Volkswirtschaftliche Tagung 2003 31St Economics Conference 2003

√ Oesterreichische Nationalbank

31. Volkswirtschaftliche Tagung 2003 31st Economics Conference 2003

Die Förderung des Wirtschaftswachstums in Europa

Fostering Economic Growth in Europe Inhalt Contents

Klaus Liebscher Opening Statement 5 Klaus P. Regling Institutional Arrangements in the EU: Scenarios for the Future 11 Lucas Papademos The Contribution of Monetary Policy to Economic Growth 23 Michael Mussa How to Strengthen Growth in Europe? 41 Robert A. Mundell Economic Recovery and the Euro: What Else Is Necessary? 53 Wol f g a n g S c h u‹ ssel Ero‹ffnungsstatement 61

Tagungsblock 1: Warum hinkt das Wirtschaftswachstum in Europa nach? Session 1: Why Does European Growth Lag? Nicholas F. R. Crafts Prospects for European Economic Growth: A Historical Perspective 69 Norbert Zimmermann Why Is Growth in Europe Lagging Behind? 85 Josef Zweimu‹ ller, Reto Foellmi Inequality and Economic Growth: European Versus U.S. Experiences 89 Bernhard Felderer Comments on Nicholas F. R. Crafts, Prospects for European Economic Growth: A Historical Perspective Norbert Zimmermann, Why Is Growth in Europe Lagging Behind? Josef Zweimu‹ller and Reto Foellmi, Inequality and Economic Growth: European Versus U.S. Experiences 107

Tagungsblock 2: Arbeitsma‹rkte und Wirtschaftswachstum in Europa: Wo besteht Handlungsbedarf? Session 2: European Labor Markets and Economic Growth: What Needs to Be Done? Jean-Philippe Cotis Reforming European Labour Markets: The Unfinished Agenda 113 Karl Pichelmann Labour Market Reform in the EU: Progress and Remaining Challenges 121 Karl Aiginger The Contribution of Labour Market Reforms, Macroeconomic Policy and Growth Drivers to Economic Growth 139

2 Inhalt Contents

Tagungsblock 3: Investitionen und Wirtschaftswachstum: Perspektiven der Industrie Session 3: Investment and Economic Growth: Views from Industry Hannes Androsch Eine tragfa‹hige Investitionsstrategie fu‹r Europa 151 Josef Taus Wirtschaftswachstum, Finanzkapital und Investitionen 159

Kamingespra‹ch / Evening Discussion Karl-Heinz Grasser Topical Budgetary and Fiscal Issues 169

Tagungsblock 4: Fiskalpolitisches Statement und Podiumsdiskussion: Reformerfahrungen im o‹ffentlichen Sektor Session 4: Fiscal Policy Statement and Panel Discussion: Experience with Public Sector Reform Vito Tanzi, Ludger Schuknecht Public Finances and Economic Growth in European Countries 178 Jon Cunliffe Comments on Vito Tanzi and Ludger Schuknecht, Public Finances and Economic Growth in European Countries 197 Jens Henriksson The Use of Fiscal Rules in Sweden 205 Martti Hetema‹ ki Experience with Public Sector Reform in Finland 210 Kees van Dijkhuizen The Use of Fiscal Rules in the Netherlands 212

Tagungsblock 5: Finanzma‹rkte und Wirtschaftswachstum Session 5: Financial Markets and Economic Growth Mario I. Blejer Financial Stability and Economic Growth 217 Manfred J. M. Neumann Comments on Mario I. Blejer, Financial Stability and Economic Growth 227 Klaus Liebscher Concluding Remarks 233 Mickey D. Levy Why Does the U.S. Grow Faster than the EU? Pro-Growth Suggestions for Closing Gap 239

Franz-Weninger-Stipendien / Franz Weninger Award 253

Die Vortragenden / Speakers 255

3 Klaus Liebscher Klaus Liebscher Governor Oesterreichische Nationalbank

Opening Statement

It is a pleasure to welcome you here in Vienna to the 31st Economics Confer- ence of the Oesterreichische National- bank (OeNB). Our topic this year is Fostering Economic Growth in Europe. Identifying the sources of economic growth is a research field which has attracted a lot of attention recently. But it is also a highly political issue. I am very pleased that our Economics Conference has attracted great interest. We have received some 300 registrations from top representatives in the fields of politics, science, academia, central and commercial banking and the media. Of course, this conference could not be held without an array of extraordinarily distinguished speakers. Tobegin with, I have to inform you that the Chancellor of the Republic of Austria, Mr. Wolfgang Schu‹ssel, who wanted to give us the honor of presenting the opening address for this conference, had to cancel his attendance this morning due to a plenary session in Parliament. But I am very glad to say he will be with us at 2 p.m., starting the afternoon session. It is a privilege to announce the Director-General of DG-ECFIN of the European Commission, Mr. Klaus Regling, as our first keynote speaker. Mr.Reglingwillsketchpossiblescenar- ios for the future institutional arrangements in the EU. Mr. Regling, a very warm welcome to Vienna, and to our conference. Klaus Liebscher

I am alsovery happy to have my dear economies like the U.S. economy. This and esteemed colleague, Mr. Lucas tendency is particularly pronounced Papademos,VicePresidentoftheEuro- in the larger European economies. peanCentralBank(ECB),asoursecond According to the OECD1), the average keynote speaker to discuss how mon- annual growth rate of U.S. real per etary policy can contribute to eco- capita GDP was 3.2% during the nomic growth. Also a very warm wel- 1990s. In the European Union, per come to you, Lucas, here in Vienna. capita GDP growth was on average And last but not least it is a great only 2%. pleasure to announce Michael Mussa It can of course be argued that from the Institute for International different growth rates are not necessa- Economics as our third keynote rily a bad thing and that welfare speaker. Professor Mussa will talk implications depend strongly on the sources of the growth differentials. It is certainly possible that the low growth rates in Europe are due to a high preference for leisure or high risk aversion. In this case, slow growth in Europe would not necessarily imply that welfare — defined in some broad sense, including the overall quality of life — is low in Europe compared to about How to Strengthen Growth in faster-growing economies. However, Europe? — a topic that goes straight slow growth might also be the conse- to the heart of this conference. A cor- quence of a suboptimal economic and dial welcome to you, Michael. institutional framework. In this case, I am very pleased to welcome Mrs. it would be involuntary, not the result Gertrude Tumpel-Gugerell, former of different preferences. Indeed, many Vice Governor of the OeNB and since economists argue that structural JunethisyearExecutiveBoardMember rigidities are a major reason behind of the ECB. Following yesterdays fare- the observed growth differentials, well reception for you at the OeNB, we and that structural policies are needed appreciate it very much that you will to create an environment of higher join us this morning here, as many productivity growth. Finding more of the preparations of this conference clear-cut answers to the sources behind still have your as we say in German the growth divide is key and will have Handschrift.So,thankyouverymuch important implications for European andaverywarmwelcome.Wewishyou economic policy. all the best in your new function in Over the last 50 years, Europe has Frankfurt. grown into an integrated market of Especially in Europe, interest in the around 300 million people. The topicwehavechosenforourEconomics creation of the Single Market in Conference is understandably high, 1992 has increased trade in goods since in recent years, European real and services among the EU Member per capita GDP stopped converging States. The euro has lowered transac- to the levels observed in fast-growing tion costs, sharply reduced risk premia,

1 The Sources of Economic Growth, OECD 2003.

6 Klaus Liebscher

and increased price transparency. labor force participation rates and the These developments have certainly high unemployment rates typical of increased competition and should many European countries are major enhance productivity growth. The factors in explaining the mediocre European financial markets are now growthperformanceofmanyEuropean well integrated and stable, and the countries. payment systems work smoothly, There is widespread consensus that ensuring a smooth flow of funds from structural reforms are necessary to in- savings to investment. On the macro- crease the flexibility of the European economic side, the stability-oriented labor markets in order to create new monetary policy of the Eurosystem jobs. Tax and benefit systems have to ensures that the price signaling mech- be reshaped such that incentives are anism can operate fully. created for an increased supply of labor Despite temporary setbacks, also quite recently, the Stability and Growth Pact has successfully prompted a reversal from the previously persisting high government deficits and rising debt ratiostoageneralawarenessoftheneed for sound fiscal positions. When we look at these overall favorable developments over the last decade or so, it appears puzzling that by households and also for increased the European economies — with a few demand by businesses. Marginal tax exceptions — have not seen an increase rates have already been cut in some in real incomes similar to that in the countries and these reforms have U.S.A., for instance. Why did more started to show some effect. intense competition after the creation Another issueistheflexibilityofthe of the Single Market and the euro not European labor force. Various studies prompt a rise in potential growth rates show that labor force mobility in the likethattheUnitedStatesexperienced? U.S.A. is more than twice as high as And, are those economists who predict in Europe. Besides increasing labor that this growth differential is likely to force mobility, it might also be increas- persist right? ingly necessary to take advantage of Diagnosing the problem is, of flexible forms of employment. New course the first step in finding a solu- technologies require flexible responses tion. Identifying the sources of the lagging toallowaswiftreallocationofresources. European growth performance is therefore The last session this afternoon an important task andwill be dealt with addressestheimportantnexusbetween extensively in the keynote and lun- investment and economic growth. As stand- cheon speeches this morning as well ard growth theory teaches us, it is the as in session 1 this afternoon. capital stock that to a large extent Session2later thisafternoonwillbe determines the long-run growth devoted to the role of labor markets for potential of an economy. economic growth. Needless to say, this Allow me to briefly stress the role topic is especially relevant for Europe. of Eurosystemsmonetary policy in this There appears to be a consensus among context. A market economy can only the economics profession that the low achieve an efficient allocation of

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resources if interest rates and the price In this respect, fiscal policies have a system coordinate investment and great potential for fostering confidence consumption decisions by firms and and thereby supporting activity, even households. This is best possible in in the short run. Establishing a well an environment of price stability. designed medium-term consolidation Thus,maintainingpricestabilityisin strategy would make a major contribu- fact the best contribution that monetary tion in this direction. This would imply policy can make to enhancing the long- comprehensive and growth-friendly run growth prospects of the euro area. measures including, in particular, a Another fundamental precondition for courageous reform of the structure sustained economic growth is a sound fiscal and the level of public expenditure. policy — an issue session 4 will address Curbing spending growth would even- tomorrow morning. Beyond a certain tually also create further room for manoeuvre to address future pressure arising from pension systems and scope for future tax cuts. Procedurally, it is crucial to underpin the fiscal policy framework with a decisive and consistent implementation of the rules of the Treaty and of the Stability and Growth Pact, and rigorous monitoring and peer pressure amongst Member States. level, public deficits and debt will put A final topic that will be dealt with upward pressure on market interest in session 5 tomorrow is the relation- rates, since governments compete with ship between financial markets and eco- the private sector for funds on financial nomic growth. The primary purpose of markets. In this way, large public financial markets is to ensure that deficits and debt can crowd out private savings are efficiently channeled to investment. The resulting lower pro- investment projects with the highest ductivity growth and employment will risk-adjusted return. Moreover, well- dampenpotentialoutputgrowth.Inthe functioning financial markets can in- extreme, unsustainable fiscal policies crease the savings rate of an economy. might even lead to a situation where Needless to say, this is likely to lead to government borrowing becomes the higher investment and will put the major determinant of market interest economy on a higher growth path. rates. This would make it harder for An important question is how financial the ECB to implement its monetary market structures should be designed policy and might even conflict with to provide optimal conditions for sus- the goal of price stability. tained growth in Europe. At this juncture, it may be partic- Over the last decades the founda- ularly warranted to stress that mone- tions were laid to transform Europe tary policy cannot by itself generate into a highly integrated and dynamic lasting and sustainable growth and economy. The Single Market and the employment in the euro area. This euro have created many opportunities. can only be achieved by appropriate Enlargement of the EU offers yet structural measures that address funda- another wave of opportunities. mental weaknesses and tackle urgent Despite these impressive achieve- adjustment requirements. ments, Europe has so far not managed

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to close the gap between European and butions — and I also would like to thank U.S. per capita incomes. This confer- all of those from the OeNB being ence will, I am confident, shed further responsible for their scientific and light on this crucial issue. If we succeed organisational preparation for this in inspiring vivid exchanges of views, conference. then we have achieved our goal of con- I am also very pleased to see tributing a little to the understanding of among us the President of the OeNB, why growth experiences are so heter- Mr. Wala, and my predecessor Mrs. ogeneous across countries. Schaumayer, former President of the I wish you all and of course us a suc- OeNB. We are very happy to have cessful and fruitful conference. Once you here. And now I would like to hand again I would like to thank all speakers over to Mr. Regling, our first keynote and panelists for their valuable contri- speaker. §

9 Klaus P. Regling Klaus P. Regling Director-General for Economic and Financial Affairs European Commission

Institutional Arrangements in the EU: Scenarios for the Future

We are here to analyse, discuss and reflecttogetherhowtofostereconomic growth in Europe. I was invited to make a contribution on Institutional Arrangements in the EU: Scenarios for the Future. You might wonder why the Com- missions Chief economist is talking about institutions at a conference that focuses on Fostering Economic Growth in Europe. There are two good reasons for this. — First, one cannot have a conference on European issues these days without talking about the European Convention. — Second, the importance of institutions for economic growth is more and more recognised. A proper functioning of the EU after enlargement requires a reform of its institutions and its decision-making procedures. The Convention has discussed ways toreformtheEuropeanUnionfor more thanayear.AfirstcompletedraftTreaty establishing a Constitution for Europe was presented at May 31, 2003, by the Conventions Presidium, a revised version at June 7, 2003. The Convention is Klaus P. Regling

in its last session today and tomorrow, European Convention. European inte- to adopt a final text. gration has brought 50 years of peace, Therefore, our discussion of this prosperity and stability in the EU. The topic today is timely and risky. EU today is a Union of States sharing Timely — for obvious reasons. a common set of democratic values. Risky — because nobody can be sure Integration has increased step by step; of the precise outcome tomorrow. In progress has often been slow and any case, the result of the work of cumbersome, and there have been the Convention will be presented to setbacks from time to time. the European Council in Thessaloniki But, looking back, the cumulative at June 19/20, 2003. change has been overwhelming and has It is important that the Convention gone beyond what could have been agrees on a reasonable compromise imagined half a century ago. From tomorrow be- the initial European Coal and Steal cause, without Community, over a customs union to reforms that the creation of a Single European make the institu- Market, EMU and the euro. tional frame- Today, EU activities are based on work more effi- four Treaties, where the working cient, the Single methods differ according to the area Market and the of activity. Some of them were drafted Economic and in the 1950s for a Community consist- Monetary Union (EMU) will not func- ing of only six Member States. Looking tionaswellastheycould,andeconomic aheadtoaUnionof25MemberStatesin growth in Europe would suffer. 2004, and a Union with probably more Subsequent speeches this morning than 30 countries in the future — the will probably focus more on traditional current legal and institutional set-up economic policy instruments that sup- is clearly inadequate. The Convention port growth. was established to address the future of But in my intervention, I will the Union, and how it can be made to focus work more effectively. — first, on legal and institutional With 10 new Member States, the reforms in the EU; EUs population will increase by — second, the need to strengthen eco- 20%, the number of Member States nomic governance; and by 65% and the number of official — third, whether the new, enlarged languages by 80%. This would be a European Union, requires more challenge for any administration. flexibility — perhaps a multi-speed Consequently, the accession has to Europe — if the European inte- be prepared. gration process is to continue. Far-reaching reforms of our institutions and our working methods that 1 Institutional Reforms were already urgent anyway, can no at the EU Level Are Both longer be postponed. Otherwise, there Necessary and Urgent could be gridlock. The institutions 1.1 Introduction could loose their ability to take neces- Let me begin by talking about the need sary decisions. That would hamper an for legal and institutional reforms and efficient functioning of the Single whatwecanandshouldexpectfromthe Marketandthereforeeconomicgrowth

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inEurope.For instance,ittook14years 1. a better division and definition of inthecurrentsystemtoreachapolitical competences in the European agreement on the taxation of savings Union directive — with only 15 Member 2. simplificationoftheUnionsinstru- States. The take-over directive is still ments being discussed in the Council, after 3. more democracy, transparency and more than 10 years. These are just efficiency in the European Union two examples that underline what 4. creating a Constitution for Euro- Commission President Mr. Prodi pean citizens meant when he said recently: status The Convention has made good quo equals paralysis for all of us. progress in a number of these areas. I will focus mainly on the areas that 1.2 The European Convention are of particular relevance for our con- A first attempt to prepare the Com- munity for enlargement was made in Amsterdam in 1997, and thereafter inNicein2000.Butprogresswasrather disappointing as the traditional method to prepare Treaty changes, through inter-governmental conferences (IGCs), reached its limit. The European Council in Laeken (in December 2001) therefore entrusted ference theme: Fostering Economic the Convention with the task of prepar- Growth in Europe. In that context, ing the future of the Union. The Con- the main points are the following: vention started its work in early 2002 — First,thedraftConstitutionimplies under the chairmanship of former a marked simplification with a clear French President Vale«ry Giscard structure compared to the existing dEstaing. Its way of working is an Treaties. It will also rationalise innovation compared to the IGCs, legislative andnon-legislative norms where national governments were within the Union. The current the only actors. The Convention in- Treaties contain hundreds of provi- cludes representatives of the Member sions of various importance and States,oldandnewones,ofthenational scale. A ranking of the various parliaments and governments, of the Treaty provisions will make it European Parliament and of the Com- possible to draw a distinction mission. Discussions are public. The between the fundamental provi- Conventions final proposal (or sets sions (which could be fundamental of options) will be presented at the rights, organisation of powers, European Council in Thessaloniki at principles of the common policies), June 19/20, 2003. As the Convention and the application provisions. cannot modify the Treaty itself, it will The draft Constitution sees a be followed by an IGC later this year. marked reduction in the overall As indicated earlier, the Conven- number of provisions. tions main task is to prepare the — Second, the draft Constitution goes Unions future. The Laeken Declara- a long way to make the European tion listed four sets of issues that the project more transparent and Convention should focus on: understandable to ordinary citi-

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zens. The Unions fundamental It is based on the following principles: values and objectives are enshrined the Commissions monopoly of the in the first part of the Constitution right of initiative (working in the inter- and in the Charter for Fundamental est of the Union and as the guardian of Rights which is part two of the draft the Treaty); the widespread use of Constitution. All Europeans will qualified majority voting in the Council continue to have access to Euro- (evenifunanimityapply in some cases); pean citizenship with a set of rights an active role for the European Parlia- attached to it. Public opinion ment; and a uniform interpretation of surveysareclear:Anoverwhelming CommunitylawbytheCourtofJustice. majority of the EU citizenswants to The fifth EU institution is the Court of expand the Unions action into a Auditors. number of new areas. The Conven- Everybody agrees that it is essential tion has thus addressed the publics that the Council, the European Parlia- desire for Europe to be more active ment and the Commission, will in, for example, foreign policy, in continue to share the legislative and justice and security, and in social executive powers. However the role affairs. They will all be part of andtheresponsibilitiesofthemainEuropean the Unions policy in the future. institutions need to be redesigned to — Third, a number of proposals have make them more effective. Let me been agreed in the Presidium as briefly go through the main proposals regards the institutional set-up of the Presidium of the Convention as I and decision making in the Euro- understand them today: pean Union. Of course, these — A fulltime EU President will chair the proposals could again be changed European Council of national leaders. by the Convention today and He (or she) will be elected for two tomorrow but the proposal from andahalfyears(renewableonce)by the Presidium has found much qualified majority. The aim is to support during the last few days. improve the continuity and visibil- Before I go into the details of the ityof the Unionswork. Therewere institutional reform proposals, I would some fears that the creation of a like to briefly recall the current struc- permanent President of the Euro- ture: The European Union is a Union of pean Council would lead to an both peoples and states. It is built on an institutional duplication and the institutional system, which is unique in creation of a new bureaucracy. the world. Based on the rule of law and Therefore, in the Conventions democracy, Member States have dele- revised proposal, the Presidents gated some of their sovereignty to the powerhasbeenlimited,nodeputies EU institutions. are foreseen, the original idea of At present, the EU is run by five creating a bureau for the Presi- institutions, of which each plays a dent has been deleted and he will specific role. The power to carry out rely on the Council Secretariat. the Unions legislative and executive — A new Foreign Ministerof the EU will tasksissharedbytheCouncil, theEuro- be appointed by the European pean Parliament and the Commission. Council and with the agreement This is the very essence of the so-called of the Commissions President. Community method, which has directly He will also be Vice President of contributed to the building of Europe. the Commission. This will allow

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Europe to speak with one single First, as regards the system of weight- voice on foreign policy issues. ing votes in the Council, the draft — The draft Convention proposes to Constitution proposes a new dual keep the current system of rotating and more straight-forward definition the Presidency of all other Council for qualified majority: a proposal is formations, but prolongs the Presi- adopted if it is supported by a simple dency to at least a year. majority of Member States, represent- — The Parliament gains in importance. ing at least three fifths of the population It will, for example, get a greater oftheUnion.Thisisseenasaveryuseful role in decision making as the scope proposal by the Commission. But, this of co-decisions is extended to proposal has provoked a strong re- 34 new policy areas. It will also action from some countries, especially elect the President of the Commis- medium-sized and small Member sion. — The Commission will continue to comprise one Commissioner from each Member State until 2009. This has been seen as important, particularly by the small Member States, in order to fully reflect the diversity of national concerns, and especially in a situation where a substantial numberof newMember States. They would see a marked cut States will join the Union. How- in their voting weights agreed in Nice ever, according to the Presidiums that give them a disproportionate proposal, the Commission would power compared to their population. be streamlined from 2009. In the As a possible compromise, the Presi- future, the Commission would dium has therefore proposed to keep consist of 15 full members, and the existing rules until 2009. Associate Commissioners (or Second, where should Member States non-voting members) from all keep their veto power?In principle, qualified other Member States. The voting majority voting appears to me to be the members will be selected on the only logical rule for decision making in basis of equal rotation between the Council in the future — with a few the Member States. exceptions in defence policy. That All this means the Convention has implies that the requirement for una- been able to make progress on simpli- nimity should be very strictly limited. fying our legal framework and on Otherwise, I see a clear risk that the developing the institutional set-up Union might become unmanageable. anddecision-making procedures. How- TherecouldoftenbeoneMemberState ever, it has proven markedly more withavitalinterest,blockingandpos- difficulttofindaconsensusonanumber sibly blackmailing the others. We have of other important issues. In particular, seen this often enough. Recently, for the debate is now on: example, when an old milk quota prob- 1. changing the complex voting sys- lem in one country was used to block tem in the Council, and theagreementonthetaxationofsavings 2. reducing the Member States veto directive. The draft Constitution pro- powers. poses to extend the use of qualified

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majority voting to trade policyand, to a stitution, the proper functioning of the certain extent, also to justice and home Single Market requires Member States affairs issues. This is very positive. to coordinate their economic policies However, the national veto would be within the Union. The creation of retainedinforeignaffairsandtaxpolicy. EMU and the introduction of the euro From an economic perspective, it is have further reinforced the need for unfortunate that tax policies have been economic policy coordination. excluded from qualified majority vot- The key motivation for coordina- ing, even tax issues that are related to tion is to ensure an adequate provision the functioning of the Single Market. of common goods and to take into More effective decision-making in all account externalities (or cross-border major policy areas will be crucial if spillovers) of national policies. For Europe is to use its full economic instance, national budgetary policy in potential. one euro area Member State can have Itappearsdifficulttofindacompro- animpactonthesinglemonetarypolicy mise on these remaining major issues. and on the exchange rate. Difficult, but not impossible. And as Structural policies can also influ- everything is linked, it is likely that ence the euro exchange rate, but the therewillbeanagreementonthewhole impact is likely to be more indirect, institutionalpackage—or nothingatall. with a longer delay and less visibility. Summing up this first part of my Coordination of budgetary and, to a intervention, I have talked about the lesser degree, structural policies are need to reform the European institu- therefore important for a well-functions in order to allow them to function tioning EMU. Because of the impor- properly in a Union with 25 Member tance for the single monetary policy, States or more. This is an important national budgetary policies are guided elementwhenwethinkaboutachieving by the rules of the Stability and Growth more growth in Europe. The Conven- Pact. tion has made good progress in many Besides the Stability and Growth respects, concerning e.g. a simplifica- Pact, overall coordination of economic tion of the Treaty, an enhanced role for policies takes place through the formu- the Parliament in decision making, and lation and adoption of the Broad Eco- the creation of an EU Foreign Minister. nomic Policy Guidelines (BEPGs). However, some issues are still contro- These play a central overarching role, versial, such as the complex voting giving strategic direction on key eco- system in the Council, or wider use nomic policy issues in the medium of qualified majority voting. More term. They concentrate on the contri- progress in these areas would be bution that economic policies can make welcome. to meet the EUs strategic Lisbon goal to raise the EUs potential growth rate 2 Strengthened Economic with more and better jobs and greater Governance Will social cohesion. To complement the Contribute to Improving BEPGs, more specialised procedures, the Euro Areas Growth such as the Luxembourg process deal- Potential ing with employment issues, and the Inthe EU,economic policiesaremainly Cardiff process dealing with goods, a national responsibility. At the same services and capital markets, go into time,andasstipulatedbythedraftCon- greater detail in their respective areas.

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This overall framework for eco- warning under the Stability and nomic policy coordination that we Growth Pact — to avoid a situation have had for some time appears broadly in which a Member State would be appropriate. Some have argued that both judge and defendant. EMU cannot work without a political Together, these measures should union. There was a particularly strong help to ensure that the Community debateinthisdirectioninmyowncoun- interest is better protected in the eco- try, Germany, as we prepared for mon- nomic policy coordination area. How- etary union in the mid-1990s. One of ever, it is unfortunate in my view that theoutcomesofthisdebatewasthepro- the Council will continue to adopt the posal for the Stability and Growth Pact. Broad Economic Policy Guidelines on In my view,the Pact is the core element of the basis of a Commission recommendation a political union that indeed has to be in rather than aproposal. Thisimplies that place for monetary union to function well. But, the Pact needs to be applied! Otherwise, the framework for policy coordination would have a big gap. For the Convention, the Commis- sion has proposed to strengthen the framework for policy coordination in three areas: 1. through a stronger Community aspect in economic policy coordi- the Council only needs a qualified nation; majority and not unanimity to push 2. through the institutionalisation of through amendments to them. This the Eurogroup; and might make it more difficult to ensure 3. through improved external repre- therespectofour rules,andtopreserve sentation. theCommunity character andthe over- How has the Convention reacted to all coherence of economic policies. the Commission proposals? Second, withaviewto strengthening First, as regards strengthening the policycoordinationintheeuroarea,the Community aspect of policy coordination draft Constitution foresees the institu- procedures, the Convention proposes tionalisation of the Eurogroup byannexing two important modifications: a protocol on the informal gathering of (a) It proposes that the Commission is euro area Finance Ministers, the Com- giventhe possibility to directlyissuea mission and the ECB. This would be a warning to a Member State whose step towards institutionalisation, be- economic policy is incompatible cause so far the Eurogroup has only witheither theBEPGsor theproper been mentioned in the European functioning of the EMU. This is a Council conclusions (of December useful strengthening of the Com- 1997). In addition, a more permanent missions role in its surveillance President of the Eurogroup would be function, because the Council has elected for two years at a time, accord- not always followed the Commis- ing to the Presidiums proposal. sions recommendation. The imminent enlargement of the (b) The Convention proposes to exclude Union makes a formalisation of the fromthevotetheMemberStatetowhich Eurogroup all the more important, the Council addresses an early since initially only 12 of the 25 Member

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States will participate in the euro area. be clearly strengthened by the creation Inaddition,theConventionproposesto of an EU Finance Minister. extendthelistofissueswherethevoting Summing up the part on economic rights within the Ecofin Council are governance, some of the recent pro- restricted to euro area Ministers only. posals from the Convention go in the It will now include issues such as the rightdirection. The Community aspect adoption of the BEPGs for the euro will be strengthened in economic pol- area, decisions on the excessive deficit icy making by giving the Commission a procedure, and the related multilateral greater say,anddecisionmakingoncer- surveillance. tain issues related to the euro area will But unfortunately, the Convention be facilitated. But it is not enough in my stops short of establishing an Ecofin view: qualified majority voting also on Council for the Euro Area as proposed tax issues would be important for the properfunctioningoftheSingleMarket andEMU.Astronger rolefor theCom- mission in the Councils discussion of the BEPGs would enhance policy consistency. And, finally, there is a clear need to strengthen the external repre- sentation of the euro area.

3 Will the New, Enlarged by the Commission. Such a euro area Union Lead to a Council would really strengthen Multi-Speed Europe? coordination in the euro area by Letmecometothelastpartofmystate- allowing discussion and decision mak- ment. I have earlier talked about the ing in a small group comprising only impact of enlargement on EUs institu- those countries that have adopted the tions. The question is if the new, en- Euro. larged Union is becoming too large Third and regrettably, the Conven- and too diverse to allow a continued tion has so far not included the idea of a integration? With a more heterogene- European minister of finance and economic ous Union, in an economic and political affairs that would represent the euro area sense, the need for a differentiated in- in international fora. Similar to the tegration might increase. This would arrangements foreseen for the EU For- certainly be the case if the Convention eignMinister,suchaEuropeanMinister fails to make sufficient progress. of Finance would be Vice President Several concepts have been put for- of the Commission and, at the same ward with respect to differentiated in- time, Chairman of the Eurogroup. tegration:Over theyearswehaveheard At present, the euro area is represented about concentric circles, variable ge- bytheEcofinChairman(aslongasthisis ometry, Europe‘ a la Carte, two-speed a euro area member). Non-Europeans or multi-speed Europe, enhanced co- are often surprised by the frequent operation etc. Although it may sound change of euro area representatives — surprising, most of these concepts are there is no continuity. Economic gov- actually used in practice! ernance of the euro area and its repre- Concentric circles, for example, de- sentation on the international financial scribe the concept that distinguishes scene(intheG7,IMF,orOECD)would theEuropeanUnionfromtheEuropean

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Economic Area that comprises Liech- participateinEMUeventually,allowing tenstein, Norway and Iceland, plus the time for further convergence. But this EU. The four freedoms of goods, serv- mighttakesometimefor someofthem. ices, capital and workers apply to the EMU is a form of multi-speed entire European Economic Area — an Europe at Treaty level. In practice, it outer circle — all the other Community is also often used in Community legis- policies only to the EU. lation in the form of country-specific Inside the Union, both the Schen- transition periods. Similarly, the con- gen agreement and EMU are successful cept of country-specific transition examplesofadeepenedintegrationthat periods has been applied in the acces- started with a subset of Member States, sion negotiations, for instance with but remain open to all the other EU respect to environmental standards, Member States if they meet certain the acquisition of agricultural land or criteria. It has evolved to prevent the secondary residences, cabotage restric- EU from being forced to move at tions in transport or the adjustment of the pace of its most reluctant member. minimum excise levels such as for However, some fear that a differenti- cigarette excises. Veryoften, the length ated integration might create a first of transition periods was inspired by class and second class Europe. Or that granted to Member States in the a Europe‘ a la Carte. original legislation. It is not unrealistic to assume that Less communautaire is the use of the new enlargement will indeed in- opt-out clauses, which has been a way to crease the need for a differentiated in- bypass the veto by one Member State tegration. History has shown that the that is not expected to participate in the unanimity requirement has prevented enhanced integration for some time or or slowed down further integration at all. It has so far been used for on occasions. Even today, there is no Denmark (on EMU, justice and home agreement among Member States affairs, acquisition of secondary resi- about the speed and the scope of Euro- dences, and defence arrangements) pean integration. In addition, the con- and the UK (on EMU and previously sensus requirement allows one country also on the social chapter). This form to blackmail the others. Differentiated of integration would appear to be integration would be a way out. It can inconsistent with the Community take many forms, but it is important to method and the Commission, in prin- design itin awaythat is compatiblewith ciple, is against the use of opt-outs. the Community method. Exceptions seem acceptable only if One way of doing it could be to the effects are confined to the Member furtherdeveloptheideaofamulti-speed State that opts out. Therefore, it has Europe.Theexpressionoftenreferstoa only been accepted in a very limited situationwherethewholeUnionagrees number of cases in the accession nego- (or at least accepts) common aims and tiations with the group of new Member objectives, but where not all countries States, for instance secondary residen- are ready to participate in the enhanced ces on Malta or the treatment of shale form of integration from the start. oil in Estonia. EMU is such an example (if we leave As you cansee,the concept of differ- aside the two opt-out clauses agreed entiated integration is not new to the with Denmark and the UK). All the Union. However, it was only in the new Member States are expected to Amsterdam Treaty that the EU formalised

19 Klaus P. Regling

the possibility of a closer cooperation that the objectives cannot be achieved for a group of Member States that wish withinareasonableperiodbytheUnion to act together, but under relatively asawhole.Onceenhanced cooperation strict conditions. The Nice Treaty is agreed, only representatives from facilitated an enhanced cooperation participating Member States shall take by limiting the possibility of Member part in the voting within the Council, States to veto. It requires a minimum even if all Member States will be al- of eight Member States for establishing lowed to participate in the delibera- an enhanced cooperation, ensures that tions. it occurs within the framework of the Itseems to methat wewillsee more European Union, and provides that examples of enhanced cooperation or Member States that do not participate multi-speed integration as the Union immediatelycouldjoinwhentheywish, grows. It may sometimes be the only way to make progress in European integration.

4Conclusion I have talked about the need to reform the European institutions to allow for a smooth functioning of the Union after enlargement. In particular, it is important to ensure that the Single Market if they meet the agreed criteria. Until and EMU can continue to function now the concept of enhanced cooper- effectively in the new,enlarged Union. ation has not been applied, although at The Convention has spent the last some stage we came close to it in the year discussing how this could be done. negotiations on energy taxation. In- Many proposals go in the right direc- deed, notably in the taxation area tion, and I am confident that a common the free-rider problem poses a problem proposal will be adopted tomorrow. for enhanced cooperation. With the That proposal will be discussed by wider introduction of qualified major- the European Heads of State and ity voting, the need for enhanced coop- Government in Thessaloniki at June erationmaydiminish.Butitcouldallow 19/20, 2003, and will become the more integration in the fields of foreign starting point for the work of the Inter- and defence policies. governmental Conference (IGC) that The draft Constitution includes an will begin in autumn 2003. enabling clause (similar to Article 308 The new Constitution will simplify of the EC Treaty) that allows the Union the existing legal framework. The — or a group of Union members — to transparent way in which the Conven- expand into areas that are not yet tion worked itself has already contrib- coveredbythenewTreaty(astheTreaty uted to make the Unions task easier to must normally provide an appropriate understand. But there is a need to legalbaseforeveryUnionactivity).The further clarify the roles and responsi- use of this provision is limited as the bilities of the European institutions. If Convention proposes that such meas- there is agreement on a permanent ures should only be adopted if it brings European Council President, it will together at least one third of the Mem- be important not to create confusion ber States, and if it has been established between the competences of that

20 Klaus P. Regling

President and those of the President of entation. The Commission will con- the Commission, and not to create a tinue to push for more progress in new bureaucracy. these areas, next week at the Euro- We must also move away from the pean Council in Thessaloniki, and later unanimity requirement as much as in the year at the IGC. possible in order to make the Single I also raised the question if there is a Market manageable in the future. As need for greater flexibility in Europes for economic governance there are future integration as the number of again a number of positive proposals Member States increases and the in the Conventions draft Constitu- homogeneity between them decreases. tion, strengthening the Community I believe that this is necessary, if method. But some issues have been we want to continue with European treated half-heartedly: such as the integration, particularly in areas where effective working of the Eurogroup we do not have much integration so and the euro areas external repres- far. §

21 Lucas Papademos Lucas Papademos Vice-President European Central Bank

The Contribution of Monetary Policy to Economic Growth

1 Introduction I am delighted at the opportunity to speak at this years Economics Confer- ence organised by the Oesterreichische Nationalbank. This series of conferences has established a long tradition — more than 30 years old — of focusing on issues which are both important and topical. The theme of this years conference is no exception. Fostering Economic Growth in Europe is the key economic policy priority considering the moderate average growth of the European economy over the past 20 years, its recent weak economic performance, and the expected modest economic recovery. To foster economic growth in Europe requires both an accurate diagnosis of the factors determining or constraining its growth performance and an appropriate policy prescription regarding the macroeconomic policies and structural reforms needed to achieve higher and sustainable growth. Today,I will discuss the contribution of monetary policy to economic growth, an issue which has long been the subject

The author would like to thank Julian Morgan for his valuable research contribution. Lucas Papademos

of theoretical andpolicy debatesamong 2 MonetaryPolicyand economists. At the present juncture, Long-Term Economic with weak growth and even talk of Growth deflation risks, and given actual or In examining the effects of monetary perceivedconstraints oneconomicpol- policy on economic activity and icies, this topic is attracting increasing growth, it is useful, both for conceptual interest, the debate has occasionally and for policy reasons, to distinguish become rather heated, and there have between long-term and short-term been numerous calls from politicians effects or, alternatively, between per- and academics for monetary policy manent and transitory effects. I will to pay more attention to growth. begin by considering whether and Againstthisbackground,Iwelcomethis how monetary policy may influence chance to add my own views to the economic growth in the long run, reviewing first the theoretical arguments on the links between monetary expansion, inflation and economic growth, and then assessing the available empirical evidence.

2.1 Theoretical Propositions A key issue in monetary theory is whether changes in the stock of money ongoing discussion. I will do so by or in the rate of growth of money can examining a number of fundamental have lasting effects on real economic issues concerning the role of monetary variables. In particular, the question policy in fostering economic growth. concerning the so-called superneutral- There are five questions that I ity of money — whether a permanent will endeavour to answer: Firstly, change in money growth has no can monetary policy contribute di- long-term effects on the real interest rectly to the attainment of a high but rate, capital accumulation and output sustainable rate of growth? Secondly, growth — has been the subject of exten- can monetary policy promote eco- sive theoretical analysis since the early nomic growth indirectly by maintain- 1960s. ing an environment of price stability? In a seminal contribution, James Thirdly, can monetary policy effec- Tobin (1965) showed that in a simple tively influence the pace of growth over model with agents saving for future the short and medium term, and thus consumption only out of current in- help stabilise output fluctuations con- come, by either holding money balan- sistently with its overriding objective ces or investing in real capital assets, an of price stability? Fourthly, how and increase in monetary expansion can towhat extent has the growth perform- lead to higher growth. Thus, Tobins ance of the euro area been influenced analysis refuted the superneutrality by the single monetary policy which of money by relying on a fairly straight- has been implemented since the launch forward mechanism related to the role of the euro? Finally, what is the role of of money as an asset and a store of the other policies in fostering sustain- wealth. An increase in money growth able economic growth in Europe over leads to a higher rate of inflation that the coming years? reduces the own rate of return on

24 Lucas Papademos

money and induces a portfolio shift tary expansion cannot affect the real in favour of real capital. This generates rate of interest and economic growth an increase in the capital stock and a (the superneutrality of money is higher level of output per person in valid).3) On the other hand, the alter- the long run.1) In an earlier contribu- native approach using overlapping tion, Robert Mundell (1963) had also generations models can provide a for- emphasised a link between anticipated mal justification for the Tobin effect in inflation and the real interest rate. His an explicitly optimising framework.4) analysis, however, examined the short- The effects, however, of monetary ex- term positive effect of a permanent pansion on economic growth under increase in inflation on real saving either of these two types of theoretical and the demand for capital and not models, also depend on other underly- the long-term effects of inflation on ing assumptions. the real rate of interest and economic A key factor influencing the con- growth.2) clusions of the theoretical studies is Over the last forty years, the the- the role of money in the real economy ories advanced regarding the relation- and how that role is incorporated in the ship between money, inflation and models. If real money balances and growth have refined and extended capital perform complementary func- Tobins analysis in several ways. They tions, and are not seen as substitutes as have also challenged his finding that in the Tobin model, higher monetary monetary expansion has a positive growth and inflation reduce capital and lasting effect on growth. Theories accumulation and the long-term rate on money and growth have become of growth. Thus, in models in which more sophisticated by deriving results agents employ their own money balan- from the optimisation of utility by ces to finance consumption and invest- economic agentswho are treated either ment, and therefore there is a cash-in- as infinitely lived or as belonging to advanceconstraintonspending,5)orin overlapping generations. Theories models in which money is treated as a have become more complete by incor- factor of production in its own right,6) porating the other functions of money or when the services provided by in the real economy. These generalisa- money holdings affect the resource tions, however, have not led to unam- constraint facing economic agents7) biguous and robust conclusions. For (rather than affecting directly the uti- example, in models where economic lity or production functions), higher agents are infinitely lived and under inflation usually leads to lower output certain additional assumptions, mone- per person and output growth in the

1 Themechanism throughwhich the Tobineffect arises,with inflationimpactingonthe real rate of interest and therebyonthe accumulation of capital, can be traced back to Metzler (1951), albeit in a more limited form. 2 An unexpected but permanent increase in the inflation rate causes a decline in real private wealth leading to an increase in real saving and the capital stock, and a consequent decline in the real interest rate. 3 Sidrauski (1967) showed that money is superneutral in a utility maximising framework of infinitely lived consumers. 4 Evenifinflationdoesnotaffectthelevelofoutputitcouldaffectitscomposition.AccordingtoFeenstra(1986)anincreasein inflation which leads people to economise on money balances could result in a change in the composition of output from consumption goods to financial services. 5 See Stockman (1981), Greenwood and Huffman (1987) and Cooley and Hansen (1989). 6 See Danthine (1985). 7 See, for example, Zhang (2000).

25 Lucas Papademos

long run. Hence, different hypotheses permanent change in money growth about the functions of money imply can alter the effective real marginal conflicting conclusions about the size tax rate on investment income, thereby and sign of the permanent effect of changing the after tax real rate of monetary expansion on growth. More- return. In such a set-up, a permanently over, the results derived from alterna- faster monetary expansion causing tive theories in some cases are not higher inflation leads to lower capital robust with respect to small variations accumulation and output growth. If, in other underlying hypotheses con- however, the governments budget cerning the preferences of economic constraint is taken into account, the agents. additional revenues resulting from Thus far, I have focused on the re- higher inflation (including extra lationships between money, inflation seignorage revenue) imply that ordi- and growth derived from traditional nary taxes can be reduced, thereby growth models in which the rate of increasing the net return on human technological progress is the funda- capital and speeding up investment mental determinant of long-term and growth. Thus, the overall impact growth. The more recent endogenous of monetary expansion on growth growth theories allow for the deter- depends on the relative magnitude of mination of the long-term growth rate each of these effects.1) endogenously, for instance by human What conclusions can we draw capital or investment in R&D. A few from the theoretical literature on attempts have been made to include money, inflation and growth? In and analyse the effects of money within 1970, Jerome Stein surveyed the liter- such a more realistic framework. It has ature available at that time and noted been found that because higher infla- that my main conclusion is that equally tion lowers the return on work, it plausible models yield fundamentally leads to a temporary decline in the different results. Two decades later, supply of labour. Since human capital Orphanides and Solow (1990) noted is thought to benefit from a learning that all we have is more reasons for reach- by doing effect, this decline in labour ing the same conclusion. A more recent supply reduces human capital and survey (Haslag, 1997) also tends to thereby lowers the growth rate of come to the same conclusion. Although the economy (Gomme, 1993). In con- these views about the inconclusive trast, it has been shown by others (e.g. nature of money and growth theories Ho, 1996) that higher inflation can may be warranted when one reviews increase the capital stock (via a Tobin the whole spectrum of models in a effect), thereby raising the long-term neutral way (that is, without assessing growth rate. therealismofunderlyingassumptions), One strand of this endogenous my own reading and interpretation of growth literature has examined the the theoretical findings is less agnostic. effects of inflation on investment in The theoretical analyses which employ the presence of nominal rigidities in more general and realistic assumptions the tax system (e.g.Jones and Manuelli, regarding (i) the role of money in the 1995). In particular, with nominally economy,(ii) the endogenous determi- specified depreciation allowances, a nation of factors shaping long-term

1 See Palokangas (1996).

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growth, and (iii) the existence of nonlinearlyasinflationrises.Neverthe- nominal institutional rigidities in the less, the magnitude of the expected economy, imply on the whole the ex- negative relation between inflation istence of a negative association be- and growth cannot be determined a tween monetary expansion and infla- priori and has to be assessed on the basis tion, on the one hand, and economic of the available empirical evidence. growth, on the other. It should also be pointed out that the existence of 2.2 Empirical Evidence a positive association between inflation What can the available evidence tell andlong-termgrowthderivedfromthe us about the link between monetary models of Tobin and others must be expansion and economic growth? A confined to relatively low rates of infla- clear majority of studies find that tion, otherwise we would reach the inflation and long-term growth are absurd conclusion that hyperinflation systematically would drastically improve the real eco- and negatively nomys performance. related. In other The view that higher monetary ex- words, higher pansion and inflation should adversely inflation tends to affect long-term growth is further sup- reduce growth in ported by other theoretical analyses the long run.1) regarding the welfare costs of inflation The result is (e.g. Fischer and Modigliani, 1978; not unanimous, Issing, 2001) and the negative effects as some papers find no correlation be- on output growth of the increased tween long-term growth and infla- economic uncertainty induced by in- tion.2) There are very few empirical flation (Lucas, 1973 and 2003). The analyses that have identified a positive costsofinflation,includingcostsresult- and stable long-term relationship being from features of the economys tween inflation and growth, but this institutional structure, clearly imply relationship holds only for low rates a negative impact of inflation on of inflation. growth. Moreover, the increased un- Nevertheless, it should be recog- certainty due to high and variable infla- nised that research in this area has been tion impairs the efficiency of the price hampered by data problems and diffi- mechanism and can be expected to culties in establishing reliable causal reduce both the level of and the rate links between inflation and growth. of increase in productivity and thus The results of studies using data from economic growth. Therefore, on the just one country may be distorted by a whole, theory implies that an expan- few exceptional periods — such as the sionary monetary policy leading to marked movements in energy prices permanently higher inflation will have, during the 1970s. To overcome such or is very likely to have, a negative possible distortions, researchers have effect on long-term growth, even for often sought to utilise cross-country moderate rates of inflation. Moreover, data, so that a variety of inflation this effect can be expected to increase and growth paths can be compared.

1 The list of papers which establish such a negative relationship includes Kormendi and Meguire (1985), Grier and Tullock (1989), Cozier and Selody (1992), Fischer (1993) and Barro (1997). 2 For instance, McCandless and Weber (1995), Bullard and Keating (1995).

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These cross-sectional analyses, how- A number of studies have consid- ever, face other difficulties, for examp- ered whether there are any non-linear- le how to adequately account for in- ities in the relationship between infla- dividual characteristics in different tion and growth by examining the countries. possibility that there are threshold Another problem is the robustness levels in the relationship.3) It has been of the empirical results. It is often found that the effect of an increase in found that slight variations in the spec- inflation on growth may depend on ification of these regressions lead to whether inflation is above or below substantially different results. Some some threshold level: while higher studies find that, once other determi- inflation above this level is associated nants of growth are included, a previ- with lower growth, this does not ously observed negative relationship appear o be the case for inflation rates between inflation and long-term below the threshold.4) Indeed, some growth disappears.1) A key issue is studies (e.g. Ghosh and Phillips, how to estimate the trend growth of 1998) suggest that for very low infla- output. It is important to be able to tion rates, and within a very narrow identify changes in trend growth, yet range, inflation and growth may be it is equally important for the esti- positively correlated. mate of the trend not to be polluted This last finding lends support to by cyclical fluctuations. the view, which can be traced back As previously noted, the relation- to Vickrey (1955) and Tobin (1972), ship between inflation and growth that small doses of inflation may be can be expected to depend on whether helpful for growth and employment, inflation is initially high or low. It is or that a little inflation is necessary sometimes argued that the estimated to grease the wheels of the economy. negative correlation between inflation It has been argued that, because of and growth is due to the inclusion of downward rigidity in nominal wages, high inflation countries and that it is a certain amount of inflation is requi- much harder to find such a negative red in order to enable real wages to relationship among countries with adjust to changing economic condi- relatively low inflation.2) Recent re- tions. This argument does not rest search, however, by Andre«s and on money illusion, but on the idea that Hernando (1999), focusing on OECD workers will resist relative wage cuts countries, finds that even in low or and that, as a consequence, inflation moderate inflation countries, there is provides a means of synchronising real evidence of a robust negative relation- wage reductions across the economy. ship between inflation and output in These propositions have been fur- the long run. ther developed by Akerlof et al. (1996

1 See Levine and Renelt (1992). 2 See, for example, Bruno and Easterly (1996). 3 See Sarel (1996), Judson and Orphanides (1996), Ghosh and Phillips (1998) and Khan and Senhadji (2001). 4 The estimatedvalue of the thresholdvaries considerably between studies. Usingannual data for87 countries over the period 1970—1990, Sarel (1996) estimates that there is a structural break in the relationship between inflation and growth at inflation rates ofaround 8%. With a largersample covering 145 countries for the period 1960—1996, Ghosh and Phillips (1998) find a much lower thresholdvalue ofaround 2—3% inflation. Morerecently, Khan and Senhadji (2001) have split the sample into industrialised and developing countries to allow for the possibility that threshold values may differ. They obtainedanestimatedthresholdvalueofbetween1—3%forindustrialisedcountriesand11—12%fordevelopingcountries.

28 Lucas Papademos

and 2000) who have calculated that, in The general conclusion that I would the face of downward nominal wage draw from this review of the money, rigidity, an attempt to reduce inflation inflation and growth literature is that from 3% to zero would raise US theweightofevidencedoesnot support equilibriumunemployment by 2.6 per- the notion that monetary policymakers centage points. Therefore, a perma- could sustainably raise growth by nently higher rate of unemployment tolerating higher inflation. On the con- can emerge at a very low rate of infla- trary, theoretical analyses (regarding tion. The evidence, however, for the the real effects and welfare costs of in- existence of such rigidities is mixed flation) as well as the bulk of empirical and it may well be the case that they evidence strongly suggest that price are removed or mitigated under low stability is conducive to long-term inflation.1) Moreover, inflation in the growth. presence of nominal rigidities can also put sand in the gears of the labour 3 The Stabilising Role of market.2) The existence of menu Monetary Policy costs and fixed nominal contracts im- In sum, monetary policy cannot be ex- plies that changes in the general price pected to directly contribute to raising level may not be evenly transmitted long-term economic growth, though throughout the economy and may it can foster sustainable growth by therefore lead to unintended and dis- maintaining an environment of price ruptive changes in relative prices. stability. It is often argued, however, This debate is unresolved, but such that monetary policy can and should arguments and evidence havebeen used seek to stabilise output around its po- to provide justification for allowing tential growth path in the short and central banks definitions of price medium run. As we all know, this stabilitytoencompasslowpositiverates hasbeenoneofthemostwidelydebated of inflation rather than literally aiming issues of economics since Keynes forastablepricelevel.3)Nevertheless,I (1936) made the case for stabilisation do not believe that the evidence about policies. And still today the debate re- greasing the wheels of the economy is garding the stabilisation of output sufficiently convincing compared with fluctuations remains very much active, the favourable effects of price stability. as indicated by the Presidential Address Evenifsometrade-offs havebeen found of Robert Lucas (2003) at the recent statistically to exist between inflation annual meeting of the American Eco- and output at very low rates of infla- nomic Association. tion, it is not at all clear that they When considering this issue, it is are either stable — and would therefore essential to realise that the potential persist during a prolonged period of for stabilisation policies depends on price stability — or that they could suc- both the size and the nature of cyclical cessfully be exploited by policymakers. fluctuations. We are all aware that eco-

1 These papers are briefly surveyed in Issing (2001). 2 See Groshen and Schweitzer (1999). 3 Other reasons for toleratinga small positive rate of inflation include the potential for measurement bias in price indices, the possibility of sustained inflation differentials in a monetary union and the prospect ofencountering the zero lower bound on nominal interest rates. For a discussion of these issues, see European Central Bank (2003).

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nomic cycles are caused by various fac- They report that, with the notable ex- tors and processes. They can be trig- ception of Japan, other G7 economies, gered and driven by shocks of various including Germany, France and Italy, types as well as by changes in policies have also experienced a downward affecting demand and supply in product trend in output volatility. A number and financial markets. The magnitude of explanations have been put forward and duration of economic cycles are for the apparent moderation of the eco- also determined by technological proc- nomic cycle. These include the increas- esses, agents behaviour and expecta- ing relative importance of services in tions, and institutional features of aggregate output, improvements in the economy. Policies influence the inventory management, and the stabil- cycle not only by directly affecting ag- ising effects of monetary policy. gregate demand and supply but also by While it appears that output volatility has declined in recent decades in many industrialised economies, the size and frequency of several types of shocks cannot be controlled. There are also reasons to believe that structural changes may have created new sources of instability that policymakers need to monitor very closely.In particular, the role of asset prices in the eco- shaping expectations and institutions. nomic cycle has received a lot of atten- The stabilising effects of monetary tion recently. Financial markets have policy depend crucially on the nature gained markedly in importance during of the publics expectations. the last decade. One implication of the Overall, theory and evidence sup- growing size of stock markets is that port theview that it is possible for mon- changes in equity prices are likely to etary policy to influence aggregate eco- have a more pronounced impact on nomic activity in the short and the the economy than in the past. While medium term.1) This conclusion, how- the development of financial markets ever, does not mean that it is should, in principle, improve the allo- necessary or desirable for monetary cation of resources, economists have policy to play a stabilising role. There long been aware that financial markets are several reasons for being cautious in can be characterised by periods when assigning such a role to monetary asset prices tend to deviate significantly policy. Indeed, because there are indi- from their equilibrium values. Such cations that economic cycles have di- situations can have implications for minished in industrialised countries, economic activity and can generate there may be less of a need for an active or accentuate output fluctuations. stabilisation policy. A recent paper by An important reason why it may Blanchard and Simon (2001) has notingeneralbedesirablefor monetary pointed to a long-term decline in US policy to play an active stabilisation role output volatility, a phenomenon which is that there is evidence that a large — if can be traced back at least to the 1950s. not the largest — part of cyclical output

1 A review and assessment of the theory and evidence concerning the links between monetary policy and economic cycles is presented in Papademos (2003).

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variability can be attributed to real TheECBsmandateandstrategyare rather than nominal or demand shocks fully consistent with the theoretical (Lucas, 2003). Such real shocks, which arguments and the empirical evidence are driven by technology, cannot be regarding the role and effectiveness of effectively offset by monetary policy. monetary policy in preserving price Inaddition, undernormalcircumstan- stability and fostering economic ces, i. e. when the central bank is growth. A key element of the ECBs confronted with cyclical fluctuations strategy is the commitment to maintain of average magnitude, the systematic medium-term price stability, which is pursuit of an activist counter-cyclical defined quantitatively. The announce- policy can be ineffective and may in- ment of a quantitative definition of creaserather thanmoderateoutputvol- price stability aims to anchor the pub- atility. The risk of this happening lics inflation expectations. Another emerges because of uncertainty about important feature of the ECBs strategy the magnitude and timing of the effects is that it is forward-looking, with a me- of monetary policy on output.1) In ad- dium-term orientation, which reflects dition, there are uncertainties associ- the long time lags in the effects of atedwithidentifyingthetypesofshocks monetary policy on the price level. and assessing the precise cyclical posi- The strategy does not justify short- tion of the economy. term activism and policies aimed at These considerations lead me to fine-tuning the economy.At the same conclude thattheconduct ofanactivist, time, the medium-term orientation of fine-tuning counter-cyclical monetary the strategy allows for a gradualist pol- policy involves more risks than poten- icy response to shocks to the price level tial benefits and should be avoided andprovidessomescopeandadegreeof under normal circumstances. Never- flexibility which may be needed to ad- theless, it is possible to envisage partic- dress various types of severe shocks. ular circumstances, triggered by severe The combination of commitment and shocks, when monetary policy can play flexibility that characterises the ECBs a role in stabilising output around its strategy allows for some constrained potential growth path. Such a policy discretion in dealing with cyclical out- would have to be implemented care- putfluctuationsinawayconsistentwith fully and consistently with the central the preservation of price stability. banks commitment to its primary objective of maintaining price stability. It 4EconomicReformsto should also be communicated effec- Increase Sustainable tively so that the publics expectations Growth in Europe and the central bankscredibility would Two general conclusions emerge about not be adversely affected. The precise the contribution of monetary policy to nature of the policy reaction will, of economic growth: first, monetary pol- course, depend on the nature of the icy cannot be expected to raise growth shock as, for instance, the response sustainably in the long run; second, to an adverse supply shock would be althoughmonetarypolicycanplayasta- very different from the response to a bilising role over the medium term, the demand shock. scope of such a role may be limited by

1 The papers contained in Angeloni et al. (2003) present and discuss the evidence concerning the monetary policy transmission in the euro area.

