The quest for growth: ideas for a new political economy and a more responsible capitalism
Conference: London, September 6 th , 2012
Karl Aiginger
H:user/aig/vortrag/Industrial_Policy_London_PolicyNetwork_2012.ppt
0 17.04.2020

 The goals of the European Society
 Status of United Kingdom as of 2012
 Specific problems to be addressed
 Policy change needed (incl. Industrial Policy)
 Real change for Europe and the United Kingdom
1 17.04.2020

 GDP per capita, economic growth
 The other goals in a welfare function:
• Social inclusiveness, employment, housing
• Ecological sustainability, energy efficiency, low carbon
• Fair distribution of income and wealth, low regional disparities
• health, education, democracy, life expectation, happiness *
 Documentation of these goals:
• Stiglitz-Fitoussi-Sen Report, Europe 2020 strategy
• WWWforEuropeProject: Welfare, Wealth and Work.
2 17.04.2020

 Searching for a new path of development for Europe
• More dynamic, more inclusive, more sustainable
 33 research organization, 4 years, lead WIFO
 Policy Network as partner, University of Coventry (David Bailey)
 Boards with a novel laureate, ex prime minister, ex Commissioner EU *
 First tasks: European governance, problems of periphery
 Scientific Support for EU-2020 and policy change in Europe.
3 17.04.2020

 Slow growth (medium run), recession 2012
 Double digit unemployment, youth 20 %, some countries 50%
 Rather constant export shares, no trade deficit=>price competitive
 Low R&D, limited ambitions in green technology
 Increasing inequality; disequilibria between countries
 Successful Euro (higher than at start) *
 Procrusted Central Bank, no vision of European institutions 2030
 Public deficit &debt (lower than in US, but higher interest rates).
4 17.04.2020

Jeffrey Sachs in Financial Times August 19, 2008:
 Strong democracies, no US style underclass
 Peace, negotiating instead of bombing
 Low child mortality, high life expectancy
 Preference for leisure *
World Bank (golden years project 2012)
 Europe is an integration machine
 Rapid transformation and catching up of socialist countries.
5 17.04.2020

 The goals of the European Society
 Status of United Kingdom as of 2012
 Specific problems to be addressed
 Policy change needed (incl. Industrial Policy)
 Real change for Europe and the United Kingdom
6 17.04.2020

 Double dip recession, GDP 2012 probably smaller than 2008
 GDP just a trifle above EU-15 (No 10) despite of devaluation of £
 Unemployment rate 8%, youth 21% (2011)
 Social goals no 11, sustainability no15 (WIFO 2011) *
 Manufacturing sector declining from max. 19% (1989) to 9% (2010)
 Financial sector increasing from 7% ( 1997) to 9.4% (2011) *

The financial sector has overtaking manufacturing.
7 17.04.2020

35
30
EU 15
Germany
United Kingdom
Netherlands
25
20
15
10 2008:
2012:
EU15
27.7
28.1
UK Germany Netherlands
28.1
29.0
28.4
31.0
33.6
34.2
5
1980 1984 1988 1992 1996 2000 2004 2008 2012
8 17.04.2020

 Investment/GDP lowest in G7 - falling from 22% (1989) to 15% (2011)
 Trade deficit -6.0%; current account -1.7% of GDP (2012)
 Public debt 91.2% of GDP and increasing (despite of austerity)
 Highest household accumulated debt (100% of GDP)
 Financial sector debt four times GDP – a bomb to explode
 UK corporations (non financial): higher savings than D and F
 Net lending position of non-financial corporations over 10 years *
 Business profits not used for investment.
9 17.04.2020

 The goals of the European Society
 Status of United Kingdom as of 2012
 Specific problems to be addressed
 Policy change needed (incl. Industrial Policy)
 Real change for Europe and the United Kingdom
10 17.04.2020

EU15
United Kingdom
Germany 2008:
2012:
EU15 UK Germany
22.2% 17.1% 19.3%
19.1% 14.4% 18.3%
25
23
17
15
21
19
13
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
11 17.04.2020

 Innovation follower; no 6 th (Innovation Score Board)
 Falling back over last 10 years
 R&D/GDP 2010: 1.77%, no 8; (1995: 1.91%, no 6)
 Weak in firm research; low number of innovators
 Business profits, government expenditure of about
50% of GDP are not used for research, innovation.
12 17.04.2020

