Karl Aiginger Director Austrian Institute of Economic Research

134 27. Mai 2008 Strengthening the Resilience of an Economy Strategies to Prevent Another Crisis1

The financial crisis has affected the real economy in stages yet nevertheless at an unex- pected rate and with all regions being affected simultaneously. It advanced almost indepen- dently of the regions’ exposure to the actual initial causes, among them the subprime crisis, innovative financial products, dubious micro-economic incentives and macroeconomic imbalances. The follow ing analysis poses the question of how the national economic structures can be made more resilient to a shock (be it a financial crisis or another turbulence) and how economic policy can act in order to stabilise the economy before and after such a shock. This analysis supplements studies on the causes of the financial crisis, on proper macroeconomic responses in the crisis and reforms of the regulation on the national and international level (Aiginger, 2009). It enlarges the menu of the traditional instruments of economic stabilisation policy by combining them with structural policies. Measures in five policy areas are discussed which could be the nucleus of a more far reaching prevention of a further crisis. However, a resilient economy is not in itself a political goal; it is only a necessary condition to a successful growth and employment policy. Furthermore, economic policy to increase resilience against shocks should not contain any protectionist elements since these lead to losses in income and employment levels.

1. Preliminary Remarks and resilience seems to have decreased dra- Limitations matically over the past decades. There There is an increasing number of analy- seems to be a consensus that globali- ses about how the current financial cri- sation and internationalisation of the sis came about. They discuss the contri- financial markets have increased the bution of the financial sector, its inno- speed with which the crisis spread vative products and the inefficiency of across almost all countries. The ques- existing regulation, the imbalances in tion that arises is whether one can and the global economy and the role of glo- should create structures which are balisation. They suggest how to combat more resilient or whether such struc- the present crisis, and also touch on tures might in themselves have disad- how the economic system in general vantages as regards efficiency, growth, could react in the long term, and dis- and employment. cuss the role of the state.2 There are few economic strategies In contrast the following article which, isolated at a national level, can asks a more specific and narrowly de- make an economy more resilient with- fined question: What can or should be out carrying negative consequences for done to make national economic struc- the efficiency or competitiveness of tures more resilient? The existing na- that economy. Most of the elements of tional structures, institutions and strat- any strategy need also to be part of an egies displayed little resilience to the international strategy in order not to shocks originated in other regions and reduce the positive effects of globalisa-

1 This lecture was presented at the annual economics conference of the Austrian central bank 2009 under the title “How Can a Small Open Economy Like Austria Protect Itself against Large International Economic Shocks?” An extended version will be published in Intereconomics (Review of European Economic Policy) in October 2009. The author thanks Klaus Friesenbichler, Angela Köppl, Sonja Schneeweiß, Peter Szopo, Gunther Tichy, Ewald Walter- skirchen, Yvonne Wolfmayr and Andreas Wörgötter for valuable comments and Dagmar Guttmann for research assistance. 2 See Aiginger (2009), Hellwig (2008), Leijonhufvud (2009) and Mooslechner (2008).