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the pursuit of the primary objective of rency.Duringthisperiod,GDPgrowth price stability, the nature of the mon- in the euro area was negatively affected etary policy transmission mechanism, by several shocks and factors, some of and by other factors, including the un- which also had unfavourable effects on certainty facing policymakers and the the price level. Although monetary stanceofeconomicpolicies.Thesecon- policy had to be tightened for some clusions raise two relevant questions: time in order to respond to an unusual How can we increase long-term eco- number of sizeable adverse shocks to nomic growth in Europe and how price stability, the stance of monetary can we speed up the recovery of the policy cannot be considered as the fac- euroareaeconomytowardsitspotential tor which constrained economic activ- growth path? ity. Actually, it was accommodative at Before addressing these questions, times. Overall, the ECBs monetary it is useful first to point to some facts policy did attain a high degree of price concerning the growth performance stability in the euro area. The average of the euro area economy and the inflation rate in the euro area between monetary policy stance. During the January 1999 and December 2002 was four years since the establishment of 2.1%, marginally above the upper ceil- the Economic and Monetary Union ing of the ECBs quantitative definition (EMU), economic growth in the euro of price stability. This was achieved area averaged a modest 2.1%. It turns because the ECB responded to shocks out that this is precisely the average to price stability in a determined and growth recorded in the ten years, from systematic way, consistently with its 1989 to 1998, before the introduction mandateandstrategy.Atthesametime, of the euro. It is rather remarkable that the pattern of inflation and interest over a longer period of almost 20 years, rates during this period reflects the from1981to1998,beforethelaunchof medium-term orientation of monetary the single currency, the growth rate in policy and it reveals that the ECB, in the countries that are currently mem- formulating its policy, did take into bers of EMU was also 2.1% on average, account its likely impact on the real although during the same period aver- economy, since policy did not aim to age inflation was about 4.6%, i.e. sub- offset fully and promptly the effects stantially higher than its level after the of shocks to price stability. adoption of the euro. It is thus evident The foregoing observations sup- that over a fairly long period of time, port a general proposition, which, I which was characterised by different believe, is by now widely recognised. monetary regimes and policies, the Although the preservation of price average growth performance of the stability and the implementation of 12 euro area countries was moderate sound macroeconomic policies are and unchanged. Although we cannot necessary to foster sustained growth, reach any definite conclusions from structural reforms are essential — the these observations, they suggest that main policy instrument — for increasing the average growth of the euro area long-term growth in the euro area. countries mainly reflects the influence More specifically, there are two com- of non-monetary factors and policies. plementary routes through which it is The second set of facts relates to the possible to raise trend economic monetary policy stance in the period growth. The first is to remove obstacles after the introduction of the single cur- to the efficient utilisation of resources

32 Lucas Papademos

by improving the functioning of market tious reform agenda aimed at making mechanisms. For instance, by reform- the European Union the most compet- inglabour marketinstitutions,itshould itive and dynamic knowledge-based be possible to reduce structural unem- economy in the world by 2010. The ployment. The resulting higher labour functioning of product markets is input should allow the level of output monitored and evaluated as part of to increase, giving a temporary boost what is known as the Cardiff process. to economic growth until unemploy- Similarly, labour market reform is as- ment fell to a new, lower, sustainable sessed within the Luxembourg proc- level. The second route involves imple- ess. Both processes rely on country menting policies that permanently examinations of reforms and provide raise economic growth. This requires input into the Broad Economic Policy knowledge of the factors that drive Guidelines, which define the overarch- thegrowthprocessindevelopedecono- ing economic policy priorities in vari- mies. There is extensive literature that ous fields over the coming three years. seeks to identify the variables influenc- Policy recommendations made to each ing economic growth over the longer EU Member State are based on these run.1) Physical and human capital accu- priorities. mulation, innovation, entrepreneur- In this years Broad Economic Pol- ship, competition, the rule of law icy Guidelines (for the 2003—2005 and the magnitude of government in- period), several main priorities for vestment are important determinants. policy action were identified.2) In ad- As mentioned earlier, some of the dition to reforming pension and empirical studies on the link between health care systems, it was agreed that inflation and growth can be criticised priority should be given to improving for their failure to take into account the functioning of the labour market both inflation and other factors that in Europe and to implementing struc- may determine economic growth. A tural reforms to increase investment study by Levine and Renelt (1992) in human and physical capital. In par- which sought to take into account such ticular, it was stressed that there is a other factors, found a clear and robust need to: association between average economic (i) facilitate investment in research growth and the importance of invest- and development and in infra- ment and trade. structure; The policies required to increase (ii) lift barriers to the business appli- long-term growth in the euro area will cation of technology and foster therefore fall largely within the remit linksbetweenthepublicandprivate of national governments. Such policies, sectors in order to exploit research however, are increasingly being co- findings; ordinated at the European Union level. (iii) enhance the role of small and me- In March 2000, the Lisbon European dium-sized enterprises in research Council recognised the importance and development through their of modernising the EUs regulatory participation in integrated pro- framework and introduced an ambi- jects, and

1 This literature is reviewed in Barro (1997). 2 Council of the European Union (2003).

33 Lucas Papademos

(iv) complete the internal market so as stantial policy reforms, then we can to help increase the competitive- reasonably expect to see a strengthen- ness of industry, thereby fostering ing of Europes growth potential and productivity and business dyna- an improvement in the labour market mism. More specifically,it was em- situation. phasised that a fully integrated The key issue is whether these re- financial market would help to forms will be implemented in a timely channel savings more efficiently and effective manner. Unfortunately, into productive investment. the implementation of previous years In order to improve the labour Broad Economic Policy Guidelines has market situation in the European been somewhat patchy. For instance, Union, a number of far-reaching struc- following last yearsGuidelines1), there tural reforms are required. The main were a number of useful initiatives in specified priorities in this field are five: the field of labour market reform. (i) totakeaction,viareformstotaxand Several countries have started, or in benefit systems, to make work some cases continued, to implement pay, so that people would not measures to make work financially be discouraged from seeking work worthwhile or reduce employers so- by the prospect of losing benefits cial security contributions. In addition, and paying higher taxes; there have been efforts to improve the (ii) to strike a balance between security job search process by increasing the and minimum standards for work- efficiency of services provided by em- ers, so as to favour job creation and ployment agencies and the adoption offer firms the flexibility they need of stricter job search requirements. to be able to respond to changing However, despite these positive devel- economic conditions; opments, many labour market reforms (iii) to increase labour market partici- have not yet been adequately intro- pation, particularlyamongwomen, duced, including comprehensive re- people who are over 50, as well as forms to pension systems and early the low-skilled and the long-term retirement schemes aimed at increas- unemployed; ing the labour force participation of (iv) to promote life-long learning and older workers, and reforms to employ- a constant upgrading of skills in ment protection regulations aimed at order togeneratehigherproductiv- improving job mobility. It is disap- ity and better jobs and pointing that the pace of labour market (v) to encourage closer cross-border reform slowed down in most euro area co-operation in the setting of countries in 2002. standards, so that qualifications Overall, there has been some prog- and experience can be widely rec- ress in recent years towards address- ognised and mobility can be facili- ing the structural weaknesses of the tated. euro area. The approach adopted until Although the list of priorities for now by many countries, however, policyactionislongandambitious,they seems to have taken the form of partial are necessary and we should fully steps rather than comprehensive re- support them. I believe that if these form efforts. As it takes time for priorities lead to concrete and sub- structural reforms to yield their full

1 European Commission (2002).

34 Lucas Papademos

benefits, the slow and partial approach maining true to its primary objective pursued in most Member States will of price stability. I have argued that, make it increasingly difficult to achieve while fine-tuning of the economy is the strategicobjectives set in the Lisbon generally to be avoided, the ECB strat- agenda. Furthermore, a lack of deter- egy can provide sufficient scope and mination to implement comprehensive flexibility for dealing with unexpected reformsmayalsobeareasonfor thelow sizeable economic fluctuations consis- level of confidence in a rapid and sus- tently with the maintenance of price tainable economic recovery. This point stability. This flexibility has also been makes greater efforts in the field of highlighted in the outcome of the re- structural reform all the more impor- cent review of the ECBs monetary tant and pressing. policy strategy. By clarifying that it aims to maintain inflation rates below 5Conclusions but close to 2% I would like to conclude by stressing over the medium a few points relating to some of the term, the ECB questions that I posed at the start. has underlined The first question was whether and its commitment how monetary policy can contribute to providing a tohigher sustainableeconomicgrowth. sufficient safety The weight of the theoretical argu- margin to guard ments and empirical evidence I re- against the risks viewed is consistent with the notion of deflation. that the best contribution that mone- The effectiveness, however, with tary policy can make to sustainable which monetary policy can perform growth is to maintain price stability. a stabilising role is limited by several Because inflation is fundamentally a factors. These include the uncertainty monetary phenomenon, monetary regarding the timing and magnitude policy is the only tool that can effec- of its effects, which partly reflects tively maintain price stability in the the dynamics of the cycle, the nature medium and long run. Therefore, it of expectations and the type of shocks makes sense that price stability is its affecting the real economy. For in- primary objective. In addition, most stance, in an environment of very of the available empirical evidence low interest rates and inflation or and analysis shows that lower inflation when the implementation of the is associated with higher long-term appropriate economic policies is con- growth. While there may be doubts strained, say by political obstacles to about the robustness of some of these structural reform. In such situations, results, there is little empirical support the effectiveness of monetary policy for the view that monetary policy would depend on the underlying causes should abandon the pursuit of price of the economic weakness and on the stability in order to increase long-term stance of other policies. Monetary economic growth. policy may be more effective if the The second question was whether problems being faced are perceived monetary policy can affect the pace of as short-lived, for example, caused growth in the short and medium term by a temporary decline in consumer and, therefore, whether it can be used confidence. In such circumstances, a to stabilise output growth, while re- temporary monetary easing that does

35 Lucas Papademos

not endanger price stability may pro- help to solve the structural problems vide a stimulus to help economic agents constraining the growth performance cope with a cyclical slowdown. of the euro area. The implementation If, however, the economic prob- of fiscal consolidation strategies and lems are persistent and/or structural structural reforms in Member States in nature, then monetary policy is will facilitate the conduct of the ECBs likely to be less effective. For instance, monetary policy so that it can foster if firms are reluctant to invest because growth combined with the mainte- of structural impediments implying nance of price stability. § few profitable business opportunities, a short-term monetary easing is unlikely to make much difference. In such circumstances, structural reforms References aimed at raising trend growth can help Akerlof, G. A., W. T. Dickens and G. L. restore confidence and improve the Perry. 1996. The Macroeconomics of animal spirits of investors. In this Low Inflation. In: Brookings Papers on Eco- way a change in the monetary policy nomic Activity 1. 1—59. stance can become more effective. Akerlof, G. A., W. T. Dickens and G. L. Moreover, structural reforms that lead Perry. 2000. Near Rational Wage and to an increase in aggregate supply and Price Setting and the Long-run Phillips greater priceflexibilitycanbeexpected Curve. In: Brookings Papers on Economic to reduce upside risks to price stability Activity 1. 1—44. and therefore give monetary policy Andre«s, J. and I. Hernando. 1999. Does more scope for manoeuvre. Inflation Harm Economic Growth? Evi- At this juncture, in order to speed dence from the OECD. In: Feldstein, M. up economic recovery and achieve (ed.). The Costs and Benefits of Price higher and sustainable growth in Stability. Chicago: University of Chicago Europe, it is important for economic Press. policies to strengthen confidence and Angeloni, I., A. Kashyap and B. Mojon. enhance the competitiveness of the 2003. Monetary Policy Transmission in the European economy. To this end, the Euro Area. Cambridge: Cambridge Uni- implementation of credible fiscal versity Press (forthcoming). consolidation strategies, based on Barro, R. J. 1997. Determinants of Eco- growth-enhancing measures, can boost nomic Growth: A Cross-Country Empiri- confidence and private spending and cal Study. Cambridge, Massachusetts: The thus counteract the direct effects of MIT Press. budgetary measures on aggregate de- Blanchard, O. and J. Simon. 2001. The mand. Moreimportantly,the introduc- Long and Large Decline in US Output tion of structural reforms to improve Volatility. In: Brookings Papers on Economic productivity and market flexibility is Activity 1. 135—164. essential for increasing potential Bruno, M. and W.Easterly.1996. Inflation growth aswell as international compet- and Growth: In Search of a Stable Relation- itiveness in a sustained way. These re- ship. In: Federal Reserve Bank of St. Louis forms could also help to increase con- Review 78(3). 139—146. fidence in the euro areas capacity to Bullard, J. and J. W. Keating. 1995. The grow,with favourable effects on aggre- Long-Run Relationship Between Inflation gate demand and economic activity in and Output in Postwar Economies. In: Jour- the short run. Monetary policy cannot nal of Monetary Economics 36(3). 477—96.

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Cooley, T. F. and G. D. Hansen. 1989. Greenwood, J. and G. W. Huffman. The Inflation Tax in a Real Business Cycle 1987. A Dynamic Equilibrium Model of Model. In: American Economic Review Inflation and Unemployment. In: Journal 79. September. 733—748. of Monetary Economics 19. 23—28. Council of the European Union. 2003. Grier, K. B. and G. Tullock. 1989. An Council Recommendation on the Broad Empirical Analysis of Cross-National Eco- Guidelines of the Economic Policies of nomic Growth, 1951—1980. In: Journal of the Member States and the Community Monetary Economics 24(2). 259—276. (for the 2003—2005 Period). Official Groshen, E. L. and M. E. Schweitzer. Journal of the European Union. June 26. 1999. Identifying Inflations Sand and Cozier, B. and J. Selody. 1992. Inflation Grease Effects in the Labour Market. In: and Macroeconomic Performance: Some M. Feldstein. (ed.). The Costs and Benefits Cross-Country Evidence. Bank of Canada of Price Stability. Chicago: University of Working Paper 92-06. Chicago Press. Danthine, J. P. 1985. Inflation and Growth Haslag, J. H. 1997. Output, Growth, Wel- in Utility-Maximising Models. University of fare, and Inflation: A Survey. In: Federal Lausanne Working Paper 8511. Reserve Bank of Dallas Economic Review. European Central Bank. 2003. Overview Second Quarter. 11—21. of the Background Studies for the Reflec- Ho, W. M. 1996. Imperfect Information, tions on the ECBs Monetary Policy Strategy. Money and Economic Growth. In: Journal June 12: http://www.ecb.int/pub/strategy/ of Money, Credit and Banking 28(4). monetarypolicystrategyreview- 578—603. overview.pdf Issing, O. 2001. Why Price Stability. In: European Commission. 2002. Broad Garcia-Herrero, A., V. Gaspar, L. Hoogduin, Guidelines of the Economic Policies of J. Morgan and B. Winkler (eds.). Why Price the Member States and the Community. Stability? Frankfurt am Main: European European Economy 4. Directorate-General Central Bank. for Economic and Financial Affairs. Jones, L. E. and R. E. Manuelli. 1995. Feenstra, R. C. 1986. Functional Equiva- Growth and the Effects of Inflation. Journal lence Between Liquidity Costs and the of Economic Dynamics and Control 19. Utility of Money. In: Journal of Monetary 1405—1428. Economics 17. 271—291. Judson, R. and A. Orphanides. 1996. In- Fischer, S. 1993. The Role of Macroeco- flation, Volatility and Growth. International nomic Factors in Growth. In: Journal of Finance 2(1). 117—138. Monetary Economics 32. 485—512. Keynes, J. M. 1936. The General Theory of Fischer, S. and F. Modigliani. 1978. Employment, Interest and Money. London: Towards an Understanding of the Real Macmillan. Effects and Costs of Inflation. In: Weltwirt- Khan, M. S. and A. S. Senhadji. 2001. schaftliches Archiv 114. 810—832. Threshold Effects in the Relationship Be- Ghosh, A. and S. Phillips. 1998. Warning: tween Inflation and Growth. IMF Staff Inflation May Be Harmful to Your Growth. Paper 48(1). 1—21. IMF Staff Paper 45(4). 672—710. Kormendi, R. C. and P. G. Meguire. Gomme, P. 1993. Money and Growth 1985. Macroeconomic Determinants of Revisited: Measuring the Costs of Inflation Growth: Cross-Country Evidence. In: in an Endogenous Growth Model. In: Journal of Monetary Economics 16(2). Journal of Monetary Economics 32(1). 141—163. 51—77. Levine, R. and D. Renelt. 1992. A Sensi- tivity Analysis of Cross-Country Growth

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Regressions. In: American Economic Re- de France, Monetary Policy, Economic view 82(4). 942—963. Cycle and Financial Dynamics. Paris. Lucas, R. E. 1973. Some International March. Evidence on Output-Inflation Tradeoffs. Sarel, M. 1996. Nonlinear Effects of In- In: American Economic Review 63(3). flation on Economic Growth. IMF Staff 326—334. Paper 43(1). 199—215. Lucas, R. E. 2003. Macroeconomic Priori- Sidrauski, M. 1967. Rational Choice and ties. In: American Economic Review Patterns of Growth in a Monetary Eco- 93(1). 1—14. nomy. In: American Economic Review 57. McCandless, G. T. and W. E. Weber. 534—544. 1995. Some Monetary Facts. Federal Stein, J. L. 1970. Monetary Growth Theory Reserve Bank of Minneapolis Quarterly in Perspective. In: American Economic Review 19(3). 2—11. Review 60. 85—106. Metzler, L. 1951. Wealth, Saving, and the Stockman,A.C.1981.AnticipatedInflation Rate of Interest. In: Journal of Political and the Capital Stock in a Cash-in-Advance Economy 59. 93—116. Economy. In: Journal of Monetary Econom- Mundell, R. 1963. Inflation and Real Inter- ics 8. 387—393. est. In: Journal of Political Economy 71. Tobin, J. 1965. Money and Economic 280—283. Growth. In: Econometrica 33. 671—684. Orphanides, A. and R. M. Solow. 1990. Tobin, J. 1972. Inflation and Unemploy- Money, Inflation and Growth. In: Friedman, ment. In: American Economic Review B. M. and F. H. Hahn (eds.). Handbook 62(1). 1—18. of Monetary Economics. Amsterdam: Vickrey, W. 1955. Stability Through In- Elsevier Science Publishers B. V. flation. In: Kurihara, K. (ed.). Post-Keynesian Palokangas, T. 1996. Inflation and Growth Economics. London: George Allen and in an Open Economy. In: Economica 64. Unwin Ltd. 509—518. Zhang, J. 2000. Inflation and Growth: Papademos, L. 2003. Economic Cycles and Pecuniary Transactions Costs and Qualita- Monetary Policy. Paper presented at the tive Equivalence. In: Journal of Money, International Symposium of the Banque Credit and Banking 32(1). 1—12.

Michael Mussa Michael Mussa Senior Fellow Institute for International Economics

How to Strengthen Growth in Europe?

Perhaps it was to add a suitable note of dissonance to this conference that its organizers invited an American to deliver a keynote address on How to Strengthen Growth in Europe. In recent years, many prominent Ameri- cans have lectured Europe on its supposed deficiencies and what should be done about them — with particular emphasis recently on the failures and need for reform in old Europe. For most the past decade, I have avoided this problem by asking my former deputy, Fleming Larsen, to deliver the message on needed policy reforms in Europe. Alas, Fleming no longer works for me. However, I make no further apologies; if you are offended by advice from an American blame the conference organizers. Turning to the issue of how to strengthen European growth, I will divide my remarks into two main parts. First, I will discuss what is responsible for the recent disappointing growth performance of much of Europe and what can be done to strengthen growth in near term. I will devote considerable Michael Mussa

attention to this subject because of its 1% in Japan). Moreover, real GDP current relevance not only to Europe growth in the United Kingdom aver- but also to the broader challenge of agedarespectable2.8%peryearduring reinvigorating global growth. Second, this period, in contrast with the earlier I will take up the fundamentally more tendency for the U.K. to grow signifi- important issue of strengthening cantly more slowly than its continental Europes longer-term growth — ex- European counterparts. Thus, the tending over coming decades. On this disappointing growth performance of second issue, I will draw very heavilyon Europe in recent years is mainly a theworkofmycolleagueattheInstitute phenomenon of continental Europe. for International Economics, Martin Indeed, the major continental Baily, who is about to publish a major European countries grew particularly study on policies for stronger growth in slowly during this nine-year period, with annual average growth of 2.2% in France, 1.9% in Italy, and only 1.5% in Germany. Several of the smaller Western European countries did considerably better, most notably Ireland with almost 8% annual average real GDP growth, as well as Spain and Finland which exceeded 3.5% annual average growth. Nevertheless, for Europe. This study, in turn, builds on the countries that now comprise the extensive work done by many econo- euro area, the period since the end mists (European and American), espe- of the 1992—93 recession has been cially the studies undertaken under the one of somewhat disappointing real auspices of the OECD. economic growth. In assessing why European growth Europes Recent has been disappointing during this Disappointing Growth recent period, it is useful to examine Real economic growth in Europe in re- three questions: Why was recovery cent years has been disappointing, both from the recession of 1992—93 rela- relative to Europes previous perform- tively sluggish? Why did European ance in the postwar era and relative to growth suddenly slow in 2000—01? the growth recently achieved in the And, why has recovery been so sluggish United States and other non-European over the past year and a half? industrial countries (excluding Japan). Going back to the mid-1990s, it is In particular,taking the nineyears from clear that most the future members of 1994through2002(whichexcludesthe the euro area inherited economic prob- industrial country recessions of the lems and imbalances that were likely to early1990sandincludestheslowdowns make recovery from the 1992—93 or recessionsof2001—02), annual aver- recessionrelativelysluggish—including age real GDP growth was 2.3% in the the policy adjustments that were man- European Union (EU) and 2.2% in the dated by the convergence criteria of euro area. In comparison, annual aver- the Maastricht Treaty (but also neces- age real GDP growth during this period saryanddesirableintheirownright).In was 3.2% in the United States, 3.6% in particular, inflation had been pushed Canada, and 4% in Australia (but only up in Europe by consequences of the

42 Michael Mussa

policies pursued in connection with during crises of confidence — such as German unification. This necessitated those sometimes experienced by that the Deutsche Bundesbank tighten emerging market countries — I doubt monetary policy sharply in 1991—92 that it is true in general or in the specific andeaseonlyrelatively gradually there- caseof Europeinthelate1990s.Rather, after as actual inflation came down. it is far more likely that real restraint Other countrieswith aspirations to join on the growth of government spend- the euro area had to follow the Bundes- ing and real increases in government banks lead (in several cases by main- revenues had a depressing effect on taining substantial premia in their demandgrowthinEuropeinthesecond short-term interest rates over German half of the 1990s. Nevertheless, there short-term interest rates). wasno practical or desirable alternative It can be argued that the Bundes- to more restrictive fiscal policies — both bankshouldhaveeasedsomewhat more aggressively during 1993—94 and again as the pace of recovery proved to be disappointing in 1995—97. To the considerable irritation of two successive Bundesbank Presidents, I made such suggestions at the time. Had this advice been followed, growth in Europe probably would have been modestly stronger during the mid-1990s, and inflation because of the desire of most European which was generally running below 2% countries to meet the Maastricht con- would not have been a problem. How- vergence criteria and (as will be ever, a path for short-term official discussed later) because of the longer- interest rates that was, on average, term requirements for prudent fiscal no more than 50 basis points below policy. the path actually followed would hardly In sum, a somewhat easier but still have produced a growth miracle. prudent monetary policy might have For fiscal policy in Europe, the modestly accelerated European recov- period from 1994 through 1999 was ery during the second half of the 1990s. one of substantial fiscal consolidation, More expansionary fiscal policy, how- with IMF estimates of structural fiscal ever, was not an appropriate tool to deficits for euro area countries falling pursue this objective. Thus, most of by more than 3% of GDP. Part of this the explanation for Europes relatively accomplishment was the illusory effect disappointing pace of recovery during of accounting gimmicks, and part of it 1993—98 comes not from inappropriate reflects the real fiscal benefits of down- macroeconomic policies but rather ward convergence of European interest from underlying imbalances and prob- rates on government borrowing costs. lems that both retarded recovery and But part was also due to real spending necessitated corrective policy actions. restraintandtorealincreasesingovern- During 1999, evidence began to ment revenues. emerge that the U.S. economy was Some analysts believe that real fiscal beginning to overheat. This was not consolidation is generally expansionary particularly apparent in U.S. measures because of its favorable effect on con- of general price inflation, although the fidence. Although this may well be true rates of rise of the core consumer price

43 Michael Mussa

index and of nominal wages began to account balance, but by only half the escalate modestly during 1999. The extent of the United States. Neverthe- rapidly widening U.S. current account less, the European Central Bank (ECB) deficit, however, was clearly sympto- began raising official short-term inter- matic of domestic demand growth well est rates in November 1999 and ulti- in excess of domestic output growth; mately tightened by 50 basis points and a strengthening dollar in foreign more than the Federal Reserve (from exchange markets was clearly helping 2.5% to 4.75% for the ECB compared to contain (and thereby conceal) do- with from 4.75% to 6.5% for the mestic inflationary pressures. Sharply Federal Reserve). rising equity prices and buoyant This relatively more aggressive business investment (especially in tech- tightening by the ECB is not difficult nology, media, and telecoms) were to justify. Having eased short-term another important symptom of unsus- official rates to 2.5% shortly after its tainable overheating. creation at the beginning of 1999 In this environment, the U.S. Fed- because of sluggish euro area growth, eral Reserve took a modest (25 basis the ECB started out with an easier pol- points) step of monetary tightening icy than that of the Fed. Moreover,ECB in the spring of 1999, but did not even monetary policy that is, by its primary entirely reverse its emergency easing of mandate, directed toward keeping the autumn of 1998 until the end of inflation low and is appropriately for- 1999. I have argued that the Fed was ward-looking should take account of tooslowinitsmonetarytighteningdur- what inflation is likely to be going ing1999andthat,asaconsequence,the forward, even if past inflation is not overheating of the U.S. economy and a problem. If the Fed was too slow the stock market was undesirably en- in recognizing the dangers of an over- couraged. The eventual result of this heating U.S. economy, the ECB was tardiness in monetary tightening in right in not following this example. 1999 and of the over-heating to which itcontributedinthenear termwaslater Monetary Policy seen in the recession of 2001 and in During the Present the forces that have impeded the sub- Economic Slowdown sequent recovery — difficulties that The U.S. economy began to slow in would have been smaller with a some- mid-2000, and growth in most of what earlier tightening of U.S. mone- the rest of the world economy, includ- tary policy. ing Europe was beginning to slow by In Europe, specifically in the euro the autumn of 2000. At year end, area, there was less evidence of over- the growth slowdown became precip- heating by 1999 than in the United itous, particularly in the United States States, although real GDP in the euro wheretheeconomyfellintothreequar- area was probably close to potential by ters of outright recession. The Federal end 1999. Consumer price gains Reserve reacted aggressively, cutting showed little sign of acceleration, wage the federal funds rate by 250 basis points gainsremained modest, andunemploy- between January and June 2001 and ment rates had not fallen to exception- cutting further during the summer ally low levels. Demand growth some- and in the aftermath of September 11. what outpaced output growth, as Along with many in Europe, the reflected in a deteriorating current ECB apparently believed that the eco-

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nomic slowdown of 2001 would have and in the euro area; and no further only mild manifestations in Europe, monetary easing was expected on reflecting the fact that trade linkages either side of the Atlantic. In the event, between Europe and the United States growthdidaccelerateintheU.S.during do not provide a large channel for the the first quarter, but then slackened in transmission of macroeconomic distur- the second quarter. The Federal bances. This was a mistake. In fact, the Reserve responded with a further 50 same economic forces that were induc- basis points of easing. With a re-accel- ing outright recession in the United eration of growth in the third quarter StateswerealsooperatingtoslowEuro- and a slowdown in the fourth, the U.S. pean growth quite substantially — albeit economy turned in respectable growth less so than in the United States. These of almost 3% on a four-quarter basis — forcesincludedtheeffectsofthesell-off with domestic demand growth outpac- in global equity markets and the collapse of the global investment boom in technology and telecoms, the sharp run-up in world oil prices during 2000, and the significant tightenings of monetary policy in both the euro area and the United States during 1999—2000. Moreover, unlike the United States where the new Bush Administration was pushing through a substantial tax ing real GDP growth by more than cut that would tend to countervail another full percentage point. recessionary forces, there was no com- In contrast, growth in the euro area parable fiscal stimulus planned for the remained quite sluggish throughout euro area. 2002, with a four-quarter advance of With its complacent attitude to- only 1% in real GDP and a signifi- ward the effects of the global slowdown cantly smaller gain in real domestic on Europe, the ECB eased official demand. interest rates by only 25 basis points The ECBs response to the contin- during the first half of 2001, versus ued miserable pace of economic recov- 250 basis points of easing by the Federal ery came only late in the year with a Reserve. And, even after the tragic modest further 50 basis point cut in events of September 11, total easing official short-term interest rates. by the ECB during 2001 amounted And, for the euro area, the stimulative to 150 basis points, versus 425 basis effect of this monetaryeasing was offset points of total easing by the Federal by the appreciation of the euro against Reserve. In hindsight — and even at the U.S. dollar that had occurred by thetime—theECBseasingof monetary year end. policyduring2001wasacomparatively So far, 2003 has again seen very timid response to the increasing evi- weak growth in the euro area, with dence that Europe was experiencing some economies actually contracting. a pronounced economic slowdown. Meanwhile, the euro has continued Last year saw a repeat of this expe- to appreciate. Forecasts for the euro rience. Early in 2002, it was widely area growth during this year are now believed that growth would pick up barely % — well below potential significantly both in the United States growth for an economy that already

45 Michael Mussa

has significant margins of slack. And could have avoided all of the slowdown again, the ECB has been tardy in since late 2000. But, margins of slack in responding to mounting evidence of theeuroareahavewidenedsignificantly continued sluggishness. from modestly negative in late 2000 to Now, it should be recognized that about 3% today; and they appear to during the past 30 months inflation in be headed higher for at least another the euro area has run at or marginally couple of quarters. Earlier and more above the 2% ceiling that the ECB has vigorous easing by the ECB could prob- defined as the upper bound of reasonably havereduced the present margin of able price stability; and inflation in slackbyatleast1%ofGDP,andreduced mid-2001 did rise briefly to almost significantly the present risk that the 3%. But temporary factors, including margin of slack will continue to the weakness of the euro in foreign expand. exchange markets in 2000—01 and Grantedthata1%gainineuroareas the effects of surges in energy prices, GDP is not a substantial part of the sol- have clearly boosted inflation despite ution to Europes longer-term growth growing economic slack. challenge; it is, nevertheless, well Moreover, the common cyclical worth having. Moreover, unlike other, pattern is for inflation to remain esca- more important things that should be lated, or even continue to increase done to strengthen European growth in somewhat, after the cyclical peak in the longer term, there are no great economic growth, and then to come political difficulties that need to be down gradually thereafter. From this overcome in order to have a monetary perspective, the uncomfortable infla- policy that is somewhat better attuned tion of 2001 provided confirmation to supporting sustainable economic of the wisdom of the ECBs forward- growth — with reasonable price stabil- looking monetary tightening in ity. This only requires a modest shift in 1999—2000. the orientation and implementation of But, a monetary policy that is ap- monetary policy which is fully under propriately and symmetrically forward the control of the ECB. looking also takes account of the tendency for inflation to fall, usually with a Fiscal Policy and modest lag, as margins of slack begin to Near-Term Growth widen. This means that in the face of a Lastlyontheissueofnear-termgrowth, sharp slowdown in growth, it is often what about the role of fiscal policy? As prudent for monetary policy to ease in growthhas slowed duringthepast three advance of clear evidence of an actual years, fiscal positions of European slowdown of inflation — recognizing governments have generally moved that inflation will come down (with towarddeficit,andPortugal,Germany, a lag) as margins of slack increase. This France, and probably Italy now find was, in fact, the monetary policy themselves in violation of the 3% of vigorously pursued by the Federal GDP ceiling on their fiscal deficits im- Reserve, but not by the ECB. posed by the Stability and Growth Pact. To be clear, it is not reasonable to Clearly, the discipline imposed by believe that a more rapid and vigorous the Stability and Growth Pact has ECB response to the weakening of eco- restrained the use of stimulative fiscal nomic growth (and the consequent eas- policy to countervail the current slow- ing of inflation pressures and risks) down — even for those countries that

46 Michael Mussa

haveviolated the explicit deficit ceiling. past three years is attributable to the Certainly no European country has felt economic slowdown — rather than free to pursue an expansionary fiscal discretionary laxity in spending or policy like the United States where revenue policies. thecombinationofsubstantialspending Ofcourse,fiscalpolicyshouldmake increases, large tax cuts, and the oper- appropriate allowance for fluctuations ation of the automatic stabilizers has in the rate of economic growth. But raised the federal budget deficit by monetary policy also has some respon- more than 5% of GDPover three years. sibility here. If the ECB had reacted Is it regretable that Europe has felt earlier and more vigorously to the constrained not to follow the U.S. lead present economic slowdown in in fiscal expansion? I do not think so. Europe, fiscal deficits this year would 1 Most European countries, including probably be smaller by between /2% thosewithbudgetdeficitsnowinexcess and 1% of GDP, and this fiscal benefit of 3% of GDP,face long-run fiscal chal- would be even larger for next year. lenges(notablythosearisingfromaging populations) that make significant and The Need to Strengthen persistent fiscal deficits highly undesir- Longer-Term European able. The present economic slowdown, Growth although uncomfortable, is not so There is broad agreement, at least threatening that it warrants substantial among most policymakers and eco- discretionary fiscal stimulus that may nomic analysts, that Europe now faces later prove difficult to reverse — espe- a critical challenge of finding effective cially not while monetary policy means to strengthen its longer-term remains available to deal with the risks economic growth, and there is also of continued economic sluggishness. broad agreement about the principal Nevertheless, it is relevant to note means for achieving this result. As thattheStabilityandGrowthPactcould emphasized in the conclusions from use some judicious revision. As pres- the Lisbon Summit of the European ently formulated — focusing on actual CouncilinMarch2000,aradicaltrans- rather than structural budget deficits — formation of the European economy is it fails to provide much incentive to needed in order for the European improve fiscal positions when econo- Union to become the most dynamic mies are doing well: and it tends to knowledge-based economy in the discourage full use of the automatic world, capable of sustainable economic stabilizers when growth slows below growth with more and better jobs and potential. greater social cohesion. An annual It should also be noted that mone- average growth rate of 3% was specif- tary policy has an important influence ically endorsed as a desirable and of fiscal outcomes. The fiscal offset achievable objective under a vigorous coefficients in Europe generally run program to raise growth potential in the range of two-thirds or even through deep-seated structural re- higher. This means that when GDP forms in labor and product markets growth slows 1% below potential, and related social policies and through the government budget position tends enhanced investment in research and 2 to deteriorate by about /3% of GDP. development and in education. Accordingly,much of the deterioration Unfortunately, while key policy- of European budget positions over the makers and economic analysts may

47 Michael Mussa

agree on the need for radical transfor- ger-run growth is so important — espe- mation to meet Europes growth chal- cially for those who value highly lenge,thegeneral bodypolitic isnot yet Europes social cohesion and solidarity. entirely persuaded — especially not During the past twenty-five years, when the radical transformation Europes real economic growth (like requires modification of social benefits that of all industrial countries) has and protections. Wesee this, for exam- slowed significantly from the rapid pace ple, in recent protests against compa- earlier in the postwar era. Neverthe- ratively modest reforms of public less, the people of Europe have contin- pensions in France, Italy, Germany, uedtoenjoybothrising reallivingstand- and here in Austria. Those who object ards for employed workers and their most doggedly are usually those for families and increasing levels of social whom reform means some reduction benefits for those more dependent on support from the state. Looking forward, the picture is not so rosy — unless critical reforms to strengthen growth are implemented. The potential GDP growth rate for the European Union over the next several years now appears to be barely more than 2%. As the effects of population aging become more pro- in their individual benefits. But these nounced in a few years, potential self-interested protestors often enjoy growth (under present policies) will considerable sympathy from the gen- likely fall below 1%, and will likely eral public. And, this phenomenon is be slower than that in some EU by no means limited to reforms of countries. Moreover, with rising public sector pensions. It applies quite proportions of older citizens who are broadly to most areas of necessary living longer, the burden of financing structural reform — especially in the generouspensionandexpensivehealth- critical area of labor markets and care benefits will fall on declining related social policies. proportions of economically active At this stage, in view of the massive citizens. For example, in Germany research that has been done during the now there are about 2 active workers past two decades on the need for to support each retiree, but this ratio and prospective benefits of critical willfalltoabout1.3workersperretiree structural reforms in Europe, the by 2030; and similar trends apply for key problem is not discovering what most EU countries. In comparison, for should and must be done to strengthen the United States, there are now more longer-term European growth. The than 3 workers per retiree and there key problem is the political problem will still be about 2 workers per retiree of persuading the general public to by 2030. understand, accept, and endorse key Moreover, in the United States, reforms that are essential to serve their where social benefits (per recipient) interest. are generally lower than in Europe, To this end, I believe that it is government spending amounts to especially important to emphasize about one-third of GDP; and potential why strengthening of Europes lon- GDPappearstobegrowingatabout3%

48 Michael Mussa

per year or slightly better. This means unemployment rate. Thus, the main that there is room to accommodate factor accounting for higher unemploy- presently specified benefits to a rising ment in Europe than in the United share ofretiredworkerswithout raising States is the wide variety of structural government spending and hence taxes impediments and disincentives for to excessively burdensome levels. In workers and employers that collect- contrast, in Europe, government ively add about 3 percentage points spending is generally around 50% of to the European unemployment rate. GDP. With potential GDP growth of Higher structural unemployment, onlyabout2%andfalling,thereappears however,isonlyoneoftheadverseman- to be no way that Europe can sustain ifestations of the structural problems in presently specified benefits to retired European labor markets. More impor- workers and other social commitments tant is the effect on labor force partic- without government spending and ipation (and correspondingly on em- taxes rising to levels that would crush ployment). In the United States, two- economic incentives and provoke a thirds of the working age population social and political crisis between the is in the labor force (either employed wants of those who receive social or counted as unemployed). In most of benefits and those who are called upon continental Europe labor force partic- to pay for them. ipation is not much above 50%. In short, without critical struc- To some extent this difference in tural reforms that will significantly labor force participation probably re- strengthen longer-term growth, flects cultural factors. But this does Europespresent social policies are fun- not plausibly explain all of the differ- damentally unsustainable. Without ence. Thirty years ago, the labor force essential reforms, Europes highly participation rate in the United States valued social cohesion is headed for a wasonlyabout 5%above thatof most of catastrophic crisis. On the other hand, continental Europe. Subsequently, as if vigorous action is undertaken that labor force participation has gone up successfully accelerates European in the United States, it has dropped growth, the most important features in much of Europe; and the gap in par- of European social protections can ticipation rates has nearly tripled. be preserved (with comparatively Notably, this rising gap in labor force modest modifications). The sooner participation rates generally corre- action is taken, the greater the prospect sponded with the rising differential for success. in structural unemployment rates between Europe and the United States. Labor Market Reform Undoubtedly the structural impedi- Among the several key areas of critical ments and disincentives to the supply structural reforms need to strengthen and demand for labor that were longer-termgrowth,probablythemost reflected in rising European structural important and the most politically unemployment were also manifest in difficult is the reform of labor market declining labor force participation and related social policies. The unem- rates. ployment rate in Europe is now about Additional useful evidence on this 9% versus 6% in the United States. In score comes from Switzerland (and to a both cases, cyclical factors probably somewhat lesser extent from the Neth- account for about 1% in the total erlands). Culturally, Switzerland is

49 Michael Mussa

surely a European country — not an Because the workers added to alpine outpost of American culture. employment would probably be, on Switzerland, however, does not have average, less productive than those a number of the labor market impedi- presently employed, the gain in output ments and disincentives (such as would presumably be less than propor- relatively generous and long-lasting tional to the gain in employment unemployment compensation) present (even assuming that added workers in many other European countries. are equipped with new capital to main- Switzerland does have quite low unem- tain a constant capital/output ratio). ployment and a labor force participa- Nevertheless, even if the gain in output tion rate that is similar to that of the was only 4% or 5%, rather than 8% United States. or 10%, it would still be well worth There should be little doubt that having. Spread out over a decade in 1 with the aid of vigorous structural would add about /2 percentage point reform,unemploymentratesinEurope to annual average GDP growth. And can be significantly reduced and labor by moving a significant number of force participation and total employ- working age people to work from ment can be substantially increased. non-employment it would usefully Indeed, important progress has been reduce and spread the burden of made in reducing unemployment in paying for Europes social benefits. most of the smaller European countries andintheUnitedKingdom.Thebulkof Prospects for Stronger the remaining task (at least with respect Productivity Growth to unemployment) appears to be in The most important open question Germany, France, and Italy. France about the prospects and means for has made some important progress strengthening longer-term European with reforms to reduce unemployment growth concerns productivity — or of younger workers, and Chancellor more precisely, total factor productiv- Schro‹der is now pushing through some ity. The United States has enjoyed a long needed reforms. significant increase in productivity If labor market reforms are pur- growth since the mid-1990s which sued vigorously, it is reasonable to has raised estimates of the potential expect that, over time, the unemploy- growth rate of U.S. real GDP from ment rate in Europe can probably be about2%toabout3%.Alreadythis reduced by 3 percentage points — 1 per- improvement in productivity growth centage point from reduced cyclical has boosted the level of potential unemployment and at least 2 percent- GDP by about 10% relative to the level age points from reduced structural that was expected a decade ago. And, if unemployment. In addition, I believe productivity growth is sustained at its that under appropriate structural re- recent average pace, the United States form, European labor force partici- should be able to face the challenges of pation rates would probably rise by an aging population in an environment at least 5 percentage points, allowing of generally rising real living standards for an equal gain in employment. Alto- for all Americans. gether, over the coming decade, struc- So far, Europe (and other industrial tural reform could probably raise total countries) has generally not seen the employment in Europe by 8%, and acceleration of productivity growth perhaps even by as much as 10%. recently observed in the United States.

50 Michael Mussa

Thisispartlyexplainedbydifferencesin made greater, more rapid, and more measurement and by the fact that much effective use of advances in technology. productivity growth occurs in high It also implies that vigorous structural technologyindustriesthatarerelatively reform in Europe — that allows Euro- more important in the U.S. economy pean businesses to operate more flex- than in Europe. But, this is not the ibly — can have important benefits whole story. beyond those usually recognized by My colleague at the IIE, Martin facilitating and encouraging a wide Baily, has done a great deal of research range of business innovations that will on productivity growth, including par- spur productivity growth. ticipation in studies of productivity Over the next couple of decades, growth at the industry and firm level. there is probably nothing that is Oneof theemerging conclusions ofthis more important for strengthening ongoing research is that the recent ac- Europes longer- celeration of U.S. productivity growth term growth reflects in part the adoption and use of and thereby sus- high technology by relatively low tech- taining the basis nology sectorsoftheeconomy —suchas ofitsmostvalued retail trade. It also appears (although policies of social this is a preliminary conclusion) that cohesion than the adoption and effective use of facilitating the new technology in these sectors is im- economic flexi- portantly facilitated and encouraged by bility that will help to deliver more the flexibility of enterprises to adapt a rapid productivity growth. For exam- whole range of their business practices ple, an increase of only % in annual to take advantage of new technology. average productivity growth sustained For example, better communications over two decadeswill lift real output by and information processing may be as much as would plausibly be achieved of little help in achieving more efficient by very vigorous labor market re- inventory management if rigid work form.1) However, boosting productiv- rules or zoning restrictions impair ra- ity growth is probably not something tionalization of shipping andwarehouse that can be achieved independent of operations. key structural reforms in labor and If this hypothesis is broadly correct, product markets and in related social then it helps to explain why American policies. Rather,more rapid productiv- enterprises — which enjoy significantly ity growth is more likely to be an greater flexibility in adjusting many important bonus that makes critical dimensions of their business operations structural reforms even more impor- than most European enterprises — have tant and beneficial. §

1 Labor market reform that encourages greater employment of less productive workers will tend to reduce measured labor productivity. But, in a broader sense, productivity is enhanced by moving people from non-employment (where they produce little) to employment (where they produce more).

51 Robert A. Mundell Robert A. Mundell Professor Columbia University

Economic Recovery and the Euro: What Else Is Necessary?

I am going to focus on three subjects: issue one is of course the euro itself, the second is the issue of growth and what else needs to be done in Europe and the third is the accession countries. Having heard the last little part of themorningdiscussionaboutEuropean reform and so on, I think I begin with the issue of structural reform or what I sometimes say is the need for a supply- side revolution in Europe. Let me pref- ace these remarks with the heading of Reversal of Fortune, which is the title of a movie that was made about Claus von Bu‹low. I mention something about another movie in a moment. The Re- versal of Fortune refers to the past half century and the fortunes of Europe and the United States. If you think back, those of you who are old enough, to the 1950s and 1960s, you think of all the problems the United States seemed to be having at that time, coming out of thewar and recovery,defense spending, the cold war, rather high unemployment, very sluggish growth, while Europe was going ahead to beat the band, with rapid growth, miracle economies in Germany, Austria, Italy and others, stable prices, fixed exchange rates, very low unemployment. In a country like Switzerland you could count it on one or two fingers. These were marvelous decades. And also it Robert A. Mundell

were marvelous two decades for Japan. low, this makes the U.S. economy From 1956 to 1971 Japan had this the most efficient big economy in miraculous period of 9% economic the world. Look back to the 1950s: growth and in some years 12% eco- the U.S. economy had come out of nomic growth. Japan was the super- the war and during the war the top miracle economy, it held the all-time tax rate had been put up to 92.5%, that record for growth until China super- is when Ronald Reagan says it is never seded it. In the last 25 years the 8% worth its while to make more than two to 9% growth since 1978 exceeded that movies a year (a lot of people who did of the Japanese record. not like his movies said: thank God). However, the focus is what was But in the 1950s there was no correc- wrong with the U.S.? Why sluggish? tion of that. There was still 80% tax What was so great with Europe? rate through the 1950s until you got Why was that good? Shift ahead the Kennedy/Johnson tax reform of now, skip the awful decade of 1970s, 1964, which lowered it to 70%. the decade of instability, to the Where is Europe coming out? 1980s and the 1990s. You see the Europehadaverylowweightofgovern- U.S. charging ahead wonderfully ment spending in the economy: 25% from 1982 to 2002, a 20-year period to 30% in the 1950s and 1960s. By of 42 million increasing jobs, rather the 1980s and 1990s this got up to high growth record in the last five 50%. This is like a dead weight. It is years of the 20th century, 5% eco- not a completely dead weight because nomic growth, so this low employment this extra spending does some good, it is increasingly in the decade of low does good and bad. It redistributes inflation. But Europe was in main income in ways that people like to respects sluggish. And Japan in the see but nevertheless it is a wedge that 1990s became almost a basket case restricts production and it just means in terms of its performance and eco- that the return to capital has to be nomic growth. much higher in order to achieve that. What was the cause of that major So thisis themajor thingandthis iswhat change? I think the quick answer to caused that major change in fortune. it is the supply-side revolution that Now, I think that Europe needs a began in the U.S. in 1981. In 1981 supply-side revolution, — I think that the highest tax rate and the highest is not just on the tax side but also bracket was 70%. When Ronald on the regulation side, freeing up Reagan left office in 1989 it was of labor markets. Everybody has 28%: from 70% to 28%, and there mentioned this. The Lisbon Summit is a deregulation — systematic through- of the European Union has focused out the economy. The corporate tax on two important things for Europe, rate was cut from 48% to 34% and that two important goals: to make Europe made the U.S. economy the most effi- most competitivein theworldusingthe cient in the world. It is true under IT revolution and, second, to crack George Bush I the top rate went up their labor markets and ease the prob- to 33%. And then under Clinton lem of unemployment. That is what has and Gore it went up to 39.6%. But to be done and that is amajor important still this was a very big improvement, stepfor theexistingEUcountriestodo, coupled with the fact that the U.S. gov- particularly because of the market ernment weight in the economy was situation and the duplication of the

54 Robert A. Mundell

problems that Europe has if they are benefits. But nevertheless nothing is imitated by the accession countries, perfect. What happened for the phase this will create even more problems. of the euro, measuring in part by the Michael Mussa has said this, which exchange rate with the dollar? From I completely agree with, the whole 1999 to 2001 the euro was too weak, system of pensions when you had 7 it went down from 1.18 USD/EUR to or 8 workers for every pensioner in 0.82 USD/EUR. And then from 2001 the 1950s and 1960s, it seemed easy to 2003 it came back up and it went up to introduce all these new programs to 1.18 USD/EUR. but they are not going to be viable What is going on? Two big in the future, when the ratio of workers economies, the euro economy and to pensioners goes down to 2 to 1 and the dollar economy: both have price even less than that. There is going to stability, 1%, 2% or 3% inflation, that be a crisis unless gradual changes are made in the retirement age and things like that. This is all I am going to say about that. Theother thing:theeuro.Well,the euro is the most important event, maybe the second most important monetary event of the 20th century. I think that it is the most important monetary event maybe since the dollar is a comparable price stability. Why do took over from the pound that is you need huge changes in exchange the most important currency in the rates of 30% to 35% in two years? Is 20th century. That occurred probably that going to be repeated over the in 1915. Or it is the most important whole course of the next future dec- event since the creation of the Federal ade? How long is it going to take for Reserve, which was a tremendously the central banks of Europe and the important event because when this U.S. to wake up and realize this is biggest economy in the world suddenly not going to be a good thing for the got a central bank, the power of the European economy nor for the Amer- dollar could spread its wings and could ican economy. I think the Americans become the dominant currency of the were sluggish in pressing for a higher 20th century. This is a very important euro or a lower dollar, when the thing. U.S. recession came. They pushed The advantages of the euro, I do not for the overvalued dollar to get down think I need to go into. I think every earlier than this would mitigate the country in the euro area has a better recession. On the other hand, when monetary policy than before, I am the euro was going into the tank in not excluding Germany from this list. the year 2000, the G-7 intervened in Every person in the euro area has now a September 2000 recognizing that the world-class currency that can be used market was not giving the cracked everywhere. People can go out through exchange rate and so that intervention Europe without having to change and was necessary but then they gave up pay very high transaction fees and after a very short time, when they changing costs. You get the transpar- decided that their intervention does ency pricing and you get the social not do any good; they are powerless

55 Robert A. Mundell

to affect the market. Of course, that is euro continues for a time, it is going ridiculous becauseifcentral bankswere to do countless damage in hurling up powerless to affect the market, how did the European economy and it is a big 11currencieslockexchangeratesinthe mistake if it is allowed to continue. I middle of 1998, without causing any think theoretically a closed economy, speculative attacks. And of course, it of course, cannot do exchange-rate is only if you have bad intervention, in- targeting. There is no exchange rate. correct and incoherent intervention But once the economy gets down from that it will not work. But if you have 100% of the world economy, which is correct intervention, it will work. a closed economy, to 50% or 40%, it There are four or five principles you becomes more and more important. have to do for a good intervention: The euro economy is less than 20% you have to have a clear-cut ex- of the world economy and as a result it is a great mistake to neglect the exchange rate. The exchange rate should be almost equally as important as any kind of inflation forecasting in the decisions made with respect to industries. Well,thelast thing I wanted to say is something about the accession countries. The euro was a great experiment change-rate target, you have to inter- and despite its defects, even if mistakes vene in the spot as long as in the foreign arebeingmadebytheEuropeanCentral market, it should be non-serialized Bank it is still a great thing for the Euro- intervention, it should be concerted. pean countries. The accession coun- The only thing about the intervention tries, low-income countries, have a at the time of the IMF meetings in great opportunity to not just enter Prague in the year 2000 was that it the European Union but enter the Eco- was concerted but it had none of these nomic and Monetary Union (EMU). I other goals. It was just an attempt to think it should be understood that the pretendthattheyweredoingsomething Europe of the future does not want a when they were not doing it. Well, I Europe of 25 countrieswith fluctuating think the euro made a big mistake by exchange rates; it makes a mockery of not pushing for a coherent floor to the common market. The efficiency is the euro, when the euro was going to have a single currency nowand that is down — either 0.85 USD/EUR or even already on the board. 0.90 USD/EUR. I think they are mak- My own guess is that Britain will ing a mistake now in letting the euro finallybitethebulletandenter inmaybe warp above 1.10 USD/EUR. I think two years. It should do that in Britains this creates a threat of deflation in interest; it is not an issue of harmoniz- Europe. I think inflation targeting ing the business cycle, the cyclical con- not paying attention to the exchange vergence between the British economy rate is a big mistake because people and the euro economy, it is a matter of forget the lags and the effects of the finding the point of which Britain can exchange rate on inflation, just as negotiate the exchange rate throughout the past weakness of the euro stirred the euro area that it thinks would be up inflationary pressures. So if the high useful. I think it is blasted by the events

56 Robert A. Mundell

of 1992, which had been misinter- the IMF meetings they meet with preted. I think Britain anyway will the head of the European Central Bank, come in. I think Britain should come in. the Commissioner for Monetary Af- But the accession countries should fairs, Pedro Solbes, and with the head all come in as soon as possible and they of the Ecofin Council (that triumvirate should come in as soon as the precon- would be the European equivalent) to ditions for entry into a monetary union work out some kind of arrangement so have been made. These preconditions you are not going to get a cycle of 30% are the same as the preconditions of up and 30% down, which is damaging entering into a currency board system. to every country in the world outside You certainly have to have a unified these areas, because it destabilizes government that wants to do it. You financial markets, it undermines the havetohavecontrolofmonetarypolicy, burden of taxation in different areas obviously. You have to have inflation and it changes rate close to the European level because the structural a country could start off with an 8% or value of debt. It 10% inflation rate, it could decide to is just not a sen- zero in on the euro and use that as the sible monetary disinflationary device for bringing it system. So work down. Britain did that when Britain to mitigate that went into the ERM in 1990, when it and then in the hada10%inflationrateandstayinginto long run move the inflation rate brought it down to back. Now that the euro has been 4%. That was a great plus. But if created,Europehasgottimetore-think you do that, you are always left with itself, it can think a little bit outside the aperiodthatisaperiodofovervaluation box of Europe and now it can start at the end of the period because the lags to think about reforming and restruc- inpriceskeepongoingupanditismuch turing the international monetary sys- better to get the inflation rate down tem. We really do not need to restruc- before it. Above all, there must be con- ture it; we need to recreate it in a sense. trol of the budget. There must be a bal- Weneed to have a global currency.Paul anced budget or as close to a balanced Walker said a global economy needs budget as the other members would global currency; I agree with him. accept from the standpoint of the But I am quoting him only to say it is Stability and Growth Pact. I leave that not just ivory tower economy as simple issue there. as this, and this is the route to go now. The last issue I did not mention I I close on little vignette not so am going to talk about it but I do think important. I talked about supply-side that coordination between the dollar reform. I began the discussion with a and the euro is important. It is hard movie — Reversal of Fortune. Now, to get a European consensus on this I sometimes ask people this question: because it is hard to find out who in what is the most important movie Europe would make the decisions. ever produced? How am I defining But clearly in the U.S. it would be importance in this? I am defining it the Secretary of the Treasury, as the in terms of contribution to GDP.What most important, and then secondly it movie produced the biggest increase would be the Chairman of the Fed, in GDP? Of course, we get Birth of Alain Greenspan, to meet. Maybe at the Nation, Godfather, Star Wars,