R & D in UK much lower than military spending
4.5
4.0
SE, FI: 3 : 1
GR: 1 : 5
3.5
R&D 2010
3.0
2.5
2.0
2.1
1.7
1.8
1.5
1.0
0.6
0.5
0.0
2.8
0.9
1.4
1.2
2.0
1.2
3.4
1.3
3.1
Military expenditure 2010
3.9
1.4
2.8
1.4
1.8
1.5
1.5
1.3
1.8
1.6
2.1
2.3
2.5
1.8
2.7
0.6
3.2
S: Eurostat, SIPRI Military Expenditure Database.
13 17.04.2020

4.5
4.0
3.5
3.0
2.5
2.0
1.5
1990
United Kingdom Germany Sweden EU 15
1995
14
2000 2005 2010
17.04.2020

(at current prices)
27
25
23
21
19
17
15
13
11
9
1980
EU15 UK
2008: 13.8% 9.2%
2010: 13.2% 8.9%
1985 1990
Germany
19.9%
18.7%
1995
15
EU 15
United Kingdom
Germany
2000 2005 2010
17.04.2020

Why manufacturing is important -
Ranks for industrial base and performance after crisis
0
LV
GR
IE
PT
EE
FI
IT
HU
UK
DK
SI
EU27
FR
US
RO
ES
NL
DE
CZ
BE
AT
SE
LT
CY
MT
SK
PO
10 20
Real GDP growth 2007/2012
16
30
17.04.2020

Business is saving, government is spending
8
6
4
2
Business (Non-financial) Government
0
-2
-4
-6
-8
-10
-12
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
17 17.04.2020

2
1
0
-1
-2
-3
-4
-5
5
4
3
1999
Fiscal balances – Household sector
Labour share in income low, consumers indebted
Euro zone
2001
UK
2003
18
2005 2007 2009
17.04.2020

4
3
2
1
0
-1
-2
-3
1999
Financial balances – financial sector
Who saves most, why?
Euro zone
2001
UK
2003
19
2005 2007 2009
17.04.2020

 The goals of the European Society
 Status of United Kingdom as of 2012
 Specific problems to be addressed
 Policy change needed (incl. Industrial Policy)
 Real change for Europe and the United Kingdom
20 17.04.2020

 Education (from lowest to highest)/Innovation (R&D)
 Reshifting resources from finance to manufacturing
 Making firms use profits for investment (incl. intangibles)
 Bringing youth back to work
 Looking for successful clusters
 Foster sustainability and raise exports
 Social innovations (organization, lifelong learning, health).
21 17.04.2020

 Past: isolated policy
• Sectoral/horizontal; picking winners
• Conflict with competition policy; shielding from competition
 Future systemic, fitting to the targets of society
• Married with innovation and education policy
• Building on comparative advantages, but one step ahead
• Supported by external and domestic competition.
22 17.04.2020

The Systemic Industrial and Innovation
Policy (SIIP) in a nutshell
Pulling forces
Vision of a new growth path (welfare beyond GDP)
Societal goals (health, climate, social cohesion)
Excellence in specific technologies (e.g. energy) )
Competition
Policy
IIP
Procurement
Trade
Policy
Industrial
Policy
Innovation
Policy
Education
Internal
Market
Regional
Policy
Pushing forces
Competition, openness and globalization
Activated, trained and retrained labor force ( flexicurity )
Competitive advantages (supported by policy )
Climate change, ageing
23 17.04.2020

 Promoting business starts: industry, software parks, spinoffs
• Less administration & less taxes
 Industrial Funds: not state owned but state procured via tendering to existing bank
 Marginal tax credit so that firms use profits for increasing investment (incl. intangibles); not saving
 Cluster policy plus upgrading and social/ecological goals
 Areas of excellence with specific emphasis on competition
(subsidies for 3 or more firms, never for one champion).
24 17.04.2020

 Collective bargaining with elements of flexibility and contracts for change on firm level
 Shift investment from large physical projects to smaller ones and business starts
 Reduce fiscal drag for 2 years against promise to cut expenditure automatically in recovery
 Rescind some reduction in shovel ready programs: schools, universities, social housing
 Reduction of low VAT, increase of 3rd VAT on luxury goods
 Reduction of compulsory insurance for people < 25.
25 17.04.2020

 Readdress distribution issue (wage rate and dispersion)
• This reduces debt, welfare bill and increases consumption
 Looking for elements of the Nordic socio-economic model
• Connect welfare payment with learning, innovation in kindergarten and schools *
 Tax financial transactions (from full FTT to double stamp tax, taxing short run transaction of banks)
 Decide to be active part of Reformed Europe, instead of twinkling to US and complaining isolation from former Empire.
26 17.04.2020