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tion. However, globalisation and inter- sidering its balance of payments sur- nationalisation can and have to be sup- plus, was a factor of its success. The na- plemented/supported by policies at the tional protectionist policies adopted national level or firm-level strategies. during the global economic crisis in the I do not wish to make economic re- 1930s actually contributed to a deepen- silience the most important political ing and lengthening of the crisis. The goal. Indeed it would be the sixth goal correct approach in order to boost eco- within the last four years to be of the nomic resilience consists of proposals highest level of priority. The five pre- for measures which in part have an in- ceding ones were: fighting unemploy- ternational and in part have a national ment during the middle of the decade dimension and which support the other (winter 2006 had the highest levels of strategic goals of the country’s eco- unemployment since the 1950s), in- nomic policy. Through the synergy of creasing economic growth (WIFO- these measures with growth and em- Weißbuch, 2006), fighting inflation ployment policies it is possible to cush- (specifically in 2008), combating global ion or even turn around negative warming (Stern Report, 2007) and growth effects of the crisis. containing the impact of the financial crisis (through monetary policy at the 2. Defining the Question and zero bound, state loan guarantees and Policy Areas fiscal stimulus measures). In previous Therefore, the precise question to be talks I have called the quick change of posed is: How can a national economy policy priorities subject hopping. pro tect itself from a future deep crisis The main goal of an economy in the with out compromising its goals of growth longer term is to promote employment and employment and without reducing and growth under the constraints of so- its degree of economic openness? cial and ecological objectives as well as To provide an answer to the ques- economic stability (defined as moderate tion we screen strategies and measures inflation and cyclicality). As a result of in five policy areas. Insofar as the strat- our experience in the current crisis we egies are supported by policy measures would add resilience as a new impor- – and not followed by private firms tant constraint. Resilience is defined as alone – the measures significantly ex- the ability of an economy to reduce the tend the traditional instruments of eco- probability of further deep crises or at nomic stabilisation policy. We further- least to mitigate the effects of a crisis. more discuss (i) the ability of economic However, whilst resilience is a con- policy to support strategy lines, (ii) straint only, not a final goal, it should whether the strategies are feasible on not be ignored. Tackling a constraint in the national level alone or only interna- an isolated manner leads probably to tionally and which side effects on some loss of employment and growth. growth (iii) and costs (iv) could exist Furthermore a national strategy which (table 1). is not embedded in an international one will carry even higher costs. National Policy Area 1: More Resilient solutions which contain even a hint of Economic Structures protectionism or which reduce the Strategy 1: Upgrading the Industrial openness of the economy should be Structure avoided since the very openness, spe- Sectors with reduced exposure to price cifically for the Austrian economy con- and business cycle volatility, e.g. highly

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processed products as opposed to raw on both a national and international materials and intermediate products, level (Aiginger and Sieber, 2009). are less influenced by economic cycles even in the current crisis. However, Strategy 2: Regional Diversification this time the fluctuations in the ma- of Exports chinery and construction sectors have A broad spread of exports across all re- been particularly high. The car sector gions is usually an effective insurance was always strongly cyclical, this time against a crisis. The simultaneity of the even more so due to flawed model poli- economic downturn in the current crisis cies (failing to adapt to increasing fuel costs or to look for alternative drive systems). Non-durable consumer goods are less cyclical compared to durable consumer goods. A larger proportion of non durable consumer goods would reduce cyclical fluctuations but could be at the expense of growth since demand e.g. for food and clothes grows more slowly than for other products and Austria is at a competitive disadvantage in this sector. What does make an economy more resilient to a crisis is a larger service sector. Although, it must be said that fast growing business surprised everyone but even now there services are more prone to stronger markets which are still growing faster fluctuations (as compared to personal than the average or which are already and public services). High value indus- growing fast again after the immediate trial products with a fast growth rate impact from the crisis. Since one can but also with a service component or assume that the next crisis will not be product differentiation by quality defi- as synchronised it is advantageous to di- nitely go some way to insuring against versify exports across all regions whilst large fluctuations. This is also true of paying special attention to growth mar- an industry structure which continu- kets such as the Middle East, China, the ally and prospectively incorporates the emerging EU Member States and neigh- European energy and climate packages bouring markets (Turkey, Ukraine and into any investment plans. This would Russia; Wolfmayr, 2009). also reduce fluctuations which occur as a result of the increasing priority of en- Strategy 3: Build in Buffer and Avoid vironmental goals. Lock-in It is however counterproductive to Building up inventories instead of just- reduce the share of industry in output in-time delivery could be increase resil- as it is the basis of many business- ience. However, larger stocks may have related services. There is also a lack the effect of reducing efficiency and in- of arguments which would justify the creasing costs. Diversifying suppliers government intervening in a market (having more than one), a broader range economy in this way. Furthermore of potential buyers (more than one Austrian industry is a model for success dominant buyer) and diversifying the application range of products (chip pro-