57 Robert A. Mundell

allthesethings.Ofcourse,thisisnotthe Now you see the connection correct answer. The correct answer is because that movie had starring in it the movie that was so important in the Jodie Foster and it was that young U.S.increatingthatreversaloffortune, man named Hinckley, who saw Jodie in creating and in implementing the Foster, followed her and decided to supply-side revolution. You must bear impress her by assassinating the in mind that in 1981 when the first tax President. Without that attempt to bills were cut, there was a Democratic assassinate President Reagan in April Congress and yet the Democratic 1981, that bill — the Economic Congress passed the first of these bills Recovery Act — of August 1981 would thatcreatedthissupply-siderevolution. not have been passed. That is the bill It was the Democratic Congress that that started the process of the great passed the second of these bills that revolution that created I think 1, 2 lowered tax rates to the low level they or more trillion USD of GDP. That were at. So what created that? What is why Taxi Driver gets the bill was that magic? Well,it was this movie. as the most important movie of all It was the movie Taxi Driver. time. §

Wolfgang Schu‹ ssel Wolfgang Schu‹ ssel Bundeskanzler der Republik O‹ sterreich

Ero‹ffnungsstatement

Lieber Gouverneur Klaus Liebscher, meine sehr verehrten Damen und Herren! Ich bin nicht zum ersten Mal bei der Volkswirtschaftlichen Tagung, aber zum ersten Mal bin ich unter ziemlichem Zeitdruck, denn im Nationalrat ist die Budgetdebatte gerade voll im Gange. Heute haben wir mit den Budgetberatungen fu‹r ein Doppelbudget 2003/2004 begon- nen. Gestern und vorgestern wurden die dafu‹r notwendigen 90 Budget- begleitgesetze beschlossen. Damit ko‹nnen wir nun vollinhaltlich in die Budgetdiskussion eintreten. Sie haben ein sehr anspruchsvolles Thema fu‹r die diesja‹hrige Volkswirt- schaftliche Tagung gewa‹hlt, eines, das zur Zeit im Nationalrat sowohl die Regierungsparteien als auch die Opposition bewegt. Ihre Fragestellung lautet:Wieko‹nnenwir inderaktuellen Situation Wachstum stimulieren? Dazu muss gesagt sein: Alle Probleme, die wir haben, werden dadurch verscha‹rft, dass wir bereits das dritte Jahr in Folge kein oder ein nur sehr geringes Wachs- tum haben. Fu‹rO‹ sterreich als kleine offene Volkswirtschaft, deren Volks- einkommen sich zu etwa 50% aus Dienstleistungs- oder Gu‹terexporten zusammensetzt, ist es beinahe unmo‹g- lich, dieser wirtschaftlichen Situation, in der selbst La‹nder wie Deutschland, die Schweiz und Holland eine Wachs- tumsprozentmarke gegen null auf- weisen, zu entkommen. Was der o‹sterreichischen Wirtschaft jedoch hilft, ist Wolfgang Schu‹ ssel

einerseits das sehr fru‹he Nu‹tzen der Zeit umfassen. Das Erste, und das ist historischen Chance der EU-Erweite- erfreulich, sind Zinsschritte, die Gott rung und andererseits die bereits sei Dank jetzt von der Europa‹ischen erfolgte Eroberung von Marktnischen Zentralbank gemachtwordensind. Seit durch o‹sterreichische Unternehmer. November vorigen Jahres ist der Leit- Sehr viele Klein- und Mittelbetriebe zinssatz immerhin um 1 Prozent- in O‹ sterreich haben sich in diesem punkte gesenkt worden. Auch wenn Bereich einen erstklassigen Ruf und man das eine oder andere vielleicht einen erstklassigen Standortvorteil schon fru‹her ha‹tte machen ko‹nnen, geschaffen. Das hilft, die Konjunktur um auch einen gro‹§eren psychologi- zu stabilisieren. Aber auch durch den schen Effekt zu erzielen, glaube ich Export haben wir nun sehr lange einen doch, dass die Tendenz die richtige Vorteil fu‹r uns lukrieren ko‹nnen. ist. Hinzu kommen die Beruhigung der O‹ lma‹rkte, der Energiema‹rkte sowie das Ende des Irak-Kriegs. Dies alles kann natu‹rlich eine Volkswirtschaft allein nicht beeinflussen. Aber Europa kann hier durch kluges politisches und wirtschaftliches Handeln sicher einiges bewegen. Der zweite Punkt ist, dass wir die Potenziale des Binnenmarktes nicht O‹ sterreich war im vorigen Jahr jenes genug nutzen. Es gibt durchaus weite Land in der Europa‹ischen Union, das Bereiche, in denen der Binnenmarkt densta‹rksten Exportzuwachsverzeich- sehr gut funktioniert. In anderen Be- nen konnte. Wir haben daru‹ber hinaus reichen ist das Binnenmarktkonzept im vorigen Jahr zum ersten Mal seit aber noch lange nicht umgesetzt. 1945 einen Handelsbilanzu‹berschuss Die Theorie hierfu‹r existiert, aber erzielt und damit eine fu‹r uns histori- bei der praktischen Umsetzungwerden sche Wende geschafft und eine sehr immer noch nationale Einwa‹nde laut gute internationale Positionierung zu- und Stolpersteine aufgebaut. Denken stande gebracht. Sie nur an die Urheberrichtlinie, an Ich mo‹chte aber nun auf die von die U‹ bernahmerichtlinie in Deutsch- Ihnen gestellte Frage, was man tun land oder denken Sie an die o‹ster- ko‹nne, um die Wachstumsperspek- reichische Stromlo‹sung. Denken Sie tiven zu verbessern, auch noch eine an die Agrarverhandlungen, die plo‹tz- perso‹nliche, subjektive Antwort ge- lich zur Chefsache beim Gipfel in ben. Volkswirtschaften, selbst gro§e, Thessaloniki gemacht werden sollten. aber umso mehr natu‹rlich mittlere Denken Sie daran, dass es noch sehr und kleine, ko‹nnen hier allein nicht viele Schreberga‹rten gibt, die u‹ber- sehr viel ausrichten. Der Spielraum, haupt nicht der O‹ ffnung des Binnen- der einer Volkswirtschaft allein zur marktes, wie sie eigentlich von dessen Verfu‹gung steht, ist naturgema‹§ ein Gru‹ndern und Scho‹pfern angedacht limitierter. Was ko‹nnten wir aber worden ist, entsprechen. Darin liegen auf europa‹ischer Ebene tun? Das ist noch viele Potenziale und Wachstums- doch einiges mehr, als die Kompeten- spielra‹ume. Wenn Europa etwas mehr zen der Finanzminister, Regierungs- Zeit darauf verwenden wu‹rde, den all- chefs und Wirtschaftspolitiker zur ja‹hrlichen Fru‹hjahrsgipfel wirklich den

62 Wolfgang Schu‹ ssel

Fragen der Bescha‹ftigungs-, Wirt- mu‹ssen,obnichtEuropa,umsicheinen schafts- und Wettbewerbspolitik zu gewissen Spielraum erarbeiten zu ko‹n- widmen, dann wa‹ren wir weiter, als nen, sein System zur Finanzierung der wir es heute sind. Um ein Beispiel AufgabenderUnionu‹berdenkensollte. fu‹r dieses Defizit zu nennen: Beim Ich wei§, das ist in manchen La‹ndern letzten EU-Gipfel haben wir, glaube ein Tabu, teilweise auch in O‹ sterreich, ich, vier Stunden mit italienischen aber ich bin u‹berzeugt, dass eine Milchquoten im Abtausch zu sonstigen Union, die handlungsfa‹hig sein will, ho‹chst komplexen Feinheiten zuge- auch Spielra‹ume im Bereich der Eigen- bracht. Die eigentlich zentralen mittel bekommen mu‹sste. Es ist klar, Themen, wie zum Beispiel die Er- dass diese limitiert sein mu‹ssen. Es darf ho‹hung unserer Wettbewerbsfa‹higkeit nicht zu weiteren Belastungen der gegenu‹berdenasiatischenLa‹ndernund Bu‹rger, der einzelnen Steuerzahler den USA, sind dabei zu kurz gekom- kommen. Die men. Denken Sie daran, wie viele Handlungsfa‹hig- Mo‹glichkeiten, Instrumente und Geld keit der Union uns innerhalb der Europa‹ischen Union sollte aber auf zur Verfu‹gung stehen, die man fu‹r ver- jeden Fall sicher- schiedene Zwecke einsetzen ko‹nnte. gestellt sein. Meiner Meinung nach verwenden Sinnvoll und ef- wir viel zu viel Geld fu‹r Konsum- fektiv wa‹re ein zwecke, auch innerhalb der Regional- Policy-Mix, der programme der Europa‹ischen Union auch die Wettbewerbspolitik, die und im Rahmen der Strukturpro- Strukturpolitik, die Forschungs-, gramme. Wir setzen viel zu viel fu‹r Investitions- und Infrastrukturpolitik bewahrende Dinge ein als fu‹roffensive, beru‹cksichtigt. fu‹r investive und fu‹r zukunftsorien- Ein wesentlicher Punkt zu dem tierte Gedanken. Denken Sie nur heutigen Thema ist auch: Was kann daran, dass wir mit viel Ach und manindiesemZusammenhangnational Weh ein Forschungsprogramm der tun? Ich glaube, dass wir viel sta‹rker als Europa‹ischen Union in Bewegung in der Vergangenheit uns dem stellen gesetzt haben, das zwar beachtlich ist mu‹ssen, was erfolgreiche europa‹ische und sehr vieles bisher bewegt hat, aber Volkswirtschaften vorgezeigt haben. dessen Volumen,wenn man die Zahlen Die Skandinavier sind hier, nicht ohne betrachtet, fu‹r einen Markt von rund Grund, immer in der Spitzengruppe 500 Millionen Menschen la‹cherlich der Rankings der Europa‹ischen Union wenig ist. Dabei ko‹nnte man sich u‹ber- zu finden. Das liegt daran, dass diese legen,obmannichtetwa50%der nicht La‹nder zum Teil wesentlich fru‹her ausgescho‹pften Strukturprogramme und zum Teil auch in wesentlich ganz bewusst fu‹r eine Aufstockung schwierigeren Situationen, als wir dies der Forschungs- und Entwicklungsaus- heute sind, ihre Strukturreformen so gaben zur Verfu‹gung stellen ko‹nnte, angelegt haben, dass sie gegenwa‹rtig anstatt diese Ru‹ckflu‹sse einfach an bereits von der dadurch geschaffenen die Finanzminister zuru‹ckzuverteilen. Dividende profitieren. Und eben diese Meiner Meinung nach ko‹nnte hier ein Strukturreformen sind nun fu‹r all jene bedeutender europa‹ischer Mehrwert anderen La‹nder, die das noch nicht erzielt werden. Auch glaube ich, dass gemacht haben oder noch mitten in wir in weiteren Bereichen u‹berlegen der Umsetzung sind, ein Thema,

63 Wolfgang Schu‹ ssel

dem sie sich stellen mu‹ssen. Das muss zogen wird. Bisher galten in O‹ sterreich auf die Agenda. Als Beispiel mo‹chte ich die 15 besten Jahre als Basis fu‹r die die aktuelle Situation in O‹ sterreich Pensionsbemessung, bei den Beamten nennen. Glauben Sie mir, es ist auch sogar nur das letzte Arbeitsjahr, von in O‹ sterreich nicht leicht, ganz im dem dann 80% des Verdienstes als Gegenteil: Vielleicht ist es in O‹ ster- Pension ausbezahlt wurden. Das wird reich in mancher Hinsicht noch jetzt schrittweise gea‹ndert: In einem schwieriger, weil wir eben ein be- Zeitraum von 25 Jahren werden wir sonders konsensorientiertes Land sind. alle Systeme auf eine 40-ja‹hrige Auch mir ist es nicht immer leicht Durchrechnung umstellen. Das gilt gefallen, von diesem gewohnten fu‹r alle, gleichgu‹ltig ob Arbeiter, ob Konsens abzugehen. Es ist immer an- Beamter, Bauer, Selbststa‹ndiger oder genehmer und scho‹ner, sich in diesem Angestellter. Das zweite Grundprinzip ist, dass 45 Versicherungsjahre und Beitrags- jahre zu einer Ersatzrate von 80% auf Basis der Lebensverdienstsumme fu‹hren. Bisher hat man in O‹ sterreich dieses Ergebnis nach 40 Berufsjahren miteinemja‹hrlichenSteigerungsbetrag von 2% erreicht. Auch lassen wir die Fru‹hpension schrittweise bis 2017 aus- weichen, sanften Konsens ohne Kritik laufen. Jedoch bleibt auch danach die von anderen zu bewegen. U‹ berhaupt Mo‹glichkeit bestehen, in Fru‹hpension dann, wenn die Wahlresultate vor gehen zu ko‹nnen, allerdings nur dann, einem halben Jahr recht gu‹nstig ge- wenn man krank oder erwerbsunfa‹hig wesen sind. Ich bin aber der Meinung, ist. Was absolut korrekt und richtig ist. dass das nicht mehr geht und dass man Fu‹r Fru‹hpensionen werden versiche- heute versuchen muss, politisches rungsmathematische Abschla‹ge von Kapital ganz bewusst und investiv 4,2% zum Tragen kommen. Mo‹gliche einzusetzen, um etwas bewegen zu Verlustedurch die Pensionsreform sind ko‹nnen. Das ist fu‹r mich staatspoli- mit maximal 10% gedeckelt, wobei tische Verantwortung. dieses Geringer-Sein-Werdender Pen- Was sind nun diese notwendigen sionen relativ ist. Nicht eingerechnet Strukturreformen? Einige der wesent- sind na‹mlich die Lohnsteigerungen, lichsten Themen sind die Grund- die es selbstversta‹ndlich auch in den probleme aller ªaging societies: die na‹chsten Jahren geben wird, oder U‹ beralterung der Gesellschaft, die Pensionssteigerungen. Es werden auch la‹ngere Lebenserwartung, das Prob- in Zukunft die Pensionen in absoluten lem, zu wenig Beitragszahler zu haben Zahlen nicht niedriger sein als heute. und auch zu wenig Kinder, eine unge- Jedoch werden die Steigerungen sunde demographische Struktur und wesentlich moderater ausfallen als dazu Erwartungen, die mit der Realita‹t fru‹her. Diese Eckpunkte sind berech- nicht Schritt halten ko‹nnen. Was haben tigt. Es gibt auch interessanterweise wir gemacht? Wir haben jetzt zum dazu keinen einzigen Gegenvorschlag. ersten Mal durchgesetzt, dass das Wa‹hrend all der Monate der Diskus- gesamte Lebenseinkommen als Basis sionen mit den Sozialpartnern oder fu‹r die Pensionsbemessung herange- auch im Parlament wurde kein einziger

64 Wolfgang Schu‹ ssel

Aba‹nderungsvorschlag auf den Tisch einekleineInselderSeligen.Denn,was gelegt. Das zeigt deutlich, dass die wenige wissen, in O‹ sterreich herrscht Tendenz durchaus richtig ist, richtig eine hohe Arbeitsmarktflexibilita‹t. So sein muss, sonst ha‹tte es inhaltliche haben wir beispielsweise keine Ku‹ndi- Abweichungen gegeben. gungsschutzbestimmungen, wie sie Das zweite gro§e Thema in O‹ ster- etwa in Italien, in Spanien, in Frank- reich ist genauso wie etwa in Deutsch- reich, in Deutschland selbstversta‹nd- land oder Frankreich die Frage der lich sind. Wenn in O‹ sterreich eine Gesundheitsorganisation und deren Ku‹ndigungnotwendig ist,dannmu‹ssen Finanzierung. Auch dieser Themen- natu‹rlich Fristen eingehalten werden, schwerpunkt ist mit dem Problem doch es gibt im Ku‹ndigungsfall keinen von alternden Gesellschaften verbun- sozialen Widerspruch, der dazu fu‹hren den, fa‹llt doch das meiste Geld, das ko‹nnte, dass eine Ku‹ndigung eigentlich man fu‹r die Gesundheit oder fu‹r die Krankenvorsorge ausgibt, in den letzten Lebensjahren an. Es ist daher auch richtig, dasswir in diesem Bereich nach mehr Gerechtigkeit trachten, um nicht immer sta‹rker die aktive Bevo‹l- kerung belasten zu mu‹ssen. Daher haben wir die Pensionistenkranken- versicherungsbeitra‹ge erho‹ht. Gleich- zeitig haben wir versucht, hier die nicht mo‹glich wa‹re. Der daraus resul- Lohnnebenkosten neutral zu halten, tierende Effekt ist, dass in O‹ sterreich um den Standort O‹ sterreich nicht zu imVergleichzuanderenLa‹nderneiner- schwa‹chen. Hinzu kommt, dass die seits doppelt so viele Fluktuationen auf Gesundheitsorganisation in O‹ sterreich dem Arbeitsmarkt bestehen, dass wir ein relativ kompliziertes System dar- aber andererseits trotzdem eine halb stellt. Klar ist jedoch, dass man sich so hohe Arbeitslosenrate haben. Hinzu den Luxus von miteinander konkur- kommt, dass durch die Reformen im rierenden sta‹ndischen Krankenver- Arbeitsmarktservice die Verweildauer sicherungen dauerhaft nicht leisten in der Arbeitslosigkeit wesentlich wird ko‹nnen. Wir brauchen natu‹rlich geringer ist als in Deutschland. Das dezentral operierende, bu‹rgernahe hei§t, dass es sich bei dem, was jetzt Gesundheitsorganisationen.Diesesoll- in Deutschland mu‹hsam diskutiert tenabereinheitlichdas GutGesundheit wird, wie die Reform der Bundes- bewirtschaften und im Krankheitsfall anstalt fu‹r Arbeit, die ku‹rzere Verweil- Sicherheit geben. Diesem Thema mu‹s- dauer in der Arbeitslosigkeit, um sen wir uns stellen, ebenso wie das nun Bereiche handelt, die in O‹ sterreich in Deutschland oder in der Schweiz relativ gut funktionieren. Verbesserun- passiert. Jeden Tag liest man in den gen bei der Qualifikation, dem Recht europa‹ischen Zeitungen von‹ ahnlichen auf Weiterbildungund bei Umschulun- Problemen. Klar ist aber auch, dass gen werden zusa‹tzlich von uns voran- dieses Thema ein hei§es Eisen sein getrieben. wird. Der vierte Bereich, der ku‹nftig ein Der dritte Schwerpunkt ist der ganz wichtiges Thema in allen europa‹- Arbeitsmarkt. Was diesen Bereich be- ischen La‹ndern sein wird, ist der Um- trifft, ist O‹ sterreich vielleicht wirklich bau des Staatssektors. Wir haben —

65 Wolfgang Schu‹ ssel

vorsichtig formuliert — in O‹ sterreich Geld investieren wollen, denn mit eine relativ gut ausgebaute Bu‹rokratie. 0,8% des BIP, die wir fu‹r Landesver- Das ha‹ngt natu‹rlich auch mit unserer teidigung inklusive Luftraumu‹ber- Geschichte zusammen: Die Dogmen wachung ausgeben, sind wir sowieso von Josef II., wie etwa ªAlles Gute amunterstenLimit.Sinnvollistjedoch, kommt von oben oder ªAlles fu‹r das sich zu u‹berlegen, wie man dieses Geld Volk,nichts durch das Volksind wohl- besser und effizienter einsetzen ko‹nnte bekannt. Hinzu kommen natu‹rlich und auf welche Themen und Aufgaben auch eine fru‹here Bu‹rokratie, die fu‹r man sich ku‹nftig vor allem hinsichtlich ein viel gro‹§eres Reich gedacht war, des internationalen Gleichklangs und und die fo‹derale Struktur, die O‹ ster- im Zusammenwirken mit anderen reich einerseits natu‹rlich etwas an La‹ndern konzentrieren soll. Wichtig Effizienz nimmt, andererseits aber in diesem Themenreigen ist natu‹rlich Bu‹rgerna‹he ga- auch die Modernisierung. Darin rantiert. Ich bin stecken viele Potenziale und Wachs- der Meinung, tumschancen. Als Beispiel mo‹chte dass jetzt die ich hier das gesamte Finanz-Online- Zeit gekommen System anfu‹hren. In diesem Bereich, ist, sich diesem beispielsweise Steuererkla‹rungen u‹ber Thema zu stel- Internet und alle diese Dinge mehr, len. Daher haben liegt O‹ sterreich in der europa‹ischen wir einen O‹ ster- Benchmarkliste sogar sehr weit vorne. reich-Konvent einberufen. Seine Auf- Allerdings sind wir im Gesundheits- gabe ist es, ein bisschen nach dem bereich noch ziemlich weit hinten. Modell der europa‹ischen Konvents- Obwohl ich nicht ganz verstehen kann, diskussion, eine neue Verfassung zu- warum es fu‹nf Jahre dauern muss, bis stande zu bringen mit der Frage- man eine Chipkarte fu‹r jeden Sozial- stellung, welche Gebietsko‹rperschaft versicherten zustande bringt, die eine ku‹nftig welche Zusta‹ndigkeiten haben einfache Abrechnung und Kontrolle soll. Dabei sind einige Fragen, die in der jeweiligen medizinischen Leistun- fru‹heren Jahren nicht einmal an- gen ermo‹glichen soll. Man hat es ja diskutiert werden durften, zum ersten auch geschafft, beispielsweise eine Mal auf der Tagesordnung. Beispiels- Bankomatkarte klaglos zu betreiben. weise die Zusammenfassung sa‹mt- Meiner Meinung nach hat jedes licher Sicherheitseinrichtungen (Poli- Land seinen eigenen Schwerpunkt zei, Gendarmerie, Zollwache). Ein bei diesen Strukturreformen, gemein- weiterer Punkt ist der vo‹llige Umbau sam ist ihnen jedoch, dass sie sich in im Bereich des Bildungssystems. Es der Tendenza‹hneln. Die zentrale Frage sollen jene Bereiche, die die La‹nder dabei ist: wie viel wollen, mu‹ssen und machen ko‹nnen, auch auf Landes- sollen wir fu‹r die Qualita‹t unseres ebene erledigt werden. Der Bund soll Sozialstaats ausgeben? Besonders wich- sich auf andere Themenschwerpunkte tig ist dabei die Frage: Wie viel soll und konzentrieren ko‹nnen. Auch die Frage muss fu‹r investive Ausgaben aufgewen- der Neuorganisation des Bundesheeres det werden? Wir haben in O‹ sterreich ist in einer Zeit, in der wir von NATO- eine Sozialquote, die etwa im EU- La‹ndern und von Freunden umgeben Durchschnitt liegt. Wir haben vor sind, ein absolutes Gebot der Stunde. allem dank der privaten Unternehmer Das bedeutet nicht, dass wir weniger eine Investitionsquote, die deutlich

66 Wolfgang Schu‹ ssel

u‹ber dem EU-Schnitt liegt. Jedoch keine Reform mehr ist. Dazwischen leisten wir beispielsweise im Pensions- gibt es offensichtlich nichts. Das kann systemeinenweitu‹berdemEU-Schnitt es aber nicht sein. Ich bin ein Schu‹ler liegenden Beitrag. So geben wir etwa des heiligen Benedikt, der stets das 14,5% unseres BIP fu‹r Pensionen rechte Ma§, den rechten Zeitpunkt aus, der EU-Schnitt liegt etwa 4% da- predigte. runter. Wenn man diese Ausgaben um Das ist etwas, was wir auch auf nur 2% senken wu‹rde, ko‹nnte man europa‹ischer Ebene finden mu‹ssen. wahrscheinlich das gro‹§te Forschungs- Europa hat sich verglichen mit den und Bildungsoffensivprogramm in Be- Zeiten von einst hinrei§end ent- wegungsetzen,dasesinderGeschichte wickelt. Europa sollte daher auch unseres Landes je gegeben hat. Dieses den Mut finden, sich von den Detail- Ziel muss zuerst definiert, strategisch problemen, die man durchaus den erka‹mpft, mit Hilfe der o‹ffentlichen Meinung kommuniziert und dann auch umgesetzt werden. Denn dies ist kein Leintuch, das dehnbar ist, sondern ein endliches Konzept, das letztlich in Form einer Umverteilung der Priori- ta‹ten erstellt werden muss. All diese Probleme, die wir in Europa, nicht nur in O‹ sterreich haben, sind lo‹sbar. Davon bin ich u‹berzeugt. Experten, den Fachministern u‹ber- Denken Sie daran, dass wahrscheinlich lassen sollte, zu lo‹sen und sich zu einer 99% der Weltbevo‹lkerung liebend Art Generalbeobachtung auf euro- gerne unsere Probleme gegen die ihren pa‹ischer Ratsebene aufzuschwingen. eintauschen wu‹rden. Auch im ge- Der Europa‹ische Rat ko‹nnte und sollte schichtlichen Vergleich gab es Schlim- das strategische Diskussions- und meres als in der aktuellen Situation. In Entscheidungsorgan sein, in dem diesem Sinne glaube ich, dass wir uns man die wichtigen gro§en Linien die Kultur des Jammerns auf ho‹chstem fixiert. Das ist es, was wir auf euro- Niveau, wie das Politiker,Journalisten, pa‹ischerEbenemehrdennjebrauchen: Meinungsbildner, Sozialpartner so Mehr Zeit fu‹r Diskussionen, weniger gerne pflegen, abgewo‹hnen mu‹ssen. Zeit fu‹r nationale Willku‹r oder natio- Ich glaube auch u‹berhaupt nicht, dass nale Besonderheiten. Kein finsteres wir in eine finstere Zeit hineingehen. Zeitalter steht uns daher bevor. Das Wir brauchen aber jetzt die Ehrlich- 21. Jahrhundert ko‹nnte vielmehr ein keit, die Dinge anzusprechen, und dazu europa‹isches Zeitalter werden. Zuvor brauchen wir Mut und Wegbegleiter. mussEuropaaberersterwachen,wiees Denn eines ist mir in O‹ sterreich auf- Peter Sloterdijk einst verlangt hat. Und gefallen: Entweder ist eine Reform zum Aufwachen geho‹rt, dass man sich brutal und daher sozial unannehmbar ru‹hrt, dehnt, streckt, das Richtige aus- oder schon so abgemildert, dass sie spricht und es letztlich auch tut. §

67 Nicholas F. R. Crafts Nicholas F. R. Crafts Professor London School of Economics

Prospects for European Economic Growth: A Historical Perspective1)

1 Introduction Throughout the years from the early 1950s to the mid-1990s labour productivity grew more rapidly in western Europe than in the United States. In the early postwar period, the United States had a large productivity lead but this was quickly reduced by rapid European catch-up growth during the golden age which ended in the early 1970s. In the next 20 years, both the United States and western Europe experienced a productivity growth slowdown but here too Europe had the faster growth and by the mid- 1990s the leading European countries had overtaken the United States in terms of (purchasing power parity adjusted) real GDP per hour worked. Since 1995, however, the United States has experienced a productivity growth revival whilst in western Europe productivity growth has weakened markedly such that in recent years the United States has outperformed. This reversal of relative growth out-

1 Revisedversion of paper prepared for the 31st Economics Conference of the Oesterreichische Nationalbank, Vienna, June 12—13, 2003. I am grateful for helpful comments from the conference participants and especially my discussant Bernhard Felderer. Nicholas F. R. Crafts

comes has coincided with the disap- Accordingly, European growth pearance of the Solow productivity prospects can be evaluated by address- paradox in the United States and is ing the following questions. clearly related to greater American — Are European incentive structures success in exploiting the productivity now less favourable to catch-up potential of information and communi- growth? cations technology (ICT). This raises or the question whether the old pattern — Is a European productivity surge of faster productivity growth in Europe just around the corner following will reassert itself or whether we have an ICT diffusion lag? entered a new era where American or productivity growth will permanently — Does ICT fit less well than earlier be the faster of the two. technologies with European social capability?

2TheGoldenAgeand Its Aftermath The period between 1950 and 1973 is conventionally known as the golden age of European economic growth (Crafts, 1995a). Table1 reports growth rates of real GDP per person in excess of 4% Several different angles have per year for most western European emerged in the literature. Compared countries with the fastest growth expe- with the golden age, Europe has be- rienced by countries with the lowest come sclerotic with incentive struc- initial income levels, i.e., the most tures that are now less favourable to scope for catch-up growth. productivity growth (Crafts, 1999). Technology transfer undoubtedly A more positive interpretation for played an important part in the golden Europe can be offered based on the lags age as a number of factors reduced the involved in obtaining the productivity barriersto diffusion ofAmericanmeth- payofffromICT,asisnormalwithanew ods that had prevailed prior to World general purpose technology (GPT). In War II. These included integration of this view, Europe is poised for a pro- European markets, changes in relative ductivity growth acceleration when factor prices, greater codification of the weight of ICT capital in the econ- knowledge, and the proliferation of omy becomes a bit larger and learning multinational enterprise (Nelson and and accumulation of intangible organ- Wright, 1992). Nevertheless, catch- izational capital permit the realization up growth had other important com- of its productivity potential (Temple, ponents. These comprised transitory 2002). But, the question then arises aspects of growth — including the trans- as to whether European institutions fer of workers out of agriculture and andpoliciesareasconducivetoexploit- postwar reconstruction — which ex- ing the possibilities of ICT as are those ertedapowerfuleffectwhiletheylasted of the United States, especially if reor- through the 1950s and 1960s especially ganization of working practices and (Temin, 2002). Although there was a labour turnover is central to this bounce back from the disruption of endeavour (Feldstein, 2003). theworldwarsandinterwardepression

70 Nicholas F. R. Crafts

Table 1 Levels and Growth Rates of Real GDP/Hour Worked

a) Levels (1990 Geary-Khamis dollars) 1950 1973 1995 2002 Switzerland 9.09 Netherlands 22.36 Norway 32.53 Norway 36.95 Netherlands 8.38 Switzerland 19.00 France 32.03 France 35.76 UK 7.49 Denmark 18.27 Netherlands 30.72 Belgium 35.33 Denmark 7.24 France 17.75 Belgium 30.42 Netherlands 31.92 Sweden 6.79 Sweden 17.27 Italy 27.42 Ireland 31.71 Norway 6.12 Germany 16.24 Denmark 27.15 Denmark 30.40 Belgium 5.87 Belgium 16.04 Germany 25.76 Austria 29.34 France 5.64 Italy 15.92 Austria 24.81 Germany 28.91 Italy 5.03 Norway 15.91 Switzerland 24.10 Italy 28.77 Germany 4.36 UK 14.31 Sweden 23.84 Finland 28.00 Finland 4.28 Austria 14.27 UK 23.71 Sweden 26.88 Austria 3.81 Finland 13.81 Finland 23.42 UK 26.27 Ireland 3.44 Spain 11.64 Spain 22.61 Switzerland 26.18 Spain 2.79 Greece 10.15 Ireland 22.35 Spain 21.97 Greece 2.43 Ireland 9.09 Greece 14.69 Greece 18.25 Portugal 2.14 Portugal 9.06 Portugal 14.57 Portugal 16.42

USA 10.9 USA 21.64 USA 28.42 USA 32.34

b) Rates of Growth 1950—73 1973—95 1995—2002 % per year

Switzerland 3.3 Netherlands 1.5 Norway 1.8 Netherlands 4.4 Switzerland 1.1 France 1.6 UK 2.9 Denmark 1.8 Netherlands 1.5 Denmark 4.1 France 2.7 Belgium 2.2 Sweden 4.1 Sweden 1.5 Italy 0.7 Norway 4.2 Germany 2.7 Denmark 1.6 Belgium 4.5 Belgium 2.9 Germany 1.7 France 5.1 Italy 2.5 Austria 2.4 Italy 5.1 Norway 3.3 Switzerland 1.2 Germany 5.9 UK 2.3 Sweden 1.7 Finland 5.2 Austria 2.5 UK 1.5 Austria 5.9 Finland 2.4 Finland 2.6 Ireland 4.3 Spain 3.1 Spain —0.4 Spain 6.4 Greece 1.7 Ireland 5.1 Greece 6.4 Ireland 4.2 Greece 3.2 Portugal 6.5 Portugal 2.2 Portugal 1.7

USA 3 USA 1.2 USA 1.9 Source: Groningen Growth and Development Centre. Levels in 1950, 1973 and growth rates for 1950—73 and 1973—95 refer to West Germany. West German level in 1995 = 29.32. and protectionism, in general, Euro- on having social capability (Abramo- pean countries did far better than vitz, 1986), that is, incentive structures merely get back on a pre-existing that encouraged innovation and invest- growth trend (Mills and Crafts, ment. A key feature of the period was 2000). Even so, at the end of the golden that in many countries postwar settle- age there was still a substantial total- ments developed social contracts that factor-productivity (TFP) gap between facilitated wage moderation in return western Europe and the United States, for high investment in a corporatist set- especially in manufacturing. Despite ting accompanied by trade liberaliza- the strength of catch-up growth, the tion (Eichengreen, 1996). The quid postwar experience has not been one proquoforgreaterexposuretotherisks ofconvergenceeither inmanufacturing ofinternationaleconomywasenhanced or inGDP(BernardandDurlauf,1995; social insurance (Rodrik, 1997). Bernard and Jones, 1996). Given the importance of institu- Catch-up in early postwar Europe tions in growth outcomes it is not wasbynomeansautomatic.Itwasbased surprising that some countries did

71 Nicholas F. R. Crafts

better than others in catch-up growth nal shareholders who could internalize during the golden age. An obvious con- the benefits of monitoring manage- trast, suggested by table 1, is between ment, of industrial relations where the UK and West Germany where the British firms were much more likely former underperformed and the latter to be confronted by multiple trade outperformed the growth achieved unions whose opportunism inhibited by countries with similar initial sunkcostinvestments,andofvocational productivity levels. There were impor- training systems where strong employ- tant differences between these two ers associations in Germany addressed countries in terms of capital markets, poaching problems and maintained where German firms were more likely strict qualification standards (Crafts, to be characterized by dominant exter- 2002). All these represented advan-

Table 2 Catch-Up Growth Bonus Relative to USA

1950—1973 1973—1995 1995—2002 % per year Austria 2.25 1.18 0.44 Belgium 1.59 0.89 —0.25 Denmark 1.16 0.54 0.15 Finland 2.10 1.25 0.61 France 1.67 0.62 —0.44 Germany 2.07 0.86 0.32 Greece 2.69 1.84 1.67 Ireland 2.37 2.01 0.74 Italy 1.86 0.91 0.12 Netherlands 0.80 —0.12 —0.28 Norway 1.52 0.91 —0.50 Portugal 2.78 2.01 1.68 Spain 2.57 1.60 0.70 Sweden 1.30 0.70 0.55 Switzerland 0.67 0.42 0.52 UK 1.10 0.57 0.57

Source: Derived from coefficient on Y0 in growth regression in Crafts and Kaiser (2003, table 5, equation 2) applied to initial relative labour productivity differences.

Table 3 Distortionary Tax Revenues

1955 1980 2000 %ofGDP Australia 14.9 21.5 22.8 Austria 19.5 28.9 31.3 Belgium 15.3 33.0 34.0 Canada 13.5 24.9 27.1 Denmark 15.0 29.0 32.9 Finland 15.2 20.5 33.2 France . . . . 33.6 Germany 20.2 27.6 27.3 Greece . . . . 24.2 Ireland 11.8 21.3 19.5 Italy 17.1 22.0 30.1 Japan 11.4 22.3 22.0 Netherlands 17.9 35.6 29.4 New Zealand 20.2 25.0 23.0 Norway 15.8 30.9 26.4 Portugal 9.30 18.0 20.7 Spain . . . . 24.7 Sweden 18.2 38.5 43.0 Switzerland 12.9 24.9 28.7 UK 19.6 26.2 25.3 USA 19.1 26.3 24.9 Source: OECD (1981 and 2002); distortionary taxes are defined as in Kneller et al. (1999).

72 Nicholas F. R. Crafts

Table 4 Employment Protection Index

1960—1964 1973—1979 1988—1995 Scale from 0 to 2 Australia 0.50 0.50 0.50 Austria 0.65 0.84 1.30 Belgium 0.72 1.55 1.35 Canada 0.30 0.30 0.30 Denmark 0.90 1.10 0.90 Finland 1.20 1.20 1.13 France 0.37 1.21 1.41 Germany 0.45 1.65 1.52 Ireland 0.02 0.45 0.52 Italy 1.92 2.00 1.89 Japan 1.40 1.40 1.40 Netherlands 1.35 1.35 1.28 Norway 1.55 1.55 1.46 New Zealand 0.80 0.80 0.80 Portugal 10.00 1.59 1.93 Spain 2.00 1.99 1.74 Sweden 10.00 1.46 1.53 Switzerland 0.55 0.55 0.55 UK 0.16 0.33 0.35 USA 0.10 0.10 0.10 Source: Nickell et al. (2002). tages for WestGermany over the UK in of labour markets, as tables 3 and 4 the early postwar decades and this is report. confirmed by a regression of growth These developments were surely across European regions during the not favourable for European growth. golden age (Crafts, 1995b). The econometric estimates in Kneller After the early 1970s, European et al. (1999) indicate that the rise in growth slowed down quite markedly. distortionary taxation in Sweden for The end of the golden age had a number example was sufficient to reduce the of root causes including the weakening growth rate by about 2 percentage of the positive transitory factors, points per year — no doubt, partly diminishing returns to investment as by pushing economic activity into the postwar boom went on and a the shadow economy (Schneider and significant reduction in American Enste, 2000). That said, it should be productivity growth which reduced recognised that the rise in distortionary the scope for catch-up growth. In fact taxation in most European countries for most countries this last factor may was much less than this and indeed have been the most important, as a left them with tax takes not much comparison of tables 1 and 2 suggests. different from the United States which As growth slowed down the postwar relies heavily on direct taxes and has settlements came under severe pres- no value-added tax. sure and became less capable of deliv- Moreover, other developments ering wage moderation while capital pushedintheoppositedirection.Inpar- found new exit options in a more ticular, exposure to international com- globalized world. Nevertheless, the petition continued to intensify for the legacy of the European postwar settle- tradables sector and by the 1980s the ments as they encountered the turbu- degree of market power in manufactur- lent 1970s was a substantial increase in ing in European countries was fairly public spending (and taxation) relative similar to that in the United States, to GDP and strengthened regulation as table 5 reports. And European coun-

73 Nicholas F. R. Crafts

Table 5 Deregulation of labour markets is, Price-Cost Margins, 1980—1992 however, notoriously difficult as is Manufacturing Market services made clear by the analysis in Alogos- Australia 1.20 koufis et al. (1995). Such reforms Belgium 1.17 1.80 Canada 1.20 1.28 create gainers, losers and people Denmark 1.15 1.64 Finland 1.24 1.24 who fear that they may be losers. It France 1.16 1.48 is quite likely that the last two groups Germany 1.21 1.34 Italy 1.18 1.96 form a majority and that it is not Japan 1.26 possible credibly to promise to com- Netherlands 1.21 1.45 Norway 1.18 pensate them. In such cases the major- Sweden 1.16 1.16 UK 1.15 1.37 ity will rationally oppose beneficial USA 1.15 1.25 reforms and policy will exhibit a status Source: Oliveira-Martins et al. (1996). Market services refers to whole- quo bias (Fernandez and Rodrik, sale and retail trade, restaurants and hotels. 1991). Whatever may have been the tries also moved in the direction of difficulties as the golden age came deregulation of product markets, as to an end, it is important to bear in is shown in table 6, albeit noticeably mind that from 1973 to 1995, western more slowly than the United States. European countries (with the excep- Giventheexistenceofagencyproblems tion of Switzerland) achieved faster in firms, deregulation and greater com- labour productivity growth than did petitioncanbeexpectedtospeedupthe the United States and catch-up contin- adoption of new technologies (Aghion ued, although more slowly than before. et al., 1997). Econometric evidence In most cases, the outperformance of does indeed suggest that had European the United States by European coun- countries deregulated more energeti- tries reported in table 1 was at least cally this would have been positive as great as predicted by growth for TFP growth (Nicoletti and Scar- regressions on the basis of the initial petta, 2003). productivity gap. Table 6 Product Market Regulatory Reform

1978 1988 1993 1998 Scale from 0 to 6 Australia 4.5 4.2 3.3 1.6 Austria 5.2 4.5 3.9 3.2 Belgium 5.5 5.0 4.3 3.1 Canada 4.2 2.8 2.6 2.4 Denmark 5.6 5.5 4.0 2.9 Finland 5.6 4.8 4.0 2.6 France 6.0 5.7 4.7 3.9 Germany 5.2 4.7 3.8 2.4 Greece 5.7 5.7 5.5 5.1 Ireland 5.7 5.1 4.8 4.0 Italy 5.8 5.8 5.3 4.3 Japan 5.2 3.9 3.2 2.9 Netherlands 5.3 5.5 4.1 3.0 New Zealand 5.1 3.6 2.2 1.4 Norway 5.0 4.3 3.2 2.5 Portugal 5.9 5.4 4.9 4.1 Spain 4.7 4.6 4.2 3.2 Sweden 4.5 4.2 3.5 2.2 Switzerland 4.5 4.5 4.4 3.9 UK 4.3 3.5 1.9 1.0 USA 4.0 2.5 2.0 1.4 Source: Nicoletti et al. (2001).

74 Nicholas F. R. Crafts

Table 7 TFP Levels in the European Union and the United States

1979 1989 1995 1999 Index: EU = 100 USA 120 113 110 112 EU 100 100 100 100 Austria 85 80 83 87 Belgium 103 111 111 111 Denmark 105 99 101 99 Finland 72 80 85 93 France 112 111 104 104 Germany 96 94 99 101 Greece 96 90 85 86 Ireland 76 87 97 105 Italy 114 112 112 109 Luxembourg 136 144 142 153 Netherlands 118 113 111 113 Portugal 81 91 89 90 Spain 84 91 86 85 Sweden 101 97 96 97 UK 100 99 100 99 Source: OMahony (2002).

Moreover, the EU countries gener- framed in slightly different ways to fill ally continued to catch-up in terms of out the picture. TFP until the mid-1990s, as table 7 Growthaccountingpotentiallycap- reports. TFP growth was faster than tures the contribution of ICT to labour in the United States in thirteen out productivity growth through three of fifteen EU countries in 1979—89 channels, namely, the growth of ICT and twelve out of fifteen EU countries capital in use (ICT capital deepening), in 1989—95. Whereas the TFP gap TFP growth in ICT production, and between the EU and the United States TFP spillovers, i.e., externalities that was 20% in 1979 by 1995 this had raise productivity additional to the halved to 10%. remunerated payoff to investment in ICT capital. These spillovers are hard 3 ICT and the Post-1995 to measure but are sometimes thought US Productivity Growth to be reflected in accelerations in TFP Acceleration growth in ICT-intensive sectors. A The acceleration in American produc- practical problem in the use of growth tivity growth has been much discussed accounting to examine relatively short anditisgenerallyacceptedthatitoweda periods is that the results may be good deal to ICT.The episode has been influenced by business cycle impacts analyzed by several authors using var- on utilization of factors of production iants of growth accounting techniques. and be sensitive to the precise period They show a distinct change of pace in chosen for analysis. the mid-1990s and attribute this mainly Table8 shows that the United States to the impact of ICT. The estimates in has devoted a substantial proportion of tables 8 and 9 are drawn from a study its investment to ICT in the past 20 that focused especially on comparison years and that the share of profits accru- between the EU countries and the ing to ICT capital has risen steadily over United States and therefore has consid- time with the result that ICT capital erable advantages from the point of stock growth has received a higher view of this paper but it will also be weight over time in growth accounting convenient to refer to other studies exercises. Table 9 reports estimates

75 Nicholas F. R. Crafts

Table 8 ICT Shares in Investment and Capital Income

1985 1990 1995 2000 % Investment USA 21.3 22.8 25.6 29.6 EU 11.6 12.2 14.1 17.1 Austria 9.6 10.0 10.4 12.8 Denmark 9.0 11.1 16.1 19.1 Finland 5.5 7.0 14.2 17.5 France 9.5 8.5 9.9 13.1 Germany 13.9 13.9 13.9 19.2 Ireland 12.3 8.3 16.0 14.6 Italy 12.5 14.2 14.8 16.7 Netherlands 14.6 15.5 16.4 20.9 Portugal 11.9 10.6 11.5 11.4 Spain 9.4 11.9 9.3 10.1 Sweden 8.7 9.7 15.8 21.6 UK 11.0 13.8 20.9 22.0

Capital Income USA 14.9 16.9 18.4 19.3 EU 7.0 8.9 9.4 10.0 Austria 6.7 7.7 8.7 8.3 Denmark 4.0 6.3 7.1 9.5 Finland 3.8 5.8 6.1 7.6 France 6.2 6.8 6.4 7.2 Germany 8.3 10.0 10.4 10.0 Ireland 7.6 7.1 6.7 8.1 Italy 8.0 10.3 9.5 9.8 Netherlands 8.5 9.8 10.1 11.5 Portugal 6.3 7.3 10.8 10.0 Spain 7.4 10.8 9.9 8.3 Sweden 4.7 8.1 9.3 14.6 UK 5.8 9.6 11.8 13.6 Source: van Ark et al. (2003, tables A1D and A4D).

that ICT capital deepening contributed per year in 2000 — again estimates 0.4 percentage point to growth in for the non-farm business sector 1990—5 but almost double that at are higher with an increase from 0.75 percentage point in 1995— 0.29 to 0.58 percentage point bet- 2000. Estimates relating to the private ween 1990—5 and 1995—2000 accord- non-farm sector find a rather larger ing to Basu et al. (2003). acceleration in the contribution of The estimates in table 9 show an ICTcapital-deepening,perhapsaslarge increase in the contribution of other as 0.6 percentage point per year TFPgrowthfrom0.36to0.78percent- (Oliner and Sichel, 2002). age point between 1990—5 and 1995— During the 1990s there was spec- 2000 and again the estimate for the tacular technological progress in ICT non-farm business sector is higher production, which encouraged ICT showing an increase from 0.58 to capital-deepening as ICT equipment 1.46 percentage point (Basu et al., became much cheaper, but also con- 2003). Here there is some scope to tributed directly to growth as Moores argue what might be involved. It seems lawcontinuedtoapplyandICTproduc- likely that this acceleration owes at least tion became larger relative to GDP in something to cyclical influences be- the United States. Table 9 records an cause extending the period forward increase in this growth contribution to include 2001 eliminates much of from 0.25 percentage point per year the apparent increase (Oliner and in 1990—5 to 0.43 percentage point Sichel, 2002). On the other hand, sec-

76 Nicholas F. R. Crafts

Table 9 Contributions to Labour Productivity Growth

ICT Other Growth of GDP/HW Capital TFP Total Capital TFP Total Percentage points per year 1990—1995 USA 0.40 0.25 0.65 0.19 0.36 0.55 1.20 EU 0.28 0.14 0.42 1.05 0.98 2.03 2.45 Austria 0.21 0.08 0.29 1.03 0.36 1.39 1.68 Denmark 0.25 0.05 0.30 0.70 1.56 2.26 2.56 Finland 0.23 0.16 0.39 0.84 1.07 1.91 2.30 France 0.21 0.17 0.38 1.11 —0.11 1.00 1.38 Germany 0.33 0.14 0.47 1.18 1.22 2.40 2.87 Ireland 0.21 1.17 1.38 0.43 1.79 2.22 3.60 Italy 0.29 0.13 0.42 1.09 1.49 2.58 3.00 Netherlands 0.30 0.07 0.37 0.30 0.36 0.66 1.03 Portugal 0.28 0.02 0.30 1.88 1.34 3.22 3.52 Spain 0.20 0.09 0.29 1.11 0.89 2.00 2.29 Sweden 0.25 0.14 0.39 0.61 0.86 1.47 1.86 UK 0.36 0.21 0.57 0.88 1.20 2.08 2.65

1995—2000 USA 0.75 0.43 1.18 0.25 0.78 1.03 2.21 EU 0.40 0.20 0.60 0.4 0.43 0.83 1.43 Austria 0.37 0.10 0.47 1.06 1.53 2.59 3.06 Denmark 0.41 0.06 0.47 0.71 0.66 1.37 1.84 Finland 0.33 0.17 0.50 —0.22 3.01 2.79 3.29 France 0.32 0.22 0.54 0.33 0.48 0.81 1.35 Germany 0.37 0.16 0.53 0.48 0.75 1.23 1.76 Ireland 0.68 3.02 3.70 0.93 1.25 2.18 5.88 Italy 0.38 0.15 0.53 0.49 0.10 0.59 1.12 Netherlands 0.55 0.10 0.65 —0.35 0.11 —0.24 0.41 Portugal 0.30 0.03 0.33 1.27 0.89 2.16 2.49 Spain 0.17 0.12 0.29 0.19 —0.26 —0.07 0.22 Sweden 0.50 0.09 0.59 0.50 0.87 1.37 1.96 UK 0.65 0.32 0.97 0.62 0.17 0.79 1.76 Source: van Ark et al. (2003, tables 19, 20 and A7). ICT capital refers to contribution of ICT capital-deepening; ICT TFP refers to TFP growth in ICT production. tors intensive in the use of ICTaccount work has been fundamental to high for a disproportionate share of labour productivityoutcomes (OECD,2001). productivity growth during the period Overall, there can be no doubt that suggesting thatTFPspilloverswere also the United States has experienced a part of the story (Stiroh, 2002). strong improvement in its productivity Both macro- and micro-level anal- growth from the advent of ICT not- ysis suggest that there are substantial withstanding the misdirected invest- lags in obtaining the productivity ments and excessive optimism of the payoffs from investments in ICT. The bubble years. much higher long-term returns reported by Brynjolfsson and Hitt 4 Will Europe Experience (2000) reflect the time that it takes an ICT Catch-Up? to follow up investment in ICT with Tables 8 and 9 show that the EU has changes in organizational structures lagged some way behind the United and to learn about the capabilities of States in ICT investment and in the con- ICT in specific business settings. Mov- tribution made by ICT to labour pro- ing to new work practices such as op- ductivity growth. For all EU countries erating with fewer layers of manage- except Ireland, ICT production ac- ment, introducing flexible job re- counts for a much smaller proportion sponsibilities, decentralization of work of GDP than in the United States and structures and greater use of team- this is reflected in a lower TFP contri-

77 Nicholas F. R. Crafts

bution. This may reflect comparative Table 10 advantage and, as such, represents a Share of Labour Force consequence of different specialization at Level 4/5 of in a globalized economy. However, a Quantitative Literacy more important part of the difference % in ICT growth contributions between Australia 19.1 Belgium 22.6 the EU and the United States comes Canada 22.2 from capital-deepening and reflects Denmark 28.4 Finland 19.7 consistently higher investment in Germany 23.5 ICT by the United States. In 2000 total Ireland 16.2 Netherlands 19.9 ICT investment as a share of EU GDP New Zealand 17.2 Norway 27.4 was only 2.9% ( similar to the share Portugal 5.2 achieved by the United States as early Sweden 35.8 Switzerland 18.8 as 1980 (van Ark et al., 2003, table 5). UK 18.6 UnderstandingwhythisshortfallinICT USA 22.5 investment has occurred is central to Source: OECD (2000, table 2.2). Levels 4/5 describe respondents who demonstrate command of higher-order information processing skills assessing the prospects for the EU to (OECD, 2000, p. xi). experience an ICT-driven productivity revival. knowledge economy, considerably ex- Clearly, incentive structures in the ceeds that in the United States. EU are in some ways less favourable to Ontheotherhand,asrecentlyasthe catch-up growth and rapid technology mid-1990s ICT equipment was much transfer than in the golden age. In par- more expensive in EU countries than ticular, tables 3 and 4 showed evidence in the United States. Even in the UK of higher direct taxes and stronger em- where the differential was least prices ployment protection. These policies were about 30% higher than in the werealreadyinplaceby1980,however, United States, in Germany the gap and did not constitute an obstacle to was 45% whilst in Portugal it was as continuedcatch-upoftheUnitedStates high as 75% (OECD, 1995). These bytheEUthroughthemid-1990s.And, price differentials reflect barriers to some of the distortions in European trade, taxes and weak competition labour markets, which raise labour and suggest that European slowness costs and have promoted capital inten- to follow the American lead in regula- sive modes of operation specially in tory reform may have been unfortu- market services, might be expected nate. The demand for computers has to have encouraged the rapid substitu- been shown to be quite price-sensitive tion of ICT capital for labour by EU (Tevlin and Whelan, 2000) and the im- countries. plication of high ICTequipment prices An obstacle to the rapid diffusion of was a delay in accumulating the knowl- computer technology in the world as edge and intangible organizational a whole is an inadequate supply of capital necessary for exploiting the human capital, a complementary factor potential of (and enhancing the returns of production (Caselli and Coleman, to) ICT. 2001). This does not generally apply After a slow start ICT investment in in the EU countries and, as table 10, the EU increased quite appreciably shows in some cases, notably among from 2.2% of GDP in 1995 to 2.9% the Scandinavian countries, the supply in 2000 whereas in the first half of of high quality labour for work in the the 1990s there was no increase in

78 Nicholas F. R. Crafts

this ratio. International cross-sectional Table 11 evidence suggests that economy-wide Cross-Section Estimates of TFP growth is positively related to IT Expenditure and Aggregate ICTexpenditure but with a substantial Investment Equations lag. The results obtained by Haacker Investment IT Expenditures and Morsink (2002) suggest the in- Constant 27.65 —4.30 (6.40) (1.55) crease in investment after 1995 should Years of schooling 0.54 0.26 (0.30) (0.04) lead to an increase in EU TFP growth of % Employment about 0.5 percentage point by 2005. in services — 0.22 0.09 (0.10) (0.02) In fact, the relationship between Employment ICT investment and economywide protection legislation 0.82 —0.18 (0.53) (0.10) TFP growth may be more complicated Regulatory burdens — 0.31 —0.18 (0.62) (0.12) than this. If success in exploiting the Adjusted R-squared 0.15 0.81 potential of ICT involves the diversion Source: Gust and Marquez (2002). Heteroscedasticity-corrected of effort into (unmeasured) investment standard errors in parentheses. Dependent variables are measured as percentage of GDP. in accumulating intangible organiza- Note: The Employment Protection Legislation Index is on a scale of 0 to tional capital then while there will 6 rather than the 0 to 2 in table 5. be a positive relationship between lagged TFP growth and ICT investment are central to obtaining the payoff from butanegativecorrelationbetweencon- ICT. The regression may also help to temporary TFP growth and ICT invest- explain why the UK has a relatively ment. This is the pattern revealed by strong ICT capital deepening growth sectoralexperienceintheUnitedStates contribution in table 9. where strong TFP growth after 1995 is Thus, there is some reason to positively related to ICT investment in think that ICT is less compatible with the 1980s but negatively related to ICT European incentive structures than investment in the 1990s (Basu et al. investment in other types of capital. 2003, table 12). On this interpretation Nevertheless, it is important not to thesurgeinICTinvestmentintheEUin exaggerate the importance of this the late 1990s may not only imply a result. The estimated coefficient on future acceleration in TFP growth but employment protection suggests that be partly responsible for the reduction if the EU were as laissez-faire in this in TFP growth observed after 1995. regard as the United States rather less The relative weakness of invest- than half of the gap in the ICT investment in ICT in Europe seems also to ment/GDP ratio would be eliminated. be related to regulation. Table 11 re- And the regression in table 11 suggests ports regression results from Gust that high investment in human capital and Marquez (2002) which show that can compensate for strict employment ICT investment but not investment in protection which may explain why general is negatively related to employ- Sweden has had much better than aver- ment protection legislation. This result age ICT capital-deepening. is shown to be robust to a number of alternative specifications and estima- 5 Conclusions tion methods. The rationale is that em- European growth prospects would be ployment protection legislation, which much better if an American-style raises firing costs, is an obstacle to the success in ICT seemed to be imminent. upgrading the labour force and the The historical record suggests that reorganizing of work practices which convergence with the United States

79 Nicholas F. R. Crafts

is not automatic and may even be some- less, ICT investment strengthened what unlikely.On the other hand, prior during the 1990s and this is likely to to the mid-1990s Europe had a strong boost TFP growth appreciably in the record of catch-up and faster produc- near future. § tivity growth than the United States.Of itself, this implies that simplistic arguments about European sclerosis are References inadequate. The taxation and regula- Abramovitz,M.1986.CatchingUp,Forging tion that was imposed in the 1960s Ahead, and Falling Behind. In: Journal of and 1970s was not so out of line with Economic History 36. 385—406. the United States as to preclude catch- Aghion, P., M. Dewatripont and P. Rey. up, although there probably was a cost 1997. Corporate Governance, Competi- in lower growth. tion Policy and Industrial Policy. In: European Economic Review 41. 797—805. Alogoskoufis, G., C. Bean, G. Bertola, D. Cohen, J. Dolado and G. Saint- Paul. 1995. Unemployment: Choices for Europe. London: CEPR. van Ark, B., J. Melka, N. Mulder, M. Timmer and G. Ypma. 2003. ICT Investments and Growth Accounts for the European Union. Groningen Morenuancedhypotheses concern- Growth and Development Centre Re- ing regulation do, however, have some search Memorandum GD-56. Groningen: validity. In particular, it appears that University of Groningen. employment protection regulation Basu, S., J. G. Fernald, N. Oulton and and the high price of ICT capital goods S. Srinivasan. 2003. The Case of the held back investment in ICT capital Missing Productivity Growth. NBER Macro- deepening in the 1980s. ICT invest- economics Annual. Cambridge, Mass.: The ment seems to have been unusually MIT Press (forthcoming). sensitive to these factors and thus Euro- Bernard, A. B. and S. N. Durlauf. 1995. pean policies exacted a price in the Convergence in International Output. In: context of a new technological era that Journal of Applied Econometrics 10. would not have been paid previously. 97—108. Given the long lags that appear to char- Bernard, A. B. and C. I. Jones. 1996. acterize the realization of productivity Comparing Apples to Oranges: Productiv- gains from this new general purpose ity Convergence and Measurement Across technology the adverse implications Industries and Countries. In: American were probably felt more in the Economic Review 86. 1216—1238. 1990s than the 1980s. Brynjolfsson, E. and L. M. Hitt. 2000. Although Europe has moved in the Beyond Computation: Information Tech- direction of deregulation and some nology, Organizational Transformation countries have a strong advantage over and Business Performance. In: Journal of the United States in human capital, the Economic Perspectives 14(4). 23—48. continued strength of employment Caselli, F. and W. J. Coleman. 2001. protection which is prone to status Cross-Country Technology Diffusion: The quo bias has continued to act as a drag Case of Computers. NBER Working Paper on ICT capital-deepening. Neverthe- 8130.