 Positive definition needed: “extended home market” in globalization
 Go for a double track integration model with trend
 Make better rules for and more coordination with Euro outsiders *
 Honest assessment of role of national states in globalized world 2050
 UK had produced 7% of world output 1950, 3% 2010, 2% 2030
 Europe including neighbors may achieve a constant share of 30%
 European integration and extension will go on: with or without UK *
 UK wants to have a say in EU, but not to comply with decisions.
27 17.04.2020

40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
21.5
28.2
31.3
34.9
13.5
8.6
3.7
UK Core Europe Euro area
28
EU 27 EU plus direct neighbours
EU plus wider neighbourhood
China
17.04.2020

 The goals of the European Society
 Status of United Kingdom as of 2012
 Specific problems to be addressed
 Policy change needed (incl. Industrial Policy)
 Real change for Europe and the United Kingdom
29 17.04.2020

 More dynamics, externally (extension) and internally
 Lower unemployment, lower disparities, and disequilibria
 Higher share of wages and investment into real sector
 Leading in education, innovation, gender equality
 Leading in energy efficiency, clean technologies
 Changing from GDP to Beyond GDP as benchmark of success.
30 17.04.2020

WWWforEurope: a new growth path
 The vision: transformation of Europe
 The goals: more dynamic, social sustainable
 One driver of change: a systemic industrial policy *
 The horizon: 4 years
 Firsts tasks:
• European governance
• Solving problems of periphery.
31 17.04.2020

 Boost investment and manufacturing
• In a competitive environment
 Develop UK 2030 and Regional Visions 2030
 Improve education (specifically at lower end)
• Vocational training, lifelong learning
 Become a leader in innovation (firm based, SME and clusters)
 Increase wage rate and decrease dispersion
• Instead of fostering household debt

Social and environmental innovations chance and not costs.
32 17.04.2020

 Financial sector larger than manufacturing/
• Less regulated/less taxed/high bonuses, attract best human capital *
 Government expenditure more than half of GDP
• High taxes on work and real sector
• financial transaction not taxed *
 Business firms accumulate surpluses and are net lenders
• But do not invest
 Military spending is higher than R&D
 UK-exceptionalism (besides that of US, F, D).
33 17.04.2020

 An attractive role for UK in EU is necessary
 Without Europe the role of UK in globalizing world evaporates
• Europe incl. Neighbours: 30%, UK: today 3%, 2050: 2%
 European integration makes and regional conflicts obsolete
 Isolation, looking for US or lost empire is no alternative *)

Cooperating with new neighbors from North Africa to Black Sea

UK alliance with neighbors to create a wider EU is a chance.
34 17.04.2020

The quest for growth: ideas for a new political economy and a more responsible capitalism
Conference: London, September 6 th , 2012
Karl Aiginger
17.04.2020

Wage share in income: low and declining (dispersion increasing; GINI)
79
77
EU 15 UK
1991:
2011:
EU15 UK
69.4% 77.5%
68.1% 70.8%
71
69
75
73
67
65
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
36 17.04.2020

 Wage share no 16 and decreasing
 Gini 25th and increasing inequality
 Poverty 22 and decreasing up to 2005
 80:20 income ratio 26
S: Stylized facts on the interaction between income distribution and the great recession
Prepared for the NERO meeting of OECD in Paris on June 18th
37 17.04.2020

8
6
4
Households
Government
Financial sector
Business (Non-financial)
Net exports
-2
-4
-6
-8
2
0
-10
-12
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
38 17.04.2020

Financial balances – business sector
5
4
3
2
1
0
-1
-2
-3
-4
1999
Euro zone
2001
UK
2003
39
2005 2007 2009
17.04.2020

Financial balances – government
0
-2
-4
4
2
-6
-8
-10
-12
1999
Euro zone UK
2001 2003
40
2005 2007 2009
17.04.2020

Globalisation not seen as a great opportunity
– compared with Nordic countries
100
Question: Globalisation is an opportunity for economic growth
90 87
82
80
76
70
60
50
71
70
68
64
63 63
62
61
60 60
59
58
56
55
53 53 53 53
52
49
48
46
45
44
42
40
30
20
10
0
DK SE NL FI HU SK EE BE DE UK LU SI IE AT MT EU27 BG PL CY LT CZ ES IT LT RO PT FR GR
41 17.04.2020

Euro zone: better but not good
1
0
-1
-2
-3
-4
-5
-6
-7
1999
Business (Non-financial)
2001 2003
42
Government
2005 2007 2009
17.04.2020