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duction for cars, mobile telephones and tivation and efforts by the unemployed conveying machinery) can have a stabi- to find a job). We should think about lising effect. Diversification may also financing social security to a higher de- reduce the amount of research provided gree from tax revenues. The new bud- by a supplier for a fixed buyer. Technical getary framework (Haushaltsgesetz) sets knowhow in the supply industry, which spending limits, which, strictly ap- is valuable to multiple purchasers and plied, provide a buffer against the state for diverse purposes, generally increases spending too much money during a flexibility in a crisis. boom through expenditure ceilings. Public or private storage of goods This prevents the dramatically increas- which tend to be cyclical and whose ing tax revenues, as seen in 2008, im- supply is relatively fixed in the short mediately being spent on additional term (difficult to expand) could be spending programmes which were set considered, e.g. food and energy. This up on short notice. Additional mecha- would curb extreme fluctuations in nisms would be desirable in regional price and lucrative speculation. Buffer administrative bodies and for the spe- stocks should ideally be on a supra-re- cial financing (funds). Also in these in- gional (e.g. European) level. stitutions any excess funds will imme- diately be spent in boom time and if there is a deficit an additional grant will be demanded from the higher level. Policy Area 2: Increasing Economic Growth Strategy 5: Investing into the Future Innovation and education strategies are recommended. They make sense both from a growth and employment point of view and as well as from the efficiency aspect. Research and education create positive external effects, thus economic policy should subsidise these expendi- tures. More innovative firms with a highly qualified workforce are better placed to produce specialised products and more bespoke solutions for custom- ers and as a rule are less vulnerable to a Strategy 4: Strengthening crisis. Competitiveness based on higher Automatic Stabilizers quality instead of lower prices increases High marginal taxation and high re- resilience as does a top 3 or top 5 posi- placement ratios (e.g. for unemploy- tion in important market niches such as ment benefits) can slow down an eco- environmental technologies. nomic boom or quickly smoothen a recession (without any additional Strategy 6: Directing the Public discretionary economic policy inter- Sector Towards Growth vention). However, both instruments Economic growth can furthermore be have a downside with regards to effi- increased by directing tax revenues and ciency (they may reduce workplace mo- government spending towards growth

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and employment. A tax system which is ronmental corporate activities. Bonuses growth orientated reduces the tax bur- should only be paid out in the case of den on labour. An expenditure strategy sustained success, and, even then, only which is growth enhancing fosters edu- with a time lag between the decision to cation and training, innovation and in- award a bonus and its actual payment. tangible infrastructure. Strategy 9: Start-ups Strategy 7: Projects with a Dual It is important for the dynamics and Purpose and High Employment and maybe also the stability of an economy Growth Effects to support young innovative firms, ga- Policy interventions to stabilise the zelles, and start-ups in general and even economy in a crisis are easier and even more so in a crisis (e.g. New Self-Em- more seminal if the projects have a dual ployed). Therefore, start-ups should be purpose. In other words in addition to encouraged particularly in a more dif- supporting demand they also promote ficult economic climate. Specific sup- long term goals, increase production port for Spin-offs or for forming a com- capacity and improve competitiveness. pany as a way out of unemployment Projects in both the environmental and should be considered. health sectors are an example. The so- Since venture capital (especially capi- cial need for, and probably the actual tal for the early high risk stage of a market potential of, health and envi- start-up) is somewhat tight, it is impor- ronmental solutions are gaining important that new framework directives are tance. They further contribute to the speedily implemented and that a state resilience of an economy because they financed fund of funds can stabilise funds are not cyclical. available to investors even in a crisis. The fund of funds would reduce the Policy Area 3: Emphasising on risk for private investors by virtue of the Longer Term Goals state’s minimum stake in the venture Strategy 8: Measure Performance capital. The Fund could also be tasked over the Long-Term to deal with anti cyclical funding. If financial flows, management salaries and company ratings are more focused Strategy 10: Anti Cyclical Wage towards performance over the longer Policy term, incomes will be stabilised and in- Demand can be stabilised by develop- centives to undertake pro-cyclical ac- ing a wage policy which is limiting tivities reduced. Corporate and eco- wage increase during a boom but stabi- nomic development will be further sta- lising or increasing the wage share dur- bilised and risks lowered if the ing an economic downturn. Such a pol- importance placed on quarterly earn- icy has more scope if it is also pursued ings, daily and weekly share prices is at an international level (or at least EU reduced. A more long term investment level). However, such policies mean horizon reduces the importance of that the costs for firms with structural short term projects. Company presen- problems would become dramatically tations, reports and ratings should con- high in the trough and thus the risk of tain longer term corporate goals and bankruptcy and job losses increases. A longer term interests for stakeholders, stabilising wage policy could be supple- as well as covering investment in hu- mented by employee profit sharing in man capital, and both social and envi-