80 Nicholas F. R. Crafts

Crafts, N. F. R. 1995a. The Golden Age of Up, Slowed Down and Still Differ. The Economic Growth in Western Europe, Manchester School 68. 68—91. 1950—1973. In: Economic History Review Nelson, R. R. and G. Wright. 1992. The 48. 429—447. Rise and Fall of American Technological Crafts, N. F. R. 1995b. The Golden Age of Leadership. In: Journal of Economic Litera- Economic Growth in Postwar Europe: Why ture 30. 1931—1964. Did Northern Ireland Miss Out? In: Irish Nickell, S., Nunziata, L., Ochel, W. and Economic and Social History 22. 5—25. Quintini, G. 2002. Why Do Jobless Rates Crafts, N. F. R. 1999. Economic Growth in Differ? CESifo Forum 1. 50—59. the Twentieth Century. In: Oxford Review Nicoletti, G., A. Bassanini, E. Ernst, of Economic Policy 15(4). 18—34. S. Jean, P. Santiago and P. Swaim. Crafts, N. F. R. 2002. Britains Relative Eco- 2001. Product and Labour Market Interac- nomic Performance, 1870—1999. London: tions in OECD Countries. OECD Econom- Institute of Economic Affairs. ics Department Working Paper 312. Crafts, N. and K. Kaiser.2003. Long-Term Nicoletti, G. and S. Scarpetta. 2003. Growth Prospects in Transition Economies: Regulation, Productivity and Growth: A Reappraisal. In: Structural Change and OECD Evidence. OECD Economics Economic Dynamics (forthcoming). Department Working Paper 347. Eichengreen, B. 1996. Institutions and Eco- Organisation for Economic Co-opera- nomic Growth: Europe After World War II. tion and Development — OECD. In: Crafts, N. F. R. and G. Toniolo(eds.). Eco- 1981. Long Term Trends in Tax Revenues nomic Growth in Europe Since 1945. Cam- of OECD Member Countries. Paris: OECD. bridge: Cambridge University Press. 38—72. OECD. 1995. Purchasing Power Parities and Feldstein, M. 2003. Why is Productivity Real Expenditures. Paris: OECD. Growing Faster? NBER Working Paper OECD. 2000. Literacy in the Information 9530. Age. Paris: OECD. Fernandez, R. and D. Rodrik. 1991. OECD. 2001. Knowledge, Work Organiza- Resistance to Reform: Status Quo Bias in tion and Economic Growth. Paris: OECD. the Presence of Individual-Specific Uncer- OECD.2002.RevenueStatistics1965—2001. tainty. In: American Economic Review 81. Paris: OECD. 1146—1155. Oliner, S. D. and D. E. Sichel. 2002. Gust, C. and J. Marquez. 2002. Interna- Information Technology and Productivity: tional Comparisons ofProductivity Growth: Where Are We Now and Where Are The Role of Information Technology and We Going? Federal Reserve Board. Regulatory Practices. Board of Governors Mimeo. of the Federal Reserve System Interna- Oliveira-Martins, J., S. Scarpetta and tional Finance Discussion Paper 727. D. Pilat. 1996. Mark-Up Pricing, Market Haacker, M. and Morsink, J. 2002. Yo u Structure and the Business Cycle. In: Say You Want a Revolution: Information OECD Economic Studies 27 (2). 71—105. Technology and Growth. IMF Working OMahony, M. 2002. Productivity in the EU, Paper 02/70. 1979—1999. London: HM Treasury. Kneller, R., M. F. Bleaney and N. Gem- Rodrik, D. 1997. Has Globalization Gone mell. 1999. Fiscal Policy and Growth: Too Far? Washington, DC: Institute for Evidence from OECD Countries. In: International Economics. Journal of Public Economics 74. 171—190. Schneider, F. and D. H. Enste. 2000. Mills, T. C. and N. F. R. Crafts. 2000. Shadow Economies: Size, Causes and After the Golden Age: A Long Run Per- Consequences. In: Journal of Economic spective on Growth Rates that Speeded Literature 38. 77—114.

81 Nicholas F. R. Crafts

Stiroh, K. J. 2002. Information Technology Temple, J. 2002. An Assessment of the New and the US Productivity Revival: What Do Economy. CEPR Discussion Paper 3597. the Industry Data Say? In: American Eco- Tevlin, S. and K. Whelan. 2000. Explaining nomic Review 92. 1559—1576. the Investment Boom ofthe 1990s. Board of Temin,P.2002.TheGoldenAgeofEuropean Governors of the Federal Reserve System. GrowthReconsidered.In:EuropeanReview Finance and Economics Discussion Paper of Economic History 6. 3—22. 2000-11.

Norbert Zimmermann Norbert Zimmermann CEO Berndorf AG

Why Is Growth in Europe Lagging Behind?

1 Which Part of Europe Is the Laggard? According to the latest forecasts, EU- wide annual GDP growth will average 1.1% in 2003, against 2.2% in the U.S.A. and 0.7% in Japan. The spread in the EU is wide. On the lower end of the range are Germany with an annual GDP growth of 0.4% and the Netherlands with 0.5%. On thehighendwefindSpainwithagrowth rate of 2.1%, the U.K. with 1.8% and Sweden with 1.5%. The European laggards are Ger- many, the Netherlands, Austria, Italy and France. This disastrous performance has to be benchmarked with the Presidency conclusions of the Lisbon European Council March 2000 saying the Union has today set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth withmoreandbetterjobsandgreatersocial cohesion. UNICE, the European umbrella organization of industrial and employers federations of 27 countries, represents more than 16 million companies; it evaluates the 2003 status of implementation of the Lisbon strategy as follows: The Lisbon strategyenters its third year and the European economy is failing to break out of its lethargic state. Norbert Zimmermann

Growth rates are not taking off. markets; also, the mobilityof quali- Consumers lack confidence. Entrepre- fiedemployeeshastobesupported. neurs are postponing investments, — The quantity and the quality of R&D watching the uncertain economic cli- spending have to be increased to enhance mate mistrustfully. Rigidities in key the potential for innovation. markets persist. And excessive labor Governments should use public costs are adding to the gloomy employ- financing more effectively and align ment situation. Lower costs and taxes national research policies with EU forbusiness,simplicityandlessredtape policies. The EU must increase are necessary. R&D expenditures and use the Several large countries in the Euro funds more efficiently. An afford- zone are failing to abide by the rules of able Community patent has to be the Stability and Growth Pact and thus established immediately. — Public communication must be improved in order to restore confidence in technology and research. — The infrastructure essential foran information society has to be implemented. The big mistake of charging huge tax loads on communication technologies should be remedied. The prices of licenses almost killed a undermining political credibility of dynamic development of European the whole zone. communication technologies. This does not have to be so! — The implementation of the packages of Although the world economy has measures toimprovetheEuropean trans- slowed down overall, our main com- port networks should be completed. petitor the United States, is still ex- — As regards employment and education periencing higher growth rates! strategies, job creation should be promoted through encouraging 2HowCanthe entrepreneurship. More than 90% Lisbon Strategic Goals of German companies are small and Be Achieved? medium-sized enterprises (SMEs), — Doing business in Europe must be much provide 70% of all jobs in the easier. country. Flexible forms of work Deregulation in major business should be encouraged and mobility areas and simplier labor rules enhanced. should create a better entrepre- Further crucial measures include neurial climate. the promotion of active ageing, Due to overregulation, administra- education programs for older em- tive and bureaucratic burdens are ployees as well as the reduction of still high. the regulatory burden on labor and Tax incentives should be given as indirect labor cost, particularly for rewards for entrepreneurial risk olderemployees. Moreover,unem- taking. Entrepreneurs have to get ployed people should be encour- access to financing and a qualified aged to attend training programs workforce. To this end, businesses before returning to the labor mar- require better functioning capital ket. It is vital to build bridges

86 Norbert Zimmermann

between education world and work ployees are over 45. At the same time, and to promote apprenticeship. only 5% of training budgets is reserved — The pension systems require moderni- for people over 40. zation. Only one third of the over-55 gen- Economic stability for future generation is not chronically sick. erations should be the main goal of This calls for action on the part of reforms. political decision makers and company managers. 3 The Danger of Inflation The ECB has to quickly change the strat- 5 The Good News: egy of relatively high interest rates and There are Companies restrictive monetary policy. that Perform Better than The interest rates in the euro area the Economy are currently 2.5%, whereas they are as Some companies low as 1.25% in the U.S.A. in Europe are The EU laggards — particularly Ger- doingbetterthan many — are heading into deflation. the economy, The way to measure inflation has to even though in be redesigned because the new EU many euro area Member States will need to increase countries labor income and raise costs; thus, the laws have been Member States of an enlarged EU will traditionally rig- pursue different goals. id and labor costs high. The British magazine Economist Nevertheless, some companies wrote on May 17, 2003, that inflation have flourished, because they followed in the developedworld is at its lowest in a few key rules: almost half a century. Prices have been — excellent management falling in Japan since 1995; in America — solid finances and tight cost con- and Germany the risk of deflation is trol greater than at any time since the — excellence in their core business 1930s; the ECB has the lowest inflation — global thinking: If countries are target of any central bank in theworld. deflating, companies have to go This and the consequence of the abroad and access demand else- sharply increased euro/dollar exchange rate where. Production moves to new could dramatically damage European markets, thus Germany has lost export business and destroy any chance approximately 3 million jobs since for growth. the early 1990s. Lower interest rates and better liquidity — first-rate logistics and information in the financial markets would support technology the growth of innovative companies. — focus less on producing things than Besides, Basel II poses an additional on selling them, change organiza- challenge to innovative SMEs. tion from a focus on function to a focus on customers 4 The Challenge of an Berndorf AG has created more Ageing Europe than 1,000 jobs over the last 10 years, About 40% of the euro areas popula- 70% of them outside the euro area. tion today is older than 45 years. In The euro area should make a much greater many companies the majority of em- effort to be attractive for investors. §

87 Josef Zweimu‹ ller Josef Zweimu‹ ller Professor at the University of Zurich, Cepr, CESifo and IZA1) Reto Foellmi University of Zurich1)

Inequality and Economic Growth: European Versus U.S. Experiences

1 Introduction The goal of this paper is to discuss differences and similarities of Euro- pean countries and the United States with respect to income distribution and the macroeconomic growth performance. Our aim is twofold. First, wediscussrecentinsightsfromthemac- roeconomic literature on the impact of inequality on the macroeconomic growth performance. Second, an attempt is made to use these insights to shed light on recent European and U.S. experiences. Our focus differs from the recent literature in two important respects. First, the recent literature has extensively studied the sources of changes in inequality. Instead, our paper turns this question upside down. Rather than looking at the explanations of high and rising inequalities, we are posing the question: Are there any feedback effects from high and increasing inequalities on the long-run growth process? In contrast, our paper is concerned with the consequences rather than the causes of inequality, so we will look at mechanisms by which income and wealth inequality is transmitted to growth outcomes. While, in principle,

1 We thank Josef Falkinger and Manuel Oechslin for helpful comments. Josef Zweimu‹ ller, Reto Foellmi

there may be many such channels, two for food decreases in income. Accord- of them seem particularly relevant in ing to this empirical observation, in- the context of recent European and come distribution must play a central U.S. macroeconomic experiences: (i) role both for the market size and the effects of inequality on human cap- price-setting behavior of monopolistic ital accumulation and (ii) the impact of firms.1) Hence income distribution inequality on innovation incentives and also affects the prices and the profits price-setting behavior. of innovative firms. As innovations Imperfections onthe capital market are a crucial determinant of productiv- are a fundamental problem inherently ity growth, we can ask how inequality associated with educational choices. By affects growth-outcomes. the very nature of educational invest- Recent empirical evidence sug- ments no collateral can be offered gests, perhaps unsurprisingly, that inequality is higher in the U.S. than inalmostallEuropeancountries.While inequality has been increasing strongly in some European countries (in particular, in the U.K.), recent empirical evidence suggests that the increase might have been strongest in the U.S., in particular if one takes a closer look at the top incomes. and the investment returns typically If inequality in Europe is smaller accrue to children who are not legally and has been increasing less strongly bound to honor the debts of their than in the U.S., what are possible im- parents. Clearly, how many individuals plications for relative macroeconomic will be constrained in their educational outcomes? The experience in the very choices will depend on the income dis- recent past suggests the U.S. has done tribution.Manyrecenttheoriessuggest (relatively) better than most European that human capital investments are an countries. Hence, we might be lead to important determinant of long-run conclude that inequality is a (perhaps) growth rates. unpleasant but necessary precondition Effectsofincomedistributiontransmit- forfavorablemacroeconomic perform- ted via imperfections in the product ances. In fact, the existence of such a market are important to understand trade-off between equity and efficiency the incentives to innovate. The income was a dominant proposition that has distribution is relevant in this respect been held by the majority of the eco- because the demand for innovators nomics profession. products crucially depends on the in- The more recent macroeconomic come distribution when the poor do literature, however, has challenged this notconsumethesamegoodsastherich. view both on theoretical and on empir- Moregenerally,the fact that market de- ical grounds. First, the trade-off has mand functions are affected by inequal- been questioned as a matter of fact. ity is most obvious in Engels law ac- There is very little empirical evidence cording to which the budget share suggesting that higher inequality is

1 Technically speaking, income distribution plays a role for market demand curves if consumers have non-homothetic preferences.

90 Josef Zweimu‹ ller, Reto Foellmi

favorable for the long-run growth ex- recent public debate, European coun- perienceofaneconomy.Cross-country tries have clearly outperformed the data suggest that economies with low U.S. over the long run in terms of initial inequality have grown much productivity growth. faster in subsequent decades than Section 4 briefly reviews the recent high-inequality countries. The second macroeconomic literature on long-run challenge for the equity-efficiency growth and income distribution and trade-off view comes from the theoret- discusses some theoretical approaches ical side. While neoclassical macroeco- that have put forth to explain the evi- nomics has focused on perfect markets, dence. The following sections deal in market imperfections are central in more detail with potential effects of more recent theories. When market income inequality on human capital imperfections are accounted for, in- accumulation under capital market come inequality becomes an important imperfections (section 5) and with determinant of macroeconomic out- the impact of income inequality on comes. In fact, in such an imperfect innovation incentives and price-setting world, it may well be that low-inequal- behavior when there is imperfect ity countries have an advantage in the competition on product markets (sec- long run,astheinefficienciesthatresult tion 6). from market imperfections will be less Section 7 summarizes. severe when incomes are more evenly distributed. 2 Differences and Trends The paper is organized as follows. in Income Inequality: We will start with a review of some U.S. Versus Europe empirical facts. In section 2 we discuss In this section we take a look at the differences in income inequality be- empirical evidence on income distribu- tween Europe and the U.S. and look tion in the U.S. and in Europe. Table 1 at recent trends. We will see that the shows a recent cross-country compar- available evidence supports the view ison among the OECD countries based that in the U.S. incomes are less evenly on data from the Luxembourg income distributedthaninEuropeancountries, studies, the most reliable and informa- and perhaps less unevenly than in tivedatabaseforcross-countrycompar- Europe as a whole. Moreover, this isons. Table 1 shows various interesting recent evidence suggests that U.S. indicators. One such indicator is the top incomes have been increasing Gini coefficient. Comparing this meas- dramatically which may be due to ure across countries confirms expect- the decline in progressive taxation. It ations: income inequality in the U.S. is is likely that this may foster further much higher than in any other country the trend towards more inequality in listed in table 1. For instance, the Gini the future. coefficient is 0.37 for the U.S., 0.30 In section 3 we contrast these infor Germany, and only around 0.23 equality trends to the differences in for a typical Nordic country. macroeconomic outcomes on the A further interesting inequality two sides of the Atlantic. We start indicator is the 90/10 percentile ratio, by reviewing the recent and more which is a rough measure of the range long-term EU and U.S. growth expe- between the poorest and the richest in a riences. Perhaps interestingly, and society. For instance, this ratio is 6.4 in certainly at odds with much of the the U.S., about 3.8 in Germany, and

91 Josef Zweimu‹ ller, Reto Foellmi

Table 1 Empirical Evidence on Income Inequality in Industrialized Countries

10 percentile Length of bars represents 90 percentile 90/10 per- Gini the gap between high and low centile ratio coefficient income individuals Finland 1991 57 157 2.75 0.223 Sweden 1992 57 159 2.78 0.229 Belgium 1992 58 163 2.79 0.230 Norway 1995 55 157 2.85 0.242 Denmark 1992 54 155 2.86 0.239 Luxembourg 1994 59 173 2.93 0.235 The Netherlands 1991 57 173 3.05 0.249 Italy 1991 56 176 3.14 0.255 Taiwan 1995 56 189 3.38 0.277 Switzerland 1982 54 185 3.43 0.311 New Zealand 1987/1988 54 187 3.46 NA Germany 1994 46 177 3.84 0.300 Canada 1994 47 185 3.93 0.287 Spain 1990 49 198 4.04 0.306 France 1989 45 185 4.11 0.324 Israel 1992 50 205 4.12 0.305 Japan 1992 46 192 4.17 0.315 Ireland 1987 50 209 4.18 0.328 Australia 1989 45 193 4.30 0.308 United Kingdom 1995 46 210 4.56 0.346 United States 1994 34 219 6.44 0.368 0 50 100 150 200 250 Average 52 181 3.53 0.279 Source: Gottschalk and Smeeding (2000).

Table 2 Europe-Wide and U.S. Distributions: Shares ot Total Income

Share of Western Italy United States Europe decile group Germany 10 4.0 3.1 1.9 2.9 20 9.8 8.0 5.7 7.9 30 16.6 13.9 11.2 14.1 40 24.2 20.7 18.0 21.3 50 32.9 28.7 26.2 29.5 60 42.5 38.0 35.7 39.0 70 53.2 48.7 46.9 49.8 80 65.3 61.2 60.2 62.3 90 79.4 76.2 76.3 77.2 Source: Atkinson (1995).

around 2.8 in a typical Nordic country. tries, but these are treated as separate The bars in the middle of table 1 entitiesintable1.Inparticular,inequal- show this range graphically. The bars ity within Europe as a whole may be show that, relative to the median higher once we account for cross- within each country, in the U.S., the country differences in per capita in- poor are poorer and the rich are comes. Atkinson (1995) made an richer than in any other country listed attempt to estimate the level of ine- in table 1. quality of the Europe-wide distri- Note that table 1 may give a biased bution of income. Table 2 reports picture about differences in income the numbers. inequality between Europe and the The set of countries that is included U.S. The U.S. encompasses different to make these calculations is some- states with rather different per capita what selective and driven by data avail- income levels that are lumped together. ability. But it includes poor countries Europe also consists of different coun- suchasPortugalaswellasrichcountries

92 Josef Zweimu‹ ller, Reto Foellmi

Chart 1 Trends in Disposal Income Inequality Gini Coefficients Percentage Change per Year and Absolute Change per Year: 19791995

2.0

1.5

1.0

0.5

0.0

0.5 FI 1979-94 IL 1979-92 IE 1980-94 JP 1979-93 IT 1979-95 SE 1979-94 FR 1979-94 NL 1979-94 GR 1979-95 CA 1979-95 AU 1981-90 CH 1982-92 U.S. 1979-96 U.K. 1979-95 NO 1979-95 TW 1979-95

Absolute change Percentage change

Source: Gottschalk and Smeeding (2000). such as Switzerland and Luxembourg, bers we present refer to changes in hence the numbers should come close inequality between the late 1970s to the measure we are interested in. and the mid-1990s (chart 1). Table 2 shows that taking account Chart 1 shows that rising income of cross-country income differences inequality is a rather common phenom- within Europe does not change the enon. Interestingly, a first look at the general picture. The U.S. still has data suggests that the countries that the more unequal distribution of in- experienced the highest increase in come. Two points are worth mention- income inequality are European coun- ing here. First, the numbers are from tries. In the U.K., for instance, the Gini the mid- and late 1980s and probably coefficient has grown by 8 points from underestimate the actual differences. 0.27 in 1979 to 0.34 in 1995 (an in- This is mainly because there has been crease in measured inequality of almost convergence across countries within one third!). Inequality has also been Europe, whereas the distribution of strongly increasing in the Netherlands per capita income across U.S. states and in Sweden, albeit both countries has been more stable. Second, the pic- (in particular Sweden) started out from ture may be different once we consider a rather low level of inequality. The also Eastern Europe as these countries remaining European countries listed consist of large populations with low inchart1,Switzerland,Germany,Nor- per capita incomes. way, experienced a modest increase, What are the trends in the distribu- whereas in Finland, Ireland, and Italy tion of income and what are the differ- therewasevenareductionininequality. ences and similarities between Europe Evidently, there are pronounced and the U.S. along this dimension? Is differences in distributional outcomes the general perception of a widening across European countries. In particu- in the distribution of income actually lar, there is not a very clear trend visible in the data? Again, the cross- towards increased inequality. In con- country data lag behind and the num- trast, the U.S. clearly experienced an

93 Josef Zweimu‹ ller, Reto Foellmi

Chart 2 Top 1 % Income Shares (Exkluding Capital Gains), 19601998, France and U.S. Shares in %

7 1960 1965 1970 1975 1980 1985 1990 1995

U.S. France

Source: Piketty (2003).

increase in inequality. This increase is situation in France (Piketty, 2003). By modestifcomparedtotheonethattook the end of the 1990s, as much as 14.6% place in the U.K. but is of about equal of total U.S. incomes were concen- size as the one of the Netherlands. In trated in the hands of the top 1%. In particular, the increase in U.S. inequal- contrast, in France the share remained ity is higher than in Germany, France, between 7% and 8% throughout the andof course,Italy(whichexperienced 1980s and 1990s. Piketty and Saez a decline in inequality). (2003) show also numbers for the Note, however, that there are good U.K. that underline that the U.S. ex- reasons to believe that the increase in perience was extraordinary: In the inequality in the U.S. may be strongly U.K. top incomes increased slightly underestimated. Recent evidence by but still remained at levels that are close Piketty and Saez (2003) suggests that to the French numbers. The U.S. pic- top incomes in the U.S. have increased ture is even more dramatic if we look substantially during the last 25 years, at top 0.1% and the top 0.01% in- whereas such a development did not comes. The share of the former was take place in Europe. Survey data like 6% (3 times as high as in the 1970s) the Luxembourg income studies do in 1998 and the share of the latter group not adequately sample the very high in- was 2.6% of total U.S. income (5 times comes (which make up a large fraction ashighasinthe1970s).PikettyandSaez of total income). Hence when the in- (2003) suggest that this is primarily come share of the top incomes changes, caused by strong increases in top wage such survey measures will understate incomes. In addition, the decline in the real changes in inequality. progressive taxation since the early In fact, the increase in top incomes 1980s may have contributed to the in the U.S. has been dramatic. In the increase. late 1970s, the richest 1% in the U.S. Toget a sense of these numbers, let earnedabout8%ofthenationalincome us make a simple calculation. The U.S. — a number that compared well to the as a whole produces about 22% of the

94 Josef Zweimu‹ ller, Reto Foellmi

world production (measured in pur- Muchoftherecenteconomicpolicy chasing power parities (PPP); World debate is about why Europe is lagging Bank, 2003). This means that the behind the U.S. in terms of economic U.S. top 1% earn about 3.1% of total growth. In fact, a first look at the data world income. Compare this to the suggeststhatrecentlytheU.S.didmuch aggregate income earned by the total better than the European countries. population on the African continent The growth rate of real GDP between (northern plus sub-Saharan Africa). 1992and2000was3.7%intheU.S.but Measured in PPP terms, the total Afri- only 2.1% in the EU-15 (Blanchard, can production amounts to about 3.6% 2003). The picture seems to be con- of world production. In other words, firmed when we look at long-term the richest 1% in the U.S. can purchase growth rates. The average growth of almostasmanygoodasthetotalAfrican real GDP between 1960 and 2000 population and about 30% more than was 3.5% in the U.S. and only 3.1% the sub-Saharan population. Clearly, in the EU-15. Can we conclude that the increase in the U.S. top income both the recent and as well as the share is dramatic and sizeable even long-term growth performance of whenviewedfromaglobalperspective. the U.S. economy dominated the In sum, our look at thedata suggests one of Europe? that: Clearly, to answer this question, it (i) Inequality in most European coun- does not suffice to look at growth rates tries is considerably smaller than in of aggregate income, but we have to the U.S. consider growth rates of per capita (ii) Inequality in (western) Europe as a incomes (if we are interested in the whole is probably smaller than in standard of living of the average indi- the U.S. vidual) or at growth rates of output (iii) Inequality has increased more per hours worked (if we are interested strongly in the U.S. than in Europe in the productivity of the average over the last two decades. worker). In a recent and widely recog- (iv) There has been a dramatic increase nized paper,Gordon(2002) showshow in U.S. top incomes. No such in- these variables evolved over the very crease took place in Europe. long term. Tocompare the growth per- Observations(i)to(iii)arebasedon formance of Europe and the U.S. the survey data, which underestimate dis- productivity growth is the variable of tributional changes resulting from a primary interest, so we will focus on higher concentration among the top the long-term changes in output per incomes. Taking this into account the hours worked. Chart 3 shows the in- differences stated in (i) to (iii) above crease in this variable for both Europe should be more pronounced than sug- and the U.S. over the past 150 years. gested by the survey data. GordonsnumberssuggestthattheU.S. were leading Europe already in the sec- 3 Macroeconomic ondhalfofthe19th century,andthatthis Performance: Stagnating gap continuously widened until World EuropeandDynamicU.S.? War II (WWII). Since then, however, In the last section we have seen that GDP per hours worked has grown Europe and the U.S. are quite different much faster in Europe. Between in terms of inequality. How about their 1950and1973,theannual productivity relative growth performance? growth rate in Europe was 1.8% higher

95 Josef Zweimu‹ ller, Reto Foellmi

Chart 3 Real GDP per Hour Worked, Europe and U.S., 18702000

Constant 1990 Geary-Khamis dollars per hour (adjusted), logarithmized

100

1870 1913 1929 1950 1973 1991 2000 U.S. Europe

Source: Gordon (2002).

theoneintheU.S.Andeveninthemore tury, significant differences in incomes recent past, between 1973 and 2000, per capita remain. According to Gor- productivity growth rates in Europe don (2002), U.S. per capita incomes were by more than 1% larger than diverged already from 1820 on and the ones in the U.S. As a result, labor the highest difference was reached after productivity in Europe has reached the WWII. Since then there is conver- U.S. levels by the mid-1990s.1) gence, but still the European incomes This evidence seems to be in stark per capita have reached only 77% of contrast to the perceptions by the pub- U.S. levels today. lic. This is also noted in a recent com- Given identical hourly productiv- ment in the Economist (2003): ities, any differences in per capita Americas much trumpeted productiv- incomes are, by definition, due to dif- ity miracle in the late 1990s created the ferences in per capita hours worked. misleading impression that Europe signifi- These differences can be explained cantly lags America in the productivity by the following observations: (i) labor league. It is true that, since 1995, American force participation is much lower in GDP per hours worked has risen by an Europe than in the U.S. (which partly annual average of 1.9%, compared with reflects the demographic structure of only 1.3% in the European Union. How- the population); the average European ever, over any longer period, up to half a worker(ii) has ashorterworking week; century, Europes productivity growth has (iii)takesmorevacation;and(iv)enjoys outpaced Americas. more work-free holidays. Parts of these While US-European differences in different outcomes are due to workers productivity per working hour have voluntary choices. Once we attach a disappeared by the end of the 20th cen- monetary value to these kinds of lei-

1 In fact, numbers presented in Gordon (2002, p.39) suggest that productivity levels in the year 2000, compared to the U.S. were 6% higher in Belgium, 4% higher in France, and 2% higher in the Netherlands. The German productivity level is at roughly the same level as the one of the U.S..

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sure, a substantial part of the difference Network of Inequality, Poverty and in per capita income between Europe Socio-economic Performance) is and the U.S. will disappear. ...while initial income inequality may not directly affect an economys aggregate 4 Inequality and Growth: growth potential, other things being equal, Evidence and some it does proxy for more fundamental inequal- Explanations ities of wealth. Once measures for those are The long-term record in terms of in- included, there seems to be a significant comeinequalityandlong-termproduc- negative relationship between asset inequal- tivity growth of Europe and the U.S. is ity and growth. very clear: Europe had lower income What do recent economic theories inequality and a better long-term pro- tell us about the relationship between ductivity growth record than the U.S. income inequality and the macroeco- In other words, lower income inequal- nomic growth performance of econo- ity seems to go hand in hand with larger mies? Persson and Tabellini (1994) productivity progress. Can we argue, suggestthefollowingexplanation.High more generally, that inequality is ben- inequality in pre-tax incomes leads the eficial for (productivity) growth? What majorityofpeopletosupportredistrib- does the recent macroeconomic liter- ution by means of a progressive tax ature have to say about the relationship system. Inequality is bad for growth, between these two variables? because such taxation is detrimental Recent theories as well as cross to investment incentives. countryevidence suggested that a more The available empirical evidence, even income distribution may be an im- however, does not support the above portant determinant of long-term model. First, in cross-country data growth rates.1) Persson and Tabellini there is no statistically significant im- (1994) and Alesina and Rodrik pact of inequality on taxes and trans- (1994) presented empirical evidence fers. Secondly, there is very little that,bothinacross-sectionofcountries evidence that redistribution has a det- and in long time series, high levels of rimental impact on investment and initialinequalityareassociatedwithlow growth. Whether or not higher taxes subsequent long-run growth rates. have an impact on growth and invest- Recent evidence by Engermann and ment depends on how the tax revenues Sokoloff (2002) compares inequality are spent: The transfer/GDP ratio and in North and South America and im- the fraction of public expenditures on pressively demonstrates the strong education frequently have a positive and long-lasting effects of inequality and statistically significant impact on on long-run economic development growth. of North and South American econo- There are further plausible reasons mies. The empirical literature based on for a negative inequality-growth rela- cross-country regressions clearly sug- tionship that are more consistent with gests that initial income and wealth the evidence. One such explanation is inequality has a significantly negative that inequality, if not mitigated by pub- impact on long-run growth rates. lic redistribution measures, leads to The view of the World Bank (stated politicalinstability,whichhasanegative on the webpage of the World Bank impact on the economys growth rate.

1 See Falkinger (1997) for a stimulating discussion of many arguments that were put forth in the literature.

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The more recent literature goes a step the education system. Low-ability chil- furtherandaskshowsocialcapital,trust dren of rich parents will get educated, and the degree of acceptance of social whereas poor high-ability individuals norms can promote economic growth. will not, resulting in an inefficient It is evident that in explaining the allocation of talents. determinants of these factors, the dis- The crucial point can be made in tribution of income and wealth has an chart 4. On the horizontal axis, we important role to play. measure the level of human capital investment of a certain individual. 5 Inequality and the The vertical axis shows the output level Accumulation of resulting from this investment. For Human Capital simplicity, let us further assume that However, the dominant explanation the relationship between investment put forth in the recent literature is andoutputisthesameforallindividuals neither based on politico-economic (which means that all individuals are of nor on sociological explanations. This equal ability). approach is based on the argument that The optimal investment level equa- imperfect capital markets may lead to tes the marginal return of an additional severe efficiency losses when there is year of education to the interest rate. In excessive inequality. For evident rea- chart 4 this is the case at investment sons,theaccumulationofhumancapital level HÃ. When capital markets are im- plays a central role in explaining the perfect, this may not be feasible for growth process of modern economies. many individuals. The rich can invest The argument is simple: Education the optimal amount HÃ, whereas the not only causes direct costs but is also a amount of education that the poor period without income. Individuals can invest is lower, HA. If the marginal who lack the necessary funds and can- returns are decreasing in the level of not raise these funds on the capital investment the wealth distribution af- market have only limited access to fects the equilibrium outcome. The per

Chart 4 Inequality and Human Capital Investment

Output

Investment

* HA H

98 Josef Zweimu‹ ller, Reto Foellmi

capita income of next period — the of all, it takes time for the process Ã weighted average of Y and YA in chart of human capital accumulation to 4 — is lower, the larger the fraction of manifest itself in productivity changes. individuals for whom credit restric- The effects of inequality on educational tions become binding. Ceteris paribus, choices are also long-term. A change this fraction will be larger with a higher in inequality today will have worked degree of inequality. out its final effect not before the Whilecapitalmarketimperfections children of the youngest parents that are certainly an argument that is of are affected by the inequality change tremendous importance in developing will have to make their education countries, it is less clear how severe decision. Both observations suggest such capital market imperfections are that we have to adopt a long-term in developed economies. Recent evi- perspective. In fact, we have seen that dence by Cameron and Heckman (1999) suggests that educational outcomes are primarily determined by the social background — the family and the neighborhood in which an individual has grown up. The truth lies most likely somewhere in between. In fact, a number of theoretical contributions, including Benabou (1996) and Durlauf (1996) there are long-run differences in demonstrate that if there are neighbor- productivity growth between Europe hood effects in the accumulation of and the U.S. Moreover, there are human capital (for instance, richer persistent differences in income in- neighborhoods provide better schools) equality which most likely have wid- limited access to capital markets may ened recently. lead to such segregation of the popula- Due to higher inequality, con- tion by income thus reinforcing the straints in educational choices due to importance of neighborhood effects. capital market imperfections are more The economy ends up as a collection severe in the U.S. than in Europe. Note of communities across which there also that such constraints are exacer- are high and persistent inequalities. bated by institutional differences in Fershtman, Murphy and Weiss the education systems. In the U.S., (1996) suggest further that status con- education has comparably high private cerns associated with education may costs, in particular for higher educa- exacerbate such adverse inequality tion. The typical U.S. student has to effects. Put in other terms, social back- pay high tuition fees. At primary and ground and imperfect capital markets secondary education levels, the de- are complementary rather than com- creasing quality of U.S. public schools peting explanations. Whatever the leads many richer parents to send their particular channel, income inequality kidsto (costly)privatehigh schools — an is a primary determinant of educational option that is not available to poorer choices. families. In contrast, in most European Do such theories help to explain countries, access to university educa- U.S. and European differences in tion is free (or cheap). While private long-run productivity growth? First schools are also widespread in some

99 Josef Zweimu‹ ller, Reto Foellmi

countries, lower European inequality purchase (normal) goods in smaller implies that financing constraints quantity but will also purchase a differ- may be less severe and widespread mis- ent (smaller and lower quality) bundle allocation of talent is less likely.1) of goods than the rich.3) As a conse- In sum, to the extent that better quence,the marketdemandfor thevar- incentives for the accumulation of hu- ious (in particular, new) products will mancapitalarerelevantfor thesuperior depend on the income distribution. (productivity) growth performance of Hence income distribution may have Europe over the long run, lower in- an important effect on the incentives come inequality may have contributed to innovate. To the extent that such to that outcome. innovations are a crucial source of technological progress, income distribu- 6 Imperfect Competition tion is a determinant of productivity on Product Markets: growth. Inequality and To illustrate those mechanisms let Innovation Incentives us consider in more detail how income In the above models, the distribution of distribution affects the demand for new incomeandwealthaffectsthereturnsto products: Suppose consumers have hi- accumulation and tomorrows supply erarchic preferences and concentrate with factors of production. The de- their consumption expenditures on mand for produced output plays a pas- basic goods, before they start to buy sive role. This is a convenient (while conveniences and luxury goods. As a simplifying) assumption for many pur- result, innovators will attract primarily poses. However,feweconomistswould rich buyers whereas poor consumers contradict the proposition that the will not (immediately) be able to afford expected level of demand for produced new goods. This leads to the presump- output is an important determinant of tion that a class of very rich people investment and innovation decisions.2) generates the necessary demand for Income inequality comes into play, new products. In fact, the idea that because consumer behavior is strongly the consumption of luxury goods is determined by income. Consumers an important engine of growth by with different levels of income do creating new wants and maintaining not only spend different total amounts incentives to provide effort also for on consumption goods they also have a the lower classes, is an argument which differentstructureofconsumption.For has already been stressed by the clas- instance, poor consumers will not only sical economists.

1 ResultsfromthePISA-studyoftheOECDsuggestthattheperformanceofpupilsintheU.S.correspondstotheaverageofother OECD countries. Moreover, there is evidence that the variance in student performance with respect to certain skills (in particular, literacy skills) have a higher variance in the U.S. than in most European countries. Note that this is in line with our reasoning:Despitehigher percapitaincomes,educationoutcomesarenothigheronaverage,andhavealargervariance, than in lower-income and lower-inequality European countries. 2 There are only few theoretical studies that have explored the implications the role of income distribution for the incentives to innovate. Among these, studies are Murphy, Shleifer and Vishny (1989), Falkinger (1990, 1994) and Chou and Talmain (1996), and Matsuyama (2002). For empirical evidence on the importance of non-homothetic preferences, see Jackson (1984) and Falkinger and Zweimu‹ller (1996). 3 While this is an obvious point, it should be noted that existing macroeconomic models that deal with many products (to explain the process of innovations and growth) assume homothetic preferences. Under this assumption a consumer is half as rich as some other consumer purchases exactly half of the same goods as the richer consumer. As a result income distribution is irrelevant for market demand.

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Canwearguethatinequalityisgood improvements in such mass consump- for growth because it induces innovation industries, that exploit economies tions? The answer is: not necessarily. of scale, productivity progress will be The reason is that there is a trade-off slow. between prices (which are high when Furthermore, with a more even aclassofveryrichpeoplehasaveryhigh distribution of incomes, demand will willingness to pay for new products) be distributed more evenly across and market size (which will be low industries. This makes it easier for when incomes are strongly concen- new methods of production to pene- trated among a few rich). Moreover, trate all industries in the economy. what matters for innovators are not As a result, the dissemination of knowl- onlyprofitstoday,butalsohowthemar- edge may be easier when there is a size- ket for the new product evolves in the able middle class. future. Obviously, a more equal distri- These arguments may have played bution of income is favorable in this an important role to explain the excep- respect. When there is a well-funded tional catch-up that took place over the middle class market size rises quickly long run. During WWI and WWII the and fosters innovation incentives. In capital stock was destroyed and with it sum, it is a priori not clear whether much of the sources of income inequal- positive price effects of high inequality ity. In the 19th century, European in- outweigh the negative (static and comes were distributed less equally dynamic) market size effects. Whether than in the U.S. Ironically, a number inequality is good or bad for growth of economic historians have pointed strongly depends on whether or not to the importance of the rather egali- there exist close substitutes for the tarian U.S. income distribution to new goods.1) explain the superior performance of The above mechanism is the most the U.S. over the second half of the obvious by which income distribution 19th century. Abramovitz and David can affect innovations, but it is not the (2000) note only one. Industrial R&D activities are In all the European countries, a tradi- to a large extent targeted towards bet- tional class structure — which separated a ter quality of existing products.2) With nobility and gentry form the peasantry, a very skewed income distribution, the the tradesmen, and an expanding middle rich have a high willingness to pay for class — survived in the 19th century. ... Aris- luxurious products, and innovators tocratic standards of quality and individu- may target predominantly goods that ality in consumption worked to inhibit the are purchased by the rich. In such a development of standardized goods and mass situation, less R&D resources will be production, and they supported an extreme channeled into the improvement of fragmentation of retail trade. mass production technologies. How- The dramatic recent changes in in- ever, without substantial technological come distribution in the U.S. seem to

1 If there are close substitutes for the innovators products positive price effects of high inequality will not be strong, because innovators face higher competition from those close substitutes. In such a situation inequality is detrimental to innovation incentives (Zweimu‹ller, 2000). If substitution possibilities are limited, the rich have a high willingness to pay for new products (Foellmi and Zweimu‹ller, 2002) and price effects dominate the market size effects. 2 SeeZweimu‹llerandBrunner(1998),Li(1996),andGlass(1996)formodelswhereincomedistributionaffectstheincentive of innovators to introduce better quality of existing products.

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have important implications for the One might object that the above ar- structure of aggregate consumer de- guments are less important today as mand. How this will affect the innova- many firms operate on global markets. tion incentives will, to a large extent, In that case, the global distribution of depend on how the new rich will income rather than the distribution of spend their income. Will this stimu- income within countries matters. This late innovation of completely new is clearly the case for tradable goods. products and the invention of new And to the extent that productivity technologies that can be ultimately growth is driven by innovations in applied throughout the economy? Or those industries, the income distribu- are we back in a situation where the tion within countries is indeed less very rich (now those in the U.S.) use important. their income to satisfy the same aris- However, there are a number of reasonswhy home markets matter even intheglobal economy.First ofall,many productsarenon-tradable,inparticular in the service sector. By definition, these products are produced and sold in the home market and their market demandwilldependonthe distribution of income within the home country. Second, if transportation costs are tocratic standards of quality and indi- substantial, markets are segmented viduality in consumption that has by geographical distance. In that case hampered technological development the geographical borders coincide to in the Europe of the 19th century? 1) a large extent with national borders. Tothe extent that a less egalitarian con- Third, substantial legal trade barriers sumption structure leads to a lower still exist. The mere fact that huge potential for exploiting economies of efforts have been undertaken to con- scale and a slower dissemination of vince European citizens to remove new technologies across all sectors, these barriers Europe underlines their the increase in inequality may have importance. Even if no such barriers detrimental effects on productivity existed within Europe (and within growth in the future. the U.S.) significant trade barriers exist These are very important questions across these areas. Hence the distribu- and they are equally hard to answer. tionwithinEuropeasawholewithinthe So far, very little empirical research U.S. as a whole (and less so the global has been done about the role of ine- distribution of income) matters for quality in determining the extent many producers. Fourth, the trade and types of innovations that are con- volume between Europe and the ducted in the economy. Among the U.S. is relatively small compared to few studies is Kremer (2002) who aggregate output of these economic showed that income distribution and areas. In other words, most production market size is of crucial importance within Europe is sold within Europe, in the pharmaceutical industry. and the same is true for the U.S. Finally,

1 Frank (2000) and many others have pointed to the luxury fever and the dramatic changes in consumer behavior (conspicuous consumption) that have been observed in the U.S. in recent decades.

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even in a world with no trade barriers capital accumulation when there are and transportation costs the home imperfections in capital markets; and market may be important, simply the effect of inequality on innovation because consumers preferences are incentives. biased towards products of the own This analysis suggests that lower country. income inequality in Europe may have contributed to larger productivity 7Conclusions progress. Other things equal, less in- In this paper we have looked at differ- equality implies less restriction in the ences in macroeconomic outcomes accumulation of human capital. To the between European countries and the extent that productivity growth is U.S. and have discussed these differ- driven by the accumulation of human ences in the context of income capital this may have been an advantage inequality. for Europe. Similar arguments can be Since the 1950s, Europe had the made for innovation incentives. An in- clearly better record in terms of come distribution that is less skewed productivity progress. By the mid- towards top incomes may foster inno- 1990s many European countries have vations and the adoption and dissemi- reached U.S. levels of productivity nation of new technologies. § and some European countries are even more productive than the U.S. Since the mid-1990s, productivity growth References in Europe lags somewhat behind the Abramovitz, M. and P. David. 2000. oneoftheU.S.buttherecent(negative) American Macroeconomic Growth in the differenceis smallcomparedtothe pre- Era of Knowledge-Based Progress: The vious positive gap. Recent empirical Long-Run Perspective. In: Engermann, S. L. evidenceconcerning incomeinequality and R. E. Gallman (eds.). The Cambridge suggests that inequality in the U.S. is Economic History of the United States. considerably higher than in most Euro- Cambridge: Cambridge University Press. pean countries, and perhaps also higher 1—92. than in Europe as a whole. Further- Aghion, P.and P.Howitt. 1998. Endogen- more, the recent dramatic increase ous Growth Theory. Cambridge, MA: MIT- in U.S. top incomes suggests that the Press. gap between Europe and the U.S. Aghion, P.and P.Bolton. 1997. ATrickle- has dramatically widened along this Down Theory of Growth and Develop- dimension. ment with Debt-Overhang. In: Review of We have used arguments from the Economic Studies 64. 151—172. recent macroeconomic literature to Alesina, A. and D. Rodrik. 1994. Distribu- interpret this empirical evidence. In tive Politics and Economic Growth. In: particular, we were asking whether Quarterly Journal of Economics 109. an even distribution of income is harm- 465—490. ful or beneficial for productivity Atkinson, A. 1995. Income Distribution in growth.Whiletherearemanypotential Europe and the U.S. Invited lecture at EALE channels by which income distribution Lyon, 1995. might have affected, we have concen- Banerjee, A. V. and A. Newman. 1993. trated our discussion on two channels Occupational Choice and the Process of which seem to be of particular impor- Development. In: Journal of Political Econ- tance in modern economies: Human omy 101. 274—298.

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Benabou, R. 1996. Inequality and Growth. Foellmi, R. and J. Zweimu‹ller.2002. Het- In: Bernanke, B. S. and J. J. Rotemberg erogenous Mark-Ups, Demand Composi- (eds.). NBER Macroeconomics Annual tion and the Inequality-Growth Relation. 1996. Cambridge, MA: MIT Press. University of Zurich. Mimeo Bertola, G. 2000. Macroeconomics of Frank, R. 2000. Luxury Fever. The Free Distribution and Growth. In: Atkinson, A. Press. and F. Bourguignon (eds.). Handbook of Galor, O. and J. Zeira. 1993. Income Income Distribution 1(9). Amsterdam: Distribution and Macroeconomics. In: North-Holland. Review of Economic Studies 60. 35—52. Blanchard, O. 2003. Macroeconomics. Glass, A. J. 1996. Income Distribution and 3rd edition. Prentice Hall. Quality Improvement. Ohio State Univer- Cameron, S. and J. J. Heckman. 1998. sity. Mimeo. Life Cycle Schooling and Dynamic Gottschalk, P. and T. M. Smeeding. Selection Bias: Models and Evidence for 2000. Empirical Evidence on Income Five Cohorts of American Males. In: Inequality in Industrial Countries. In: Atkin- Journal of Political Economy 106, 262—333. son,A.andF.Bourguignon(eds.).Handbook Chou, C.-F.and G. Talmain.1996. Redis- of Income Distribution 1(5). Amsterdam: tribution and Growth: Pareto Improve- North-Holland. ments. In: Journal of Economic Growth 1. Gordon, R. 2002. Two Centuries of Eco- 505—523. nomic Growth: Europe Chasing the Durlauf, S. 1996. ATheory of Persistent In- American Frontier. Paper prepared for equality. In: Journal of Economic Growth 1. Economic History Workshop, Northwes- 75—93. tern University. Economist. 2003. Chasing the Leader. Eco- Jackson, L. F.1984. Hierarchic Demand the nomics Focus. February 6. Engel-Curve for Variety. In: Review of Eco- Engermann, S. L. and K. L. Sokoloff. nomics and Statistics 66. 8—15. 2002. Factor Endowments, Inequality, Kremer, M. 2002. Pharmaceuticals and the and Paths of Development Among New Developing World. In: Journal of Economic World Economies. NBER Working Paper Perspectives 16. 67—90. 9259. Li, C.-W. 1996. Inequality and Growth: A Falkinger, J. 1990. On Growth Along a Schumpeterian Perspective. University of Hierarchy of Wants. In: Metroeconomica Glasgow. Mimeo. 41. 209—223. Matsuyama, K. 2002. The Rise of Mass Falkinger, J. 1994. An Engelian Model of Consumption Societies. In: Journal of Growth and Innovation with Hierarchic Political Economy 110. 1035—1070. Demand and Unequal Incomes. In: Ricerche Murphy, K. M., A. Shleifer and R. Vishny. Economiche 48. 123—139. 1989. Income Distribution, Market Size, Falkinger, J. 1997. Wachstum, Verteilung and Industrialization. In: Quarterly Journal und Bescha‹ftigung. Working Paper 9712. of Economics 104. 537—564. University of Linz. Perotti, R. 1996. Growth, Income Distribu- Falkinger,J.andJ.Zweimu‹ller.1996.The tion and Democracy: What the Data Say.In: Cross-Country Engel-Curve for Product Journal of Economic Growth 1. 149—187. Diversification. In: Structural Change and Persson, T. and G.Tabellini. 1994. Is In- Economic Dynamics 7. 79—97. equality Harmful for Growth? In: American Fershtman, Ch., K.M. Murphy and Y. Economic Review 84. 600—621. Weiss. 1996. Social Status, Education, Piketty,T.2003. Income Inequality in France, and Growth. In: Journal of Political 1901—1998. In: Journal of Political Economy Economy 104. 108—132. (forthcoming).

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Piketty, T. and E. Saez. 2003. Income Zweimu‹ller, J. 2000. Schumpeterian Entre- Inequality in the United States, 1913— preneurs Meet Engels Law: The Impact 1998. In: Quarterly Journal of Economics of Inequality on Innovation-Driven Growth. 108. 1—39. In:JournalofEconomicGrowth5.185—206. World Bank. 2003. World Development Report. Zweimu‹ller, J. and J. K. Brunner. 1998. Innovation and Growth with Rich and Poor Consumers. CEPR Discussion Paper 1855.

