is the President of the Commission) --- puts out unusually good comparative studies of the EU economies a couple of times each year, with the US the major foil, though Japan plays a role too. The most thorough and informative studies are the EU Competitiveness Reports, which appear annually in the fall. Recently, the Commission --- which of course has a huge statistical and economics bureaucracy (among others) --- published its annual report that assesses the progress of the EU countries in meeting their ambitious commitments undertaken at Lisbon, Portugal, in the late 1990s.

The main commitment? To overhaul their national economies in order for the EU itself, as an integrated regional economy, to overtake the US and become the world's most advanced and competitive economy in the world. The deadline for achieving this goal was set a decade into the future, 2010. The EU's just published report on the progress toward that goal --- or lack of it --- is nicely summarized in the EU-Observer
 

WAS THAT GOAL EVER OBTAINBLE?

From the outset, the seemed an impossible goal. The recent report, just published, is summarized in the EU-Observer's own readable prose. It shows that the EU countries, far from closing the productivity, job, and technological gaps with the US, are falling behind . . . the crucial gaps with the US in technological progress, investment, productivity advances, and job-creation accentuating over time, not narrowing.

Nothing surprising really, except many for the EU media types and talkheads. Historically, the industrial revolution is now about 220 years old. For more than half that time --- since the 1880s --- the US has been the richest country in per capita income. Viewed differently, of the five eras of lead-technologies that have broken over the capitalist world in clustered waves every 50 years or so --- revolutionizing production, life-styles, and the distribution of income and related power across countries --- the US has been the pioneer in the three latest. (Textiles and iron the first wave started in the 1770s; railways and steam-powered ships began in the 1830s and 1840s, plus the telegraph)



  • the wave that started around 1880 and lasted until WWII, with electrification and the internal cumbustion engines and telephones, plus standardized mass production and new credit facilities for purchases of housing and durables;


  • the era from 1940 or so until the 1980s, where the radically transforming technologies were in aviation, long-distance trucking, sythentic materials, mass tourism, and consumer electronics (radio, TV, VCRs, faxes);


  • and the era since then, generating one wave of breakthrough innovations after another, centered on telecommunications, information technologies, biotech, the Internet, wireless technologies, and what have you . . . with revolutionary nanotech and new high-tech fuels just adding their momentum.


Essentially, in each of these latter three waves since the 1880s, the major follower countries --- Northwest Europe originally, joined around the start of the 20th century by Mediterranean Europe and Japan, the only non-European culture to industrialize noticeably before WWII --- benefited for several decades from what's called convergence catch-up growth: they will eventually grow faster than the rich technological and productivity lead country because

1) they had more investment opportunities compared to the lead US economy after a while, thanks to the onset of diminishing returns to cumulative American investments in the new technologies --- at any rate, once the innovations slowed down and production of them became standardized.;

2) they could then further benefit from acquiring the costly innovations because US multinationals or licensing of the technology would diffuse it to countries with lower wage costs;

3) they could copy and adapt American production techniques and management styles and then often produce higher-quality goods: think of Japanese cars and TVs.

4) and they could further benefit, as they assimilated the technologies and reduced the costs of the resulting manufactured goods (or services), from exporting massively back into the rich US economy, largely indifferent --- unlike Europe, Japan, or the rest of Pacific Asia --- to trade deficits.


Each time, however, the more competitive catch-up followers would approach roughly 80-90% of the US per capita income --- as Japan and Germany did in the mid- and late 1980s --- only to fall back as they approached the costly technology frontier where they had to innovate themselves . . . not to mention the dislocating costs of creating start-up firms to bring the innovations to the market. By the late 1990s, 75% of the Fortune 500 American Companies hadn't even existed in 1975. In contrast, there had hardly been a change in the Japanese or European equivalents in the same period.

Worse for convergence catch-up in this era, we're half-way through the transition in this country to a full Knowledge-Based Information economy. That means innovations might never slow down and standardize, not the radically transforming ones anyway.