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good times and guaranteed minimum as forming new companies (Conduits, payments in a recession Special Purpose Vehicles) had its own In times of economic crisis one dangers. The earlier arbitrary subdivi- could also strive for higher spreads in sion of the dynamic market in the USA wage increases. Consumption can be carried the advantage that any crisis stabilised through relatively high wage was limited to one section of the econ- increases at low incomes (with a given omy (e.g. the savings and loan crisis in increase in aggregate wages). Share- the USA in the 1980s). holders demand returns even in a reces- The combination of private pension sion. However, if there is high profit provisions with minimum payments growth during a boom then in a reces- and returns guaranteed by law can sta- sion there must be low profits or losses. bilise consumption and be fair from a In any case, if profits fall by 50% that is distributional point of view. The man- not actually disastrous, but simply a cy- agement of private pensions must also clical reality. It makes no sense, either incorporate life cycle considerations at macroeconomic or business level, to which imply e.g. reducing investment strive for profit at all costs in a reces- in shares as retirement approaches and sion (thereby not investing in the future not only pursue the highest return. The or increasing wages) combination of foreign currency loans with a repayment model (repayment Strategy 11: Thinking More vehicle – Tilgungsträger) which is de- Long-term (European Model) pendent on share prices is not suitable The Anglo-American model places for low wage earners. more emphasis on short term incentives and market clearing, usually Policy Area 4: Avoiding a Crisis through the use of price mechanisms. Strategy 12: Smart Regulation They are further reinforced through Regulation should at least not contrib- competition policy and are deliberately ute to any crisis (which was the case not tempered using market regulation. with the regulations in the Basel II The European model is less based on agreements, compare Hahn, 2003). The monetary incentives, knows prudence goal of regulatory reform should be to (e.g. in accounting) and regulates using introduce anticyclical equity provisions a combination of targets for both price and to take due account of systemic risk and quantity. Quota regulation and tar- in the financial sector (macro-pruden- gets can be stabilising but they hide the tial regulation), rather than assessing danger of slow structural change. The risk at the level of individual products. trend of moving from quotas or regula- The following measures should not be tory rules to more price flexibility after disputed: international cooperation in decades of deregulation and liberalisa- financial regulation; all financial insti- tion could be over in several areas. The tutions should fall under the remit of former separation in the US financial the financial regulator, the financial sector between commercial and invest- regulator should make any necessary ment banks etc. – called compartmental- warnings, as should economic research isation by Axel Leijonhufvud (2009) – institutions and central banks if there was definitely not ideal. However, the are extraordinary yields, substantial crisis has shown that lifting these sepa- deviations of price earnings ratios from rations and creating new financial prod- their historic average, or unsustainable ucts in unregulated institutions, as well price rallies and speculative waves.

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These institutionalised warning mecha- Strategy 14: More Critical Evaluation nisms would counter any tenden cies in of Mergers and Company Size the market to become over optimistic Competition policy has not been suffi- in times of boom. Regulators and ana- ciently critical of mergers, monopolies lysts must build into any regulatory and oligopolies over the past few years. measures the fact that financial markets Mergers, and the size of a company, tend to have waves of optimism/pessi- need once more to be regarded with a mism. It is the task of analysts and of any monetary policy to at least keep an eye on any economic bubbles and not only to clean up the mess afterwards. Part of any regulatory measures must occur at the international level (cf. Proposals concerning the European Systemic Risk Council). National regulations can and should supplement these. Regulations, which are stricter at the national than at the international level, e.g. higher equity provisions or lower leverage, could not be enforced at a national level and would negatively affect competitiveness. The monitoring more critical eye especially in the case and control of high risk activities or of a take-over or merger financed by poor governance in financial institu- credit. The disadvantage of large com- tions will increasingly involve firms panies is that if they have problems, which are active in more than one they generally bring down whole re- country. It would therefore be worth- gions, and thus tend to be bailed out while involving international analysts with large financial packages. There- and experts, in the work of the national fore, companies which are essentially financial regulatory bodies. too big to fail, need to be subject to tighter competition controls and re- Strategy 13: Work against the Pro porting obligations. Company ratings Cyclical Nature of R&D Expenditure will need to become more frequent During a crisis firms reduce their in- because these companies are more ac- vestments in projects with long term tive in the bonds market. One possibil- returns, which include R&D expendi- ity would be that once a company ture. This is especially true in large in- reaches a particular size, market share ternational firms with subsidiaries in or is active in a particular number of several countries. Research incentives countries, ratings become mandatory and incentives for certain important in- and thus complement the reporting ob- vestments could be made more anticy- ligations on long-term strategies by clical. Although constant framework firms. More competition (entry of new conditions are naturally important for companies, less dominant firms, com- longer term activities, state research petition in liberal professions (Freie subsidies should be specifically in- Berufe) can make an economy more re- creased during any crisis. Decreasing silient. third party funding for e.g. university research should be compensated for.