105 Bernhard Felderer Bernhard Felderer Director Institute for Advanced Studies (IHS)

Comments on Nicholas F. R. Crafts, Prospects for European Economic Growth: A Historical Perspective Norbert Zimmermann, Why Is Growth in Europe Lagging Behind? Josef Zweimu‹ller and Reto Foellmi, Inequality and Economic Growth: European Versus U.S. Experiences

Productivity growth revival and productivity slowdown in Europe is not a matter of the 1990s, but rather a very old fact. As a recent paper of Gordon (2002) suggests, U.S. growth was leading already in the second half of the nineteenth century. This gap increased up to the eve of the Second World War (WWII). After WWII, Europes growth rates were larger than those of the United States for about three decades. The same is true for productivity increase per working hour which continued to be higher in most European countries up to the 1980s. Bernhard Felderer

They have been outperformed by U.S. and creating an economy better labor productivity at different times equipped to absorb exogenous shocks. from the first half of the 1980s till In Europe, these reforms where de- the mid-1990s. U.S. labor productivity ferred. E.g., the liberalization of the increase in the second half of the 1990s telecommunication market was imple- was higher than in all European coun- mented in Austria only on January 1, tries. The graphical exposition clearly 1998. Deregulation of labor markets shows that this development is a long- would be of particular importance in term trend and not a transitory event. Germany,Italyand France. The smaller The period of high European European countries have shown more growth after WWII can well be ex- ability to adapt to the new necessities of plained by the integration of European global competitive pressures. markets, by the transfer of workers The paper of Professor Crafts puts a lot of emphasis on the role of ICT investment in explaining the differences in economic growth. Undoubtedly, theUnitedStateshaveinvestedfar more in ICT than Europe. The question is: Why should a European profit maxi- mizing firm invest less in ICT if it enhancedproductivitygrowthasitdoes in the United States? The reason obvi- from agriculture to industry and serv- ously is that there are unfavorable ices where marginal productivity was incentive structures as obstacles to a much higher. The enormous demand rapid diffusion of computer technology for reconstruction after the destruc- in Europe. This was demonstrated in a tions during WWII, the important paper by Gust and Marquez (2002) migration from Eastern Europe in which shows that ICT investment — particular to West-Germany, the imi- but not investment in general — is neg- tation of American production and atively related to employment protec- management methods, the emergence tion. The reason is that employment of a large number of multinational protection legislation is an obstacle European enterprises — most of these to the reorganization of work practices factors where of a transitory nature which is a necessary condition for in- and weakened and disappeared in the creasingproductivitybyICT.Thispoint 1970s. comes out very nicely in the paper of Growth rates of the United States Professor Crafts and shows that the in the 1960s and 1970s were also quite ultimate reason for the slower produc- low. But in the 1980s the United tivity growth in Europe are not differ- States changed its institutional frame- ences in ICT investment but deregu- work for economic policy in several lated labor and product markets. respects. The liberalization of product The paper of Norbert Zimmer- markets (energy, telecommunication, mann presents a representative view etc.) and deregulation — rather by prac- of an industrialist on European eco- tical behavior than by law — of labor nomic policy strategies. The most in- markets turned out to be important teresting point he raises is the fact that steps towards a more flexible economy, companies perform better than their generatinghigher productivityincrease economies.Wehavecheckedthisasser-

108 Bernhard Felderer

tion by looking at the companies united earlier as most European countries in the German DAX. Most of these did, triggered off two effects: more companies are independent of their human capital increased the growth Germannationalityandearnthelargest rate of GNP and of productivity. At part of their profits somewhere else. thesametime,moreeducationreduced These multinational companies in- inequality as differences in education crease the competition between loca- are the most important reason for pro- tions. This fact is a threat to relatively ductivity and wage differentials be- unattractive locations as Germany tween individuals. Thereby, they seems to be and an advantage for many achieved two goals: more growth other more attractive locations. Nor- and less income inequality. Obviously, bert Zimmermann is CEO of a com- the correlation between inequality and pany which has created a lot of jobs growth is negative. inrecentyearsbutmostofthemoutside Foellmi and Zweimu‹ller claim that Austria and Europe. the accumulation of human capital and The paper presented by Josef lower inequality may have contributed Zweimu‹ller relates economic growth to a superior growth performance in to the inequality of income distribu- Europe after WWII. The expression tion. Empirical studies together with may have seems acceptable because theoretical explanations by Persson the main reasons for the period of high and Tabellini (1994) and Alesina and GNP and productivity growth in Rodrik (1994), followed by many Europe are, as mentioned above, the others (Benabou, 1996; Saint-Paul integration of European markets, the and Verdier, 1992; Bertola, 2000; transfer of workers out of agriculture, etc.) have shown that high levels of ini- postwar reconstruction demand, mi- tial inequality are subsequently associ- gration, etc. These transitory factors ated with lower long-run growth rates were certainly dominant because the while low levels of initial inequality are humancapitaladvantageinEuropewith followed by higher long-run growth respect to the States still exists while rates.Theseempiricalresultshavebeen long-term growth rates have fallen be- repeatedly found with different data, low those of the United States. cross section and time series. This is It would be wrong, however, to true for samples including developing conclude thatmoreequality necessarily countries and industrial countries. Dif- means more growth. Assuming that we ferent explanations have been advanced would try to reduce wage inequality by in literature. Persson and Tabellini redistributional taxes or subsidies: the (1994) related higher inequality to labor market sends us the signal that it higher attempts of redistribution and needs more skilled labor and less un- thereby to higher distorting taxation skilled labor, which means that skilled that reduces the growth rate. Another labor gets higher salaries than unskilled explanation is that large differences in labor. If we dampened down these sig- income lead to political instability that nals by distributional measures, we again affects investment and growth. would certainly reduce the growth The most widelyaccepted theory,how- rate. This fact is not in contradiction ever, is the one that relates inequality to the observation that historically, and the accumulation of human capital. more investment in education has re- Countries which started compulsory duced inequality and increased growth basic education and higher education at the same time. §

109 Bernhard Felderer

References American Frontier. Paper prepared for Alesina, A. and D. Rodrik. 1994. Dis- Economic History Workshop, Northwes- tributive Politics and Economic Growth. tern University. In: Quarterly Journal of Economics 109. Gust, C. and J. Marquez. 2002. Inter- 465—490. national Comparisons of Productivity Benabou, R. 1996. Inequality and Growth. Growth: The Role of Information Technol- In: Bernanke, B. S. and J. J. Rotemberg ogy and Regulatory Practices. Board of (eds.). NBER Macroeconomics Annual Governors of the Federal Reserve System 1996. Cambridge, M. A.: MIT Press. International Finance Discussion Paper 727. Bertola, G. 2000. Macroeconomics of Persson, T. and G. Tabellini. 1994. Is In- Distribution and Growth. In: Atkinson, A. equality Harmful for Growth? In: American and F. Bourguignon (eds.). Handbook of Economic Review 84. 600—621. Income Distribution 1(9). Amsterdam: Saint-Paul, G. and T. Verdier, 1992. North-Holland. Education, Democracy and Growth. In: Gordon, R. 2002. Two Centuries of Eco- Centre for Economic Policy Research nomic Growth: Europe Chasing the (CEPR) Discussion Paper 613. London.

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Jean-Philippe Cotis Jean-Philippe Cotis Chief Economist and Head of Department OECD

Reforming European Labour Markets: The Unfinished Agenda

Introduction My mission today is to give you an OECD view about labour market reform in Europe. I will try to do that, but you will forgive me if I also drawon my past professional experience as a policymaker in Paris and Brussels. To save time, let me tell you upfront what the three main messages I want to convey are: — First, Europe has made substantial progress reforming its labour markets over the last 10 years. Job creation has been stronger and unemployment has declined — not by accident but through better policies. — Second, European countries have made uneven progress. Some of them have achieved remarkable success, for example the Nordic countries, Ireland and the United Kingdom. Substantial progress has also been achieved along the Atlantic facade — Spain, France, Belgium and of course the Nether- lands. In contrast, Germany has only lately started to reform its labour markets. Jean-Philippe Cotis

— Third and last message: we may debate how much they added to overall have travelled the easiest part of employment. the road toward full employment The labour-deepening strategy and a lot remains to be done. has produced impressive results. Over Unemployment remains unaccept- thepast10years(1993—2002),whichis ably high, in particular among the full length of an economic cycle, young and low-skilled persons. employment in the business sector Long-term joblessness is still a has increased by nearly 14 million in matter of concern and the employ- the European Union, nearly as much ment rate of older workers is dis- as in the United States (16.4 million). appointingly low. Achieving the Altogether, unemployment declined Lisbon Summit targets will indeed from a peak of 10% in the mid- require a lot of ambition and cour- 1990s to about 8% currently. In addi- age. tion, these gains have withstood rather well the current slowdown. While un- Substantial Progress on employment has increased, it remains Labour Markets in Europe well below the peak reached during the Idlike now to come back to the past to last downturn. All in all, the fall in draw lessons from experience. In the European unemployment seems to current context of doom and gloom, be a lasting one, borne out of better it is important to remember that good functioning labour markets. policies led to substantial progress on labour markets. Through hard work Uneven Speed and Spread and continued efforts, a large number of Labour Market Reforms of European countries managed to gen- Among EU Countries erate a labour-deepening process. For various reasons, the pace and scope Labour deepening simply means using ofreformhavedifferedacrossEuropein more intensively the most abundant the past 10 years. Germany has been resource, that is, human resources. particularlytimiduntilrecently.France These countries mostly situated along took useful measures in the mid-1990s the Atlantic facade did their best to but relapsed into Malthusian policies price less-skilled workers back into with the 35-hour week. Spain, and thelabour markets.Theyoperatedboth more recently Italy, have engaged in from the demand side of the market, by a continued effort to adapt labour cutting for instance non-wage labour market regulations and arrangements. costs and later from the supply side, Finally, the Nordic countries, the through in-work benefits and tax Netherlands, Ireland and the UK credits designed to fight the so-called have been more comprehensive and poverty and unemployment traps. persistent in their efforts. Governments were helped in their As a result, labour market out- task by the considerable expansion of comes are quite uneven across Europe. temporary and part-time employment Unemploymentratesvaryfromthelow in those countries where traditional levels of 4% in Austria and Ireland to labour contracts were deemed too 9% and above in France, Germany and rigid. These special contracts have Spain.Employmentratesarealsohighly indeed spread very rapidly in Spain, dispersed. In Italy only slightly more Portugal, France and Finland. It than half (55%) of those of working remains, nonetheless, a question of age are employed. By contrast, three

114 Jean-Philippe Cotis

out of four persons are employed in difficult to meet Lisbon objectives Denmark and the Netherlands. for 2010. I dont need to remind As the OECD has shown in a recent you of the key figures. At 64%, the rate study of the sources of growth, low of employment in Europe is well below utilisation of labour is the main reason the 70% Lisbon target. For older why GDP per capita in Europe lags that workers, the situation is even worse. in the US. As you all know, labour We aim for 50% in 2010 but the em- utilisation depends on both employ- ployment rate is still hovering at 39% ment rates and the number of hours today. This is a very large planning gap. workedperemployee. Usingthis meas- The problem is not only that a lot ure of labour utilisation European remains to be done; it is also that the countrieslookabitmorehomogeneous easiest remedies have already been used than one might think prima facie. To up. So far, governments have often give just one example, it appears for instance that the Netherlands and Germany have managed to keep relatively high employment rates by resort- ing to short working hours. In truth only a handful of European countries (Austria, Scandinavia, the UK) can meet the test of high labour utilisation. Well functioning labour markets may not only be useful to reduce mass reformed by stealth, or in other words, unemployment and stimulate long- by turning a blind eye when markets term growth, but also to ensure the were bypassing burdensome regula- resilience of European economies in tions.In countriessuchasFrance,Spain the short run. I do not have the time or Italy, for instance, hiring workers today to thoroughly address the inter- under special labour contracts has actions between labour markets and become de facto the norm while the economic resilience. Let me just say highly protected sort of contract is that in the case of Germany, at least, reserved for long-standing employees. lack of resilience seems deeply rooted More temporary contracts make it in fragile labour markets. easier for the economy to adjust to cyclical fluctuations. But it also con- Most Difficult Challenges tributes, negatively, to create a dual Are Still Ahead of Us labour market. We first need to remember that past Reforms have also been relatively improvements started from a very painless because they have been low base. Europe had very poor financed through public budgets either employment prospects in the early in the form of lower taxes or higher 1990s so that even today the situation spending. The deteriorated state of remains unsatisfactory with low em- public finances in most European ployment rates, high unemployment countries will make it very difficult and severe labour market exclusion to accentuate these policies in the for the most vulnerable groups. future. Budgetary scope to expand In addition, the pace of progress has further earned income tax credit kinds obviously receded in the recent past. At ofschemesorlower taxesonlabourwill present trends, it will indeed be very be much more limited.

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These painless reforms have made This, of course, did not happen. important contributions. But they Unemployment remained high in those will be more difficult to mobilise to countrieswhichindulged inMalthusian address the remaining problems I policies while the long-term sustain- already mentioned. The next steps ability of pension systems was badly af- toward full employment will imply fected. It is now time for governments tackling labour market institutions to roll back all these disincentives. This and mechanisms more squarely than means dismantling preretirement and in the past, entailing at times a high other similar schemes and allowing political cost for the authorities those people who want to work past in the face of strong resistance to the legal retirement age to do so. change. On the demand side it will be important to make sure businesses adjust Five Possible Priorities rapidly to the new policy set up and for Future Reforms manage to retain ageing workers in Putting the Employment Rates of the labour force. Older Workers on a Rising Track All these changes on the pension Encouraging older workers to stay lon- side are of course needed to stimulate ger in the labour force is not an easy potential growth and buttress the sus- task. Obstacles will have to be removed tainability of public finances. But they from both the demand and supply sides should also be seen as a first step toward of labour markets. more flexible systems,‘ a la sue«doise, We have been working hard at the where people will be able to choose OECD on some of the supply-side whentowithdrawinthefullknowledge issues. Andwe found that in most Euro- of the consequences on their pension pean countries the opportunity cost for incomes. older workers of staying in the labour force is often prohibitive. Adapting Employment Protection This applies to people in their mid- Legislation to Meet the Present fiftiesfacedwiththepossibilityofenter- Needs of Our Societies ing pre-retirement or similar schemes. Here we need to provide adequate It also applies to people in their sixties protection to all employees without willing to stay beyond the legalworking penalising employment. Ideally, we age. As a general rule, working extra should strive for shared flexibility years beyond the legal age does not and job security, or to put it differently bring you any increase in your future full employment without dualism and pensions. precariousness in labour markets. According to a forthcoming OECD As you all know, special contracts, study,this very skewed set of incentives such as part-time or short-term con- has had quite a negative impact on tracts owe their current popularity employment. Why did this absurd to good and bad reasons. On the pos- situation emerge? Because pension itive side, they provide employers and policies have often been subverted employees with flexibility in some spe- and used as auxiliary instruments for cial circumstances. They may help misguided labour market policies. It employers cope, for instance, with was often believed that by removing highly seasonal or uncertain activity. ageing workers from the labour force And they provide some employees with you would reduce unemployment. better opportunities to combine work

116 Jean-Philippe Cotis

and other activities such as care giving, Activating the Fight Against education or leisure. Unemployment and Poverty Traps Onthelesspositiveside,however,it Here we should aim at removing the may be suspected that the current strongest disincentives to take up spread of special contracts is reflecting low-paid jobs. Financial disincentives excessregulationintherestoftheecon- can be for instance very strong if omy. In countries with strict employ- high replacement incomes, relative ment protection, special contracts may to wages, are cut off abruptly when indeed remain the only option to retain getting a job. flexibility. This is probably why, in How to alleviate these unemploy- France, two-thirds of new hirings have ment traps is of course a matter of taken the form of special contracts in political choice and budgetary circum- the past few years. And why also, in stances. Some countries might choose Germany, during the same period, to boost in-work benefits while main- permanent jobs sharply contracted, taining high replacement incomes. while temporary employment in- Others may choose to reduce them. creased. Most countries would be well Temporary jobs are now a signifi- advised, in addition, to review and cantrealityofourlabour markets.They tighten the management of unemploy- have contributed to alleviate Europes ment schemes. Avariety of parameters unemployment problem but with a such as eligibility conditions, job cost. Labour turnover and job insecur- searching requirements, time-degres- ity are now highly concentrated on vul- sivityof replacement incomes may have nerable groups living at the fringes of to be adjusted according to circum- labour markets.Thiskindoftwo-tiered stances. labour market comes with additional Tobe a bit more concrete, it would drawbacks, too. Because it is less regu- be good if practice matched principle, lated than traditional labour contracts, so that unemployment compensation is temporary work is often less remuner- really withdrawn when job offers are ated. It also provides a lower access to systematically refused. One has to key fringe benefits, such as paid vaca- recognise, however, that regrettably tions, paid sick leave, unemployment enough unemployment compensation insurance and pensions. is very often paid regardless of job It is now time to move from second searching activities. Hence job place- bests and palliatives to first best op- ment agencies have an essential role tions. We need to give more balance to play to remedy these obvious defi- to the currently polarised arrange- ciencies. Indeed, some countries have ments. It could mean reforming thor- had remarkable success with so-called oughly permanent contracts with a activation policies where replacement view to reducing separation costs. A income is conditional on availability less encompassing solution may involve to various work-like or training activ- the introduction of a benchmark fixed- ities. term labour contract, characterised by To put it in a nutshell, we are still a reasonable but not excessively long far off the mark when it comes to fight- duration and moderate separation ing unemployment traps. In this field, costs. Whatever the options, labour there is still a lot of unfinished business contract reform is certainly needed and more worryingly much unstarted to reduce dualism and social exclusion. business.

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Reducing Further Labour Costs in cost-effective ways. All in all, Euro- for Low-Skilled Workers pean governments spend between 1% Inmostcountries,thereisnobudgetary and2%of GDPonactivelabour market room for additional cuts in labour taxes policies. From past personal experi- should they be needed. In this context, ence, I have the strong feeling that here the tough issue of reforming minimum lies a source of solid budgetary savings. wage formation cannot be bypassed any more. In France, the cost of unskilled Conclusion labour is still relatively high with det- To wrap up my thoughts, I would say rimental consequences for employ- that 10 years ago European labour mar- ment. In my home country, indexing kets were indeed in very bad shape. At minimum wages on consumer prices the time and following the lead of rather than average wages will help. pioneering countries such as the Neth- More generally, adapting minimum erlands and the UK, other countries wages to sectoral and regional specif- launched difficult reforms. These at- icities should also be advised. tempts were often met with suspicion, derision or hostility, in wide segments Pruning Active Labour Market Policies of the population. With hindsight and Active labour market policies have a contrary to naysayers predictions they tendency to proliferate and to detract produced good results. policymakers attention from more Now is the time to launch a second substantial labour market reforms. wave of reforms. If anything, this As such, they can easily reach the zone second wave may be more difficult of negative returns. to steer through than its predecessor. Toavoidsuchanoverstretchingthey But it is no less needed. As you well should be targeted to areas of proven know from newspapers, labour market value. A number of training and subsi- reforms are back in the headlines, dised employment schemes directed to meeting again with stiff resistance. the youth and long-term unemployed Tothose embattled reformers, I would seem indeed valuable. These pro- say: Europeans made it once, they can grammes should of course be designed succeed again. Let us go forward. §

118

Karl Pichelmann Karl Pichelmann Research Adviser, European Commission, Directorate General for Economic and Financial Affairs Associate Professor Institut dEtudes Europe« ennes, Universite« Libre de Bruxelles

Labour Market Reform in the EU: Progress and Remaining Challenges

1 Introduction1) Europeskeychallengesofrestoringfull employment, creating a knowledge- based economy, preparing for population ageing and safeguarding social cohesion are closely inter-linked and, as stressed in the EU Broad Economic PolicyGuidelines,needtobeaddressed by a coherent and comprehensive economic policy strategy for the medium tolongterm.Theoverarchingobjective ofthisstrategyistoenhancethecapacity of the EU economy to generate high rates of non-inflationary growth over a prolonged period. Basically, this requires pressing ahead with deep, comprehensive reforms of product, capital and labour markets, backed up by a sound macroeconomic policy mix aiming at sustained rates of growth close to potential within an environment of price stability.

1 The analysis presented in this paper draws heavily on several recent contributions from the EU Commission Services,inparticularonmaterialassembledinchapters 2 and 4 of The EU Economy: 2002 Review. Special thanks are due to Werner Ro‹ger and Mary McCarthy for helpful comments and support. Of course, the usual disclaimer applies. The views expressed in this paper are strictly personal and do not necessarily correspond to those of the European Commission. Karl Pichelmann

Against this background, this paper tial output, growth of per-capita in- takes another look at labour market comes and age-related public expendi- reform in the EU. The paper is organ- ture. The scenario analysis clearly ised as follows. Section 2 examines the shows the fairly dramatic economic progress made over the past couple of and budgetary implications of the de- years with respect to better-function- cline in the EUs working age popula- ing labour markets, characterised by tion if governments do not take offset- higher employment rates and reduced ting policy actions. The section ends structural unemployment. It presents with a brief discussion of the available some stylised facts on observed im- options to attenuate the growth impli- provements in labour market perform- cations of ageing populations. ance in a numberof EU Member States, Finally, section 4 provides some and for the area as awhole. Specifically, brief concluding remarks. We argue the paper reports on a reform assess- for an urgent need to revitalise reform ment exercise based on simulation momentum. Action to improve incen- techniques which indicates that struc- tives in order to make work pay, to tural reform efforts over the past cou- facilitate job creation and to allow ple of years have indeed borne fruit and for efficient labour reallocation are delivered significant benefits in terms fundamental to better-functioning of output and employment levels. labour markets. We also stress that However, the vast majority of EU determined efforts aimed at expanding Member States, both old and new, is the potential labour force are the most still far away from the Lisbon employ- effective means of limiting the overall ment targets, with, in particular,all the growth loss stemming from the declin- major economies of the euro area ing and ageing population in Europe. plagued by high structural unemploy- Consequently, the current weakness ment rates in the 8—12% range. Thus, in economic activity, with output there can be no doubt that the momen- growth clearly below potential, must tum and the breadth of structural not be taken as an excuse for further reforms will certainly have to be main- delays in implementing the compre- tained and increased, given the long hensive structural reform agenda as unfinished agenda to improve the func- agreed in Lisbon and reinforced in tioning of EU labour markets. Stockholm. Obviously, this is to be If reform fatigue wins the day, combined with growth-supportive Europe appears destined to suffer a macroeconomic policy making, which set-back to a medium-term growth — while maintaining price stability and path barely exceeding 2%. In fact, as a sound medium-term orientation of argued in section 3 of the paper, in fiscal positions close to balance or in the absence of policy change, popula- surplus — should aim at stabilising tion ageing will push Europespotential growth close to potential. growth even below this level. Section 3 provides an overview of the basic data 2Progresswith on population trends in the EU, the US, Labour Market Reform: Japan, with the rest of theworld broken An Assessment down into two groups of fast and slow At their summit meeting in Lisbon in ageing countries. It then goes on to il- 2000, EU leaders set the ambitious goal lustratetheimplicationsofthesketched for the EU to become the worlds most demographic developments for poten- competitive economy by 2010 and

122 Karl Pichelmann

Chart 1 EU Performance

Index: US=100

0 GDP per Employment Hours worked Labour productivity capita rate per worker per hour worked

1995 2000 2001

Source: EU Commission Services. agreed on a comprehensive structural — fostering productivity and invest- reform agenda to boost employment ment growth; and liberalise markets, now known — efficient, integrated financial mar- as the Lisbon strategy. This economic kets. reform drive was largely motivated by Obviously, the various interactions the observation of a persistent income and synergies between reforms in dif- gap with the US and a widespread ferent areas have to be taken into perception of falling even further account in overall assessment of the im- behind. pact of structural reforms. In particu- Indeed, at the turn of the century lar, the vigorous pursuit of economic EU income levels — measured in terms reforms to improve product market of GDP per capita in purchasing power competition can be expected to have parities — stood, on average, at only a positive impact on labour market some 70% of the US level. However, performance, essentially by shifting it is important to note that the gap is the labour demand curve resulting in somewhat less pronounced in terms higher employment over the medium of productivity per hour worked. term. But clearly, the full benefits of Thelarger partofthedifferenceinaver- increased product market competition age levels of income is explained by the will only materialise when the labour fact that Europeans work less than their market structures in place allow for US counterparts, both in terms of em- a smooth reallocation of labour. Lack ployment rates and, if employed, in of competition in product markets, terms of average hours worked. on the other hand, is likely to curb Against this background, the four the positive impacts of labour market main planks of the comprehensive reforms due to rent-seeking behaviour structural reform strategy to address of workers and firms. thechallengetoraiseEuropespotential As regards labour market reforms, growth and to narrow the income gap EU Member States have undertaken an are aiming at array of reforms of labour market in- — higher employment rates and lower stitutions over the past couple of years. structural unemployment; Reform efforts aimed at stimulating — improving competitive conditions; employment have addressed, inter alia,

123 Karl Pichelmann

Chart 2 significant results in terms of a higher Employment Rates in the EU employmentcontentofgrowth,atrend As a share of the total population of the same age group increase in labour force participation and employment rates, and a reduction 60 in levels of structural unemployment as 50 indicated by a fall in the non-accelerat- 40 ing inflation rate of unemployment

30 (NAIRU). — In particular, over the period 1995 20 to 2001 10 — the total number of jobs in the EU- 0 15 increased by about 13 million, Overall Females Older workers and the overall employment rate 1564 1564 5564 1995 increased by almost 4 percentage 2001 points; Source: EU Commission Services. — labour force participation rose by around 9 million, driven largely tax and benefit systems, for example in by women, reflecting an increase the form of cuts in payroll taxes for in the trend participation rate of targeted groups or in-work financial around 1.5 percentage points; support for low-wage earners, more while active and preventive labour market — unemployment fell by about 4 mil- policies, and a modernisation of work lion, i.e. a reduction in the unem- organisation, including the facilitation ployment rate of around 3 percent- of part-time work and more flexible age points, with about half of the work contract arrangements. overall decline being attributable While it is certainly difficult to es- to a fall in structural unemploy- tablish precisely the contribution made ment. by the various reform efforts, there can Itmustalsobeacknowledged,how- be little doubt that they have produced ever, that progress in reform has been Chart 3 NAIRU Level in 2002 and Change from 1995 to 2002

0 BE DK DE EL ES FR IE IT LU NL AT PT FI SE UK EU-12 EU-15

NAIRU level in 2002 Fall since 1995

Source: EU Commission Services.

124 Karl Pichelmann

Chart 4 Real Wage Gap Indicator

Index: 1970 = 0

2 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Source: EU Commission Services. fairly uneven across countries and gen- over the past couple of years, and erally rather piecemeal. Moreover, all supported by some structural labour the major economies of the euro area market reform efforts, factor input are still plagued by relativelyhigh struc- proportions have altered in a labour- tural unemployment. Overall, this sug- friendly way. In particular, gests that the various labour market — the labour contribution to growth policy initiatives implemented over has turned positive, broadly match- the past several years may offer only ing those in the US; a partial explanation for the apparent — the contribution from capital accu- area-wide improvement in the short- mulation and TFP growth has been run unemployment-inflation trade subdued. off. It is difficult, in fact, to account Chart 5 for the fall in the NAIRU without in- Employment and Productivity voking the role of widespread wage Growth in the EU-15 moderation, inter alia based upon in- Change in % formal incomes policies in a number 2.0 of countries, which do not constitute reforms per se. 1.5 A simple growth accounting ap- 1.0 proach demonstrates that the second 0.5 half of the 1990s has seen a significant change in the growth pattern of the EU 0.0 economies. Not only has average 0.5 growth of GDP in the EU-15 acceler- 19911996 19972002 Employment ated from a meagre 1.5% over the pe- Capital deepening riod 1991—1996 to an average rate of TFP growth 2.35% for the period 1997—2002, but Source: EU Commission Services. thecontributionstogrowthfromfactor inputs and productivity improvements As a result, EU growth over the have also changed fundamentally in the period 1997—2002 was characterised latter period (see chart 5). In line with by relatively strong employment gains, the observed real wage moderation in combination with significantly lower

125 Karl Pichelmann

Chart 6 Unemployment and the NAIRU in the Euro Area

7 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 NAIRU Unemployment rate

Source: EU Commission Services.

capital deepening and, thus, weak ap- justment due to employment rigidities. parent labour productivity growth. Indeed, empirical analysis suggests Two additional factors have to be kept that, if anything, the cyclical respon- in mind in terms of actual growth siveness of employment has risen rel- accounting: Labour input growth in ative to the past, and estimates for termsoftotalhoursworkedwassmaller the Okun-coefficient do not differ sig- thaninheads,becauseasignificantshare nificantly between the EU and the US. of the net additional jobs represented Reviewing the broad patterns of part-time work. Moreover, apart from structural reforms and improvements cyclicalfactors,therecentslowdownof in the functioning of factor and product labour productivity also partly reflects markets in the past couple of years, DG the employment of formerly unem- ECFINhasattemptedtoassesstheover- ployed or inactive workers with less- all impact of these reforms on output than-average productivity. and (un-)employment in a backward- In the course of 2001, however, the looking illustrative macro-economet- EU entered a period of fairly sluggish ric simulation exercise. economic development, with actual The labour market reform scenario output growth now falling below has been implemented in the form of a potential for more than 8 consecutive gradual increase in the overall partici- quarters.Intheinitialphaseoftheslow- pation rate by a cumulated 1.5 percent- growth period employment held up age points combined with an ex ante quite well and the rise in the unemploy- downwardshiftofthewage-settingrule ment rate remained limited. However, by1%uniformlyinallcountries; more- now the resilience of the labour market over, reflecting the structure of net job appears to have weakened and the pro- creation (part-time jobs, temporary tractedweaknessineconomicactivityis work etc.), it has been assumed that taking its toll in terms of net job losses the average productivity of additional and rising unemployment, with labour employment amounts to only 80% market adjustment biting particularly of the baseline level. hard in Germany. However, from an As regards product market reform, overall perspective, the fairly moderate the numerous efforts undertaken in the increase in unemployment (at least so second half of the 1990s to increase the far) is likely to reflect also some im- level of competition on European provements in underlying structural product markets are probably best factors, rather than simply delayed ad- illustrated by the significant progress

126 Karl Pichelmann

made in completing the Internal Mar- GDP relative to its baseline level of ket for goods and by the move towards about 3—4%. In terms of growth rates, liberalisation and deregulation of the this translates into an acceleration of network industries. The liberalisation output growth by almost percentage and deregulation in the network indus- point annually over a period of 7 to 8 tries, notably in telecommunications years. Our assessment suggests that and, to a somewhat lesser degree, in without the progress in structural electricity, has paid off in terms of reforms, and not forgetting the ob- lower (relative) prices. For example, served wage discipline, there would simply summing up the estimated be 5—6 million fewer jobs in the EU reduction in price mark-ups in the elec- today, about 2 million more unem- tricity and the telecommunication sec- ployed people, and the average growth tor, weighted by their relative share in rate would have been 2.2% instead of business sector output, results in a the 2.6% realised in the period 1996— decline of the economy-wide mark- 2001. Thus, structural reform efforts up of almost 50 basis points. Overall, have indeed borne fruit and delivered roughly translated into aggregate significant benefits in terms of output figures to be used in the simulation and employment. assessment exercise, it is estimated that However, it has to be kept in mind the sketched developments corre- that typical estimates of the euro areas sponded to a reduction in the average potential output growth rate have been price mark-up of about percentage in the 2—2% range; moreover, as point. our results indicate, the growth stim- A remaining channel for structural ulus from past structural reforms tends reforms to raise output and employ- to fade away over time. Indeed, if ment is via their impact on productive reform fatigue were to win the day, efficiency. However, in general the Europe would appear destined to suffer empirical evidence is not at all suppor- a set-back to a medium-term growth tive of a significant acceleration of total path barely exceeding 2%; in fact, as factor productivity growth in the EU will be argued in the next section, in over the past couple of years. Against the absence of policy change, popula- this background, the simulation exer- tion ageing will push Europespotential cise has been restricted to analysing a growth even below this level. Obvi- level shock to labour productivity; ously, to achieve the overall employ- translated into model terms, this has ment rate target of 70% for the EU been implemented as once and for as a whole by 2010, as formulated at all level increase of total factor produc- the Lisbon Summit, the momentum tivity (TFP) by 1%. and the breadth of structural reforms Turning now to the results of this will certainly have to be maintained simulation assessment exercise, a styl- and increased. Consequently, the cur- ised structural reform scenario equiv- rent weakness in economic activity, alentinscaletoahypotheticalreduction with output growth clearly below po- intheNAIRUby1.5percentagepoints, tential for more than two consecutive a reduction in the price mark-up by years,mustnotbetakenasanexcusefor percentage point and a level increase furtherdelaysinimplementingthelong of TFP by 1 percentage point has unfinishedagendatoimprovethework- been analysed. The simulation results ing of EU labour markets. The main suggest a medium-term increase in areas of urgently required action, as

127 Karl Pichelmann

identifiedintheBroadEconomicPolicy dict, but in the absence of major policy Guidelines, are the following: changes,theyareunlikelytoreversethe — improving the combined incentive overall demographic pattern. Accord- effects of tax and benefit systems ing to the central baseline scenario of — ensuring that wage bargaining sys- Eurostat, the total EU-15 population is tems allow wages to reflect produc- projected to increase from 376 million tivity differentials in 2000 to 386 million in 2020. After — promoting more adaptable work that, it will to start to fall, reaching 364 organisation, in particular efficient million by 2050. These EU develop- employment contracts mentsstandinsharpcontrastwiththose — facilitating labour mobility, both in the US. The recent census there has geographically and occupational indicated a rebound in the fertility rate — ensuring efficient active labour to 2.2%; coupled with higher levels of market policies inward net migration, the US popula- Clearly, while many of these poli- tion is projected to increase by 130 mil- cies involve a good deal of instan- lion between now and 2050. The sig- taneous pain, it often takes a consider- nificance of this becomes evident con- able time span before the full benefits sidering that 50 years ago the US pop- become manifest, requiring a firm and ulation was only half that of the current continued commitment to reform. 15 EU Member States, whereas it will Moreover, given that structural re- be 40 million larger than in the EU-15 forms are almost always, in one way by 2050. or another, associated with the reduc- Itshouldbenotedthattheaggregate tion or elimination of economic rents, picture for the EU masks significant considerations of distributional fair- differences across countries. France ness, both from an intra- and an inter- and the UK, for example, are projected generational perspectivewill inevitably to see an increase in total population have to be taken into account; indeed, size over the period until 2050, while theymayactuallybeanimportantfactor other countries such as Germany and to overcome stubborn reform resist- Italy will witness large declines. ance. Obviously, the EU is not the only region in theworld facing demographic 3 The Impact of Ageing1) upheaval due to falling birth rates and In coming decades, the EU — and also increased longevity. This is evident its accession countries — will undergo from chart 8 which compares depend- unprecedented changes in the size and ency ratios for five country blocks, the structure of its population. Fertility EU, the US, Japan and with the rest of ratesareexpectedtoremainwellbelow the world broken into two distinct the natural replacement rate, and life groups of countries, namely fast age- expectancy is projected to continue ing and slow ageing. This classifica- to increase by about one year each dec- tionfor therestoftheworldissimilar to ade. Migration flows are hard to pre- theapproachadoptedbyTurneretal.2),

1 This section is largely based on the analysis presented in chapter 4 of Mc Morrow, K. and W.Ro‹ger. 2002. The EU Economy 2002Review.EuropeanCommission.SeealsoMcMorrowK.andW.Ro‹ger.2002.EUPensionReform—AnOverviewofthe Debate and an Empirical Assessment of the Main Policy Reform Options. European Commission Economic Paper 162. 2 Turner, D. et al. 1998. The Macroeconomic Implications of Ageing in a Global Context. OECD Economics Department Working Paper 193.

128 Karl Pichelmann

Chart 7 Demographic developments in the EU and the US

Total Population (19502050) Average Fertility Rates and Annual Migration Flows (20002050) Million

400 2.0

300 1.5

200 1.0

100 0.5

0 0.0 1950 19701990 2010 2030 2050 Fertility Rate Migration (million)

USA USA EU EU

Source: EU Commission Services. and it is based on the dependency ratio ing to higher dependency ratios in the calculations underpinning the UNslat- remaining areas, will have major eco- est global population projections. In nomic and social consequences for the effect, those countries which are pre- countries affected. dictedtoexperienceanincreaseintheir In Europe, the working-age popu- overall dependency ratio over the com- lation of the EU-15 is projected to ing decades are classified as fast ageing, decline very significantly from 243 mil- withthislattergroupmadeupofOECD lion in 2000 to 203 million in 2050, a member countries (other than EU-15, drop of 40 million persons or 18%. US, Japan, Mexico and Turkey) plus all Over the same period, the population of the Eastern European countries, over older persons (aged 65 and over) Russia, China, Hong Kong, Korea, Sin- will increase by 40 million persons, an gapore and Thailand. As regards future increaseofover60%.Ofthisgroup,the projections, while uncertainties exist, biggest increase will be amongst the especially regarding the evolution of very elderly, i.e. persons aged 80 and fertility rates, one fact appears indis- over. Their numbers will triple in size putable: large increases in the share from 14 to 38 million by 2050, which is oftheover65sintheoverallpopulations particular relevant given that they are of all five areas are set to occur over the the most intensive users of health care coming decades due to global increases and long-term care. in life expectancy. These trends in life Overall, these shifts in population expectancy are also a feature of the structure will lead to a dramatic change last 50 years but what is new is the re- in the old-age dependency ratio, which duction in the share of the population of is projected to approximately double working age which provides the eco- from 24% for the EU-15 today to al- nomicsupportfor theyouthandretired most 50% in 2050. While the demo- populations. Changes in the 15—64 age graphic burden of ageing will differ sig- group will ensure that increases in nificantly across current EU Member dependency ratios will occur in four States in absolute terms, with old- of the five areas with the slow ageing age dependency ratios rising to levels group being the only exception. It is well above 50% in some countries, envisaged that the ageing process, lead- what is common for all is the strong

129 Karl Pichelmann

Chart 8 Dependency Ratio Developments

0.8

0.6

0.4

0.2

0 EU US Japan Fast Ageing1) Slow Ageing2)

1950 2000 2050

Source: EU Commission Services. 1) Rest of OECD countries excluding Mexico and Turkey, all of the Eastern European countries, Russia, China, Hong Kong, Korea, Singapore and Thailand. 2) Remaining countries of the world not classified elsewhere.

Chart 9 Working-Age Population in the EU-15, the US and Japan

Annual change in %

1.0

0.5

0.0

0.5

1.0

1.5 2000 2010 2020 2030 2040 2050

USA Japan EU-15

Source: EU Commission Services.

increase relative to current levels. ing-age population in the EU will start Recent UN population projections to shrink as of 2010 when the post-war suggest broadly similar trends in old- baby-boom cohorts enter their retire- age dependency ratios for the EU ment years. If translated into a corre- accession countries, exhibiting even sponding fall in labour supply, and un- lower fertility rates and significant less offset by increases in productivity net out-migration. growth, this development is bound to Clearly, increasing levels of pros- reduce the rate of potential growth. perity over time have been closely The EU Commissions macro- linked to sustained increases in labour econometric model QUEST II has supply and high levels of productivity been used to assess the quantitative growth. However, population ageing implications of demographic change. means that these sources of growth In absolute terms the EUs annual aver- cannot be taken for granted in the age potential growth rate over the future. As indicated above, the work- period 2000—2050 would fall from

130 Karl Pichelmann

Chart 10 Old-Age Dependency Ratio in the EU-15

65+ as a percentage of 1564

0 BE DK DE GR ES FIRL IT LU NL AT PL FISE UK EU-15 2000 2050

Source: EU Commission Services.

Chart 11 Old-Age Dependency Ratio in EU Accession Countries

65+ as a percentage of 1564

0 Bulgaria CyprusCzech Estonia Hungary Latvia Lithuania Malta Poland Romania Slovakia Slovenia EU-15 Republic

2000 2025 2050

Source: UN population projections 2002. Ameco for EU-15. the baseline rate of 2.1% to 1.3% in a greater than the impact on changes no-policy-change scenario, with the in living standards. This divergence Japanese potential growth rate falling between the two indicators reflects even more, to an average of only the influence of differences in the 1.1%. It should be underlined that outlook with regard to the population these are annual average growth rates of working age which has an impor- and that the EU will witness individual tant effect on the relative productive years with potential growth rates at the capacity of economies. In overall end of the simulation period of slightly terms, in the case of the EU and Japan, below 1%, with Japan experiencing the fall in average potential growth growth rates substantially below 1%. rates over the next 50 years is roughly Note that the effects on potential double that of the decline in living output in the various areas are much standards compared with the technical

131 Karl Pichelmann

Chart 12 Simulated Potential Growth Rates in the EU-15, the US and Japan

Annual change in %

2.5

2.0

1.5

1.0

0.5

0.0 2000 2010 2020 2030 2040 2050 Japan EU-15 USA

Source: EU Commission Services.

baseline of no change in population and 1% in the EU and Japan respec- trends. tively. These differences in potential In terms of growth rates of GDP growth rates are almost totally ex- per capita, ageing is expected to reduce plained by changes in the outlook for the annual average rate of growth, rel- thegrowthinthepopulationofworking ative to the baseline, by around 0.4 per- age, since the model assumes that there centage point in the case of the EU and isnochangeinTFPgrowthrates; more- Japan and by around percentage over, any effects from higher levels of point in the US. The pattern of change capital intensity on labour productivity in living standards globally is largely are of a relatively small order of mag- dictated by underlying productivity nitude, especially as a significant pro- and dependency ratio developments, portion of the excess savings is likely with the failure of the slow ageing to be invested abroad and not in the countries to capitalise on their more domestic capital stock. favourable demographics, in the form Growth developments along these of a rapid catching up in income per lines would have a profound impact on head,reflecting theirongoingrelatively global output distribution. Chart 13 poor productivity performance. shows the position in 2000 and in Thus, with respect to GDP per 2050, with the most important devel- capita growth rates, the scenario shows opments being: very few differences over the next — The growth in the relative share for 50 years between the EU, the US and the slow-ageing group of countries, Japan,withannualaveragegrowthrates which sees its share of world output in income per head in a very narrow growing from 25% in 2000 to 39% range of between 1.5% to 1.7%. How- in 2050; the main driving factor ever, it is when one compares potential behind this increased share is due output growth rates that one sees the to demographic developments as extentofthedifferenceintheeconomic opposed to any underlying produc- outlook for the respective areas, with tivity improvements. the US expected to grow at a healthy — The US enjoys a small increase in its annual average of 2% over the next share of world production which 50 years compared with rates of 1% contrasts sharply with the relative

132 Karl Pichelmann

Chart 13 Global Output Distribution

2000 2050

1 2 2 Fast Ageing ) Slow Ageing ) Fast Ageing1) Slow Ageing ) 26% 25% 21% 39%

Japan 8% Japan 4%

EU EU USA USA 18% 10% 23% 26%

Chart 14 Expenditure as a Share of GDP in 2000

0 BE DK DE1)GR1)ES1)FR2)ITNLATPT IR 1) FI SE UK EU (weighted average)3)

Long-term care Health care

Source: Table 4.1 from http://europa.eu.int/comm/economy_finance/publications/european_economy/2001/eers0401adv_en.pdf 1) Results for public expenditure on long-term care are not yet available for a number of Member States. 2) Results for Ireland are expressed as a share of GNP. 3) Weights are calculated according to the Member States for which results are available. Therefore for health care it is a weight for the EU-14, and for long-term care, and total expenditure on health and long-term care, the average is for 10 Member States.

performance of the EU and Japan, at the end of the simulation period. both of which are expected to Finally, it is worth remembering witness a significant decline in their that in 1970, the EU produced relative economic importance in 25% of global output compared the world over the coming decades. with 23% for the US. While the — In the case of the EU, its share of US has been able to retain its share world output falls from 18% at over the last 30 years and is ex- present to 10% in 2050, with Ja- pected to continue to do so over pans relative share being halved the next 50 years, the EU has from 8% at the moment to 4% already witnessed a steady erosion

133 Karl Pichelmann

in its share of global output, a trend expenditures such as investment in which is forecast to continue over human capital and in R&D. the coming decades. It is against this background that the Obviously, a decline in potential EU growth strategy agreed in Lisbon growth is not only a concern because has been refinedand amended. The Lis- it will lead to a relative decline in pros- bon European Council diagnosed the perity, but also because it will make it key long-term challenge facing Europe ever more difficult to meet the expect- as slow growth. It set in place a strategy ationsanddemandsofagrowingelderly to inject dynamism into the European population. Much of the pension enti- economy and fixed an ambitious goal tlements which citizens are accruing for the EU to raise the potential growth in Europes public systems today are rate to 3% by 2010. The Stockholm based on an assumption of a potential European Council in 2001 was more specific on the policy prescription to deal with demographic changes. It endorsed a three-pronged approach which should be tailored to the specific situation of each Member State. This consists of: — first, a fast pace of debt reduction; — second, raising employment rates especially of women and older growth rate of around todays level. workers; and EU policymakers concern about the — third, reform of pension and health consequences of ageing populations care systems, including where ap- in the first instance arose from the propriate greater recourse to the projected implications for public funding of pension systems. spending on pensions, health care A thorough assessment of how EU and long-term care. Indeed, the most Member States are faring as regards recent report by the EUs Economic each of these three prongs is clearly Policy Committee on the budgetary outside the scope of this paper. challenges posed by ageing popula- Ambitious targets have been set until tions arrives at the conclusion that 2010 to raise the employment rates on average, age-relatedpublicspending of older workers to 50% and to in- could increase by between 5 and 8 per- crease the effective retirement age centage points of GDP by 2040, and by 5 years. However, simple inspection by much larger amounts in certain of current levels and the lacklustre countries. progress made so far clearly indicate Obviously, failure to address the that the targets are in jeopardy of budgetary challenges indicated in this not being met. type of no-policy-change scenario anal- Indeed, raising the effective retire- ysis would lead to unsustainable public ment age appears to be the single most financesinthelong run.Inthiscontext, potent reform option tackling the neg- sustainability is not simply a matter of ative growth impact from declining avoiding debt accumulation. Sustain- working-age populations, with a 1 year ability also requires keeping the tax increase estimated to shave off between burden at a reasonable level, and not 0.6 to 1 percentage point from the pub- squeezing out other essential public licexpenditurerise.However,mostEU

134 Karl Pichelmann

Chart 15 Employment Rates of Older Workers

50 EU target

0 BE LU IT AT FR DE EL EU-15 ES NL FI IR PL UK DK SE Source: EU Commission Services.

Chart 16 Employment Rates of Older Workers and Overall Unemployment

Unemployment rate for persons aged 1564 in %

FI 10 EL ES

8 IT FR DE y = 0.0425x + 7.9548 R2 = 0.0279 EU-15 6 BE UK 4 DK SE AT NL IR PT 2 LU

0 20 25 30 35 40 45 50 55 60 65 70 Employment rate for persons aged 5564 in % Source: EU Commission Services.

Member States are still shying away of-labour fallacy that retirees free jobs from the required bold action, and for others. However, the number of the employment targets are therefore jobs in an economy is clearly not fixed in jeopardy of not being met. Clearly, and, indeed, cross-country patterns in encouraging longer working lives will the EU reveal no relation at all between typically require modification of incen- employment rates of older workers tivesembeddedinpensionandtax-ben- and overall unemployment. Moreover, efit systems that encourage early with- flanking measures to improve the em- drawal from the labour market; and in ployment prospects of older workers, many countries access to early retire- such as adequate training and retraining mentschemeswillhavetobehandledin programmes and a more adaptable in- a much more restrictive way, including dividual workplace environment with the blockage of potential escape flexible pathways to retirement, could routes via invalidity pension schemes. also be supportive to raise effective Concerns have been raised that de- retirement ages. Last but not least, a termined action along such lines may fundamental shift in attitudes of em- cause additional labour market fric- ployers to older workers will have to tions, at least in the short run, with take place, so as to create meaningful some arguments based on the lump- work opportunities for older persons.

135 Karl Pichelmann

4 Concluding Remarks potential growth in Europe has failed The very first years of the new century to accelerate in a sustained way. More- have seen weak economic activity in the over, available long-term scenarios EU, largely reflecting cyclical adjust- paint a relatively alarming picture of ments to global and internal imbalan- significant reductions in potential ces. In the initial phase of the slow- growth rates in the EU over the coming growth period employment held up decades, with the slowdown in poten- quite well and the rise in the unemploy- tial growth also making the budgetary ment rate remained limited. However, implications of ageing, in terms of now the resilience of the labour market higher pensions and health care costs, appears to be weakening and the pro- more difficult for the individual tractedweaknessineconomicactivityis economies to bear. While such projec- taking its toll in terms of net job losses tions based on no-policy-change as- and rising unemployment. However, sumptions may be somewhat unrealis- from an overall perspective, the fairly tic given that governments are unlikely moderate increase in unemployment to stand idly by, they nevertheless give (atleastsofar)islikelytoreflecttosome an idea of the scale of the task faced by extent improvements in underlying EU policymakers, and the speed with structural factors, rather than simply which they must act, in devising policy delayedadjustmentduetoemployment measures aimed at avoiding, or at least rigidities. cushioning, the shock to peoples rel- The empirical evidence is indeed ative living standards and to their ex- suggestive of some progress made over pectations in terms of future potential the past couple of years with respect growth. to better-functioning labour markets, Itisclear thattheEUMemberStates characterised by higher employment will have to adopt a range of macro and ratesandreducedstructuralunemploy- structural policy actions to moderate ment in a number of EU Member the economic burden of ageing. In States,andfor theareaasawhole.How- terms of fiscal policy, the broad frame- ever, the vast majority of EU Member work for ensuring budgetary sustain- States, both old and new,is still far away ability, in the face of substantial age-re- from the Lisbon employment targets, lated spending pressures, would appear with, in particular,all the major econo- to be in place in the form of the Stability mies of the euro area plagued by high and Growth Pact. The Pact will be cru- structural unemployment rates in the cial in avoiding the emergence of 8—12% range. Thus, there can be no unsustainable deficit and debt posi- doubt that the momentum and the tions; indeed, recent Commission breadth of structural reforms will calculations suggest for such a threat certainly have to be maintained and to be present on the basis of current increased, given the long unfinished policies in a majority of the Member agenda to improve the functioning of States of the euro area. EU labour markets. Determined action However, the challenge for public is required to improve incentives in finances posed by ageing populations order to make work pay, to facilitate cannot be tackled only by debt reduc- job creation and to allow for a smooth tion or the meeting of aggregate budget and efficient reallocation of labour. targets. In many countries much more Unfortunately, there can be little action will be required to ease the sig- doubt that the underlying rate of nificant disincentive effects in relation

136 Karl Pichelmann

to work effort and labour supply deci- There appears to be a growing sions. With regard to the degree of consensus among pundits and policy- readiness of the Communitys labour makers in the EU about the key eco- markets to withstand the inevitable nomic policy issues and priorities to shock which is looming, increases in improve labour market performance, labour force participation rates, reduc- to lift potential growth and to tackle tions in structural unemployment and the challenge of ageing populations. an increase in the average effective re- At the Community level, peer pres- tirement age from less than 60 at sure, benchmarking and the provision present to the statutory age of 65 of best practices in the context of are all highly desirable reforms. En- the so-called open method of co- couraging longer working lives will ordination can be helpful to increase typically require modification of incen- the momentum for reform. However, tivesembeddedinpensionandtax-ben- experience has shown that there is a efit systems that encourage early with- long way to go from diagnosis to cure; drawal from the labour market; and in and implementation of reforms has many countries access to early retire- proven difficult given their inevitably mentschemeswillhavetobehandledin complex and sensitive nature, often a much more restrictive way, including touching the very heart of the social the blockage of potential escape contract between governments and routes via invalidity pension schemes. citizens. While far from being draco- Finally, the EU must also continue nian, there can be no doubt that to promote higher factor productivity bold reform measures are required growth through structural reforms in many countries. Only determined aimed at both enhancing allocative ef- action in good time will safeguard ficiency and at increasing the flexibility the welfare of both current and future ofgoods,servicesandcapitalmarketsin generations and help to respect the the Community, whilst simultaneously basic goals of fairness and solidarity acting to ensure open and competitive that underpin the social contract in trading conditions at the global level. Europe. §

137 Karl Aiginger Karl Aiginger Deputy Director Austrian Institute of Economic Research (WIFO)

The Contribution of Labour Market Reforms, Macroeconomic Policy and Growth Drivers to Economic Growth

Europe in a Low-Growth Trap Europe has a severe problem of insuf- ficient growth. Three years of meagre growth at about 1% is the famous smaller part of the iceberg to be seen at the surface. Europe underperformed in the nineties relative to the US in growth, productivity and employment creation. The difference in growth performance maintained during the crisis, which had started and was caused by US problems. The latest figures for 2003 again show the US well ahead of Europe in growth of output and productivity. I believe that the growth differential will also exist in the future: Europe is on a growth path of at best 2%, while the US posts a 3% growth perspective over the next decade.

The Importance of Growth The importance of economic growth for welfare has to be fully evaluated at another occasion. Here it matters that in Europe employment rates are Karl Aiginger

8 percentage points lower than in the 2003, chapter 5). Or in the wording US and the Lisbon target of a 70% em- of Cotis: reforming labour markets ployment rate seems to be out of reach. will create jobs and stimulate growth Unemploymentisstickyat8%,whichis (Cotis, 2003, p. 7) or a recent study quite high, even if it is good news (Co- on the sources of growth has shown ... tis, 2003) that it did not climb higher in low utilization of labour is the main the current slow-growth period. The reason why GDP per capita in Europe costs of the European retirement sys- lags that in the US (Cotis, 2003, p. 3). tems will become unbearable if there is Or in words of Pichelmann: A no growth, and European enlargement coherent strategy with the goals of non will not work smoothly if economic inflationary rate of growth ... basically growth does not accelerate. There requires deep comprehensive reforms are strategies to increase the employ- of the product, capital and labour ment content of given low growth markets. ... Growth is sluggish since rates, but they are neither nice nor easy labour utilization is low in Europe to implement. The easier of them have (Pichelmann, 2003). been implemented. Growth is important for employ- Labour Market Flexibility ment, pensions, budget, and enlarge- Is One out of Three Differences ment. All these reasons together Between the US and Europe may explain why Europe has to try Comparisons between the faster grow- to reach the Lisbon target of a 3% ing US economy and the slower grow- growth path. ing European economy show three sets of differences (with many sub items The Main Suspect for Low Growth in each): The first is market flexibility, in the EU: Market Inflexibility the second are differences in invest- In looking for the reason of low growth ment into growth drivers and the third in Europe and for the growth differen- set comprises differences in fiscal and tial towards the US, the main suspect monetary policy. Labour market re- usually is (Pichelmann, 2003; Cotis, forms (and related reforms of product 2003) the market inflexibility in market, keeping costs in line with Europe. Inflexible labour and product productivity, investing in a favourable markets decrease employment and environment for business) are — I consequentlyeconomicgrowth.Higher completely agree here with Cotis utilization of labour would guarantee and Pichelmann important for increas- higher output. Labour utilization is ing employment and output. Their understood as limited by regulations, growth enhancing effects may high costs, high taxes, high welfare, probably not come that quick and and big government. There is a whole may not be that robust, that labour family of explanatory attempts along market reforms automatically generate this line, the two papers choose the growth. If macroeconomic policy is following variants: restrictive and if the economy does In the wording of OECD: key not invest into its future, the upcoming policies to raise labour utilization are blossoms of liberalization may not find well known: to reform tax and benefit the sun and the water they need for system, specifically unemployment growth and expansion. Functioning support and tax wedge, to ease labour of market is the necessary condition andproductmarketregulation(OECD, for growth, but investment into the

140 Karl Aiginger

Chart 1 EPL 1990 and Growth of GDP

Growth of real GDP 1994/2003 IE 7

US FI GR 3 Top 4 UK NE SE ES PT DK EU 2 BE AT FR Large 4 IT 1 DE JP 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 EPL1) total 1990

Source: WIFO calculations using OECD Database on Regulation Indicators. 1) Indicator on employment regulation (0 = low, 6 = high). determinants of long-run growth is the pean labour market had been assessed sufficient condition for growth. With- as 2.9 in 1990 and this indicator de- out investment into the long-term decreased to 2.6 in the average of EU terminants of growth liberalization countries in 1998. For regular con- does not create long-term growth. tracts the regulation did not change much, only the two countries with Deficit No. 1: the toughest regulation (Spain and Underinvestment into Growth Drivers Portugal) did deregulate standard con- Economic growth in developed econo- tracts significantly. Most changes hap- mies depends on research, education pened for temporary contracts. While and the diffusion of new technologies. this allows flexibility for firms without Europe underperformed in investment changing the basic rules for existing into the future at least to the same ex- contracts, this asymmetry leads to tent as in market perfection. In a set of danger of a dual labour market (Cotis, 16 indicators measuring input and out- 2003). put of research, input and output of There have been changes over the education, production and consump- last decade. Karl Pichelmann cites tax tion in ICT, Europe shows inferior and benefit reforms for targeted performance in 14 indicators. groups, in work support, more active labour market policy, part-time work Deficit No. 2: and more flexible work contracts. He EvidenceonLabourMarketInflexibility calculates that the impact of structural Labour markets are more restricted by reformsmighthaveincreasedEuropean law, rules, and collective bargaining in growth by about half a percentage Europe than in the US. Using the point. Actual growth was 2.6% be- OECD indicator on labour market reg- tween1996 and2001, without reforms ulation which uses a scaling between 0 it may have been as low as 2.2%. Jean- (= unregulated) to 6 (= regulated) the Philippe Cotis calls the reforms sub- US labour market is assessed as practi- stantialprogress,withthemostdifficult cally unregulated (0.2 points). Euro- part ahead.