Those that have so far, say cellular phones, can be produced abroad, often more cheaply or with better quality than in the US. That said, even in cell phones, Qualcomm in San Diego --- essentially a research lab that produces nothing itself --- owns almost all the licenses of the CDMA and G-3 technologies being used by American and foreign companies (Ericsson, the giant Swedish telecomm, now merged with Sony, also has bought part of Qualcomm as a settlement of Qualcomm's suit over the use of its technology). Otherwise, both in civilian and military technologies, the gap with the EU and Japan hasn't narrowed much; and if anything, it is increasing again. Right now, UC Santa Barbara and UCLA and several private companies have entered into a half-billion dollar consortium to accelerate the breakthroughs in nanotechnology --- working with materials at the molecular base --- and in bringing them to the market.



 

WHY BRITAIN AND IRELAND HAVE DONE BETTER

The EU report on the Lisbon goals does note, rightly, the uneven economic performance among the 15 members. Tiny Sweden and Austria (9 million each), Denmark (4 million), and Holland (15 million) have made noticeable progress in becoming more competitive . . . as has Britain, 60 million, the same population as France and Italy. Germany has 80 million. The latter three have been mired in all sorts of status-quo policies that block major reforms.

The Crucial Need for Institutional and Policy Reforms, Too Much Statism,
Too Many Regulations, Too Much Red-Tape, Too Much Inflexibility


By contrast, in the 1980s, a Conservative government led by the tough, unyielding Margaret Thatcher severely pruned the welfare state, cut back British anti-business regulations, trounced the bloody-minded unions that went on defiant strikes, and opened up Britain even more to multinationals from abroad. At the start of the 1980s, Britain's per capita income was about 20% lower in purchasing power terms compared to France's and Germany's; it's now a tad higher. And unlike them, Britain has had a vigorous record in job-creation. Hundreds of thousands of Continental young people flock there to find jobs. Britain also differs from the Continentals in another way: along with Sweden and Denmark, it is outside the eurozone: it retains its own currency and central bank and control over interest rates.

Note that the other major English-speaking countries --- save for Canada, ruled by the Liberal Party dominated by French-speaking prime ministers in an almost unbroken manner since the early 1960s --- have also carried out major pruning of their welfare states and regulatory apparatus, plus their taxes: Australia, New Zealand, and Ireland. In the upshot, they have recovered the economic vigor they once had, with Ireland --- once one of the two or three poorest EU countries --- now one of the two richest (along with Denmark). Canada, meanwhile, looks much more like a Continental welfare, regulatory state. Are Canadians happy? A survey two years ago showed that 85% thought politicians were corrupt or self-serving and didn't consult the citizenry enough.

Keep in mind that in Canada, the Liberal Party won three elections in the 1990s and early part of this decade while getting less than 40% of the vote. The last time, it got about 26% of all registered voters' support, yet that was enough to give the Jean-Chretien led party complete control of the executive and both Houses of Parliament. (The British, lacking even a federal system despite some devolution of power recently to Wales and Scotland, have a similar winner-take-all system of voting.)

Something else to keep in mind, come to that: though Britain's economic performance has been better than France's or Germany's or Italy's in the last decade or so, it still seems --- according to savvy visitors --- to have poor infrastructure and transportation services compared to the French and other Continentals. Much of the country too, outside the West and North ends of London and a few glittering other areas, apparently looks more shabby too. Is public order worse in Britain? Bad as crime is on the Continent, the International Crime Victimization Survey --- carried out for the UN every 4 or 5 years by a Dutch university team --- it appears to be worse in Britain, right behind Australia as the country with the most violent crime. You are four times more likely to be mugged on the streets of London these days than in New York streets. [Again, recall that the US stands out as worse in homicide --- about 4 to 5 times a higher rate --- than Japan or the EU, but near the bottom third in overall violent crime; overall crime generally; and with the most confidence in our police and going out into public spaces.]  

The Worst EU Performers

The EU report also notes the noticeably laggard performance of the Portuguese, Greeks, Spain, and Italy at a time when 10 new East European states are about to join the EU this year. Remember, too, that the EU Summit Conference last month in Italy ---- the national government that takes the presidency changes every 6 months --- failed to reach agreement on a new series of institutional reforms for making and administering policies for the EU.