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Strategy 15: Tax Financial Strategy 16: Deleveraging and a Transactions, Evaluate Financial More Stable Shareholder Structure Innovations, Reduce Speculation Companies which have a higher equity Taxing short term financial transac- ratio are more resilient, as are compa- tions makes sense for many reasons, nies which have a stable owner struc- and has been condoned on many occa- ture. This in turn means that firms able sions (Schulmeister, 2008; und Schul- to avoid the need to maximise short meister, Schratzenstaller and Picek, term returns through taking on more 2008). The size of the financial sector debt and more risky projects and that has grown relative to the real economy firms are able to bear losses in a reces- (if such a dichotomy can be measured sion. All company reporting on (high) empirically). The internationalisation of returns on equity should disclose the the financial sector has supported the leverage factor (by standardised indica- growth of developing countries and the tors). There is a loss of efficiency if new members of the EU and allowed shareholder structures are too stable, them both to catch up with the rest of and if any mistakes or missed opportu- the world/EU.3 However, not all trans- nities are not spotted. actions promote growth, and many A period of deleveraging is a period transactions do not actually serve to- of low growth. This is why demanding wards determining the long term value a higher equity ratio affects short to of an asset but rather exploit chance medium term growth. Empirical stud- changes in exchange rates, share prices ies have shown that before the crisis, in or other financial products. We have the industrial sector there was no general over-indebtedness relative to equity but the opposite was true in the financial sector.

Strategy 17: More Regionalization Those firms and industries which have a higher share of exports are worse hit by any worldwide crisis. Companies with a more regional distribution and which are more regionally integrated are less exposed. Lengthy transporta- tion of products (often merely for an intermediate stage of production) is being criticised from an environmental point clearly seen the limits of financial mod- of view and does not always seem to els where the provision of funds is sepa- be entirely necessary. The only mea- rated from its risk (Originate to dis- sure which can be used to promote a tribute). Although it must be empha- return to a more regional basis, with- sised that securitisations have been ad- out having to accept any loss of effi- vantageous for both loan providers and ciency, would be to include all the borrowers. external costs and side-effects of trans- portation in its actual cost. This would

3 It also increased the probability of financial crises, however.

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also be an environmentally desirable and with a completed tendering pro- outcome. cess. Smaller projects on a regional More regionalisation does not auto- level can be more speedily set in mo- matically mean there is less risk of a tion than larger ones. They should, crisis but would mean that it might not however, also be financed by a fund be- spread so simultaneously. However, too cause during any crisis even the tax much regionalisation can bring with it revenues at a regional level decline rap- losses in efficiency and growth since idly. It should also be noted that es- you forgo the gains from the interna- tablishing a fund does carry certain tional division of labour. This policy costs and reduces budgeting trans- also works against a wider and more di- parency when putting together a bud- verse (regional) market. get.