141 Karl Aiginger

Chart 2 Growth Drivers; Europe Versus USA

R&D as a percentage of GDP Business expenditure Share of ICT industries as a percentage of GDP 2

Share of skill Research intensity intensive industries in manufacturing

1 Share of technology Publications driven industries per resident

Cellular mobile 0 Patents subscribers per resident per resident

Internet users Secondary per resident education

Tertiary PCs per resident education

TLC expenditure ICT expenditure as a percentage of IT expenditure as a percentage of GDP as a percentage of GDP

1990 2000

Source: WIFO calculations using OECD Database on Regulation Indicators. Remark: Each indicator outside the unit circle shows a superior performance versus the USA.

Deficit No. 3: Growth Orientation in Central Bank could not be more Fiscal and Monetary Policy supportive to growth before it had Monetary policy has been focussing established the credibility to be tough primarily on price stability in Europe. on inflation. And we want to stress that In the US the Fed targeted at inflation countries with deficits above 3% or 4% free growth. The capacity and deter- of GDP are not really in the best posi- minedness of the Fed to counteract tion to kick-start their economy by declining demand would have been increasingdeficitsevenmore.But there criticized as ultra-Keynesian by Milton had been unused chances over the past Friedman and many European experts ten years to support growth by both for monetary policy.Fiscal policy in the policies. This indeed would have been US had successfully managed balanced done if the Lisbon target of 3% growth budgets in the late nineties and could would have been taken as equally nowoutofthispositionallowautomatic earnest as the 3% deficit ceiling. And stabilizers to run the budget into a high strictly speeking the first is the goal, deficit in the downturn, and to an- the second only an instrument. nouncesweepingtax cutsatthedeepest pointofthebusinesscycleinadditionto Learning from the Best: an increased bill for security and war. Choosing Top 4 Performers in the EU This is not the place for a full evaluation Looking at European countries shows a of macroeconomic policies. And we large diversity in growth and employ- have to keep in mind that the European ment creation. Progress has been un-

142 Karl Aiginger

even in the words of Pichelmann as people in unemployment or disabled well as of Cotis for labour market re- schemes proves next to impossible). forms. Choosing a broad set of indica- Where I differ from Jean-Philippe tors on economic performance, like Cotis is that I believe that the remark- growth of output and productivity,em- able success of the Nordic countries ployment generation, inflation and is only to the smaller part due to fiscal stability, we get a group of four labour market policy and to a large best performing countries in the EU, extent to growth promotion via namely Sweden, Finland, Denmark research, education and embracing and maybe also the Netherlands. We the information and communication group these four countries together, technology. independent of some caveats relating to the position of the Netherlands, Performance Differs Significantly as the top 4 countries. Between Top 4 and Large 4 Countries This list of top performers is not The top 4 countries post higher growth too different from Jean-Philippe Cotis (2.7% in 1993/2002), as compared to top league of performance, which 1.9% for the large 4 European coun- aimed at singling out top performers tries. This holds for productivity in- on the labour markets. We just delete crease and output growth in manufac- the United Kingdom from the group of turing. Employment rates are higher, top performers, knowing that the UK unemployment lower. The most strik- currently faces the challenge to either ing difference occurred in the public leave the countrys infrastructure to sector indicators. Public debt had been deteriorate or massively raise taxes higher in1993andisnowlower relative to finance education and health and to GDP in the top 4 countries. While traffic. And we add the Netherlands budget deficits which were 5% in both due to remarkable low unemployment, groups at the beginning of the nineties, high employment rate and top produc- now the top 4 countries post a surplus tivity (knowing that costs are running and set the target to have surpluses high again and the attempt to regain at about 1% or 2% of GDP over a busi- employment out of the one million ness cycle to cover past debt or future

Chart 3 Differences Between Top 4 and Large 4 Countries in GDP Growth

Growth of real GDP 1994/2003

130

120

110

100

70 1980 1985 1990 1995 2000

Top 4 Large 4

Source: WIFO calculations using AMECO.

143 Karl Aiginger

commitmentsforpensions.Atthesame in 1988 and increased their research time three out of the large 4 countries efforts irrespective of the crisis in are dangerously near or above the the early nineties continuously to penaltyarea of the Stability and Growth 3%. Sweden has with 3.8% the highest Pact. The turnaround of the top 4 shareintheEUcountries,theaverageof countries has been partly the result thetop4countriesis2.8%.Thesharein of discrete budget cuts, partly of self thelarge4countrieshaspeakedin1987 imposed expenditure limits. The high- and is slightly decreasing to 1.9% in er growth rate then helped to make the 2000. reforms self-enforcing, since growing The top 4 countries are also leading economies post higher revenues at con- in other indicators on research (busi- stant or declining statutory tax rates, ness expenditure, patents, and publica- while the big low-growth countries tions), have a higher ratio of secondary faced decreased revenues, which called andtertiaryeducationandareleadingin for the next budget cuts and so on all indicators on the production and (downward spiral). diffusion of information technology. Overall the top 4 countries have today The Top 4 Countries an advantage in 14 out of 16 indicators Invested into Economic Growth andimproveditspositioninthenineties The top performing countries lead in relative to the large economies. any ranking targeted to measure innovation, new technologies or progress The Top 4 Countries towards information society. Specifi- Did Reform Institutions cally impressing is the performance Looking at the indicators on product in research and development. The market and labour market regulation, top 4 countries used to invest about the surprising result is that the top 4 1% ofGDPin 1982;thiswaslessthan countries are not really outliers with the 1.9% of the large 4 countries. The higher regulation (as onewould suspect top 4 countries overtook the large ones from their position in welfare costs and

Chart 4 The Growth Driver Hierarchy

Research

Human capital

Technical progress

Physical investment

Population growth

Natural resources

High income countries Medium income countries Low income countries

144 Karl Aiginger

Chart 5 Differences Between Top 4 and Large 4 Countries in R&D

R&D as a percentage of GDP

2.5

2.0

1.5

1.0 1980 1985 1990 1995 2000

Top 4 Large 4

Source: WIFO. taxes). Product market regulation1) As far as labour market regulation2) is approximately on EU average (or is concerned, the top 4 countries had slightly below, with 1.5 for the top 4 been in the average position in 1990, countries and 1.6 for EU average). It with lower regulation in Finland and is marginally higher in Finland due in Denmark and higher in Sweden to remaining state control and govern- and the Netherlands. Looking at the ment ownership, but slightly below change in the nineties three of the EU average. As far as liberalization top 4 countries did reduce labour mar- of markets is concerned, top 4 coun- ket regulation strongly (Denmark, tries had been less liberalized in Sweden, and the Netherlands) and Fin- 1988 and are now all more liberalized. land reduced its less strict regulatory Measured by the decline in regulation scheme marginally. The labour market in the network industries the top 4 regulation of the top 4 countries is now countries are the champions in liberal- below that of the EU and of the large 4 ization. Average regulation is now 2.65 countries. The change did come mainly in the top 4 countries versus 2.96 in from deregulation of temporary con- the arge 4 countries and 3.26 in the tracts, where the regulation indicator EU (on average), but still far from dropped from 3.1 to 1.63). For regular 1.02 in the UK and 1.36 in the US. contracts only a few changes were

1 Thedatasetsuppliesanoverallindicatoronproductmarketregulationfor1998,whichcontains17dataonthestatecontrol over business enterprises (e.g. size public sector, voting rights, legislative control, and price control). Demand and control regulation in general, barriers to entrepreneurship, and barriers to international trade and investment (non-residents discrimination, regulatory burden, and tariffs). 2 The OECD data set on regulatory indicators contains 15 indicators of strictness of employment protection grouped into workers with regular contract and workers with fixed-term contracts or temporary work agencies. 3 Examples for changes regarding temporary contracts are that either or both fixed-term contracts and contracts can now be used in a wider range of situation than in the beginnings of the nineties (for example in Denmark, the Netherlands, and Sweden). In Denmark and Sweden, all restrictions on the types of work for which temporary work is legal have been removed (Nicoletti et al., 2002, p. 49). In Denmark the restrictions on the number of renewals have been removed. The maximum duration of successive contracts has been increased in Germany, Belgium, Denmark, Italy,and the Netherlands (Nicoletti et al., 2000, p. 50). France has restricted the types of jobs that could be offered by temporary work arrangements and reduced the maximum number of successive fixed-term contracts.

145 Karl Aiginger

made, like reductions in the replace- right to become fully employed after ment ratios1), stricter obligations to two years of part time work, that accept job offers and to upgrade qual- switching to part-time work and (with ification. some restrictions) changing back to Summing up the top 4 countries full-time work has recently been legally had — despite of being considered as guaranteed, that part time work is also countries with an elaborate welfare chosen voluntarily by employees with system a system of regulation of prod- higher qualification (and even by man- uct and labour markets which was not agers) and is no longer seen as detri- significantly tighter than that of other mental for the further career. Further- countries. In the nineties they managed more social contributions, insurances to fine-tune their system in the direc- and benefits are paid pro rata relative tion of better incentives: they enforced to the number of hours worked. These part-time work, activation of unem- rules limit the upcoming of a dual la- ployed through qualification, they in- bour market as feared by Jean-Philippe tensified their active labour market Cotis. Part-time work is no longer that policy, and enforced liberalization in much a characteristic of a person or a network industries. They maintained position in the firm, but avoluntary de- the key elements of a comprehensive cision for a certain phase in ones life. welfare system, but circumvented its negative incentivesfor work andleisure In-Work Benefits decisions. These countries however Benefits for people working are a very also realized that they can afford their important incentive. However, they high costs only if they strive for high can be very expensive specifically if productivity and if they stimulate eco- the replacement rates (for unemploy- nomic growth. They increased their ment or pensions) are high. The differ- investment into research, education ence between income in work and and promoted the diffusion of new income out of work may not be as de- technologies. Consequently they per- cisive as many advocates of reduced formed better than European average benefits believe since countries with in the nineties (and in the current three very high replacement rates are leading years of slow growth). in employment (Sweden, Finland, the Netherlands, and Denmark)2). The Which Labour Market Reforms problem is that in-work benefits can Are Specifically Attractive? be very expensive for government The Surprise of Non-Marginalizing and that they should be used only for Part-Time Work a well-specified time. The real miracle in the Netherlandswas that part-time work is no longer seen as Welfare to Work with a Human marginalizing. Among the measures Background (Assistance and Commitment) used to accomplish this were that Denmark reformed its labour market part-time earners have got a priority system first by decentralizing and sec-

1 ChangesforpermanentoccurredinFinland,Portugal,andSpainwhichhavesignificantlyreducedregulationforpermanent workers,furthermoreinFinland boththedelaytothestartof noticeandthenoticeperioditselfwerereduced,andprocedures somewhat simplified (Nicoletti et al., 2002, p. 49). 2 Onecharacteristicofthetop4countriesistheirhighreplacementratioforlowincomes,replacementratiosforunemployment and pensions are declining for higher income (this is a consequence of the redistributive effect of Nordic type welfare states).

146 Karl Aiginger

ondly by dividing the period for which somebody else (maybe a younger). unemployment insurance is paid into Shifting people into a disabled scheme different phases. In the second phase or intoearlyretirementisconsequently efforts to activate the unemployed is seen as a strategy to reduce unemploy- increasedbyraisingboththeobligations ment. This is one extreme viewpoint, and the intensity of help (up to personal sometimes called lump of labour fal- training plans and job offers in the non- lacy. It implies that preventing early market segment). The system has been retirement aggravates unemployment and has to be fine-tuned, but is an in- problems. terestingvariantofthewelfare-to-work (Labour) supply creates demand: The system, with less offensive rhetoric and other extreme is a new variant of Says real commitment to help the unem- law, this time for the labour market: ployed. each person who leaves the European pockets of inactivity and who can be Retraining and Making Employment persuaded to enter the labour market Attractive for Older People automatically increases GDP, even if Specific attempts are made to make he or she is less productive than the work more attractive for older work- current members of work force and ers, and in parallel to decrease costs for gets lower wage. For this view see firms and to learn to use more fully the the characteristic statement: ... low specific ability and knowledge of this utilization of labour is the main reason group. Lifelong learning is necessary why GDP per capita in Europe lags to upgrade qualifications. Changing that in the US (Cotis, 2003, p. 3). work and career pattern for people It is evident that the truth lies in in different phases of their work life between these extremes: increasing should become available, reducing effective labour supply increases eco- the steepness of wage schemes is nec- nomic growth and per capita income. essary. Keeping the older workers on The important question is to which ex- the job is an essential part of the Lisbon tent?Willitbehigh enoughtocompen- strategy, it reduces the burden of the sate for the implicit value for leisure, retirement systems, and provides a will it be enough to increase net income valuable human resource, specifically per worker? Will it be higher if supply if Europe heads into a period of labour comes from disabled, older workers, shortage (as forecast for the period out-of-workforce people? And from from 2010 on). the other perspective: to which extent will the older people which are kept on Longing for Empirical Research: the labour market add to GDP and to Lump of Labour Fallacy Versus which extent will they only prevent Labour Supply Creates Labour Demand young people to enter?These questions There are two hypotheses which mark are open to empirical research and the extreme views on labour markets should not be solved by statements. and which are used by different groups The data presented by Karl Pichel- of economists, both without sufficient mann in chart 5 indicate that the evidence: consequence of increasing the labour Lump of labour fallacy: The first content to growth increased economic extreme view is that labour demand is growth a little bit but to a larger extent fixed,andeacholderworker remaining reduced the capital content of growth in the market steals away the job of and the rate of multi-factor productiv-

147 Karl Aiginger

ity. Overall growth would not really cessful European countries versus the accelerate, specifically if we extended big ones, tells us that no single policy the chart to 2003. The data for 1997— set is likely to bring Europe back to a 2002 seem to be the most favourable medium-term growth rate of 3%. This evidence, since growth accelerated a session of the 31st Economics Confer- little bit relative to 1991—1996. But if ence is about labour markets, and the we take 2003 into account or if we look two papers consequently focussed on at the medium-term prospects of a 2% labour market policy, attesting Europe growth, we will not be able to contend substantial albeitunevenprogressand that increasing employment by 13 mil- calculating a 0.4% contribution of lion people (Karl Pichelmann) or 14 structural reforms to medium-term million people (Jean-Philippe Cotis) growth. did not accelerate growth. Increasing Mypersonalviewandreadingofthe employment did change the employ- evidence is that all three policy sets to- ment content of growth, but reduced gether are to be used to bring Europe the other two components of produc- back to a 3% growth path: tivity growth (capital deepening and — Making markets more flexible and multi factor productivity). Ceterum containing private costs (mainly censeo only investment in growth driv- labour costs) and public costs (gov- ers is able to increase the long-term ernment expenditures) is the nec- rate of growth. Flexible labour markets essary part of the strategy. are important, but do not work alone, — Investing into the future drivers of at least in the short or medium run. growth is the sufficient part of the strategy. While the EU and the The Conclusion: Labour Market OECD are hard in fiscal discipline, Reforms Are Needed, but Are not in liberalization and in labour Sufficient to Return to Growth market deregulation and while The experience for Europe relative to the ECB is successfully heading the US, as well as the strategies of suc- towards repudiation for inflation

Chart 6

Macro economic support: The sufficient condition: · Fiscal policy · Research · Monetary policy · Human capital · New technologies

The goal: 3% growth

The necessary condition: · Product & labour market reforms · Balanced costs & productivity

148 Karl Aiginger

mindedness, all instances are soft if Aiginger, K. 2002. The New European governments and countries are not Model of the Reformed Welfare State. investing enough into the future, if European Forum Working Paper 2. Stanford theyareviolating innovationtargets University. and not investing enough in pan- Aiginger, K. 2002. Framework for Business European infrastructure. Decisions. Firms, Markets, and Policy — A fiscal and monetary policy not Strategies in Europe. Course material, biased against growth is of great Graduate School of Business. Stanford help for the period necessary for University. June 13: structural reforms to translate into http://www.wifo.ac.at/Karl.Aiginger higher growth and also for the Aiginger, K. and M. Landesmann. 2002. period long-term investments into Competitive Economic Performance. The the future need to become effec- European View. WIFO Working Paper 179. tive. The economic policy in the Cotis, J.-P. 2003. Reform of the European US as well as that of the success- Labor Markets: A View from the OECD. ful European countries have fol- Draft prepared for the 31st Economics lowed a comprehensive approach Conference of the OeNB. Mimeo. including labour market reforms, Nicoletti, G., St. Scarpetta and O. investment into growth drivers Boyland. 2002. Summary Indicators of and a prudent macroeconomic Product Market Regulation with an Exten- policy. § sion to Employment Protection Legislation. Working Paper 226. Economic Depart- ment, OECD. Paris: OECD. Organisation for Economic Co-opera- References: tion and Development — OECD. Aiginger, K. 2003. A Three Tier Strategy 2003. Economic Outlook 73. June. for Successful European Countries in the Pichelmann, K. 2003. Reform of the Nineties. WIFO Working Paper 205. European Labor Markets, Progress and Aiginger, K. 2003. The Relative Importance Remaining Challenges. Draft prepared for of Labor Market Reforms to Economic the 31st Economics Conference of the Growth. WIFO Working Paper 208. OeNB. Mimeo.

149 Hannes Androsch Hannes Androsch Industrieller AIC Androsch International Management Consulting GesmbH

Eine tragfa‹hige Investitionsstrategie fu‹r Europa

Nach der Phase des Wiederaufbaues nach dem Zweiten Weltkrieg erfreuten wir unsfu‹reinVierteljahrhunderteines Goldenen Zeitalters (laut angloameri- kanischer Terminologie ªGolden Age, laut franzo‹sischer ªles trente glorieu- ses) mit einem wirtschaftshistorisch beispiellosen Wirtschaftswachstum. Dieses schlug sich in einer bis dahin un- vorstellbaren Steigerung des Massen- wohlstandes bei gleichzeitig betra‹chtlich sinkender Wochen-, Jahres- und Lebensarbeitszeit nieder. Frei- und Ur- laubszeiten konnten erho‹ht, der Wohl- fahrtsstaat betra‹chtlich ausgeweitet werden. Dank der ja‹hrlich erwirtschaf- teten kra‹ftigen Zuwa‹chse war auch die Verteilungsfrage in Form ho‹herer indi- vidueller Einkommen und vermehrter Sozialleistungen vergleichsweise leicht zu lo‹sen. Daru‹ber hinaus standen aus- reichende Mittel fu‹r in die Zukunft ge- richtete Investitionen zur Verfu‹gung. Mitte der Siebzigerjahre kam es, ausgelo‹stdurchdenerstenErdo‹l-Preis- schock vom Oktober 1973, zu einer auspra‹gten Rezession. In der Folge ver- lief die Wachstumskurve entschieden Hannes Androsch

flacher, womit auch nur mehr gerin- wurf ist insbesondere auch an die gere Zuwa‹chse zur Verteilung zur Ver- politischen Entscheidungstra‹ger zu fu‹gungstanden.EineAusnahmebildete richten. indenNeunzigerjahrenderaufgebla‹hte Wie meinte doch Keynes: ªWenn Boom der ªNew Economy und der sich die Umsta‹nde‹ andern,‹ andere Aktienbo‹rsen in den USA. Das Platzen ich meine Meinung. Was machen Sie, dieser BlasehatdienunmehrigeStagna- Sir? Keynes ist auch in dieser Hinsicht tion samt Rekordarbeitslosigkeit aus- zu Unrecht ins Ausgedinge gestellt gelo‹st. worden. Das neue Jahrhundert ist in wirt- O‹ sterreichs Wirtschaftsentwick- schaftlicher Hinsicht bislang durch lung befand sich u‹ber das sogenannte Flaute, also verloren gegangene Dyna- ªGoldene Zeitalter hinaus lange Zeit mik, Stagnation oder gar Rezession aufderU‹ berholspur.IndenNeunziger- gekennzeichnet. Dieser Befund gilt jahren fielen wir trotz der Impulse der schon u‹ber ein Jahrzehnt fu‹r Japan, Osto‹ffnung als Folge der lahmenden inzwischen auch fu‹r die USA und im gro§koalitiona‹ren Politik — (deren Besonderen fu‹r Europa, vor allem Leistungskatalog entha‹lt immerhin jedoch fu‹rO‹ sterreich. Die wirtschaft- unseren EU-Beitritt, die Abschaffung liche Verfassung der Triade der drei der Vermo‹gens- und Gewerbesteuer gro‹§ten Wirtschaftsblo‹cke, auf die zu- oder die Ermo‹glichung von Privatstif- sammen mehr als 70% der Weltwirt- tungen) — auf die Kriechspur zuru‹ck. schaft entfallen, hat negative Auswir- Seit 2000 befinden wir uns im Zustand kungen fu‹r die restliche Welt. der Stagnation. Die unerfreuliche wirtschaftliche Andere, ebenfalls kleine La‹nder Entwicklung ist sicherlich eine, wenn wie Finnland, Schweden oder Irland auch hartna‹ckige konjunkturzyklische haben ihr Schicksal eindrucksvoll in Erscheinung, zu einem betra‹chtlichen die eigene Hand genommen. Sie haben Teil allerdings auch die Folge ungelo‹s- mit Erfolg ihre Wirtschaft gru‹ndlich ter Strukturprobleme. Dieser Befund restrukturiert und modernisiert sowie trifft jedenfalls fu‹r Europa und beson- das Sozialwesen reformiert und zu- dersaugenscheinlichfu‹r unserLandzu. kunftstauglich gestaltet. Das fehlende Wachstum wirkt sich Mit der Politik der Aufrechterhal- negativ auf Einkommen und Bescha‹fti- tung des Status quo ohne Beru‹cksich- gung aus, bewirkt steigende Arbeits- tigung der inzwischen eingetretenen losigkeit, verscha‹rft die ohnehin unge- Vera‹nderungsprozesse wurde gleich- lo‹sten Probleme der o‹ffentlichen sam ein Wechsel auf die Zukunft ge- Finanzen, erschwert die Sicherung zogen. In einer Art Generationsbilanz der Sozialsysteme und untergra‹bt die mo‹gen es Jahreswirtschaftsleistungen Wahrnehmung von Zukunftsaufgaben. sein, die bereits verbraucht worden Wichtige Investitionen unterbleiben, sind, ehe sie noch u‹berhaupt erwirt- anstehende Probleme werden prolon- schaftet worden sind. Natu‹rlich ko‹nnte giert. Sie drohen sich zu Lawinen aus- man angesichts der europaweit mehr zuwachsen. Dennoch u‹ben wir uns in oder weniger stagnierenden bzw.in ab- Realita‹tsverweigerung. Unsere Verhal- sehbarer Zeit sinkenden Gesamtbevo‹l- tensweisen und Erwartungen orientie- kerung und so hohen Wohlstand auch ren sich trotz eines sich immer sta‹rker die Frage stellen, wozu wir denn u‹ber- vera‹ndernden Umfeldes an einer la‹ngst haupt Wachstum, das ohnehin nur die verloren gegangenen Zeit. Dieser Vor- begrenzten Ressourcen des Biotops

152 Hannes Androsch

Erde belastet, brauchen? Nun ich entgegenwirkt. Auf Dauer wird sich glaube,esgibteineReihevonGru‹nden, der Sozialstaat, eine sich immer weiter warum wir dennoch Wachstum brau- aufbla‹hende Verwaltung oder eine chen: Zum einen, weil sicherlich noch wettbewerbsverzerrende Subventions- kein die gesamte Bevo‹lkerung in den politik, wie im Speziellen im Agrar- Industriestaaten umfassendes Niveau sektor, nicht auf Pump durch Deficit an Wohlstand erreicht wurde, wie es Spending finanzieren lassen, wie dies im Idealfall wu‹nschenswert wa‹re, ganz in Europa seit den Achtzigerjahren zu schweigen vom Rest der Welt. Und zunehmend der Fall ist. Zu nennen sind zum anderen werden wir die Leistun- auch die gigantischen und zu Lasten gen angesichts der demographischen der Entwicklungsla‹nder wettbewerbs- Entwicklung einer zunehmend‹ alter verzerrenden Agrarsubventionen der werdenden Gesellschaft mit einer zah- Industriestaaten. lenma‹§ig geringer und la‹nger in Aus- bildung stehenden ju‹ngeren Genera- tion nicht in dem beno‹tigten Ausma§ bestreiten ko‹nnen, schon gar nicht angesichts unserer budgeta‹ren Situation. Dass es auch fu‹r kleine La‹nder im derzeit ungu‹nstigen konjunkturellen Umfeld mo‹glich ist, aus dem Ruder gelaufene Budgets wieder in Ordnung zu bringen, hat Professor Aiginger ein- Auch wenn nunmehr ein Ende der drucksvoll aufgezeigt. konjunkturellen Talsohle erreicht zu In den letzten drei Jahrzehnten sein scheint, ist das Tal vor — allem stand die Beka‹mpfung der Inflation in Europa — noch la‹ngst nicht durch- im Zentrum der Wirtschaftspolitik. schritten. Vor der Euphorie eines Als Instrumentarium kam die auf raschen Konjunkturaufschwungs muss Preisstabilita‹tausgerichtetemonetaris- daher vor allem in der EU gewarnt tische Wirtschafts- und Fiskalpolitik werden. Diese Hoffnung ko‹nnte sich zum Einsatz. Die antizyklische Nach- allzu rasch als ªexpectation bubble fragepolitikwurdeindieBesenkammer erweisen. Es kristallisiert sich immer der Wirtschaftspolitik gestellt — aller- deutlicher heraus, dass die Automatik dings nicht in den USA unter Reagan von wirtschaftlichen Stabilisatoren sowie Bush Vater und Sohn. alleine nicht genu‹gt, um die Wirtschaft Inzwischen stellt die Inflation keine anzukurbeln und die bestehende Nach- weltwirtschaftliche Bedrohung mehr frageschwa‹che zu kompensieren. dar. Vielmehr besteht eine globale U‹ berdies ha‹lt die EZB unbeirrt am Nachfragelu‹cke, weil vielfach — wiede- Ziel der Beka‹mpfung der Inflation rum besonders in Europa, aber auch in fest. Die Zinssa‹tze wie auch die Japan — die Sparquote die Investitions- Wechselkurse des Euro sind allerdings quoteu‹bersteigt.Eswa‹redaherhochan zu hoch, um kurzfristig eine Besserung der Zeit, zu einer Wirtschaftspolitik der Konjunktur und des Wirtschafts- zuru‹ckzukehren, die nachfrageseitig standortes bewirken zu ko‹nnen. Im auf Keynes und angebotsseitig auf U‹ brigen herrschen weltweit zum Teil Schumpeter aufbaut sowie dem defla- schwer wiegende Ungleichgewichte, tiona‹ren Umfeld durch eine entspre- wie das US-Au§enhandelsdefizit, Ver- chende Geld- und Wa‹hrungspolitik zerrungen auf dem Agrarmarkt oder

153 Hannes Androsch

bei den Wechselkursen, wie etwa die Die Beka‹mpfung dieses Konflikt- Unterbewertung des Renminbi zeigen. potenzials findet derzeit in der inter- Weitere Abschwa‹chungen des US- nationalen Zusammenarbeit noch Dollar mu‹ssen erwartet werden. keine ada‹quate Entsprechung. Dieser Viele der derzeit virulenten Prob- Vorhalt richtet sich insbesondere an leme sind auch Ausfluss einer unzu- diegro§enStaatenderErde,allenvoran reichenden Auseinandersetzung mit die USA, aber auch an Europa, letztlich dem technologischen Fortschritt, mit aber an jeden einzelnen Staat. Die der Globalisierung und Liberalisierung Setzung von Initiativen ist notwen- der Ma‹rkte, mit den neuen geopoli- digerweise nicht an territoriale Gro‹§e tischenundgeostrategischenGegeben- gebunden. Dominanz kann Koope- heiten(BeendigungdesKaltenKrieges, ration und dementsprechende Alli- Fall der Berliner Mauer am 9. Novem- anzen nicht ersetzen. Dies gilt auch fu‹r die Wirtschaftspolitik. Die damit verbundenen Aufgaben ko‹nnen nicht nur an die EU delegiert werden, sondern mu‹ssen von den einzelnen Staaten im Rahmen ihrer Mo‹glichkeiten wahrgenommen werden. Die Schubkra‹fte fu‹r wirtschaftliches Wachstum mu‹ssen wieder aktiviert werden. Unser Land und Europa ber 1989), mit dem neuen Terroris- brauchen eine wirtschaftliche Wachs- mus (Anschlag auf die Twin Towers tumsoffensive. am 11. September 2001) oder den Voraussetzung dafu‹r ist eine mo- vielfa‹ltigen gesellschaftlichen Ver- derne, zukunfts- und wachstumsorien- ‹anderungen. Zu deren gravierendsten tierte Wirtschaftspolitik. Nur mit Umbru‹chen za‹hlen unter anderem Versta‹ndnis darauf werden Bescha‹fti- ein neues Selbstversta‹ndnis der gung und Einkommenszuwa‹chse er- Frauen, eine dramatische A‹ nderung wirtschaftet, die o‹ffentlichen Finanzen der Alterstrukturen in den Industrie- in Ordnung gebracht, das Sozialsystem staaten und der U‹ bergang zur Wissens- gesichert, angemessene o‹ffentliche gesellschaft. Leistungen angeboten und Zukunfts- Die meisten der neuen Heraus- aufgaben wieder wahrgenommen wer- forderungen werden sich nur durch den ko‹nnen. eine versta‹rkte internationale Zusam- ªGet growth going musswie in den menarbeit nachhaltig lo‹sen lassen. (Mit USA auch in Europa und bei uns zum dem Scheitern in Cancun wurde eine Motto werden. gro§e Chance vergeben.) Dasselbe Auf die einzelnen makroo‹kono- Axiom gilt auch fu‹r die Bewa‹ltigung mischen Ansa‹tze als indikativen Aus- der Bedrohungen, denen die Mensch- lo‹ser zugunsten von wirtschaftlichem heit etwa durch Hunger, Mangel an Wachstum mo‹chte ich nicht im Einzel- sauberem Trinkwasser, international nen eingehen. Einen Schlu‹sselpunkt organisierte Kriminalita‹t, Drogen, dabei stellen jedenfalls Investitionen Klimavera‹nderung, neue Seuchen zur Steigerung der Produktivita‹t und wie Aids, radikale Ausbeutung der zur Ausscho‹pfung des vorhandenen, Umwelt oder durch ethnische Kon- aber bei weitem nicht ausgescho‹pften flikte ausgesetzt ist. Wachstumspotenzials dar, also die

154 Hannes Androsch

Fo‹rderung von Innovationen, Investi- folgerungen fu‹r notwendige Reformen tionen und Infrastruktur. im eigenen Land ziehen. Dabei sind Als ein Beispiel von vielen mo‹chte insbesondere auch die Rahmenbedin- ich in diesem Zusammenhang die im gungen fu‹r die einzelwirtschaftliche klassischen Sinn verstandenen Infra- Ta‹tigkeit zu hinterfragen und drasti- strukturbereiche unterstreichen. Was sche Reform-Ma§nahmen zu setzen. wir beno‹tigen sind moderne Verkehrs- Einvordringliches Anliegen dabei muss verbindungen und nicht, denken Sie an die Entbu‹rokratisierung sein. Dem unsere sogenannten Autobahnen, Par- Wildwuchs an Vorschriften ist Einhalt coursla‹ufe zwischen den einzelnen zu gebieten, die Bu‹rokratie ist zu ver- Baustellen, oder das unbefriedigende schlanken, die Beho‹rdenwege sind zu Dienstleistungsangebot der Bundes- verku‹rzen. Dies trifft vor allem auf bahn, deren Gu‹terwaggons angeblich die Ebene der Bundesla‹nder zu. Die nur zu 18% ausgelastet sind. Ausho‹hlung der Bundesebene durch Neben der materiellen Infrastruk- die zunehmende Verlagerung von tur wird im Zuge des U‹ bergangs zur KompetenzenaufdieEbenederLa‹nder Wissensgesellschaft Bildung, Schul- hat in diesem Zusammenhang kontra- und Weiterbildung immer wichtiger. produktive Auswirkungen. Wenn hier gespart wird, dann ent- Lassen Sie mich auch auf die Situa- spricht dies der Vorgangsweise eines tion vieler Industriebetriebe kurz ein- Bauern, der sein ganzes Saatgut gehen. Gegenwa‹rtig wird diskutiert, konsumiert statt es zu sa‹en und sich ob wir noch eine Inflation oder bereits daraufhin wundert, dass er keine Ernte schon eine Deflation haben. Ich meine, mehr einbringen kann. Dieser drasti- wir haben beides. Wir sind im Dienst- sche Zusammenhang trifft insbeson- leistungssektor, im Bereich der o‹ffent- dere auch auf die Bereiche Innovation, lichen Hand mit inflationa‹ren Tenden- Forschung und Forschungsfo‹rderung zen konfrontiert, wa‹hrend der indus- zu sowie auf die Dotation und Aus- trielle Bereich immer sta‹rker dem stattung der Universita‹ten. Dies gilt Pha‹nomen der Deflation ausgesetzt ist, fu‹r den o‹ffentlichen Bereich ebenso was im Verlust der Preissetzungsmacht wie fu‹r den unternehmerischen. der Unternehmen besonders deutlich Mit einem ausgepra‹gten For- zu Tage tritt. Dies bedeutet, dass mas- schungsbewusstsein sowie einer ho‹he- siver Druck nicht nur auf die Preise, ren Innovationsbereitschaft lie§e sich sondern logischerweise in der Folge manches, wahrscheinlich sogar vieles auch auf die Margen besteht, mit Aus- zum Besseren wenden. Hier besteht ein wirkungen insbesondere auch auf die Defizit, das sich auch in der Fo‹rderpra- Bonita‹tunddieFinanzierungsfa‹higkeit, xis der o‹ffentlichen Hand widerspie- was vor dem Hintergrund von Basel II gelt. O‹ sterreich etwa hat nur eine halb ein besonderes Damoklesschwert dar- sohoheForschungsquotewieFinnland. stellt. In der Folge stehen die Unter- Wenn man bedenkt, dass Finnland vor nehmen neben der Optimierung der 12 Jahren im Zuge der Implosion der Kosten gleichzeitig auch vor der Not- Sowjetunion geradezu einen wirt- wendigkeit,hinreichendeInvestitionen schaftlichen Schock durch den Verlust zu ta‹tigen und ihre F&E-Aktivita‹ten von 20% seines Au§enhandels erleben voranzutreiben, um jenen Mindest- musste, dann soll man von der erbrach- zuwachs an Produktivita‹t zu erreichen, ten Leistung nicht nur den Hut, son- der das U‹ berleben auf dem Markt er- dern durchaus entsprechende Schluss- mo‹glicht.

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Man ko‹nnte nun zur Ansicht gelan- ches Wachstum. Bei aller einzelwirt- gen, eine Bereinigung des Marktes sei schaftlichen Verantwortung braucht gar nicht so schlecht, da diese zu einer es aber eine entsprechende Politik, Konsolidierung fu‹hren wird, die im die wiederum den Mut und die Bereit- weiteren Sinne eine scho‹pferische schaft fu‹r Vera‹nderungen und Auf- Zersto‹rung bewirken ko‹nnte. Aller- geschlossenheit gegenu‹ber Neuem dings: Nicht jede Zersto‹rung ist auch voraussetzt. Und gerade in diesem eine scho‹pferische. Zudem wird der Bereich haben wir das gravierendste freie Wettbewerb weiterhin durch Defizit. Was wir beno‹tigen, ist eine staatliche Eingriffe verzerrt, sieheetwa neue Aufbruchsstimmung, Fortschritt die Regelung von Chapter 11 in den und Modernita‹t statt Ru‹ckschritt, vor USA. allem aber eine zukunfts- und damit Letztlich bedingen einander einzel- wachstumsorientierte Investitions- wirtschaftliches und volkswirtschaftli- politik. §

156

Josef Taus Josef Taus CEO Management Trust Holding AG

Wirtschaftswachstum, Finanzkapital und Investitionen

Europa, die EU, besonders der deutsche Sprachraum, zeigen seit einigen Jahren erhebliche Wachstumsschwa‹- chen. Die Diskussion u‹ber ªGrenzen des Wachstums, wie sie etwa ab Ende der Siebzigerjahre des vergangenen Jahrhunderts mit gro§er Intensita‹t gefu‹hrt wurde, scheint zuna‹chst aus- gestanden zu sein. Aus o‹konomischer Sicht sind Wachstumsgrenzen nicht erkennbar. Gleichma‹§iges Wachstum ist bei gegebenem Wissensstand wahrscheinlich nicht erreichbar, Wachstums- schwankungen sind daher als system- immanent anzunehmen. Stagnation oder gar Schrumpfphasen des Systems sollten aber als ªKrankheitszustand definiert werden, weil sie die Funk- tionstu‹chtigkeiterheblichvermindern. Die Frage, dies sei in Parenthese erwa‹hnt, wann eine Marktwirtschaft in einen stationa‹ren Zustand mu‹ndet, hat schon Alfred Marshall und besonders John Maynard Keynes bescha‹ftigt. In den ªEssays on Persuasion1) wird die Frage behandelt, wann der Kapitalis- mus in einem stationa‹ren Zustand

1 Keynes, J. M. 1931. Essays on Persuasion. London: MacMillan. Josef Taus

landet. Der Zustand ist erreicht, wenn so weit Keynes.1) Das mag ja so es keine Anreize zur Kapitalakkumula- manchem nicht gefallen, aber es ist tion mehr gibt, wenn der Realzins 0 unbestreitbar geistvoll. geworden ist. Im voll entwickelten Abgesehen von den Keynesschen Kapitalismus sind die Produktivita‹t Visionen werden wir noch weiter und die Einkommen so hoch, dass mit dem marktwirtschaftlichen System alle Bedu‹rfnisse befriedigt sind. Die leben, wie lange? Ich wei§ es nicht. Arbeitszeit ist so kurz geworden, dass Faktum jedenfalls ist, dass dieses die Menschen mit ebensolchem Ver- System in den ªentwickelten Industrie- gnu‹gen arbeiten, wie sie heute zum staaten schon eine noch vor60, 70Jah- Beispiel Tennisspielen. Dann, so prog- ren schwer prognostizierbare Produk- nostiziert Keynes, wird es einen tivita‹tssteigerung entwickelt hat und Wandel der Werte geben: ªWenn ein- dem gro‹§eren Teil der Menschen in diesen La‹ndern auch einen nicht leicht vorhersehbaren Wohlstand und eine steigende Lebenserwartung gebracht hat. Vom Schlaraffenland sind wir zwar noch weit entfernt, auch in seiner modernen Gestalt der Keynesschen Vision. Aber immerhin, es ist erkennbar viel geschehen. Es sollte daher darum gehen, auch in der Phase des mal die Ansammlung von Reichtum ªnoch nicht voll entwickelten Kapita- ihre soziale Bedeutung verliert, wird lismus einigerma§en akzeptabel und esimKodexderMoralgro§eA‹ nderun- in einer als einigerma§en ªgerecht gen geben. Wir werden uns von empfundenen ªVerteilungslage zu pseudomoralischen Grundsa‹tzen be- leben. Dazu geho‹rt meines Erachtens, freien ko‹nnen, die uns 200 Jahre lang dass das ªmarktwirtschaftliche System beherrschten, Grundsa‹tze, die einige in einem — so weit wie mo‹glich — ste- der unangenehmsten menschlichen tigem Wachstumsprozess sich bewegt. Eigenschaften zur ho‹chsten Tugend Stagnation und Schrumpfung sind machten. Wir werden es uns leisten daher als ªKrankheiten des Systems ko‹nnen, das Geldmotiv nach seinem anzusehen, dauern sie an, ist eine wahren Wert einzuscha‹tzen. Doch Dauerkrise des Systems nicht aus- Vorsicht! Die Zeit dafu‹r ist noch nicht zuschlie§en. Ein triviales Modell mo‹ge gekommen. Noch weitere 100 Jahre dies verdeutlichen. Nehmen wir eine werden wir uns vormachen mu‹ssen, beliebige Periode von 10 Jahren: Am dass das Gute schlecht und das Anfang betra‹gt dasBSPeines beliebigen Schlechte gut ist — denn das Schlechte Landes 100.000 WE, es wa‹chst im ist mo‹glich und das Gute nicht. Geiz Durchschnitt dieser Periode noch und Wucher und Vorsorge mu‹ssen um 4% p.a. — eine optimistische noch fu‹r eine Weile unsere Go‹tter Annahme. Das BSP nach 10 Jahren bleiben. Nur sie ko‹nnen uns aus wu‹rde daher (zinseszinsma‹§ig berech- dem Dunkel der wirtschaftlichen net) rund 150.000 WE betragen. Notwendigkeit ans Licht fu‹hren — Stagniert das BSP in diesen Jahren,

1 Engels, W.1982. Moral und Gescha‹ft. In: Kaltenbrunner, G.-K. (Hrsg.). Kapitalismus. Freiburg—Basel—Wien: Herder (Herderbu‹cherei Initiative 47).

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das hei§t, es betra‹gt am Ende der wirtschaftlich. Die Budget- und Steu- Periode real ebenfalls nur 100.000 erdiskussionen, auch die Pensions- WE, ist relativ einfach festzustellen, debatte, die steigende Arbeitslosigkeit was das bedeutet. Die Spannungen in sind Symptome dieser Entwicklung. der Gesellschaft, sei es im sozialen, Diese Tagung hat umfangreiches o‹konomischen Bereich oder in sons- Zahlenmaterial gebracht, ich kann tigen Bereichen, wu‹rden erheblich mich daher auf weniges beschra‹nken. wachsen, die politische Instabilita‹t zu- In der Mai-Ausgabe der Monats- nehmen. Radikale Ideologien ko‹nnten berichte der EZB wurde fu‹r den die u‹blichen irrationalen Hoffnungen Euroraum 2001 ein Wirtschafts- auf eine bessere Welt wecken usw. wachstum von 1,4% gemessen, 2002 Das ist ja alles nicht so neu, hat es schon 0,8% und fu‹r 2003 wird ungefa‹hr gegeben und gibt es potenziell noch 1% erwartet. Die Bruttoanlagein- immer. vestitionen sanken 2001 um 0,6% Gegenwa‹rtig lassen sich o‹kono- und 2002 um 2,6%. In den Jahren mische Wachstumsgrenzen nicht er- vorher stiegen sie etwa zwischen 4,9% kennen, das hei§t nicht, dass solche und 5,8%, nur um auf einiges hin- nicht existieren. U‹ ber Qualita‹t und zuweisen. Steuerung des Wachstums wird es Angenommen, die Wirtschafts- immerpolitischeundwissenschaftliche politik im Euroraum wird nicht u‹ber- Diskussionen geben. Um es noch dacht, und die USA bringen es nicht einmal festzuhalten, ein marktwirt- fertig, Konjunkturlokomotive fu‹r die schaftliches System braucht, um funk- EU zu spielen, dann ist eine Ru‹ckkehr tionsfa‹hig zu bleiben, Wachstum, das zu einem ªnormalen Wachstums- im 10-Jahres-Durchschnitt bei einiger- tempo (z. B. 3% real) in na‹chster Zu- ma§en entwickelten Volkswirtschaften kunft nicht zu erwarten. Wirtschafts- nicht unter 2 bis 3% real p.a. liegen politisch wa‹re es meines Erachtens sollte (nominell etwa zwischen 3 notwendig, eine Gleichrangigkeit z. B. und 6%).1) von Bescha‹ftigungs- und Wa‹hrungs- Seit 2, 3 Jahren wa‹chst die europa‹- politik zu statuieren. Es gibt nicht ische Wirtschaft und besonders die den geringsten Anlass, die Wa‹hrungs- Deutschlands und auch O‹ sterreichs politik dominieren zu lassen. Wachs- weniger als 2 bis 3% real. Die Schwie- tum, Bescha‹ftigung, technischer Fort- rigkeiten ha‹ufen sich. Politisch und schritt sind gleichrangig.

1 1951erschienimHumboldt-Verlag,Wien—Stuttgart,einBuchdeso‹sterreichischenPsychologenPeterR.Hofsta‹ttermitdem Titel ªDie Psychologie und das Leben. Im Kapitel V (ªDie Randbedingungen der Demokratie) sind auf S. 93 ff. folgende Sa‹tze zu lesen: ªDie expansive Natur der Demokratie und die notwendige Bindung ihrer Ideologie an den Fortschritts- gedankenundandenderFreiheit—derNicht-Eingefu‹gtheitineinenOrdo—findetihrencharakteristischenAusdruckindem Theoriengeba‹ude der neuzeitlichen Wirtschaftslehre. Ein gegenwa‹rtiger Besitz repra‹sentiert eine Mo‹glichkeit, in der Zukunft einen gro‹§eren Besitz festzustellen, er wa‹chst — der Theorie nach — ins Unendliche und er wa‹chst so eigentlich nicht, denn das hie§e, dass er sich auf eine bestimme Endgestalt zu entwickelte; er unterliegt vielmehr — der Theorie nach — einem unendlichen Progress. Es ist gewiss kein Zufall, dass die Entwicklung der Demokratie seit dem 17. Jahrhundert mit einer immer sta‹rkerenBetonung des o‹konomischen DenkensHand inHand ging.EsistebensowenigeinZufall, dassdievom Ordo-Gedanken getragenen Systeme, die Kirche des Hochmittelalters, Faschismus und Kommunismus in der individuellen Benu‹tzung des Kapital-Progresses und des Zinsen-Mechanismus eine Su‹nde erblickten und erblicken, die bis in die Beicht- vorschriften hineinverfolgt wurde. ... Die Randbedingungen des Kapitalismus sind daherauch nahezu identisch mit denen derDemokratie:EineallgemeinverbindlicheFortschrittsideologie—derFreiheitsgedanke,dieGleichheitstheseundschlie§- lich die expansive Tendenz, deren Behinderung gleichbedeutend mit einer Katastrophe ist. ...

161 Josef Taus

Es fehlt hier der Platz, sich mit neo- die bis vor wenigen Jahren in O‹ ster- klassischer Analyse, Keynesianismus, reich einigerma§en allgemein akzep- Monetarismus auseinander zu setzen: tierten Spielregeln hinweisen. So viel sei aber festgehalten: Die An- Der o‹sterreichische Wiederaufbau nahme der sehr raschen Anpassung nach dem Zweiten Weltkrieg, der Auf- vonPreisenundLo‹hnenandiejeweilige stieg unseres Landes in die obere Ha‹lfte wirtschaftliche Lage sowie rationale derIndustriestaaten,istvonderFinanz- Erwartungen der Menschen, ja, ein auch systemseite her in praxi bis zum heu- nur durchschnittlicher Informations- tigen Tag im Wesentlichen von zwei stand der Wirtschaftssubjekte sind Elementen getragen worden: ku‹hne Annahmen, die sich praktisch Von der Innenfinanzierung der Un- kaum realisieren lassen. Eine einiger- ternehmen und vom Bankkredit. Die ma§en vernu‹nftige staatliche Wirt- Bilanzstruktur der o‹sterreichischen schaftspolitik, die dort eingreift, wo Unternehmen spiegelt dies wider. sie es fu‹rno‹tig ha‹lt, wird auch in Zu- Die Eigenkapitalausstattung der Masse kunft notwendig sein, wobei es wie in der o‹sterreichischen Unternehmen vielen Bereichen menschlichen Han- ist international gesehen unterdurch- delns ein Weg zwischen Skylla und schnittlich. Die Oesterreichische Charybdisist.Eine u‹berbu‹rokratisierte Nationalbank vero‹ffentlicht seit Jahren und regelungswu‹tige staatliche Wirt- die Bilanzanalysen einiger hundert schaftspolitik ist fu‹r die Wirtschafts- o‹sterreichischer Unternehmen: Nach entwicklung genauso schlimm, wie meinem Wissensstand ist im industriel- der Traum vom Markt, der wie ein len Bereich eher das ªobere Drittel der Deus ex Machina eine ªvernu‹nftige o‹sterreichischen Unternehmen ent- Entwicklung der Wirtschaft erzwingt. halten.Derfu‹r unserLandexistenznot- Wir mu‹ssenzurKenntnisnehmen,dass wendige Fremdenverkehr wurde — ich wir mit einem einigerma§en ver- u‹bertreibe (aber nicht sehr) — wirt- nu‹nftig handelnden wirtschaftlichen schaftlich praktisch mit keinem oder und damit auch wirtschaftspoliti- einem sehr geringem Eigenkapital schen Trial-and-Error-Prozess leben aufgebaut, um nur auf einiges hinzu- mu‹ssen. Vergleiche hinken zwar meis- weisen. tens, aber schon in der klassischen Der organisierte Kapitalmarkt Pharmazie war bekannt, dass es auf spielt bis zum heutigen Tag nur eine die jeweilige Dosis ankommt. Grund- untergeordnete Rolle. Es gibt dafu‹r sa‹tzlich gilt das auch fu‹r die Wirt- eine Reihe von Gru‹nden: Einmal, schaftspolitik. O‹ sterreich hat nur relativ wenige KonkreteFinanzsysteme sindinder gro§e Unternehmen im Sinne der Regel das Ergebnis sehr langer histori- Vorstellungen der westlichen Wirt- scher Entwicklungen, wie z. B. das schaftswelt von bo‹rsefa‹higen Unter- anglo-amerikanische oder die konti- nehmen. Es gab zwei Konzerne, die nentaleuropa‹ischen Finanzsysteme. vielleicht diesen Vorstellungen ent- Ich mo‹chte mich daher, auch wenn sprochen ha‹tten, die Verstaatlichte O‹ sterreich zu den kleineren Mitglied- Industrie und der CA-Konzern. Beide staaten der EU geho‹rt, mit dem o‹ster- gibt es nicht mehr. reichischen auseinandersetzen und Unternehmen,dieinO‹ sterreichals zwar im Licht der internationalen Ent- gro§ angesehen werden, sind inter- wicklung, vor allem der Diskussion in national bestenfalls gro‹§ere Mittel- der EU. Vor allem mo‹chte ich kurz auf sta‹ndler; sie sind, wenn sie keinen

162 Josef Taus

Mehrheitsaktiona‹r besitzen, ziemlich Aberkurz zuru‹ckzurEU.InderEU sicher U‹ bernahmekandidaten. gibt es meines Erachtens sehr wohl Dabei ist O‹ sterreich ein Land, das einen Wettbewerb der Staaten, nicht nicht ªrisikokapitalschwach ist. Im nur der Unternehmen. Daher ist es Gegenteil: Der o‹sterreichische Sparer wohl angebracht, sich zu u‹berlegen, ist mangels hinreichender Anlagemo‹g- welche Rolle die Eigentu‹mer spielen. lichkeiten im eigenen Land eben ein Nationale U‹ berlegungen werden in der gro§erªKapitalexporteur — ich werde EU in den na‹chsten Jahrzehnten gewiss noch einmal darauf zuru‹ckkommen. nicht verschwinden, das gilt es zu Weiteroben habe ich auf die Innen- beachten. Wollteman tatsa‹chlich einen finanzierung hingewiesen,ohne nun im o‹sterreichischen Kapitalmarkt aufbau- Einzelnen darauf eingehen zu ko‹nnen. en, wa‹re eine grundlegende A‹ nderung Seit dem Wiedererstehen unseres des seit langem eingefrorenen steuer- Landes 1945 war die Steuerpolitik von der Begu‹nstigung der Innenfinan- zierung gepra‹gt. Das mag in den ersten 20, 30 Jahren nach dem Ende des Zweiten Weltkrieges durchaus vernu‹nftig gewesen sein; hat auch heute noch im Lichte hoher Steuerbelastung seine Bedeutung. Aber bisher sind alle Versuche, die steuerlichen Voraus- setzungen fu‹r einen organisierten politischen Denkens notwendig. Ge- Kapitalmarkt zu schaffen, wenig er- wiss sind das eminent politische Ent- folgreich gewesen. Gewisswaren dafu‹r scheidungen, aber gesellschaftspoliti- politische Gru‹nde ma§gebend. Die sche Entscheidungen — und Steuerpoli- gro§en politischen Lager O‹ sterreichs tik ist Gesellschaftspolitik — sind eben waren an fundamentalen A‹ nderungen immer politische Entscheidungen. der Eigentu‹merstruktur wenig interes- Der Aufbau eines organisierten Ka- siert, da verkauft man lieber an ausla‹n- pitalmarktes ist Vermo‹gensbildungs- dische Ka‹ufer, gegen die grundsa‹tzlich politik, sie vera‹ndert Einkommens- nichts einzuwenden ist — wenn sie in und Vermo‹gensverteilung. Wenn man O‹ sterreich investieren wollen, dann davon ausgeht, dass ein breit gestreutes sollen sie es tun. Nur: In der EU ist Ver mo‹gen die Stabilita‹t einer Gesell- ein solches Verhalten auch der kleine- schaft festigt und zu gro§e Unter- ren Staaten nicht u‹blich. Die EU hat schiede in der Einkommens- und Ver- zwar einen gemeinsamen Markt, ist mo‹gensverteilungvermindert,dannist aber kein Bundesstaat und wird es mei- es unter den gegebenen Verha‹ltnissen nes Erachtens auch in absehbarer Zeit wahrscheinlich vernu‹nftig, steuerpoli- nicht werden. Sie ist ein Staatenbund tisch beim ªMittelstand anzusetzen, sui generis, wie das in der Tradition der in jeder Gesellschaft die Entwick- der o‹sterreichischen Staatrechtslehre lung tra‹gt und im Wesentlichen erheb- zu formulieren wa‹re. Als Beispiel sei liche Teile seines Einkommens als hier die Doppelmonarchie O‹ ster- Steuerabliefert.UmKlartextzureden: reich-Ungarn herangezogen, die als Um die Reichen in einer Gesellschaft, Realunion bezeichnet wurde. Was die weder verherrlicht noch verteufelt war das? Nun eben eine Realunion, werden sollen, braucht sich der Staat ein Konstrukt sui generis. wenig zu ku‹mmern. Sie ko‹nnen sich

163 Josef Taus

selbst helfen. Den Armen muss ge- Teil — das sei klar gesagt — bislang o‹ko- holfen werden, sie sollten Chancen nomisch gesehen zum Teil Eigenkapi- bekommen, in den Mittelstand auf- talersatz. Das hat bislang tadellos funk- zusteigen. tioniert. Bei normalem Wachstum sind Der Mittelstand ist es, der in der die Risiken bei den gut entwickelten Regel mehr als 50% der Bevo‹lkerung Sicherungs- und U‹ berwachungstech- eines entwickelten Industriestaates niken der Banken einigerma§en be- umfasst. Dort muss steuerpolitisch an- herrschbar. In einem marktwirtschaft- gesetzt werden. Es sei nur kurz skiz- lichen System sind aber Verluste nicht ziert: Einmal-Ausschu‹ttungen von vermeidbar, sie halten sich bei einiger- Unternehmen sollen fu‹r das Unter- ma§en stabilen Wachstumsverha‹ltnis- nehmen Abzugsposten sein, das hei§t sen in der Regel in u‹berschaubaren so behandelt werden wie Zinsen. Ver- Grenzen. Die Situation‹ andert sich, wenn, aus welchen Gru‹nden immer, wachstumsschwacheodergarPerioden einer schrumpfenden Wirtschaft eintreten. Mit steigenden Insolvenzen, zunehmendem Liquidita‹tsbedarf, sinkenden Investitionen‹ andert sich das Risikoprofil einer Wirtschaft und das Risikoverhalten der Kreditgeber. Die unterschiedliche Haltung zum luste von Risikowertpapieren sollten Risiko von Unternehmen vergro‹§ert fu‹r jedermann absetzbar sein — um sich in krisenhaften Perioden im Steuerausfa‹lle nicht zu gro§ werden Kreditapparat, nicht der Preis fu‹r zu lassen, wa‹re auch eine abgestufte Kredite — der Zins — ist dann entschei- Deckelung denkbar.Zinsen fu‹r Kredite dend, sondern die sinkende Neigung zum Ankauf von Risikowertpapieren zur Krediterteilung aus Angst vor sollten ebenfalls absetzbar sein, Decke- den wachsenden Risiken spielt die ent- lung ist vorstellbar. Das EU-Recht scheidende Rolle. Die Verfu‹gbarkeit sollte zugestehen, dass ein Mitglied von Krediten fu‹r Unternehmen ist ent- zur Fo‹rderung seines Kapitalmarktes scheidend. Wird der Liquidita‹tsbedarf diese Ma§nahmen nur fu‹r Gewinn- nicht hinreichend gedeckt, beginnt in wertpapiere von Unternehmen im der Regel in den Unternehmen der eigenen Land ermo‹glicht. Also, wenn Kampf gegen die Kostenremanenz: In- ein O‹ sterreicher US-amerikanische vestitionen werden geku‹rzt, Arbeits- oder franzo‹sische Risikowertpapiere kra‹fte werden freigesetzt. kauft, gelten diese Vorteile nicht. In welche Richtung entwickelt sich Auch A‹ nderungen im Gesell- nun das Bankgescha‹ft? Es gibt eine schaftsrecht wa‹ren notwendig, doch intelligente Definition des Bank- darauf sei nur hingewiesen, ebenso gescha‹ftes, die vom deutschen O‹ kono- auf die Bedeutung von ªprivate equi- men Wolfgang Stu‹tzel stammt: Bank- ty-Gesellschaften usw. gescha‹ft ist ein Handel mit Risiken. Nun aber einige Hinweise zur Wenn nun eine so wichtige Branche Kreditfinanzierung. Das wesentlichste wie die Banken ihre Gescha‹ftspolitik Elemente fu‹r die Au§enfinanzierung in Richtung ªRisikoaversion oder, an- in O‹ sterreich waren und sind Bank- ders formuliert, Risikovermeidung kredite. Sie sind zu einem erheblichen durch Bu‹rokratisierung‹ andert, wie