That said, the Commission noted that all the national economies have similar problems of overhauling their economies and making them more flexible, dynamic, and competitive.

 

THE MAJOR OBSTACLES TO AMBITIOUS REFORMS: IMPEDIMENTS TO INSTITUTIONAL AND POLICY CHANGE

The report, of course, can't enter into the political obstacles in the way of serious reforms on the Continent: especially the huge blocking coalitions of vested interests that prevent major reforms essential to coming even close in most countries to the Lisbon goals by 2010, above all:



1) powerful trade unions even in the big public sectors,

2) left-wing parties who see free-markets in quasi-Marxist terms

3) conservative parties whose leaders fear that big changes in a free market-direction could set off crackling social-conflicts (including violence) . . . the big European welfare state essential after 1945 to the social peace that most Continentals had enjoyed for decades or over a century.

4) tremendous bureaucratic inertia and concerns by the top bureaucrats to keep their budgets and missions full-throttle,

5) politicians of all stripes who want to get re-elected

6) and not least, a risk-adverse population everywhere, accustomed save in Britain by decades of welfarism to look on life with a kind of "learned self-helplessness", to use a term coined by the Swedish economist of note, Assar Lindbeck (himself formerly a Social Democrat who moved rightward).


 

Three Related Complications

(i.) The problems of overcoming these resistances are aggravated by a new, pressing challenge: the rapid aging of the European populations, at a time when the native European populations and work-forces are shrinking.

The retirees, to put it tersely, are growing rapidly grow in number and live ever longer. Since they will have to live essentially on state-financed pensions, with private pensions almost non-existent in the EU save in Britain, the shrinking work-forces will have to be taxed ever more to support them. The only other alternative is to keep raising the age of retirement and cutting back the pensions.

(ii.) Which brings us to a related complication: Immigration would help increase the work-force size everywhere, and in fact Britain is enjoying a big influx from the Continent, where job-creation is generally mired in stagnation and unemployment among young people especially high. The trouble is, almost all the immigrants would be from Islamic countries, and the social-strife that marks the relations between the rapidly growing Islamic minorities and their European neighbors would very likely only intensify. That strife has already fueled the noticeable growth of backlash right-wing populist movements: some fairly moderate as in Denmark, even in government in Austria (Haider's Freedom Party), others far more racist and extremist like the Belgian Volks-Blaam and Le Pen's National Front in France. A recent survey found that only 42% of Frenchmen disagreed with most of the policy objectives and positions of the National Front . . . a worrying sign, to say the least.

(iii.) Finally, a climate of gloom and pessimism prevails among the EU populations about their economic and political future, according to the recent bi-annual Euro-barometer survey No. 60, published last fall. It's not a climate to encourage enthusiastic change, just the contrary. See the buggy take on this, published a few days ago.

 

Any hopeful signs?

Yes, despite the initial economic burdens of slow EU exports to the US and elsewhere --- the result of the rapidly growing strength of the euro compared to the dollar --- the illusions that prevail in most of the EU that they could keep their economies growing and hence avoid painful policy and institutional changes have been punctured, probably once and for all. Whether the EU governments will be able to overcome the earlier-mentioned resistances to change in their societies is another matter. Most likely, the small Scandinavian countries, Britain, Ireland, and possibly Holland --- the latter more problematic because of the strife involved in the conflicts between the rapidly growing Muslim communities and worried Dutchmen (not that these conflicts are unique to Holland alone) --- will continue to do better than the others.

What will happen in Italy, France, Germany, and Spain will be bellweather tests of the European Continentals ability to meet their challenges head-on.



Replies: 1 Comment

Dr. Gordon,

I was wondering if you could comment on the similarities between the U.S. and the E.U. with regard to economic problems. What will the national debt ($7 trillion, according to the Bureau of the Public Debt website) and the devaluation of the dollar do to US economic strength? Isn't the refusal of both parties to address the growing debt and dollar devaluation a sign of bureaucratic or legislative inertia?

Posted by Michael Jabbra @ 01/24/2004 03:00 PM PST