Policy Area 5: Crisis Stabilizing Strategy 20: Supporting Firms with a Institutions Viable Business Model Only Strategy 18: Budget Surplus before a Every crisis contributes to structural Crisis change. Economic intervention should The most effective macroeconomic reduce the negative effects on employ- protection against the consequences of ment but without preventing this struc- any crisis is a budget surplus over the tural change. This means that any gov- whole of the economic cycle. The mini- ernmental support (cheap loans, pur- mum to be expected would be a con- chasing incentives, guarantees) should siderable cyclically adjusted (structural) be strictly linked to concepts and re- budget surplus in each peak of the cy- structurings (including management cle. The surplus can then be used dur- and ownership structures) which are ing times of crisis to stabilise demand looking to the future. Otherwise a cri- in the entire economy without having sis actually becomes the building block to fear future tax rises or public expen- of further and deeper crises (at least in diture cuts. a section of the economy). Limits to taking up new public debt need to be spotted early. If funds are Strategy 21: Innovative Solutions to put aside early the necessity to save Limit Unemployment during or after a crisis is reduced. Reducing working hours in the short term and in a reversible form will re- Strategy 19: Construction Ready duce unemployment. Models where Projects working hours are calculated over lon- During a crisis demands are often made ger periods of time and flexible work- for construction projects which can im- ing time arrangements have such an ef- mediately be set in motion. Particularly fect. This free time should be used to in the current crisis it has become clear get school certificates or late gradua- that the time lag between deciding on a tion from apprenticeship trainings. stimulus package and actually setting in There now tends to be a shortage of motion big construction projects is qualified workers. Unemployment is long. This time span – called implemen- known to be inversely correlated with tation lag in literature – may even have education. risen over time. The projects need to It is important not to reduce the already be planned in advance, includ- workforce in the long term. Reduced ing all necessary construction permits working time should be used to catch

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up on further qualifications (appren- duced economic fluctuations. They are ticeship, bachelor studies, courses at also more easily reconcilable with the politechniques etc.). Any further edu- broader goals of economic policy (envi- cation should lead to some form of for- ronment, full employment, distribu- mal recognition as this in turn increases tion). job mobility. Not all employees will be Broader corporate goals (Corporate able to be employed in exactly the same Social Responsibility in a wider sense) companies after a financial crisis. should also have a place in company as- Active labour market policies foster sessment by financial analysts. They growth. Broader qualifications and train- form a trusted base on which flexible ing which is forward looking reduce and sustainable strategies can be built. the effect of fluctuations in output on Performance orientation, fairness and the labour market. If in a recession flexibility are the important elements there are still sectors and companies of success in the Scandinavian models which could actually produce more and in a functioning social partnership. if they found the correctly qualified In countries with such structures peo- staff (engineers, skilled workers, carers ple are more prepared to see openness and child carers), a more flexible work- and globalisation as advantageous. Mi- force would actually reduce economic cro economic change needs trust and fluctuations (level of mismatch is re- macroeconomic stability and at the duced). same time contributes to economic resilience. Strategy 22: Experience Rating Companies which avoid fluctuations in 3. Summary employment inhibit less cost on unem- The theory of business cycles explains ployment insurance funds and should how there are short term fluctuations thus pay less contribution. The bonus around a medium term growth trend. could be calculated either in absolute or The medium term trend is taken as a relative terms to the sector average (cf. given. It is defined by factors which do WIFO-Weißbuch, 2006). The need to not influence economic fluctuations lay off staff or have seasonal contracts is and which cannot be changed by stabi- reduced if fluctuations in output are re- lisation policy (i. e. are exogenous). The duced or if employees can be flexibly instruments that can then actually be employed and carry out different tasks used to stabilise an economy become during the year. somewhat limited: monetary policy, budgetary policy and possibly also re- Strategy 23: Broader Company distribution of income for the benefit of Goals, Trust and Distributional lower income earners. The time lag for Justice such policies to take effect is extremely The single goal of short term profit long and often even longer that the eco- leads to more pronounced cyclical fluc- nomic crisis itself. The structural ef- tuations. Those companies which pay fects are becoming more problematic as attention to the development of human the budget deficit finances construction capital and capabilities, which take into projects which are not viable in normal account environmental and social as- times. Economic stabilisation policy pects, and for whom Corporate Social has a tendency towards asymmetries: Responsibility is a given, have a more deficits in recessions are not matched lasting success and contribute to re- by surpluses in boom times. Neverthe-