164 Josef Taus

das Basel II z. B. birgt, dann ist das ein ner mo‹glichst gro§en Anzahl von An- Risiko fu‹r eine Marktwirtschaft. Der legern. Das hei§t, es kann kein Markt Preis des Geldes, der Zins, ist — wie allein der Institutionen und ªReichen erwa‹hnt — nur ein Teil der Wett- sein, sondern es sollte — da ist freilich bewerbspolitik einer Bank. eine perso‹nliche gesellschaftspolitische Wesentlicher ist das Element Wunschvorstellung enthalten — auch Risikobeurteilung. Der Wettbewerb und zu einem guten Teil ein ªMarkt unter Banken spielt sich vor allem in des Mittelstands sein. Darauf wurde der unterschiedlichen Einscha‹tzung weiter oben schon hingewiesen. Die des Risikos ab. In einem bestimmten Mittel hiezu gibt es in O‹ sterreich. Nur: Fall gewa‹hrt die Bank A einen Kredit, Es sind meines Erachtens einige die Bank B wu‹rde das nicht tun. Das ist wesentliche A‹ nderungen im Steuer- das entscheidende Wettbewerbsele- system notwendig — in der Ku‹rze einige ment. Wenn nun im Licht von Basel Hinweise: II die Banken ªRiskmanagements ein- Risikobereite Mittel sind in O‹ ster- richten, die oft mehr als zwei Dutzend reich hinreichend vorhanden. Eine abgestufte Ratings enthalten, dann einzige Zahl mo‹ge dies verdeutlichen: klingt das nach Orwells ª1984 im DasVolumenausla‹ndischerEmittenten Bankgescha‹ft: Bu‹rokratismus pur. Viel in o‹sterreichischen Investment- zu spa‹t beginnt nun in Europa die fonds betrug Ende 2002 rund 60,7 organisierte Kritik an Basel II. Mrd EUR, wenn davon nur 20% in Allgemeine, auf Gesetzesebene o‹sterreichischen Risikowertpapieren gehobene Regeln zur weitgehenden angelegt worden wa‹ren, also rund Risikovermeidung einzufu‹hren hei§t, 12 Mrd EUR, wu‹rde der organisierte das Wesen des Bankgescha‹ftes in einer Kapitalmarkt in O‹ sterreich etwas Marktwirtschaft misszuverstehen. Um anders aussehen, ich halte das fu‹r Missversta‹ndnissen vorzubeugen: Es mo‹glich, aber nicht unter den gegen- soll leichtsinniger Risikopolitik nicht wa‹rtigen Verha‹ltnissen, sie geho‹ren das Wort geredet werden, aber Verein- grundlegend gea‹ndert, wenn nicht, heitlichung von Risikobeurteilung, wird der o‹sterreichische Kapitalmarkt ªBestrafung von schwachen Unter- das bleiben, was er seit Jahrzehnten ist: nehmen mit ho‹heren Zinsen, ist eine ein Mauerblu‹mchen im europa‹ischen marktwirtschaftlichem Denken zu- Kontext. Aber: Wir sind nicht nur widerlaufende Vorgangsweise. Dann Kapitalexporteure, wir sind auch ko‹nnte gleich eine Kreditverteilungs- Humankapitalexporteure. Der Brain- beho‹rde eingerichtet werden, das wa‹re Drain aus O‹ sterreich, vor allem bei einfacher. Reduzierung des Wett- der technisch-naturwissenschaftlichen bewerbs unter Banken ist mindestens Elite, ist erheblich. Er ist durch den so schlimm wie u‹berhaupt Einschra‹n- Import von wenig qualifizierten Per- kung und Behinderung des Wett- sonen nicht zu ersetzen, darauf sei aber bewerbs in anderen Branchen. Ge- nur gewisserma§en in Parenthese hin- schieht das noch durch staatliche An- gewiesen, ohne einen xenophobischen ordnung, dann ist das eine Su‹nde wider Hintergrund. den Geist eines Wettbewerbssystems. Voreinigen Jahrenerza‹hlte mir z.B. Noch eine U‹ berlegung sei ange- FritzPaschke,dassanseinemInstitut an fu‹gt. Ein unter den gegebenen Verha‹lt- der Wiener Technik sehr viele talen- nissen einigerma§en funktionierender tierte Absolventen vor allem nach Kapitalmarkt bedarf der Teilnahme ei- Deutschland und den USA beruflich

165 Josef Taus

auswandern und dort bedeutende technisch-o‹konomischen Sinn ent- Karrieren machen. wickelt ist, von der Effizienz des Bil- Nun einige U‹ berlegungen zu In- dungssystems abha‹ngig, von der gesell- vestitionen. Die Investitionsta‹tigkeit schaftlichen Bewertung von Bildung ha‹ngt in einer Wirtschaft mit nicht und Ausbildung, vom Glauben an zu stark differenzierenden Einkom- den Fortschritt, vom Stellenwert von mens- und Vermo‹gensstrukturen, das Wissenschaft und Forschung in einer hei§t in einer Gesellschaft mit einem Gesellschaft, von der unternehmeri- Mittelstand, der mehr als 50% der schen Substanz, von der Ausnutzung Bevo‹lkerung umfasst, zu einem erheb- des unternehmerischen Potenzials ei- lichen Teil von der Verfu‹gbarkeit von ner Gesellschaft, vom Willen und externen Finanzmitteln ab. Gleich- dem Mut zum Eingehen von Risiken; gu‹ltig, ob diese in Form von Bank- ohne das Wissen und die Akzeptanz krediten oder externen Eigen- oder von Risiko, ohne die Akzeptanz, dass Quasieigenmittelzufu‹hrungen bereit- auch Scheitern mo‹glich ist, gibt es kei- gestellt werden. Banken sind ja nur nen technischen Fortschritt. Ohne deshalb im 20. Jahrhundert gro§ ge- technischen Fortschritt gibt es wahr- worden, weil es eben zu einer A‹ nde- scheinlich kein einigerma§en kontinu- rung in der Einkommensverteilung ierliches Wirtschaftswachstum und und damit zum Massensparen kam. damit keine steigenden Reallo‹hne, In welcher Form nun der Finanzmittel- keine hinreichenden Gewinne. transfer vom Sparer zum Investor statt- Um es deutlich zu machen: For- findet, ob durch Kredite oder Eigen- schung und Entwicklung sind teuer mittel, ist o‹konomisch gesehen wenig und riskant — fu‹r einen kleinen Indus- relevant, ist aber in den meisten triestaat wie O‹ sterreich, mit seiner Rechtsordnungen anders geregelt. Be- im Wesentlichen mittelsta‹ndischen sonders wichtig sind aber immer die Wirtschaft, eine nationale Herausfor- Finanzierungsspielregeln,‹ andern sich derung. Ein risikoavers werdendes diese,wiedasz.B.zurzeitimdeutschen Bankensystem, ein mangelhaft funk- Sprachraum der Fall sein ko‹nnte, durch tionierender Kapitalmarkt sind keine eine bewusste Risikoreduktionspolitik hinreichende Voraussetzung, um im der Banken, dann ist der wirtschaft- internationalen Wettbewerb mithalten liche Dauereffekt dieser A‹ nderung zu ko‹nnen. Soweit das heute einiger- der Spielregeln, na‹mlich eine Wachs- ma§en abscha‹tzbar ist, wird tech- tumsbremse, wahrscheinlich. nischer Fortschritt und damit auch Woher kommt Wachstum, woher Wachstumspolitik noch fu‹r Jahrzehnte kommen steigende Reallo‹hne und eine das Alpha und Omega wirtschaftspoli- u‹ber den Zyklus hinweg zumindest tischen Handels bleiben. Allerdings gleichbleibende Kapitalrendite? Lange sollte die Mahnung P. A. Samuelsons hat man es nicht genau gewusst, aber nie vergessen werden: ªHistorische seit einigen Jahrzehnten ist es ziemlich Trends stellen keine unaba‹nderliche klar, empirisch festgestellt: Es ist zum Entwicklung dar. Dass es diese Trends gro§en Teilder technische Fortschritt, im Wirtschaftswachstum gibt, mag der diese Entwicklung gebracht hat. vielleichtzudemSchlussverleiten,hier Technischer Fortschritt fa‹llt nicht handle es sich um unvermeidliche Ent- vom Himmel, er ist das Ergebnis eines wicklungen, also beispielsweise zu der umfassendengesellschaftlichenProzes- Annahme, dass wir fu‹r alle Zeiten mit ses. Er ist, je ho‹her eine Gesellschaft im einem raschen Anstieg der Pro-Kopf-

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Produktion sowie der Reallo‹hne und unserer Umwelt no‹tigen Ma§nahmen der realen Produktionsleistung rech- nicht mehr durch den technologischen nen ko‹nnen. Fortschritt abgefangen werden. Die Dieser verlockenden Vorstellung Periode seit 1973 — mit einer deutlich eines konstanten Wirtschaftswachs- langsameren Wachstumsentwicklung, tums sollten wir widerstehen, denn weniger ausgepra‹gten Reallohnsteige- damit wu‹rden wir falsche Lehren aus rungen und geringeren Zunahmen Geschichte und Volkswirtschaftstheo- der Produktionsleistung pro Arbeits- rie ziehen. Obwohl es sich um anhal- kraft — soll uns daran erinnern, dass tende Trends handelt, zeigt die na‹here kein einziges Gesetz der Volkswirt- Betrachtung, dass es innerhalb von schaft garantieren kann, dass die Zu- zehn- oder mehrja‹hrigen Perioden kunft ebenso wie die Vergangenheit immer wieder zu starken Schwankun- durch ein kra‹ftiges Wachstum der Ein- gen oder Abweichungen vom Durch- kommen gekennzeichnet sein wird, schnitt gekommen ist. Es gibt schlie§- wiewiresimauslaufendenJahrhundert lich auch keinerlei theoretischen erleben durften.1) Grund anzunehmen, dass der tech- Es ist zu hoffen, dass es gelingt, ein nologische Wandel immer in dem- nachhaltiges Wachstum noch fu‹r ge- selben Tempo fortschreiten wu‹rde, raume Zeit zu erreichen. Denn in praxi und dass unser Lebensstandard immer darf auch nie vergessen werden, dass weiter steigen muss. Irgendwann kann westliche Demokratie und Marktwirt- das Ertragsgesetz wieder schlagend schaft mit hoher Wahrscheinlichkeit werden, oder vielleicht ko‹nnen eines siamesische Zwillinge sind, und es frag- TagesdiegegendieUmweltverschmut- wu‹rdig ist, ob das eine ohne das andere zung oder eine globale Bedrohung existieren kann. §

1 Samuelson, P.A. und W.D. Nordhaus. 1998. Volkswirtschaftslehre. U‹bersetzung der 15. amerikanischen Auflage. Wien/ Frankfurt: Wirtschaftsverlag Carl Ueberreuter. S. 625 f.

167 Karl-Heinz Grasser Karl-Heinz Grasser Austrian Federal Minister of Finance

Topical Budgetary and Fiscal Issues

Well, indeed, I am happy that this conference organized by the Oester- reichische Nationalbank is being held for the31st time.Ofcourse,discussions on pertinent economic issues are important for the country, for the central bank and for the population at large. When I talked to Vice-President Papademos over dinner yesterday, I tried to pin him down so that he will concede that an economic recovery is already underway. He hasnt quite said that but lets give an overview of the situation. There are different opinions. I talkedtosomewhoarefullofeconomic pessimism and who say the current juncture—thethirdyearofaneconomic downswing — is catastrophical. On the other hand, ladies and gen- tlemen, consider for a moment what has happened in these three years and what had happened before that. There was a period of ten years of an economic upswing which we had hardly experienced after the Second World War. It lasted for ten years, and now we have entered a time that was coined by September 11, 2001. — An event that at that time nobody would have considered to be con- ceivable. Still, we mastered this Karl-Heinz Grasser

event: The financial markets situations of companies. Then I think showed quite some stability and this also will have a positive confidence resilience. impact on CEOs and on executive — Let us think of the fight against ter- levels.Whenyouhaveenoughliquidity, rorism, the war in Afghanistan, and then you may decide to resume invest- the current situation in Iraq: Will ing. Investments are, of course, a nec- there be a war or not? What will all essary basis for a sustainable upswing, thenegativeimpactsbeontheecon- for sustainable growth. omy? Then the war was launched I think we can be optimistic, more with the negative impacts on the for the U.S.A. than for Europe in par- oil prices, etc. ticular when we look at the expansive — In addition, the confidence in the monetary policy and fiscal policies, economy was shaken by the ac- with low interest rates and the tax package of 330 billion dollars. So, if you look at the dollar-euro-relation fromtheUSpositionandifyouconsider in addition that President Bush knows this very well — Kissinger was here yesterday and he said the elections in the United States were won via the economy and not via security policy or foreign policy — you will have this counting scandals, such as Enron, extreme pressure to set an economic etc. policy agenda. So Bush will do So, in considering what has hap- everything to avoid what has happened pened over the past three years, we to his father. He will push for the may say that the world-wide economy upswing. is still quite stable and resilient. Sir Karl In Europe, the Lisbon strategy Popper once said optimism is a duty,is serves as a framework. By 2010 we an obligation. And we know that fore- want to be the most competitive area casting is tough, especially when it con- in the world, the area with the highest cerns the future. The recovery has been growth. Well, this is a rather lofty aim, forecast twice and everybody shirks and we also know that the strong from forecasting it a third time and impulse for growth will come from making a mistake. But I do think the United States. and I admit that one should not play What are our expectations in the on sentiments in the central bank, third year of weak economic develop- butIpersonallyhaveafeeling,and there ment?Ifwearetoopessimisticandifwe are some indicators that confirm this regard growth rates of 1% in Europe, of that we can think positively when it 2% in the United States, as catastroph- comes to the future. And I do hope ical, then we will have to ask ourselves: the financial markets are also right Is it realistic to expect growth rates of by confirming my optimism by and 5% in the United States? I think the US large. You see that the trading volume is well on its way and I think Europe has gone up and how volatility has gone gives no reason for pessimism either. down, that in the meantime we do have But there is still the disadvantage that higher levels of share prices and that the we in Europe are less flexible, that we trend is positive as regards the earning are less deregulated, that we are less

170 Karl-Heinz Grasser

adaptable than the US, and therefore I ities — stability-oriented fiscal policies think, as far as the economic upswing is will have to be a central pillar for our concerned, we are lagging behind by growth policy combined with price about three to six months. So there stability,aswasmentionedbyGovernor is this time lag, no doubt. But we Liebscher. may add that there is no economic in- And this takes me to my second dicator pointing to an upswing in the subject — growth policy. One thing Europe of the 15. is evident. We must implement the Still, we can be glad about the past Lisbonstrategyatthenationallevelwith policy of the European Central Bank. much more determination, in particu- Of course, no central banker likes a lar structural reforms. Of course, this finance minister commenting on mon- is the way to achieve growth in the etary policy. That is why I am simply long run. The issue is how much lookingforwardtothefuture monetary do we translate policy of the European Central Bank. into national We received this positive signal, i.e. legislation? the changed definition of price stability Here the sit- of (close to) 2% rather than between uation differs de- zero and two. cisively, if we And thus the question arises: What compare 2003 flexibility do we have? Although co- with the years ordination is an interesting thing, we 2002 and 2001. do not want ex ante co-ordination be- I may refer to the Austrian situation. tween monetary and fiscal policies. To In yesterdays Cabinet meeting we be clear, I repeat that we shouldnt have had a very intensive and vivid political any ex ante co-ordination. Of course, debate. It was a tightrope walk over the thepolicymixmustberight,andweare past weeks, I must say. Yesterday, how- movingtowardsanexpansivemonetary ever, we agreed on essential structural policy, no doubt. reforms in Parliament, with the most I strongly advocate a strong fiscal comprehensive pension reform that policy. The Stability and Growth Pact Austria has ever seen in its Second Re- is important to me, just as an active public. growth policy for Europe is. These The situation differs between 2003 arethetwopillarsthatwehavetocentre and the years 2002 and 2001, because on.Therearemanyempiricalexamples both in Europe and in the Member that show that an expansive fiscal policy States, the discussion about reforms towards larger deficits does not lead to has been going on now for two years. more growth and employment in the And itsclear that we do have a problem long run. This is a fact, and this is rea- here. And the major part of the pop- sonable, and therefore we must not ulation and also the trade unions know make this mistake again to engage in that we have got a problem. And this is deficit spending. The next question why the approaches to solve the prob- is: How do we interpret the Stability lems are different. The discussion has and Growth Pact? The key issue is: intensified and the pressure to imple- Dowe adhere to the Pact or not? I think ment reforms has also intensified. In thatnomatterwhatthedetailsmaylook Germany and France, this pressure like, in the medium and long term — has led to problems, and there is need especially, if we think of pension liabil- for action also as far as curbing high

171 Karl-Heinz Grasser

deficits is concerned.I am talking about the leading edge. It is quite obvious that Austria, because in Austria we find if an employee can stay in a company ourselves in a better position than forever because you cannot give notice the average EU Member State. And to this employee, then the whole struc- therefore, it was much more difficult ture will become petrified and rigid. for us to implement the reforms in a So, we need deregulation, we need situation, more flexible labour laws. — where we have record employment And, of course, the Single Market levels, has not been completed yet. Many — where we have the third-lowest issues still remain to be tackled. Look unemployment rate in Europe, at the energy market, at the financial — where we have a positive trade services, at privatisation in many balance, countries. So, we still have a lot of work to do. How will we tackle these challenges? Wewill aim at a labour-sustainable growth and combine thiswith pension reforms and thus with the issue — Michael Mussa mentioned this today: Can we integrate the ageing population into the employment process, andwhat does this entail for our growth poten- — a positive current account, tial? If we do not manage to make peo- — an inflation rate significantly ple participate in the working process — below 2%, in Austria people usually say that we — a growth rate above the European have the oldest students and the young- average. est retirees — it will be crystal-clear that Insuchasituationitwasmuchmore the economy would go from a growth difficult for us politicians to give an rateofpotentialoutputof2%toaround explanation to the Austrian people that 1.5%. This is the threat, and this is why unpleasant reforms will have to be wehavestartedthereformprocess,and implemented if we want to guarantee we need these reforms. And this is why sustainablegrowthintheyearstocome. we need the participation of the older So, when you have such a positive generation in the working process. And environment, it will be much more I am positive that these reforms will be difficult to push reforms. actually implemented. Of course, one can refer to France, Turning back to the current Germany, Italy, and many other coun- Austrianpolicy,somebodytalkedabout tries and the debates that are going on the supply-side revolution since the there.Thiscertainlyhelpsyoutoimple- year 2000. And I fully underline this. ment nationally what is actually impor- We do not need a demand-side policy tant and imperative. thathas prevailed over thepast decades. A labour market reform in addition What we need are supply-side reforms. to pension reforms also plays a decisive This is the key to more growth. And we role, especially when looking at Ger- have pressed this part with determina- many and France. Because adaptability tion since 2000, combinedwith a stable and adjustment are important in a financial policy and fiscal policy, priva- global economy. Here, the US has tisation, liberalisation, pension reform

172 Karl-Heinz Grasser

in 2000 and now an administrative re- sustainable growth and greater inde- form and a clear objective to consoli- pendence from Germany. For a long date the public budget and the aim to time, Germany was the benchmark reduce taxes. At the moment, we face a for Austria. Today, our benchmark is taxburdenofaround44.5%ofGDP,we no longer Germany. Our benchmark will move down to 40% by 2010, as a is the top 3 position in Europe, and this major policygoal,includingshiftsinthe is where we want to get. This is our structure of taxation. Structural re- objective. And thus competition within forms on the one hand, stability-ori- Europe is important, because it will ented growth on the other hand will help us to be successful. § be combinedwithin aten-year strategy. Let me turn to the enlargement of the European Union, which should be conceived as an opportunity. We have welcomed the ten acceding countries that will join us most warmly. We Austrians have said: We must invest in these countries in transition. This is an opportunity for growth. This is an opportunity to bring about changes. Well, summing up, this all has helped Austria to achieve higher

173 31. Volkswirtschaftliche Tagung 2003 31st Economics Conference 2003 Vito Tanzi Jon Cunliffe Jens Henriksson Martti Hetema‹ ki Kees van Dijkhuizen Fiskalpolitisches Statement und Podiumsdiskussion: Reformerfahrungen im o‹ffentlichen Sektor

Fiscal Policy Statement and Panel Discussion: Experience with Public Sector Reform Vito Tanzi Undersecretary of State, Italian Ministry of Economic and Finance1) Ludger Schuknecht European Central Bank1)

Public Finances and Economic Growth in European Countries

1 Introduction the OECD (2003). This study has Growthisacomplexphenomenonthat, looked at many factors that may con- in spite of considerable progress over tribute to growth. Its major conclusion the years by economists such as Schum- is that long-term sustainable economic peter, Kuznets, Solow, Dennison, Lu- growth has many sources and cannot be cas, Barro, Romer and others, is still fully steered by policy-makers. not well understood or explained. Relating growth to the public finan- cesofcountriesmaybeaquixoticenter- prise because of the role played by non- fiscal variables and because public finances can be decomposed into many variables some of which may be more important than others. Furthermore, some of the more important ones cannot be measured.2) In this paper we are concerned about sustained, or long- There is the experience of countries, run, growth rather than about short- such as Japan, that after a sustained run or cyclical developments. Under and fast rate of growth come to an al- specific circumstances, Keynesian fis- most full stop. And countries, such as cal, counter-cyclical policy can be use- China and Korea, that after stagnating ful to pull a country out of a tem- for centuries start growing at avery fast porary slowdown. However, counter- pace. Thus, the miracle of growth re- cyclicalpolicycannotpromotesustained mains as mysterious as most miracles growth. It is important to keep these and attempts to explain it through two aspects separate because in the cur- the behavior of single or few variables rent popular discussion, they are often (capital, labor, technology, human confused and it is argued that the aban- capital, etc.) often prove disappointing. donment of the Stability and Growth The unexplained part of growth re- Pact and a reduction of interest rates mains always uncomfortably large in by the European Central Bank (ECB) spite of the fact that, as time passes, would promote growth. more and more variables are added in the attempts to provide fuller ex- 2 Public Finances and planations of the miracle of growth. Growth: Theory A major attempt at explaining the If public finances affect growth, they Sources of Economic Growth in OECD will do it through one or several of Countries has been made recently by the following variables.

1 The views expressed are strictly personal and do not necessarily reflect the official views of the institutions of the authors. 2 Even though the theoretical public finance literature has many references togrowth and many public finance books have the wordgrowthintheir titles,thespecializedliteratureongrowthhasmuchlesstosayaboutit.Forexample,agoodrecentbook on economic growth almost totally ignores public finance (see Jones, 2002)

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2.1 The Level of Taxation Japan); or because the macroeconomic A high level of taxation is likely, ceteris imbalances could create high inflation paribus, to reduce the growth potential or other macroeconomic problems (as of a country because of the negative used to be the case in Latin American impact that it might have on work in- countries).1) Often, in these situations, centives, investment, saving decisions, the monetary authorities react by rais- and on the allocation of resources in ing interest rates thus reducing growth. general. In a global environment high At least in theory, there must be a taxes in one country may also reduce level of taxation that could be consid- growth in that country by inducing cap- ered optimal from a growth point of ital flight towards lower taxed coun- view because it would be just sufficient tries. It is for these reasons, in addition to finance the essential public services in to the belief that lower taxes may in- an efficient way. When the tax level of a crease demand in the short run, that country exceeds this optimal level, a several countries (France, Germany, lowering of it could lead to faster Italy, U.S.A.) have recently reduced growth. their taxes. The level of taxation is im- Two observations can be made re- portant because (a) taxes are almost al- lated to this aspect. First, the precise ways distortive because truly neutral determination of this optimal level is taxes do not exist in the real world; pratically impossible to make in the real and (b) taxes transfer resources from world. Second, all the industrial coun- the private to the public sector and tries have now tax levels that, at least there is often the presumption that from the point of view of financing es- the private sector is more efficient in sential spending, are above the optimal their use. level. Therefore, a reduction of the tax While taxes may reduce growth by level in these countries would promote being too high, they might also reduce a faster rate of growth as long as this it by being too low. This will happen if reduction were accompanied by a re- the level of taxation is too low to give duction in non productive spending. the public sector of a country the re- We shall return below to the connec- sources necessary to provide essential tion between public spending and government services. Here, the pre- growth. sumption is that there is a level of resources that can be used more pro- 2.2 The Structure of Taxation ductively in the public than in the pri- Over the years, in an enormous liter- vate sector. Furthermore, if, over a ature, public finance experts have an- sustained period of time, government alyzed the impact of different taxes on revenue is much lower than total public important economic variables. In fact, spending, (thus, creating unsustainable thetaxsideofthebudgethasbeenmuch macroeconomic imbalances and public morestudiedthantheexpenditureside. debt accumulation) growth may be re- These experts have generally con- duced because the private sector might cluded that not all taxes have the same come to see the fiscal situation as un- impact on the economy. Taxes that are sustainable (as it may be happening in imposed with high marginal rates are

1 The OECD study (2003) finds a negative correlation between the rate of inflation and economic growth. But no relation is evident at low rates of inflation (p. 65).

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more damaging because economic of tax systems may have an impact theory teaches that the dead-weight on growth. Recently the Bush admin- cost of taxes grows with the square istration has been arguing that a reduc- ofthemarginaltaxrate.For thisreason, tion of the tax on dividends will pro- on efficiency grounds, value added mote growth. The reform just enacted, taxes (that are basically proportional will reduce the tax on dividends but taxes on consumed income) are pre- will also reduce the level of taxation, ferred by many tax experts to personal combining thus incentive and demand incometaxesthatareoftenappliedwith effects. Expenditure is not supposed high marginal tax rates on both con- to change, thus fiscal deficits would sumption and saving.1) When income widen unless the reform has a substan- taxes are applied with high marginal tial positive effect on growth. tax rates, they are likely to have signifi- 2.3 Tax Stability Thereis an old adage that maintains that old taxes are good taxes because economic operators have got used to them and the economy has already incorporated their effects. For example, existing taxes have been capitalized in the prices of the assets. While this aspect should not be overplayed, because, as cantnegativeeffectsonvariablessuchas mentioned above, there are tax changes work effort, saving and investment that that improve the efficiency of the econ- are important determinants of growth. omy,itisalsotruethatwhentaxsystems A recent paper using OECD data has are changed frequently in their struc- provided empirical support to the con- tural and level aspects, these changes clusion that income taxes reduce the introduce tax uncertainty, and this rateofsaving(seeTanziandZee,2000). could have negative effects on growth. For the reasons mentioned above, Tax reforms cannot be made frequently revenue neutral tax reforms can affect and cannot be stretched over too long a a countrys capacity to grow by chang- period of time when they are made. ing the distortionary impact of taxes. Uncertainty makes more difficult eco- For example, the tax reform intro- nomicdecisionsinvolvingthefuture.It, duced by the Reagan administration thus, encourages individuals to post- in 1986 probably contributed to the pone making some decisions. This faster growth that the U.S. economy can happen especially when tax uncer- experienced in later years. In general, tainty is likely to create time consis- reforms that broaden the base of in- tency problems. For example, a tax re- come taxes and reduce the marginal form may introduce tax incentives to rates, or that replace income taxes with stimulate investment but, because proportional sales taxes improve the the incentive will cost revenue to the efficiency of an economy. However, government, the investors may fear even the change of specific features that they may be removed or reduced

1 For similar reasons there has been a strong movement especially in the United States to replace traditional personal income taxeswith flatrate taxes. If the flat rate taxeswere levied on consumed income, they would goa long way toward eliminating distortions.

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after theinvestmentshavebeenmade.1) some countries, such as Italy, taxes on Some commentators on the current transactions connected with particular American tax reform have referred forms of contracts (sales of property, to the instability in the U.S. tax system rentals, etc.) remain very high and introduced by recent changes. But this are likely to reduce transactions and is not a typical U.S. phenomenon as, growth. until recently, the United States had had infrequent tax changes. A soon 2.5 Public Spending to be published survey of Tax Systems We now shift our attention to public and Tax Reforms in Europe has evi- spending. It is obvious that the govern- denced this increased instability of ment collects taxes to finance its spend- European tax systems (see Bernardi ing. Therefore, one cannot or should and Profeta, 2003) not separate the revenue side from the expenditure side of the budget. 2.4 Other Tax Aspects A government that collected taxes in the most While the attention of economists is neutral wayand used the revenue collected to often directed towards tax levels and finance, in the most efficient way, public statutory tax structures, the reform of spending that is essential to the functioning the tax administration may also play a sig- of the economy would promote growth. Un- nificantroleifitbringsaboutalowering fortunately, this is rarely the case in of compliance and administrative costs. the real world. The taxes collected Recent studies have shown that these are often far from being neutral. The costs, and especially compliance costs, expenditure made are not all essential can be very high in some countries (see to the functioning of the economy, and Sanford, 2000). Unfortunately, the in- they are made with substantial de- formation needed to take this factor grees of inefficiency. They are thus un- into account in studies of growth is productive. In terms of the objective not available. of growth, unproductive expenditure A final point to be made in relation often tends to be a large proportion to the impact of taxes on growth is the of total spending. role that some taxes (registration taxes, To do empirical work, it would be transfer taxes and so on) have in dis- necessary to separate productive from couragingtransactions.Thisisanaspect unproductive expenditure and distor- generally ignored by economists, ex- tionary from neutral taxes. But there cept for the recent attention to the are formidable theoretical obstacles Tobintax. In a recent paper (in Italian), to this distinction and of course insur- one of the authors of the present paper mountable practical difficulties. has elaborated on the connection be- In the empirical literature that tries tween transactions, taxes, and eco- to link public finances with growth, nomic growth. Simply put, the more three expenditure variables have been transactions take place in an economy, considered: public investment spend- thegreater thechancethattheeconomy ing, public consumption spending will grow. It follows that if some taxes and social welfare or redistributive impede, or reduce, the number of spending. Some of this literature has transactions, they will have a negative also considered public spending that impact on growth (see Tanzi, 2003). In increases human capital and spending

1 Of course, the change to remove the incentives may be made by another government.

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that contributes to innovation such as efficient one. But the level of core that for research and development spending is also likely to depend on (R&D). the state of technology which may create oreliminate public goods and on the 2.6 Core Spending development of the private market It seems trivial to mention that there is which may be able to replace the gov- some governmental activity and some ernment in the protection against some related public spending that is essential risks. These developments make possi- for the performance of the economy. ble the transfer of some activities from Public finance text books provide the the public to the private domain or the theoretical reasons for this spending. other way around, thus reducing or This core, or essential, or produc- increasing public spending (see Tanzi, tive spending may be as important to 2001). growth as capital andlabour.Without it The level of core spending is likely the economy will not function well and to be much lower than the current level willnot grow.Thelevelof thisspending of total public spending in industrial depends on how efficient the govern- countries. The reason is that in the past ment is in using the resources available. half century many of these countries Thelessefficientisthegovernment,the haveallowedpublicspendingofapurely higher must be the spending level. But redistributive or transfer nature to the role of the government and needed grow rapidly (see Tanzi and Schu- spending depends also on the level of knecht, 2000). While transfer spend- development of the country and on the ing can be justified by ethical or poli- sophistication of its market. tical reasons, much of it is unlikely to Core spending would include contribute to growth in spite of some spending for essential administrative arguments made in its favour.2)For services, justice, basic research, basic example, much spending for health education and health, public infrastruc- and pensions goes to individuals who ture, internal and external security and have already left their productive so on. Itwouldexclude publicspending activities and cannot thus contribute of a purely redistributive nature as well to growth. This spending is of a as inefficient spending made for polit- consumption-sustaining nature. In ical or other reasons.1) conclusion an increase in efficiently The level of core spending is of executed core spending can promote course very difficult or even impossible growth while an increase in non-core to determine in part because of theo- spending can be assumed to retard retical difficulties in deciding what to growth. include and because of the inefficiency with which public resources are used. 2.7 Public Investment A more efficient government may be Public investment is a narrower con- able to provide the same essential serv- cept than productive or core spending. ices with less spending than a less It is more specifically directed to the

1 Some economists have argued that some welfare or redistributive expenditure could also be considered productive because it reduces some risks for individuals thus allowing them to play a greater role in the economy. 2 It must be recalled that much of this spending is not pro poor but of a fiscal churning kind. The government taxes you to finance me; then it taxes me to finance you. In the process it introduces disincentives or inefficiencies on both the taxation and the spending side.

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creation of physical infrastructures. It is other OECD country — without much often argued that public investment on impact on growth. infrastructure is necessary to crowd in Third, the increase in the fiscal def- private investment and to reduce some icit and in the public spending that private costs. Normally this type of would accompany the increase in in- public spending is limited to around vestment spending could send some 2—3% of GDP and is much favoured negativesignals to themarketandcould by economists and politicians. At the even crowd out some private invest- moment, there are proposals within ment. Europe aimed at relaxing the parame- Still,inspiteofthesereservations,it ters of the Stability and Growth Pact to must be maintained that properly de- introduce a golden rule, as in the fined public investment and efficiently United Kingdom, that would exclude executed public projects would con- public investment from the fiscal tribute to growth. accounts relevant to the European Unions Pact. 2.8 Fiscal Deficits and Public Debt There is no question that (a) public The relationship between public finan- investment may contribute to growth; ces and economic growth may come and (b) if it does, there may be a good from differences between the level of argument for excluding it from public spending and ordinary public politically imposed fiscal ceilings. In revenue. If these differences are large general one would agree that reducing and are sustained over a period of time, government consumption to finance they may lead to the accumulation of higher public investment would be a large publicdebts that require servicing growth stimulating policy. It could also and that under certain circumstances be argued that raising tax revenue to could become unsustainable and lead allow higher investment spending to financial crises. In normal situations could be a growth-promoting policy. these large public debts always lead to It is, however, more questionable higher tax levels to service them. whether financing higher investment In a recent article, Tanzi and Chalk spending through a higher fiscal deficit (2000) have analysed the relationship is necessarily a growth friendly policy. between large public debt and eco- The reasons for this scepticism are nomic growth. They identified six several. channels trough which public debt First, the definition of what is an may reduce the growth rate of a coun- investment is somewhat arbitrary and try. Two of these merit mention. First, could lend itself to manipulation. there is the inevitable and positive Second, investment decisions are relationship between the size of the often made politically and not econom- public debt and the level of taxation. ically.The use of strictly objective cost- High debt requires a higher tax level; benefit analysis has yet to enter this and higher taxes lower the rate of area. There is always the danger that growth because of the distortions at least some of the investments could they create. Second, the servicing of be white elephants with little value the debt often comes at the cost of to the economy. There is the evidence public investment that may be impor- of Japan that over the last decade has tant for growth. increased its public investment to ex- As mentioned earlier, trying to find traordinary level — higher than any a relationship between public finances

183 Vito Tanzi, Ludger Schuknecht

and growth may be a quixotic enter- For taxation, some authors — East- prise. For sure in empirical work it erly and Rebelo (1993); Folster and is not justified to separate the revenue Henrekson (1999); Cashin (1995); side from the expenditure side of the Miller and Russek (1997); de la Fuente budget. And one cannot ignore the (1997); Kneller, Bleaney and Gemmell composition of tax revenue and of (1999); Hiebert, Lamo, Romero de expenditure as well as the difference Avila and Vidal (2002) — have found between revenue and expenditures. significant negative effects on growth as one would expect from theory. Of 3 Public Finances and these, Folster and Henrekson; Cashin; Growth: Brief Literature de la Fuente; and Kneller et al. have Review used OECD sources. There are, how- There is by now a considerable litera- ever, other studies that have not found ture that analyses empirically the rela- any relationship. None seems to have tionship between fiscal variables and found a positive relationship.1) A few economic growth. Much of this work of the empirical studies have dealt has been carried out by macroecono- with the impact of specific taxes on mists who pay little attention to the particular economic variables. For quality and the significance of the data. example, Tanzi and Zee (2000) have For example, in one of these studies, dealt with the impact of direct taxes that about 20 years ago attracted much (income and social security taxes) on political attention and was even men- saving; Daveri and Tabellini (2000) tioned by President Reagan, Marsden with the impact of labour taxes on paired 10 groups of countries showing employment; Daveri and Maffezzoli that low-tax countries such as Brazil (2000) with the impact of labour taxes grew faster than high-tax countries on growth. These studies have used such as the Philippines. OECD data and have found the ex- The author was not aware that pected results. for Brazil, and for some other countries Turning to public spending, the in his survey, he was using only central relationshipbetweenpublicinvestment government revenue, that was less than and growth has attracted the most at- half total tax revenue while for the tention. Significant positive relation- Philippines he was using total general ship for OECD countries has been government revenue. For developing found by Cashin (1995) and by de la countries, most of the empirical Fuente (1997). When public invest- studies have used the data published ment is replaced by the broader cate- intheIMFsGovernmentFinanceStatistics. gory of productive spending, a signif- These data, while the best available, icant and positive relation with growth refer to central government only and was found by Kneller, Bleaney and often have major problems. Many of Gemmell in two studies (1999 and the empirical studies have used four 2000). public finance variables: taxation, For consumption spending, the investment spending, consumption few studies that have dealt with OECD spending, and social welfare spending. countries — Alexander (1990); Dow-

1 Over the years, while at the IMF, one of the authors of this paper tried several times to find a statistical relation between taxes and growth but was unable to do so.

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rick (1993); Devarajan, Swaroop and below the optimum in some spending Zou (1996); de la Fuentes (1997); areas and above it in others. and Kneller, Bleaney and Gemmell Expenditure and tax efficiency also (1999 and 2000) have found either a differs across countries and this is not negative relationship or no significant captured in standard equations that effect. look at levels or ratios of fiscal varia- For the impact on growth of social bles.1) Finally, the timing of effects is welfare spending, some have found difficult to anticipate. After how long significant, negative effects — Korpi an increase in public investment should (1985); McCallum and Blais (1987); lead to higher growth? Lower taxes, if Castles and Dowrick (1990) — but, believed to be sustainable and part of a interestingly, others have found signifi- comprehensive reform package may cant, positive effects — Weede (1986 yield positive effects on investment and1991);Nordstrom(1992),Persson and growth after and Tabellini (1994); Cashin (1995). some time.Lower However, many authors did not get taxes that are any significant relationship. not adequately Thus, with increasing sophistica- financed, that tion in estimation techniques and in signal volatility the use of data some conclusions have of the tax sys- emerged. However, many studies are tem, and that not conclusive and when they are the are prone to re- size of the coefficients differs strongly versal may have no effect or even neg- among different authors and the find- ative effects on growth. Finally,reliable ings are not robust. It is difficult to infra-annual data are not available, and decide how much weight to give to data are not always comparable across these results. countries and over time. The causality between variables For all these reasons, it is under- remains a major difficulty in spite of standable why it is difficult to get the efforts made. For example, higher empirical results that are beyond growth creates traffic problems and questions. It is thus wise to see these other bottlenecks. These bottlenecks results at most as broad indicators of require more public investments. directions or effects. Growth also facilitates fiscal consolidation. Thus, it is easy to argue that it is 4 Public Finances and growth that determines public invest- Growth: Stylized Facts ment, fiscal deficits and some kinds of Rather than adding another (question- spending such as more health expendi- able) econometric contribution to ture because this expenditureis income this literature we will conduct a elastic.Therelationsarealsooftennon- simpler but hopefully still informative linear because marginal returns to exercise, building on and extending a growing public expenditure are likely data set that we had used in the context to decline while marginal costs are of our earlier work on public expendi- likely to increase for rising taxation. ture in industrialised countries (see Furthermore, some countries may be Tanzi and Schuknecht, 2000). We will

1 For a first study that tries to measure public expenditure efficiency, see Afonso, Schuknecht and Tanzi (2003).

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present long-term trends in economic of the decades.2) This is based on the growth and in relevant fiscal variables presumption that it is fiscal variables for country groups, that may be of that influence growth. In addition, particular relevance in the European we present decade averages for gross- context. We will then derive stylized fixed capital formation and employ- facts as to the relationship between ment ratios to explore possible links fiscal variables and growth hoping between fiscal variables and growth that they will hold lessons for country viatheseitems.Pleasekeepinmindthat groups that share certain characteris- the classification of countries as low tics. We will make no claims about growth or high growth refers exclu- causality but simply rely on a priori sively to these countries performance theorizing for judging the results. in the 1990s. We consider 24 OECD countries and allocate them in three groups of 4.1 Per Capita Economic Growth relevance in the European context:1) Economic growth across the different — high- (above-median) versus low- groups was relatively similar in the growth countries in the 1990s 1960s (see table 1). However, per cap- — Anglo-Saxon versus non-Anglo- ita growth was also typically much Saxon EU versus other OECD higher in low-income than in high-in- countries come countries indicating that conver- — big Anglo-Saxon (UK, US) versus gence was taking place in this period. big non-Anglo-Saxon EU (France, Chart 1 illustrates this stylised fact by Germany, Italy) countries plotting the correlation between PPP- Growth data are presented as 10- based per capita GDP in 1960 (on the yearaveragesforeachdecadewhiledata x-axis) and average per capita GDP for a number of fiscal variables are pre- growth in the 1960s (on the y-axis) sented as point-data for the beginning for the 24 sample countries.3) The

Table 1 Real Annual Per Capita Economic Growth, 24 OECD Countries

1960s 1970s 1980s 1990s % Average all countries 4.3 3.1 2.3 2.2

High-growth 1990s1) 4.1 3.2 2.7 3.1 Low-growth 1990s 4.4 2.9 1.9 1.3

Anglo-Saxon2) 3.2 2.1 2.0 2.4 Non-Anglo-Saxon EU3) 4.6 3.1 2.1 2.1 Other OECD4) 4.9 4.3 3.3 2.1

Big continental (D, F, I) 4.3 3.1 2.0 1.4 UK, US 2.8 2.3 2.1 1.8 Source: AMECO. 1) Growth on average equal to or above median of 1.74, all groups exclude Norway. 2) Australia, Canada, Ireland, New Zealand, UK, US. 3) EU except Ireland and UK. 4) Iceland, Korea, Japan, Norway, Switzerland.

1 We exclude Norway as its economic and fiscal performance has been mostly affected by oil price developments. 2 Data for additional fiscal indicators and for all individual countries are provided in a data appendix. 3 Eachdotrepresentsonecountryandthusrespectivevariablesandperiods(orchangesacrossperiods)inthisandthefollowing graphs. All graphs also provide the regression line and basic statistics fora simple logarithmic or OLS regression through the observations.

186 Vito Tanzi, Ludger Schuknecht

Chart 1 Conditional Convergence 1960s

Per capita annual real growth average 1960s

4 y = 3.3941Ln(x) +27.736 R2 = 0.6675 2

0 0 500 1,000 1,500 2,000 Per capita GDP, 1960 (PPP-based)

Source: AMECO and OECD.

Chart 2 Conditional Convergence 1990s

Per capita annual real growth average 1990s

3 y = 2.2081Ln(x) +23.334 R2= 0.2001 2

0 0 5,000 10,000 15,00020,000 25,000 Per capita GDP, 1990 (PPP-based)

Source: AMECO and OECD. poorest and fastest growing economies countries (Italy, Germany and France), at the time were Japan, Greece, Spain plus a few others. Moreover, the rela- and Portugal (dots in the top left corner tionship between per capita growth of chart 1) while the United States, and income level was much weaker Switzerland and Luxembourg were than in the 1960s. Chart 2 represents the richest ones (observations in the the relationship between income bottom right corner). levels and per capita GDP growth in This picture changed drastically the 1990s for OECD countries and over the next 30 years. In the suggests that further income conver- 1990s, average growth in the low- gence is much weaker today than growth countries (which in the 40 years ago. 1960s had grown at an annual rate of Growth developments have been 4.4%) fell strongly and was a mere much more favourable (with average 1.3% compared to more than 3% in growth even rising in the 1990s com- the high growth countries. The paredtothe1980s)inanumberofsmall laggards of the 1990s are the non- catch-up economies and a selection of Anglo-Saxon EU countries, especially other countries. These are mostly the big three continental European countries that, throughout the period

187 Vito Tanzi, Ludger Schuknecht

Table 2 Fiscal Deficits

1960 1970 1980 1990 2001/latest %ofGDP Average all countries 0.9 0.8 À3.0 À2.3 1.2

High-growth 1990s À0.1 0.0 À4.2 À2.1 0.9 Low-growth 1990s 1.7 1.4 À2.5 À2.8 0.3

Anglo-Saxon À0.5 À0.6 À4.7 À3.4 0.7 Non-Anglo-Saxon EU 0.8 1.2 À3.4 À3.0 0.5 Other OECD 3.9 0.4 À1.4 0.7 0.7

Big continental (D, F, I) 1.0 À0.7 À3.9 À4.9 À2.4 UK, US À0.6 0.5 À3.0 À2.6 0.2 Source: AMECO; country groups as in table 1.

Chart 3 Per Capita Growth 1990s Versus Change in Public Debt Ratio 19902000

Per capita growth

4 y = 0.03x +2.2544 R2 = 0.3965 3

0 100 50 0 50 100 Change in debt ratio

Source: AMECO.

had small governments;1) or countries that poor growth in the continental that undertook major reforms, most big 3 is due to the somewhat poorer notably the US, Ireland, Australia fiscal balances or the other way round. and (to a lesser extent) the UK and Interestingly enough, the euro area the Netherlands. grew at a higher annual rate (1.9%) in the 1995—2002 period when fiscal 4.2 Deficits and Public Debt deficits had been constrained by the Turning to the relation between fiscal Maastricht criteria than in the 1980— variables and growth, empirical studies 1995 period when fiscal deficits were have stressed the potential link be- higher (1.8%). tween growth and fiscal deficits. The Growth performance and public evidence on this relation is not obvious debt developments show a more inter- for OECD countries (see table 2). estingpattern.In1970,publicdebtwas There is no large difference across highestinthecountriesthatinthe1990s country groups in the deficit perform- became the high-growth countries and ance over time and in the 1990s. It is in particular in the Anglo-Saxon coun- not possible from the data to conclude tries. This picture changed strongly

1 By small governments we refer to countries with public spending less than 40% of GDP.

188 Vito Tanzi, Ludger Schuknecht

over the next three decades. High- (see table 3). However, especially growth countries were able to reduce the Anglo-Saxon countries were able public debt on average by 7% of GDP to stabilise their spending ratios during over the 1990s while low-growth the 1980s and to reduce them signifi- countries experienced a further in- cantly in the 1990s. Average public crease of 18% of GDP. Debt in the spending in these countries is now well continental big 3 increased by almost below 40% of GDP making them 50% of GDP since 1970 reaching 75% small-government countries in our of GDP at the end of the 1990s. This classification. It was reduced by impor- ratio compares with an average of tant reforms in areas such as social around 50% for Anglo-Saxon coun- security, privatisation, public expendi- tries. Even though it is not possible ture management and budgetary con- to say much about causality from these trols, regulation and other areas. The numbers, the data show that growth UK is the only country in this group and debt move in different directions that runs the risk of leaving this as argued in Tanzi and Chalk (2000). group of low spenders. Spending Chart 3 plots the changes in debt ratios in non- Anglo-Saxon EU countries between 1990 and 2000 and average and in the continental big 3 stabilised per-capita growth in the 1990s for in the 1990s at close to 50% of GDP. the sample countries. Countries that Given that interest rates and interest experienced strong growth also re- payments declined significantly over ported debt reductions with Ireland, the period, primary spending hardly the observation in the top left corner changed in these countries. of chart 3, showing the most dramatic Notable exceptions to the relatively fall in debt. big governments in continental Europe are Luxembourg and the Netherlands 4.3 Total Expenditure which belong to the group of high- Growth patterns across country groups growth countries. The Netherlands reveal some interesting relationships managed a major reduction in public with public expenditure patterns. Total spending ratios since the early 1980s. public expenditure is much higher and This reduction coincided with signifi- has increased much more strongly over cant structural reforms and a revival recent decades in the low-growth than of growth. Its growth rate increased inthehigh-growthcountries.Thestart- from 1.7% in the 1980—1995 period ing points in the 1960s were similar to2.2%inthe1995—2002period.Lux-

Table 3 Total Spending

1960 1970 1980 1990 2000/latest %ofGDP Average all countries 26.5 32.3 40.8 44.0 42.7

High-growth 1990s 27.0 31.5 40.6 40.5 38.9 Low-growth 1990s 26.1 32.7 40.5 46.5 46.3

Anglo-Saxon 28.3 31.8 39.0 40.4 35.6 Non-Anglo-Saxon EU 27.1 33.2 45.4 49.2 48.4 Other OECD 17.2 19.2 27.2 30.5 35.3

Big continental (D, F, I) 31.3 36.0 45.5 49.6 49.3 UK, US 31.6 34.0 37.8 37.1 34.2 Source: AMECO; country groups as in table 1.

189 Vito Tanzi, Ludger Schuknecht

Chart 4 Change in Total Spending 19602000 Versus Change in per Capita Growth, 1960s1990s Change in per capita growth

2 y = 0.1556x +0.4228 R2 = 0.3626 4

8 0 5 10 15 20 25 30 35 Change in total spending in % of GDP Source: AMECO.

Chart 5 Total Spending 1990 Versus Gross-Fixed Capital Formation 1990s

Gross-fixed capital formation in % of GDP

25 y = 0.2742x +33.456 R2 = 0.4244 20

10 0102030 40 50 60 70 Total spending in % of GDP Source: AMECO.

embourg has the lowest spending ratio public spending ratios in the 1990s (see intheEUapartfromtheUKandIreland chart 5). and one of the fastest growth rates. All this leads us to believe that re- Other countries that reduced public ductions in public spending are favour- spending while undertaking important able to growth. fiscal structural reform (Canada, Finland, Ireland, New Zealand and 4.4 Expenditure Composition Sweden) have seen their growth rate The differences across countries in accelerate. spendingontransfersandsubsidiesaremost Chart 4 illustrates the growth- striking (see table 4). In recent years spending dynamics in the very long spending on this category averaged run. It shows a strong correlation be- about 13% of GDP in high-growth tween total spending increases and and Anglo-Saxon countries and 17% growth declines over the past 40 years in low-growth countries. It reached for OECD countries. Moreover, gross- almost 20% in the continental big fixed capital formation (one of the 3. The long-run correlation between standard growth determinants) is growth and transfers and subsidies is strongly and negatively correlated with shown in chart 6. The chart shows that

190 Vito Tanzi, Ludger Schuknecht

Table 4 Transfers and Subsidies

1960 1970 1980 1990 2000/latest %ofGDP Average all countries 8.5 10.9 16.2 15.9 15.4

High-growth 1990s 7.7 10.6 16.8 14.0 13.3 Low-growth 1990s 9.0 10.9 15.5 17.3 17.3

Anglo-Saxon 6.2 8.4 12.8 13.1 13.1 Non-Anglo-Saxon EU 9.5 13.2 19.8 18.4 17.3 Other OECD 5.6 4.9 9.2 10.7 12.4

Big continental (D, F, I) 12.9 14.8 19.5 18.0 19.2 UK, US 6.5 8.6 11.6 11.7 12.4 Source: AMECO and Tanzi and Schuknecht (2000); country groups as in table 1.

Chart 6 Change Transfers & Subsidies 19602000 and Change in Growth 1960s1990s Change in per capital growth

2 y = 0.2576x 0.5683 R2 = 0.1917 4

8 051015 Change in transfers and subsidies in % of GDP

Source: AMECO, Tanzi and Schuknecht (2000). the reduction in per capita growth discussing briefly. These are often cat- between the 1960s and the 1990s is egorised as productive expenditures correlated with increases in spending and are assumed to promote growth. on transfers and subsidies in the past Nevertheless, we observe little differ- 40 years. ence across country groups over time Amongst other spending catego- and at present. In education, spending ries, we also observe less spending on was slightly higher in Anglo-Saxon goods and services in high-growth and countries than in the other groups until Anglo-Saxon countries than in low- about 1980. Since then, spending has growth and non-Anglo-Saxon EU converged. Public investment differs countries. Differences in the spending strongly across countries but not across ratios for this category are less pro- country groups, with the exception nounced than for transfers and subsi- perhaps of non-Anglo-Saxon and non- dies. Perhaps the reason is that the need EU countries where Japan plays a for core spending in countries is rather significant role. Public investment is similar so that differences in spending slightly higher in high-growth coun- ratios may be due to how efficient the tries but it is also higher in the non- countries are in this spending. Anglo-Saxon EU countries than in Expenditure patterns in education Anglo-Saxon countries. This is perhaps and public investment are also worth an area where the efficiency of spend-

191 Vito Tanzi, Ludger Schuknecht

Table 5 Total Revenue

1960 1970 1980 1990 2000/latest %ofGDP Average all countries 26.9 32.9 38.8 41.5 44.5

High-growth 1990s 26.1 30.7 36.9 37.6 40.9 Low-growth 1990s 27.4 34.7 39.8 43.8 46.6

Anglo-Saxon 26.2 33.2 35.0 37.2 37.8 Non-Anglo-Saxon EU 27.8 34.5 42.1 45.9 49.1 Other OECD 21.1 19.1 26.9 32.0 36.0

Big continental (D, F, I) 32.0 35.2 41.6 44.7 47.6 UK, US 28.8 39.9 35.1 34.7 36.8 Source: AMECO and Tanzi and Schuknecht (2000); country groups as in table 1.