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less, the advantages of anticyclical as icy areas), namely (i) more resilient compared to procyclical or neutral structures (ii) increasing economic budgetary policies are a central and im- growth (iii) more emphasis on longer portant economic insight. term goals (by firms, analysts and eco- The current world wide crisis of the nomic policy) (iv) avoiding factors real economy is long enough for all monetary and fiscal strategies to be ex- hausted. The long time lags before policies have had an effect became clearly visible this time. Programmes for additional state spending, which were de- cided upon in Austria in October 2008, will only have an effect in the second half of 2009. Financial aid for banks and guarantees for industry loans only come into effect in early summer 2009. Poli- cies which could rapidly be implement ed were support for families, increasing pensions and the tax reduction as per 1 January 2009, albeit the latter also has which actually cause economic crises a delay before any effect can be felt. The (v) institutions and incentive schemes effect itself is also reduced by saving. which serve to stabilise the economy. Government expenditure on structural In these five broad policy areas, 23 issues, such as training and energy sav- different strategies have been pre- ing, remained low in many countries. sented, although this list is not exhaus- In such a situation the question tive. Not all strategies are achievable arises how shocks can be avoided in the without negative side-effects and costs. first place (cf. Aiginger, 2009; Cooper, Specifically, not all strategies to foster 2008; Goldman Sachs, 2009; Hahn, economic resilience are achievable 2008; Taylor, 2009) or how structures without negative effects on growth. can be created which are more resil- Some demand a similar policy to be fol- ient. Ideally, we look for economic pol- lowed in other countries/regions and at icies which foster economic stability, an international level. Table 1 reports but at the same time growth, structural on the feasibility of economic policy to and environmental change. influence a strategy, the side effects of Resilience should not be an isolated the strategies on growth and competi- economic goal but should be integrated tiveness and their ability to be imple- as an additional important constraint mented on a national level. No strategy into growth and employment strate- should be followed, which leads to less gies. Micro economic change and ful- openness and protectionism, since pro- filling social goals must complement tectionism costs growth and jobs. The each other. The contribution of private negative effects for the dynamic of the firms and of an economic policy which economy of some of the strategies need is growth and stability orientated, are to be compensated for by integrating both indispensable and indeed support special growth strategies into the over- each other. all strategy. In this way higher growth Economic resilience should be and employment could ideally be com- achieved through five channels (or pol- bined with greater stability.

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The European (and Austrian) socio- would increase if the European coun- economic model offers a foundation for tries avoid cementing existing struc- a more resilient structure, since it is tures in production, regulation and the less biased towards short run goals, public sector. It is not less change but regulation and governance does not rather adapting more proactively to the rely on prices only, and financial inno- future and open structures plus provid- vations and speculation does not play a ing buffer stocks which bring more se- similar role as in the US. Performance curity and dynamism in the long run.

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Table 1 Strategy Elements to Increase Resilience: Feasibility and Side Effects

Controlable Growth Cost effect National by effect possible/ economic only policy international Policy Area 1: More Resilient Economic Structures Strategy 1: Upgrading the industrial structure difficult positive – national Strategy 2: Regional diversification of exports somewhat rather – national positive Strategy 3: Build in buffer and avoid lock-in partly negative increasing rather (stocks) international Strategy 4: Strengthening automatic stabilisers yes rather – national negative Policy Area 2: Increasing Economic Growth Strategy 5: Investing into the future yes positive short-term national increasing/ long-term decreasing Strategy 6: Directing the public sector towards yes positive short-term national growth increasing Strategy 7: Projects with a dual purpose, high yes yes short-term national employment and growth effects increasing Policy Area 3: Emphasising on Longer Term Goals Strategy 8: Measure performance over the long term partly rather increasing? international positive ? Strategy 9: Start-ups somewhat positive increasing national Strategy 10: Anti cyclical wage policy partly ? private rather increasing international Strategy 11: Thinking more long-term (European marginal rather rather international model) positive (?) increasing Policy Area 4: Avoiding a Crisis Strategy 12: Smart regulation yes positive – international Strategy 13: Work against the pro cyclical nature of yes positive public national R&D expenditure increasing Strategy 14: More critical evaluation of mergers and yes ? short-term international company size increasing Strategy 15: Tax financial transactions, evaluate yes rather slightly only interna- financial innovations, reduce speculation positive (?) increasing tional Strategy 16: Deleveraging and a more stable marginal rather increasing rather shareholder structure positive (?) international Strategy 17: More regionalisation somewhat negative increasing national (limited) Policy Area 5: Crisis Stabilising Institutions Strategy 18: Budget surplus before a crisis yes short term/ ? national long term Strategy 19: Construction ready projects yes yes positive national Strategy 20: Supporting firms with a viable business somewhat yes slightly national model only increasing Strategy 21: Innovative solutions to limit rather yes yes positive national unemployment Strategy 22: Experience rating yes – decreasing national Strategy 23: Broader company goals, trust and for difficult positive? short-term also national distribution increasing/ long-term neutral

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