Table 6 Direct Taxes and Social Security Contributions

1960 1970 1980 1990 2000/latest %ofGDP Average all countries 15.0 17.5 22.7 23.7 25.5

High-growth 1990s 14.3 16.0 21.0 21.8 23.8 Low-growth 1990s 14.5 19.0 23.9 25.1 26.6

Anglo-Saxon 13.8 15.4 17.9 19.9 21.3 Non-Anglo-Saxon EU 14.9 19.4 25.8 28.0 29.4 Other OECD 13.5 8.7 15.1 15.8 18.0

Big continental (D, F, I) 17.1 20.1 26.5 28.7 29.4 UK, US 15.4 18.8 19.8 20.1 23.2 Source: AMECO and Tanzi and Schuknecht. 2000. Country groups as in table 1.

ing matters the most, given the impor- and still fairly similar across country tance of political considerations and groups.1) institutional factors such as corruption Considering the revenue composi- and red tape (see Tanzi and Davoodi, tion, the negative correlation between 2000). direct taxes (including social security contributions) and growth is notewor- 4.5 Level, Composition and Stability of thy (see table 6). High-growth and Tax System Anglo-Saxon countries have revenue Public expenditure needs to be financ- ratios in the low 20% whereas those for ed and, as mentioned above, this typ- low-growth and continental European icallyrequiresdistortionarytaxes.Total countries are in the high 20% or even revenue patterns mirror closely those above 30% of GDP.Such differences in oftotalpublicexpenditure(seetable5). revenue ratios imply a similar pattern High-growth and Anglo-Saxon coun- for marginal tax rates and, therefore, tries feature much lower revenue ratios major differences in dead-weight costs than low-growthandnon-Anglo-Saxon and in tax wedges on labor income. EU countries. This reflects the strong OECD studies have shown that the in- increase in the tax burden since 1960 comerangestowhichmarginaltaxrates when revenue ratios were much lower near 100% apply are much more prev-

1 For surveys of tax policies and systems in OECD countries see, for example, van den Noord and Heady (2001) and Joumard (2001).

192 Vito Tanzi, Ludger Schuknecht

Chart 7 Change in Direct Taxes 19601990 Versus Change in Capital Formation, 1960s1990s Change in gross-fixed capital formation in % of GDP

1 y = 0.2778x 0.4569 R2 = 0.2849 2

8 051015 20 Change in direct tax revenue in % of GDP

Source: AMECO, Tanzi and Schuknecht (2000).

Chart 8 Change in Direct Taxes 19601990 Versus Change in Employment Ratio, 1960s1990s Change in employment ratio

0 y = 1.09x +12.167 R2 = 0.4803 5

15 051015 20 Change in direct tax revenue in % of GDP

Source: AMECO. alent in non-Anglo-Saxon EU coun- Charts 7 and 8 show that increases tries. Indirect tax revenue differs much in the direct tax ratio over the past less strongly across country groups.1) 40 years are correlated with negative The probable long-term disincen- changes in gross-fixed capital forma- tive effects of rising direct taxes can tionand,evenmorestrongly,intheem- be illustrated by looking at their corre- ployment ratio over the same period. lation with gross-fixed capital for- Finally, the stability of the tax mation and with employment — two system may be related to countries key elements of growth equations. growth performance. This is difficult

1 It is nevertheless noteworthy that, despite increases in VATrates and other indirect taxes, the indirect tax revenue ratio has not increased in many countries since about 1980 (e.g., France, Germany, Austria) and a strong lumping of countries near 15% of GDP may suggest that it is very difficult to move beyond this ratio. In fact, almost no country has succeeded in getting more than 10% of GDP in revenue from value added taxes.

193 Vito Tanzi, Ludger Schuknecht

to measure as ideally it would imply deductive reasoning and on arguments an analysis of specific statutory changes based on theoretical analysis. in the countries tax systems. As a Using fiscal data covering a period proxy, we make use of the fact that of four decades, we have shown that the structural and cyclical influences are quantitative relationships so obtained normally the main determinants of were generally consistent with theoret- changes in tax revenue. Cyclical influ- ical considerations even though they ences affect real revenue but leave the could not be assumed to be proofs revenue ratio broadly unchanged (un- of those considerations. The point is less the tax system is significantly pro- that one should not ask more from gressive or regressive in its entirety). empirical work than it can deliver Hence, frequent fluctuations in the and governments should not wait for revenue ratio may be indicative of empirical proofs to use tools that pro- frequent reforms in the tax structure. fessional consensus has determined to Volatility(asmeasuredbythestand- be growth promoting. The main prob- ard deviation of the revenue ratio be- lem is that long-term growth is rarely tween 1980 and 2000) is much higher the only or even the main objective of for direct than for indirect taxes.1) fiscal policy. § However, it is broadly similar between high- and low-growth countries. Vola- References tility of direct tax receipts in Anglo- Afonso, A., L. Schuknecht and V. Tanzi. Saxon countries is much lower than 2003. Public Sector Efficiency: An Inter- in non-Anglo-Saxon EU countries. national Comparison. ECB Working Paper The question of tax stability is probably 03/242. much more linked with changes in Alexander, W. R. 1990. Growth: Some specificaspectsoftaxesandparticularly Combined Cross-Sectional and Time — of income taxes. There is no statistics Series Evidence from OECD Countries. that captures this feature. In: Applied Economics 22. 1197—1204. Bernardi, L. and P. Profeta. 2003. Tax 5 Concluding Remarks Systems and Tax Reforms in Europe. In this paper, we have surveyed argu- London: Rutledge (forthcoming). ments that suggest that fiscal policy, Cashin, P. 1995. Government Spending, promoted through changes in taxes Taxes and Economic Growth. In: IMF Staff and in public expenditures, could have Paper 42. 237—269. significant effects oneconomic growth. Castles, F. G. and S. Dowrick. 1990. The Thus, it remains one of the important Impact of Government Spending Levels on tools available to the government for Medium-Term Economic Growth in the pursuing its growth objective. How- OECD, 1960—85. In: Journal of Theoretical ever, for a variety of reasons discussed Politics 2. 173—204. in the paper we believe that it is impos- Daveri, F. and M. Maffezzoli. 2000. A sible to get very reliable empirical Numerical Approach to Fiscal Policy,Unem- evidence of the impact of fiscal policy ployment and Growth in Europe. Universita‘ on growth. Thus, government deci- Bocconi, Instituto di Economia Politica, Studi sions on the public finance tools must e Quaderni die Economia applicata, EEA continue to be based on a priori or 2000. May 4.

1 Note that the standard deviation of revenue ratios is only a very crude measure of the volatility of tax systems.

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Daveri, F. and G. Tabellini. 2000. Un- System? In: European Sociological Re- employment, Growth and Taxation in view 1. 97—118. Industrial Countries. In: Economic Policy. McCallum, J. and A. Blais. 1987. Govern- April. 47—104. ment, Special Interest Groups and Eco- Devarajan, S., V. Swaroop and H. Zou. nomic Growth. In: Public Choice 54. 3—18. 1996. The Composition of Public Expendi- Miller, S. and F. Russek. 1997. Fiscal ture and Economic Growth. In: Journal of Structures and Economic Growth: Interna- Monetary Economics 37. 313—344. tional Evidence. In: Economic Inquiry 35(3). Dowrick, S. 1993. Government Consump- 603—613. tion: Its Effects on Productivity Growth and van den Noord, P. and C. Heady. 2001. Investment. In: Gemmell, N. (ed.). The Surveillance of Tax Policies: A Synthesis of Growth of the Public Sector: Theories Findings in Economic Surveys. In: OECD and International Evidence. Aldershot: Economics Department Working Paper 303. Edward Elgar. Nordstrom, H. 1992. Studies in Trade Easterly, W. and S. Rebelo. 1993. Fiscal Policy and Economic Growth. Stockholm Policy and Economic Growth. In: Journal University Monograph 20. of Monetary Economics 32. 417—458. OECD 2003. The Sources of Economic Folster, S. and M. Henrekson. 1999. Growth in OECD Countries. Paris: OECD. Growth and the Public Sector: A Critique Persson, T. and G. Tabellini. 1994. Is of the Critics. In: European Journal of Politi- Inequality Harmful for Growth? In: Ameri- cal Economy 15. 337—358. can Economic Review 84. 600—621. de la Fuente, A. 1997. Fiscal Policy and Sanford, C. 2000. Administrative and Com- Growth in the OECD. CEPR Discussion pliance Cost of Taxation. London: Fiscal Paper 1755. Publications. Hiebert, P., A. Lamo, D. Romero de Tanzi, V. 2001. The Rule of the State in the Avila and J. P.Vidal. 2002. Fiscal Policies XXI Century. Mimeo. The Italian version is and Economic Growth in Europe. In: The published in: Scienza delle Finanze e Diritto Impact of Fiscal Policy. Banca dItalia: Rome. Finanziario. 613—637. Tanzi, V. 2003. Transazioni, Imposte, e Jones, C. I. 2002. Introduction to Economic Sviluppo Economico. Ezio Vanoni Lecture Growth. Second Edition. New York and given at the University of Pavia, 16 Decem- London: W.W. Norbu and Company, Inc. ber, 2002 (forthcoming). Joumard, I. 2001. Tax Systems in European Tanzi, V. and N. Chalk. 2000. Impact of Union Countries. In: OECD Economics Large Public Debt on Growth in the EU: Department Working Paper 301. A Discussion of Potential Channels. In: Kneller,R.,M.BleaneyandN.Gemmell. European Economy 2. 23—43. 1999. Public Policy and the Government Tanzi, V. and H. Davoodi . 2000. Corrup- Budget Constraint: Evidence from the tion, Public Investment and Growth. In: OECD. In: Journal of Public Economics Tanzi, V. (ed.). Policies, Institutions and the 74. 171—190. Dark Side of Economics. Cheltenham and Kneller,R.,M.BleaneyandN.Gemmell. Northampton: Edward Elgar. 154—170. 2000. The Implications of the Comprehen- Tanzi,V.and L. Schuknecht. 2000. Public sive Spending Review for the Long-Run Spending in the 20th Century. A Global Growth Rate: A View from the Literature. Perspective. London: Cambridge Univer- In: National Institute Economic Review 171. sity Press. 94—105. Tanzi,V.and H. Zee. 1997. Fiscal Policyand Korpi, W. 1985. Economic Growth and the Long-Run Growth. In: IMF Staff Papers 44. Welfare System: Leaky Bucket or Irrigation 2179—2209.

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Tanzi, V. and H. Zee. 2000. Taxation and Rates in Industrialised Democracies. In: the Household Saving Rate: Evidence from European Journal of Political Research 14. OECD Countries. In: Banca Nazionale del 501—519. Lavoro Quarterly Review 212. March. Weede, E. 1991. The Impact of State Power Weede, E. 1986. Sectoral Reallocation, on Economic Growth Rates in OECD Distributional Coalitions and the Welfare Countries. In: Quality and Quantity 25. State as Determinants of Economic Growth 421—438.

196 Jon Cunliffe Managing Director HM Treasury, UK

Comments on Vito Tanzi and Ludger Schuknecht, Public Finances and Economic Growth in European Countries

First of all, I am very grateful for the of the points I want to bring out as I go opportunity to be here and the oppor- through this, is macroeconomic stabil- tunity to talk about something other ity does have an effect on long-term than the UKs decision on the euro. growth and macroeconomic instability It is a welcome relief. Although when through hysteresis effects and other I got to my room last night there was a effects can have an adverse effect on very nice glossy book waiting for me, growthandmacro-stabilitycomesfrom which said The road from the Schilling the policy framework, with which to the euro. Being old enough to re- everyone is familiar, which is the sort member the Shilling in the UK, I won- of the sexy sister of the macro-frame- dered whether this was avery well pro- work. But fiscal policy frameworks also duced hint. When I looked, the spelling matter. And with fiscal policy, and I was different. I realised that I was being think this was mentioned, the same is- oversensitive. sues of credibility and time consistency I have a presentation, I am afraid. I apply to the fiscal policy authority as to want to talk about fiscal policy reform the monetary policy authority and of intheUKandindoingsoIlltryandpick course debt is quite a good feedback up some of the themes that Vito Tanzi mechanism from fiscal policy into lon- has touched on. I am not sure if I am a ger-term growth issues. I wanted to type one or type two reformer.I think I touch on some of that aswe go through. am a type three reformer because of What I intend to do is just to go some of the points I want to make through quickly the UKs experience around stability. I think it is certainly before 1997, the reforms since true that counter-cyclical or pro-cycli- 1997, which are the main focus, the cal fiscal policy does not have a direct impact of the reforms and a couple effect on long-term growth. I think one of issues for the future.

Chart 1 Net Borrowing, 19831997

% of GDP

Deficit 4

Surplus 2 19831984 19851986 19871988 19891990 19911992 19931994 19951996 Cyclically-adjusted net borrowing Net borrowing Source: HM Treasury.

197 Jon Cunliffe

Chart 2 Current Budget

% of GDP

Surplus 2

Deficit 4

8 19701971 19751976 19801981 19851986 19901991 19951996 Source: HM Treasury.

Chart 3 Public Investment, Average 19712000

% of GDP

2 UK DK NL DE BE IT GR EU-15 ES FR PT IR SE FI AT Source: European Commission.

The experience before 1997: a high was a structural surplus. We did not and volatile borrowing in the UK. This really concentrate on the cycle. And goes back to 1983/4. I could have run then you see what happen further as the cycle back to the 1950s and it would you go into the early 1990s. We saw not have shown a materially different a rapid deterioration in the public picture: avolatile and peaky borrowing finances as a result of that. cycle. The main point I wanted to bring The other point I just want to bring out of that part is (we have some ex- out ofchart1is actually therelationship perience) that the cycle and under- between the red line and the grey line. standing it matters. If you get it wrong, The red line is cyclically adjusted net it can have long-term effects on the borrowing, the grey line is absolute public finances. net borrowing. And you see there Also of the period from 1971 the policy error that was made in through: borrowing to spend rather the late 1980s in the UK, when net than to invest. That is the current borrowing went into surplus and the budget. Again, you see that kick-up, government assumed that that was a here it is in the early 1990s, into sur- structural surplus. It did not take plus but mainly over that period the account of the cycle. Whereas if you current budget was in deficit while look at the red line, cyclically adjusted, the UK was borrowing to consume. actually there is still a deficit. At that And the counterpart of that, it has point fiscal policy was loosened, taxes beenmentioned,is publicinvestment.I were reduced because we thought this still do not know and it is difficult to

198 Jon Cunliffe

know what the right number is for pub- objectives. I could have shown the lic investment. This is a thirty year different formulations of fiscal policy series: 1971 to 2000 looking at public that we had in the UK throughout investment as a percentage of GDP in the 1980s and 1990s. I think we the EU. You can see that the UK over achieved nine in all over a 14-year that period has been right on the bot- period. So fiscal policies and its tom, just under 1%. Austria, I am objectives were unclear and changing pleased to say, has been close to a over the period. 4% mark and is at the top of the EU The reform since 1997: a code for average. I think anyone who has used fiscal stability that has been enshrined the London metro system and has used in legislation, in the Finance Act 1998. public transport in Austria will appre- The code sets out some principles on ciate some of the differences there. transparency and fiscal sustainability What are the lessons that we took from this experience? The first lesson I think is about sustainability and the importance of sustainability. I have not shown the picture for the debt stock but in the 1980s the net debt stock rose quite quickly to nearly 45%. The second is the point I made, allowing for the cycle and understanding the effect of the cycle on the public that fiscal policy must followand it then finances as you make decisions, and requires the government to state its ob- also understanding and dealing with jectives and rules. We did not legislate uncertainty in aworld where economic the objectives and rules because gov- growth varies over the cycle and the ernments change and governments relationship between economic growth may have different objectives and rules. and the public finances changes from The legislation simply says the govern- cycle to cycle and also in aworld where ment would specify what those objec- both growth and public revenues and tives and rules are. We strengthened spending often do not turn out to openness, transparency and account- be as predicted in any given year. ability through the publication of docu- You need a fiscal system that can allow ments but also through having the key the fiscal authority to cope with out- assumptionsonwhichthefiscalforecast comes that are different to forecasts and on which the budget are based without losing credibility. The issue audited by the independent public for thefiscalauthoritybecomestosome auditor, who reports to Parliament extent how could it ensure fiscal cred- not to the government. Those assump- ibility that people believe it will achieve tions can cover both assumptions that its medium-term targets while still cangointotheforecast,liketheoilprice being able to respond to uncertain or the level of equity prices, which have outcome. quite an impact on the forecast or the The third principle that we took audit can cover assumptions that the from that was to protect public invest- government has made about increasing ment, given a historically low invest- tax revenue by increasing compliance. ment in the UK and the third was Both sorts of assumptions can be inde- the importance of clear rules and pendently audited.

199 Jon Cunliffe

The aims of fiscal policy as a me- which is that fiscal policy should sup- dium-term aim, which is the me- port monetary policy by allowing the dium-term credibility point I talked automatic stabilisers to work over about, which is to ensure sound public the cycle. finances and to ensure that tax and Thethinkingbehindthisisverysim- spending decisions impact fairly both ilar to the thinking behind the UKs within generations, intra-generation- monetary policy framework. We call ally I could say, and between gener- it constrained digression. It goes back ations, inter-generationally.The short- to the point I made earlier. In aworld in term objective is to allow fiscal policy which forecasts are uncertain and you to work to support monetary policy, expect error and you expect shocks, particularly by allowing the automatic you should allow the monetary policy stabilisers to work fully. authority flexibility to cope with that, As a result of that we have two firm you should not lay down policy rules fiscal rules, the more numerate among that bind it to operate in a certain you will have spotted that there are way but you do have to put that into three bullets there but actually it is only a framework, so that the monetary two fiscal rules and the third point, I policy authority has credibility and sol- think, is a complementary point that ves the time inconsistency problem. comes out of the general aims. And the same for fiscal policy. With The first is the golden rule which fiscal policy the time consistency prob- it has been referred to in the UK, which lem isworse because people trust mon- is over the economic cycle the govern- etary policy authority normally more mentwouldborrowonlytoinvestandit than they trust governments when it will not borrow to consume. You can comes to tax and spending. But one see the genesis of that in the picture I has to have goals and targets that are showed you earlier of the amount of credible in the medium term so the borrowing for consumption we did fiscal authority could then respond over the 1980s and 1990s. But it is im- flexibly while still maintaining credibil- portant to see the golden rule alongside ity that it will hit its medium-term thesecondrule,whichisanetdebtcon- targets. The best way to get credibility straint for sustainable finances. So the is by doing what you say you are going ratio of net debt to GDP will be held to do. Over a long period of time if you over the cycle at a level and the govern- say something and then do it, you get ment specified that that level is 40%. credibility. A shorter route to that, I This is net debt rather than gross debt. think particularly for governments, is Thegrossdebtfigureis4%or5%higher. to have rules and frameworks that But sometimes the point is made: well, entrench that. if you have the golden rule, what stops Hasitworked?Whathashappened? you continually investing and building This is the cyclically adjusted surplus. up a debt stock and possibly engaging You see the cyclically adjusted balance, in non-productive investment. There you can see it is back in surplus, from is a constraint here. And the debt con- about 1997 it dipped down in 2002 straint overrides the investment con- and has now come back up again. This straint because ultimately you need forecast of the cyclically adjusted sur- credibility about sound public finances. plus is not run at the 2% level that we The third bullet is not a rule but is a had in the late 1990s but to run about 3 sort of outcome, which is the aim, % to /4% of GDP.

200 Jon Cunliffe

Chart 4 Current Budget Back in Surplus

Cyclically adjusted, % of GDP

Forecast 1 Surplus 0 Deficit 1

4 19901991 19921993 19941995 19961997 19981999 20002001 20022003 20042005 20062007 Source: HM Treasury.

Chart 5 Net Borrowing and Net Investment

% of GDP

Forecast 6

Deficit 4

Surplus 2 19901991 19921993 19941995 19961997 19981999 20002001 20022003 20042005 20062007

Net investment Net borrowing

Source: HM Treasury.

Borrowing and investment: the European countries. Net borrowing is borrowers are public investment and forecast to come below that so we will you can see the sort of low investment be funding some of this investment out cycle. Investment is forecast to come of the current budget. back by the end of this period to about I said debt was forecast to stabilise 2.2%. I do not how that scores on the around net debt and it stabilised just issue: is it enough or is it too much or is under35%ofGDP.Thatnetborrowing it just right? We aim to get the 2.2%, figure that you see in chart 1 is actually which will still be below a number of roughly the level that you need to sta- Chart 6 Debt Low and Stable

% of GDP

Forecast 40

25 19901991 19921993 19941995 19961997 19981999 20002001 20022003 20042005 20062007 Source: HM Treasury.

201 Jon Cunliffe

Chart 7 Change in Fiscal Stance: UK

3 Pro-cyclical 1998 Counter-cyclical fiscal tigthening 2 1997 fiscal tigthening 1999 1

Output gap, % of GDP 2004 0 2000 2 1 0 1 2 2001 2003 1 Change in 2002 strucutral 2 Pro-cyclical balance, Counter-cyclical fiscal loosening fiscal loosening % of GDP 3

Source: Commission Forecasts.

bilise the debt stock on assumptions want to see if it is counter-cyclical is about inflation and interest rates in that when you are on the right of the monetary policy framework. the picture, you are also on the top Chart 7 just looks at what has hap- of the picture, in other words fiscal pened, whether the UKs objective policies being applied counter-cycli- was to try and get stability and part cally, being tightened when you have of that objective is for fiscal policy a positive output gap and thenyou want to support monetary policy. Have we to be in the bottom left corner so that achieved that? Has fiscal policy oper- fiscal policy is loosening and then you ated in a counter-cyclical way? This haveanegativeoutputgap.Andtheper- is a bit of a complicated picture. I like formance of the UK from 1997 is quite it. It is a European Commission picture good. We have a period 1997,1998 to originally. But what one looks for is as 2000 when fiscal policy was tightened, you move towards the right of the pic- by 4 percentage points over that period ture, the output gap is getting positive and then 2001, 2002 to 2003 fiscal pol- and as you move to the left, the output icy is being loosened as the output gap gap isgetting negative.Asyoumoveup, has turned negative. the fiscal policy stance is tightening and Icouldnotresistputting inthesame as you move down, the fiscal policy figure for the euro area. You forgive stance is loosening. What you would me. In 1997 you see a pro-cyclical fiscal

Chart 8 Change in Fiscal Stance: Euro Area

3 Pro-cyclical Counter-cyclical fiscal tigthening 2 fiscal tigthening 1997 1 1999 2004 Output gap, % of GDP 2003 0 2 1 0 1 2 2002 1998 2001 2000 1 Change in strucutral 2 Pro-cyclical balance, Counter-cyclical fiscal loosening fiscal loosening % of GDP 3

Source: Commission Forecasts.

202 Jon Cunliffe

tightening, which I would say is the sort change of the labour force. So greater of Maastricht hurdle. I think this was a focus on long-term sustainability. And tightening in a number of euro-area we published, alongside the pre-budget countries to meet the entry conditions reportlastNovember,areportonlong- for EMU, and their fiscal policy loos- term fiscal sustainability looking at ened in 1998. Actually since then, I trends to 2050, over the next 50 or would say,fiscal policy has not operated so years and we will continue to do that pro-cyclically or counter-cyclically. It every year and try to inform on the me- has been pretty flat along that line. diumterm.Thesearesomeofthethings Of course in 2003 to 2004 forecasts, we have to understand better: how the you might discover in 2003/2004 fore- ageing population impacts, healthcare casts actually a pro-cyclical loosening in particular, how longer expected life but certainly as far as forecasts are spans impact on the public finances. concerned you could say that fiscal And we have to improve our modelling policy has not really played a role in but there is a big job to be done here. supporting monetary policy over this On the Stability and Growth Pact; I period. think, the UK has supported its recent Issues for the future, taking our evolution to take more account of the framework forward: first and foremost economic cycle to avoid pro-cyclicality we need to get into the framework both ways, both on the tightening and more understanding of long-term the loosening side. The importance of trends in public finance both on the long-term sustainability and the impor- tax and the revenue side because it is tance of debt levels, I think that came fine having a medium-term target out of the earlier speech, and the role but actually the UK, like most other of public investment. You can see all countries, is subject to demographic of that being rooted in the history I change and long-term spending pres- described to you earlier. sures. We need to understand more Ill just show you one other pic- and bind in, through transparency, ture, I think which — as I have been some understanding of how we are talking a lot about EMU recently — going to tackle that, we do not have maybe is a picture that Jens Henriksson an issue on the pension side. Pension will talk about as well. Fiscal policy expenditure of 5% to 6% of GDP will used to be the main demand manage- be the same in 2050 as it is now. There ment tool when we were all in Bretton will not be much change. But on health Woods and monetary policy had an spendingthereisanissue.Andthereare exchange-rate objective and that fell issues around education spending and into disrepute in the 1960s and also issues around demographics, the 1970s because of asymmetry, because

EMU Forward Policy Agenda — Fiscal Stabilisation Policy in EMU

If the UK were to join EMU, credible policy options include institutions for using fiscal instruments more actively: Issue Solution

Preserving sustainability: constrained discretion Could have symmetric stabilisation rule Transparent policy Would produce stabilisation report Could have greater use of independent audit Timely and effective instruments Could consider modernisation of tax regulator

203 Jon Cunliffe

politicians found it easier to loosen cal policy more for demand manage- rather to tighten fiscal policy and be- ment to reduce some of the inflation cause of practical problems, lags in variability one is starting to see. I think the spending, etc. I think for the last there is a Swedish example of it. I just 20 or 30 years there has been a consen- say that one of the features of the UK sus that monetary policy is the demand statement on the euro was a proposal if management tool and fiscal fine tuning we join the euro we would look at hav- should be avoided. You should avoid ing a third fiscal rule which would using fiscal policy in a discretionary actually be a symmetric stabilisation way to do this. I think some of that rule, so we would expect fiscal policy consensus is changing now, people to operate to stabilise the economy.We think how can you apply some of the would do that in a way similar to the technology that has been applied to Bank of England framework but when monetary policy the output gap was forecast to exceed a to fiscal policy. trigger level, this would not be for fine Soyoucanusefis- tuning, wewould say if the output gap — cal policy more positive or negative — exceeded 1% credibly for de- or 2%, the government would have to mand manage- write to Parliament to explain what fis- ment. I think in a cal action it proposed to take. And we monetary union try and offer this in a symmetric way. there is a lot of We issued a discussion paper on this to thinking going on as well about: well, see whether we can refine the princi- do individual countries need to use fis- ples. Ill leave you there. §

204 Jens Henriksson State Secretary Swedish Ministry of Finance

The Use of Fiscal Rules in Sweden

Chart 1 Public Finances

% of GDP

12 1985 1986 1987 19881989 1990 1991 1992 1993

Source: OECD.

I will tell you about my practical expe- the IMF would step in and take over rience of working as a close political the Swedish economy. adviser to the social democratic finance Inshort:Therewasabigcrisis.Now minister of Sweden for the past eight this is Sweden — the former role model. years. At least in our own eyes, this meant that the whole political system was Table 1 humiliated. Gross Debt Estimate In the OECDs Economic Outlook in OECD Economic Outlook of December 1994, the projection for (December 1994) Sweden was bleak. In the year 2000, 2000 %ofGPD public debt was expected to be Sweden 128.2 128.2% of GDP. Source: OECD. It was certainly an interesting time for a 27-year-old economist to start working as a political adviser and speechwriterfor theincomingMinister When the Social Democrats came of Finance Go‹ran Persson. to power in October 1994, the Swedish What I am going to give you now public deficit was above 10% of GDP. are ten lessons I have learnt from The interest rate differential vis-a‘-vis budget consolidation in Sweden. Some Germany came to 450 basis points of them might be typical for the and the unemployment rate stood at political system of Sweden, but I more than 8%. There were even ru- daresay I consider most of them rather mors on the financial markets that universal.

205 Jens Henriksson

Lesson 1: Sound public ally elected to improve the (financial) finances are a prerequisite for growth. situation of voters. But when there is a I really believe in this, both in political deficit problem, they have to deal with and economic terms. questions they are not familiar with and In economic terms you can inter- perhaps not prepared for: Expenditure pret this statement as getting your has to be cut and taxes have to be raised. macroeconomic fundamentals right. Such issues are extremely difficult During the past ten years, Sweden to handle. That is why a successful had a floating exchange rate. With a consolidation process must have strong low deficit, interest rates and inflation support from the people. As a politi- will be low as well. cian you have to be able to turn the In 1970, Sweden was one of the edge of the debate against those who richest countries in the world. Now do not want to take harsh measures. there are 14 OECD countries with Ibelievethattherehastobeoneman higher PPP-adjusted GDP per capita or one woman who takes the lead. And than Sweden. Between 1970 and that this politician must put his or her 1994 we made every possible mistake office at stake. we could make and certainly did not get our macroeconomics right. Lesson4:Setupgoalsandsticktothem. One of the monetary policy lessons of Lesson 2: If you are in debt, the past ten years is that transparency is you are not free. good and that inflation targeting is very Let me have two different perspectives effective. on this claim. We worked along similar lines, as When a countrys deficit is large, we set up goals for handling the deficit: everything the government does is — By 1996, public debt was to be monitored by the financial markets. stabilized. In political terms this means that the — In 1997, we were to pass the 3% power is shifted from the open cham- deficit test. bers of elected peoplesrepresentatives — By 1998, the public deficit should to theclosed rooms offinancial markets have disappeared, and so on. in London and New York. Setting up goals is always very easy. That is a very strong political But sticking to them is much harder. message. The other perspective is a In the beginning of 1996, the private one. cyclical situation in Sweden was One day in 1994 my sister — who problematic, which meant that we ex- was then 13 years old — came to me and pected difficulties in reaching the asked me how much she was indebted. targets. So what did we do? Instead It turned out she had read a Swedish of blaming business cycle develop- newspaper with a picture of a newborn ments, we took new measures. child andtheheadline Bornwithadebt The contractionary effect of fiscal of 200,000 Swedish kronor. policy was then met by the expan- Ricardian equivalence exists! sionary effect of a confidence boost. Growth was lower in the short term, Lesson 3: The one who is responsible but in the long term I am sure the out- must put his or her office at stake. come was positive. In a deficit situation, politicians face a Being a small country in the far difficult task. Representatives are usu- north, with asocial democratic govern-

206 Jens Henriksson

ment and a tax burden of over 50% of much harder to compensate for poor GDP,you never get the benefit of doubt education or bad healthcare. from the financial markets. Youhave to stick to your goals. Lesson 7: Do not leave the problems to the local authorities. Lesson 5: Consolidation should be When I mentioned the three ways of designed as a package. taking care of public finances, I empha- A consolidation program has to be de- sized the world public because there signed as a comprehensive package; an is a fourth way of taking care of state ad hoc hodgepodge of measures will finances, and that is to shift the problem only have a limited chance of success. to the local authorities. Presenting the consolidation measures In doing so you create problems in one package makes it clear to all with schools, childcare, healthcare, interest groups that they are not the only ones asked to make sacrifices. Asapoliticianyoucanneverexplain why you have to cut down on pensions only. But if, at the same time, you cut down on child benefits and unemploy- mentinsuranceandraisetheincometax for therichestgroupsofthepopulation, you are on safe ground. When one strong interest group and so on. This is a hard lesson we complains, you are in trouble. But with had to learn, so be aware. everybodycomplaining,youarenot.At least if you have a four-year mandate Lesson 8: period and you are in the beginning Be honest toward your citizens. of it. A consolidation process consists of two Even if there is a general public phases: doing it, and holding on to it. understanding of the seriousness of Even if the first phase is successful, the budget situation, the burden renewed resistance will appear when must be distributed fairly among the the measures affect the voters own different groups in society to guaran- pockets. The government must be able tee positive and long-run acceptance to say,This is no news. Wehave said all of the consolidation program. This along that getting public finances in is extremely important in Sweden order is extremely harsh and that it where electoral participation is above requires large sacrifices from every- 90%. body throughout society. Never say that it wont hurt. Never Lesson 6: Activities have to be given say that it is peanuts. priority over transfers. When trying to consolidate public Lesson 9: Be honest toward the finances, therearebasicallythreethings financial markets. to do: (1) cut transfers, (2) cut activ- The whole process must be as trans- ities, or (3) raise taxes. parent as possible. Honesty toward Our reasoning was that as an adult, the market means always clarifying youcouldalwayslivewithhaving hadan assumptions and calculations. Never economically poor childhood. But it is try to fool anybody by using gimmicks

207 Jens Henriksson

Chart 2 Public Finances

% of GDP

12 1985 1987 1989 19911993 1995 1997 1999 2001 2003 2005

Source: OECD.

Table 2 Lesson 10: Stick to it. Maastricht Debt When you have got this far, you have 2000 accomplished the first phase of consol- %ofGPD idating public finances. But there is also Sweden 52.9 a second phase: the phase of sticking to Source: OECD. the program. This phase consists of monitoring public finances, taking care or bookkeeping tricks. Only then can of institutional weaknesses and fighting credibility be recovered, and only then inflation. can the program earn legitimacy. We carried out some structural re- Be transparent and extremely open forms, of which the four most impor- toward capital markets. Try one budget tant reforms were: gimmick and you may lose market — Joining the European Union; confidence that could take years to — Reforming our pension system; regain. It is of great importance that — Creating a new budget process; the Minister of Finance is conservative and in predicting deficits and debts. Do not — Giving independence to our central use overoptimistic calculations. bank.

Table 3 Growth in Sweden, EU and OECD

Sweden EU OECD %ofGDP 1995 4.0 2.2 2.5 1996 1.3 1.4 3.1 1997 2.4 2.3 3.5 1998 3.6 2.9 2.7 1999 4.6 2.8 3.1 2000 4.4 3.5 3.9 2001 1.1 1.4 0.8 2002 1.9 0.8 1.8 Mean 2.9 2.2 2.7 Source: OECD.

208 Jens Henriksson

And what are the results of the So it turned out that the OECD is Swedish consolidation program? Well, not always right. the public finances of Sweden are in Let me end by giving you the order. growth figures for Sweden since We now have a surplus goal for 1994 (see table 3). The Swedish ex- public finances of 2% of GDP over perience leads me to the conclusion the business cycle. And what about that sound public finances are a pre- Maastricht debt? In the year 2000 requisite for growth. § the public debt in Sweden was 52.9% of GDP.

209 Martti Hetema‹ ki Director General Finnish Ministry of Finance

Experience with Public Sector Reform in Finland

As far as fiscal policy is concerned, is based on economic growth or, in the very fine presentation by Jens other words, that at the end of the Henriksson on the Swedish case day the tax base and the size of output describes rather well also the Finnish determine what we can finance in the case. I will concentrate now on struc- public sector. tural policy in Finland. The third argument that we have As Michael Mussa said, the used is that we need to cut taxes to biggest problem get higher labour input but we can in structural po- do that only if we reform also the ex- licy is the politi- penditure side at the same time. Tax cal process. It is cuts need to be financed. not that we do In chart 1, thehorizontal axis shows not know what the marginal tax rate on labour and the to do, but how vertical axis shows the hours worked to get the re- in relation to the working-age popula- quired reforms tion (i.e. the utilisation rate of labour accepted. I will list five simple argu- in the economy). High-tax countries ments that we have been using in Fin- have low use of labour. land to win the case for reforms. Ed Prescott has written an interest- First, at the Ministry of Finance, ing article to justify and analyse the we have said that higher labour input effectof thelabour tax wedgeon labour or productivity is needed to get a input.1) The difference between the higher standard of living. This is a very standards of living of some large con- basic argument, but it is surprising tinental EU countries and the US can how many people believe that growth be (almost) fully traced to the differen- and output is somehow given from ces in the marginal labour tax wedges. outside and that it is determined inde- The link between taxation and out- pendently from what we do. put is also something that is very hard Second — and again it is a very basic to get through. There is often the argu- argument that we have used — we have ment that high taxes are needed to pay emphasized that higher output is for thewelfare state. In this context, we needed to pay for future pensions, have said that a big enough cake is healthcare, etc., which means that needed to finance the welfare state the sustainability of public finance is and that the cake will be big enough critically dependent on growth. Again, only if work and productivity pay well it is surprising how many people think enough. that it is only a matter of political will The fourth argument that we have that public services are provided. But I used is that we must get retirement think we have managed to convince age up and act now. In the past 7 or people at large that the welfare state 8 years when the Minister of Finance

1 Prescott, E. 2002. Prosperity and Depression. In: American Economic Review 92(2). 1—15.

210 Martti Hetema‹ ki

Chart 1 Hours worked and Tax Rate on Labour

Hours worked per working age population Iceland 1,500 Korea

1,400 Czech Republic 1,300 United States Switzerland Canada New Zealand Japan 1,200 Australia Sweden United Kingdom Finland 1,100 Mexico Slovak Republic Denmark Ireland Norway Spain 1,000 Greece Netherlands 900 France Germany Belgium 800 Italy 20 30 40 50 60 70 Tax rate on labour Sources: OECD: Employment Outlook 2002, tables B (emloyment rate) and F (hours worked per employee) and OECD: Taxing Wages 2000-01, table 7 (marginal tax rate on average production worker = marginal income tax rate of worker + social security contributions by worker and employer). and also the Prime Minister gave To conclude, I have three points. speeches on the economy, they usually First, I would claim that we broadly pointed out the challenge of an ageing know what kind of reforms will boost population.Theyrepeatedthismessage or are likely to boost growth and time and again. I think that today, Fin- improve the sustainability of public nish people at large accepted this chal- finances. The required reforms are, lenge. however, politically hard to sell. Recently a major pension reform Second, a public debate about the was agreed in Finland. I will mention dangersoffailingtoimplementreforms only three elements of the reform. and the benefits of reforms is needed. First, two early-retirement schemes Otherwise we risk ending up in a sit- will be abolished. Second, there will uation where there are no reforms be- be an automatic cut in pensions accord- fore crises. This is a real danger when ing to the increase in life expectancy. thingsarerelativelygoodandpeopleare That is very important for sustain- fairlywealthy.Third,todaysconditions ability when you have a defined benefit — globalisation and ageing — are very system. hard constraints. They emphasise the Third,benefitswillbecalculatedon importance of forward-looking action the basis of the whole lifetime income and political leadership. and not of the last or the best years. I A long time ago, then Swedish Min- understand that this is similar to what ister of Finance Kjell-Olof Fa‹ldt said has been agreed in Austria. The differ- that often it was politically too early ence is that in Finland there were no to reform before it was too late for demonstrations before or after the theeconomy.Ithinkthisholdstrueeven agreement. more so today. §

211 Kees van Dijkhuizen Treasurer General Dutch Ministry of Finance

The Use of Fiscal Rules in the Netherlands

Fiscal rules are important, because Finance, whereas countries with coali- they enhance budgetary discipline. In tions should make more ex-ante agree- addition, fiscal rules typically have a ments. In its Economic Outlook of last longer time horizon and therefore winter, the OECD concluded that stimulate the focus on medium-term transparency and well-designed rules or structural developments rather than can help in setting and achieving fiscal cyclical fluctuations. Two years ago, at consolidation. Rules are particularly the request of the Dutch Ministry effective in cases when there is a strong of Finance, Professor von Hagen incentive to comply to the target, as carried out a re- for instance was the case at the end search into the of the 1990s with the entry of the Eco- role of fiscal nomic and Monetary Union (EMU). rules in budget- The Netherlands are traditionally ary policy.1) The run by a coalition government, which conclusion was means that the budgetary process is that countries best organized when it is based on with strong fis- transparent and ex-ante rules. For the cal rules have last 10 years, our budgetary policy has achieved better results with regard been based on three important basic to fiscal discipline, although the nature principles: of the fiscal rules may differ with the — Assumption of a cautious growth politicalsystemandtheinstitutionalde- scenario derived from the inde- sign of the budgetary process. For in- pendent Netherlands Bureau for stance, countries with a single-party Economic Policy Analysis. government can rely on the relative — At the start of a new coalition, a strong position of the Minister of medium-term assessment is made

Chart 1 Budgetary Policy in the Netherlands

Cautious growth scenario Coalition agrees on: · revenue · expenditure · fiscal balance

Expenditure Revenue: fixed in real terms automatic stabilizers

SGP absolute limit Fiscal balance

1 Hallerberg, M., R. Strauch, and J. von Hagen. 2001. The Use and Effectiveness of Budgetary Rules and Norms in EU Member States. Report Prepared for the Dutch Ministry of Finance, July.

212 Kees van Dijkhuizen

of the desired level of expenditure, favourable outcomes is more likely revenue and the fiscal balance. At thanunexpectedsetbacks.Over the that moment, parties can make long run (i.e. the full business their assessment of the desired level cycle), it can be expected to lead of revenue, expenditure and the to additional improvement in the fiscal balance. fiscal balance and debt reduction. — After themomentanagreementhas With the help of these fiscal rules, been reached, there is a strict divi- the Netherlands managed to make sionbetween government expendi- good progress with the restructuring ture and government revenue for of their public finance. Benefited by the rest of the coalition period. This strong economic growth, the fiscal means that revenue windfalls or tax balance improved from —4.2% in increases cannot be used to finance 1994 and 1995 to a surplus of 1.5% additional spending. in 2000 (UMTS excluded). The real Thissetofruleshasthreeimportant virtue of the fiscal rules lies in the fact implications: that most of the extra revenues at the — The ex-ante agreement on the level end of the 1990s (which turned out to of real expenditure and the strict be temporary of nature) have been division with government revenue directed towards debt reduction. means that the level of real govern- Within only a period of 8 years, the ment expenditure is not affected by government debt ratio decreased from the business cycle as far as the rev- almost 78% to 53%. enues are concerned. The fiscal rules not only led to an — On the revenue side, automatic improvementinthefiscalbalanceandto stabilizersarefreetooperatewithin debt reduction, but also to a reduction the limits of the Stability and in government expenditure. Because of Growth Pact. the ex-ante agreement, the growth of — While growth is based on a cautious total expenditure was kept under con- scenario, the probability of more trol. In combination with the strong

Chart 2 Turn-Around in Public Finance (1)

% of GDP % of GDP

2 70

1 60 0

50 1

2 40

3 30 4

5 20 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Fiscal balance (left-hand scale) Structural balance (left-hand scale) Government debt (right-hand scale)

Source: Dutch Ministry of Finance.

213 Kees van Dijkhuizen

Chart 3 the fiscal balance back into deficit is Turn-Around in Public Finance (2) worrisome and requires action. The Composition of total expenditure (% of GDP) recently installed government is prepared to make strong adjustments in 50 order totimelycorrectfurtherslippage 40 of the deficit. Within the new coali- 30 tion, the same fiscal rules will continue

20 to apply. The new coalition has agreed on a strong adjustment package which 10 primarily consists of expenditure cut- 0 backs of approximately 2% of GDP. 1994 1998 2002 With unchanged policies the budget Government consumption and investment Income transfers deficit would rise to 2.5% in 2004 Interest and improve only modestly to 1.8% Source: Dutch Ministry of Finance. in 2007. With this package the budget deficit strongly improves over the pe- economic growth in the second half of riod and is brought back to 0.5% in the 1990s, this resulted in a decline of 2007. In structural terms, the budget the ratio of total expenditure to GDP, deficits are much lower in this period. which was brought back from 54% in These forecasts are based on a cautious 1994 to 47% in 2002. Part of this economic growth forecast of 2% for decline was caused by a reduction in the period 2004—2007. interest payments and the decline in Besides the discipline in public fi- income transfers as a result of the nance, fiscal rules can also contribute favourable economic development, to economic growth. Within our which created room for more produc- framework there are several different tive expenditure. This is highlighted by channels. In the short run, government the fact that the real growth of total revenue is allowed to fluctuate with consumption and investment averaged economic development, so automatic 3% in the period from 1994 to 2001. stabilizerscanoperatefreely.Inthelong Despite the achievement in pre- run, economic growth benefits from vious years, the recent strong fall of solid public finances. In addition, given

Chart 4 New Coalition Agreement: Fiscal Balance

% of GDP

0.5

1.0

1.5

2.0

2.5

3.0 2004 2005 2006 2007 Baseline New coalition agreement Strucutral balance

Source: Dutch Ministry of Finance.

214 Kees van Dijkhuizen

the medium-term focus of the fiscal rules makes government policy more rules,politiciansaremorelikelytocon- transparent and therefore more pre- centrate on the structural impact of dictable which provides confidence their policy. Finally, the use of fiscal to both businesses and consumers. §

215 Mario I. Blejer Mario I. Blejer Director Centre for Central Banking Studies, Bank of England1)

Financial Stability and Economic Growth

1 Introduction Thepurposeofthispaper istoelaborate on the relationship between financial stability, or more precisely financial- sector stability,and economic development and growth. It should be pointed out, at the outset, that, at a general level, there seems to exist a quite en- trenched believe among economists — a believe that is almost conventional wisdom — that financial stability certainly promotes growth and, in certain circumstances it is actually a precondition for growth. Moreover, the oppo- siteisalsoregardedasatruism:financial instabilityisdetrimentalforgrowthand financial volatility is growth retarding. As intuitively appealing as these statements seem to be, they are, in fact, not very well established at the analytical levels. In fact, the treatment of this specific question in the economic literature is rather scanty. There are at least three issues that make it difficult to establish a clear cut relationship between financial stability and growth: (i) Aprecisedefinitionofwhatisexactly understood for financial stability and financial instability is lacking and the concepts are used, frequently, in quite an ambiguous manner.

1 The views expressed are those of the author and do not necessarily represent those of the Bank of England. Mario I. Blejer

(ii) There is no recognized analytical Among the issues that seem to be quite channeloftransmissionthroughwhich well established, both analytically and financial stability, or its absence, empirically, we can mention: would tend to affect economic — There is a clear distinction to be growth. Moreover, the variety of made between monetary policy hypotheses advanced by some re- and macroeconomic stability, on searchers regarding such a trans- the one hand, and financial stability, mission process lack clarity and on the other. While there is a clear are not really consistent. relationship between them, these (iii)There is no available empirical evi- are issues that can, and sometime dence that confirms a robust and sig- should, be analysed and dealt with nificant relationship between separately. growth and financial stability. As — It is apparent that financial deepen- a matter of fact, ing and financial development are there is a dearth indeed associated with more rapid of empirical growth, particularly in the medium studies dealing term. with these is- — In general, financial instability sues and, there- would tend to slow down and be fore, it is diffi- detrimental to financial develop- cult to provide ment. Therefore, indirectly, finan- convincing evi- cial instability may reduce the rate dence that the relationship is indeed of growth by retarding financial important (or that it even exists). development. This statement, As a whole, a random search of re- however, is not universally agreed. cent economic literature would not Some analysts see low financial yield much results regarding the rela- development as being the cause of fi- tionship, and the causality, between nancial instability, and not the con- financial stability and economic sequence. In this view,low levels of growth. Of course, the same search financial development are the rea- would turn out a great deal of material son for both low growth and insta- on financial stability and countless bility and there is no direct causality quotes on economic growth, but little, between instability and growth. if anything at all, on the specific rela- In summary, a relationship that is tionship between the two. Moreover, apparently clear to most observers, searching for monetary policy and is not that well established and certainly growth, one finds hundreds of results, requires some more elaboration and and the same applies to the relationship analysis. Four aspects of these analyses between financial development and are discussed in this paper: (a) the def- growth,butregardingfinancialstability initions of financial stability and the and economic growth, there is not very sources of financial instability; (b)what much to be quoted. do we really know about the effects of The conclusion one can reach from instability on growth; (c) what are the these casual observations is that there is possible channels of transmission from a number of related relationships that financial instability to the real econ- arequitewelldocumented,whileother omy; and (d) the policy implications claims are just taken as an accepted ax- and the ways available to reduce finan- iom but need much more elaboration. cial instability.

218 Mario I. Blejer

2 Operational Definitions Withrespecttothecausesorfactors of Financial Stability and that can result in a loss of financial the Sources of Instability stability, the literature identifies two The distinctions between monetary types of sources: (i) general market stabilityandfinancialstabilityarerather and international financial trends, and clear-cut and there is broad agreement (ii) intrinsic characteristic of financial about the conceptual meaning of mon- markets: etary stability. Usually monetary stabil- (i) There are three general trends that ity is defined as the stability of the gen- have increased the sensitivity of fi- eral price level and, in general terms, nancial markets and rendered the the avoidance of inflation is as regarded markets more prone to instability: as a desirable objective. — The rapid growth in the volume Thereismuchlessconsensusamong of financial transactions in most specialists regarding the appropriate of the financial markets of the definition of financial stability (and insta- world bility). In an extensive study on the sub- — The increasing integration of ject, Frederick S. Mishkin (2000) de- capital markets and the acceler- fines financial instability by its effects: ation of capital flows — implying Financial instability occurs when more interdependency and shocks interfere with information flows so more systemic risk that the financial system can no longer — The increased complexity of fi- do its job of channelling funds to those nancial instruments with productive investment opportunities. (ii) Intrinsic financial market charac- Mishkins definition implies, therefore, teristics: It has been known for long that regardless of the source, financial time that financial markets have instability is reflected in the interrup- somefeaturesthatmakethem more tion of the normal intermediation of re- volatile than other markets. It has sources through the financial markets. been observed that there is an en- A different approach is taken by hanced probability (compared with Andrew Crockett (1997). He distin- otherrelevantmarkets)thatnormal guishes between stability of financial flexibilityandordinaryadjustments institutions and stability of financial could rapidly degenerate into vol- markets. Institutional stability means atility and crises. The reasons gen- that financial institutions can meet con- erally advanced to explain this phe- tinuously their contractual obligations, nomenon relate to three specific without interruptions and without market failures that are particularly need of assistance. On the other hand, prevalent in financial markets: stability of financial markets denotes asymmetric information; moral the stability of market prices and im- hazard; and perverse selection. plies that asset prices reflect fundamen- Thefactthatthistrioismoreubiq- tals and do not oscillate — beyond small uitousinfinancialthaninothermar- margins—withoutrelationtotheseeco- kets and the observation that each nomic fundamentals. In terms of its one of these distortions has the possible effects on investment and eco- potential of affecting growth may nomic activity, both types of instability lend some analytical support to could be potentially damaging, leading the conventional wisdom view that to Mishkins result, i.e., to the inter- financial instability and economic ruption of normal intermediation. growth are negatively correlated.

219 Mario I. Blejer

3 Does Financial Instability parametric evidence that relates spe- Indeed Affect Growth? cific measures of financial instability There is a substantial body of clearly or financial volatility to economic established empirical evidence regard- growth. Some empirical studies have ing the importance of the level of finan- attempted to correlate uncertainty, cial development as a factor stimulating both in general terms and more specif- economic growth. The existence of a ically related to financial markets, with relationship of this nature was already economic growth but the results have claimed by Schumpeter, who argued not been significant (see for example, that financial intermediation, by mobi- Lensink, Bo and Sterken, 2003). A lizingsavings,evaluatingprojects,man- possible explanation for this lack of aging risk, and monitoring perform- an observable correlation is that uncer- ance is an essential element for techno- tainty may affect growth through two logical innovation and therefore for offsetting effects. On the one hand, economic development. Many writers uncertainty may increase the level of elaborated and built on these relation- precautionary savings. However, at ships. The most well known and most the same time, it may distort the overall widely cited is, probably, Ronald I. allocation and reduce the total produc- McKinnon (1973) who also provides tivity of savings (in the limit, as uncer- empirical evidence. tainty rises, people may place their More recently, a comprehensive savings in totally non-productive but study by Robert G. King and Ross safe types of assets, such as gold or Levine (1993) presents rich empirical jewellery). evidence (based on a sample of 80 Whereas systematic evidence re- countries) that higher levels of financial garding the impact of financial instabil- development are significantly corre- ity on growth is not available, a signi- lated with capital accumulation and ficant amount of observational evi- with faster current and future growth dence has been accumulated over the (measured by per capita levels of years from surveying the consequences income). The variables that King and of extreme cases of financial instability, Levine use to measure financial i.e., from assessing the costs of financial development are: the ratio of liquid crises. Such costs have been staggering liabilities to GDP, the importance of and some examples are useful for commercial banks versus the central illustration. The 1995 Mexican crisis bankinallocatingcreditandthefunding resulted in a 12% contraction in indus- of private firms vis-a‘-vis credit to the trial output. During the same year, and government and the public sector. In as consequence of the contagion from fact they find that their financial indi- theTequilaeffect,theArgentineGDP cators are more robust explanations for fell 7% below trend while the deep fi- economic growth than a largevarietyof nancial crises of 2001—2002 caused a alternative economic indicators. further GDP collapse of more than While there is, therefore, a robust 12%. In the early 1980s, Chile suffered body of evidence corroborating the aprolongedrecession followingabank- positive effects of financial deepening ing crisis that led to a reduction of on economic growth, the state of affairs growth from 8% a year, before the cri- is completely different regarding the sis, to no more than 1% over the next impact of financial instability. There five years. Equally, financial crises in is little, if any, solid econometric or Scandinavian countries resulted in con-

220 Mario I. Blejer

siderable losses of output. Finland, for may have negative consequences for example, experienced a reversal in its economic growth: growth performance from about 4% (i) Financial instability at the institu- expansion before thecrisis to acontrac- tional level may lead to a deterio- tion of more than 4% in the following ration in consumer and business year.1) confidence regarding the ability These costs are certainly exceed- of financial institutions to honour ingly high, but they relate to extreme its commitments. These, in turn, circumstances, to full blown financial may result in disintermediation crises and cannot be easily and directly and would discourage the mobilisa- extrapolated to more normal circum- tion and the allocation of savings stances.Asmentionedabove,regarding through the financial system. the effects on growth of intermediate (ii) Another consequence of institu- and incremental cases of financial instability, there is no rigorous quantitative validation available. Even so, however, it would be worthwhile to analyze, in some detail, the various potential channels through which factors that impair financial stability may eventually have detrimental effects on economic activ- ityandaffectnegativelythepotentialfor sustained growth. tional instability is the possibility that a substantial number of banks 4 Channels of Transmission and other financial intermediaries from Financial Instability may collapse and fold during peri- to Economic Activity and odsofstress.Byruininglong-stand- theRateofGrowth ing business relationships, financial The most traditionally accepted chan- instability would have a negative nel through which financial instability informational impact on the sys- could affect the rate of growth of the tem. Financial intermediaries tend economy is through its disturbing im- to develop specialized knowledge pact on the level of financial interme- about their clients thus enhancing diation and financial depth. It is also their ability to monitor firms, indeed clear that significant degrees reducing the cost of borrowing of instability slow down and disrupt and increasing allocation efficiency. financialdevelopment.Thereare,how- Financial instability and crises ever, other mechanisms through which would tend to lead, therefore, to financial instability — defined as above, a direct loss of information produc- i.e., institutional and market/price in- tion in financial markets. This not stability — could impinge negatively on only hurts current growth but also the rate of growth.2) affects future growth due to the lags There are three main channels involved in accumulating new in- through which institutional instability formation.

1 A possible exceptionisthe USexperience.Its savings and loansdebacle didnotseemto have hada noticeable effect ongrowth performance. 2 See Crockett (1997).

221 Mario I. Blejer

(iii)Institutional instability also affects creases rigidities, eliminates poten- the organization of the financial tial efficient investments from the sector.A direct consequencewould credit market, and increases spec- be the deterioration of the payment ulativeactivities.Moreover,foreign system, increasing costs of transac- exchange market uncertainty also tion and distorting resource alloca- tends to push up interest rates with tion. the consequences described above. With respect to market instability,in (v) Volatility in financial asset prices thesenseofsustained pricevolatility,its adds significant difficulties to the main harmful consequences arise from formulation of macroeconomic the enhance generation of uncertainty. policies.Unstableassetpricesinflu- This could affect growth through, at enceallthechannelsoftransmission least, five distinctive channels: of monetary policy: the interest (i) The most traditional effect is, of rate, the exchange rate, and the course, the erosion of savers and wealth channels. In balance, it investors confidence and the drop makes shifts in policies more sharp in overall credibility. The most im- and makes it more difficult to pre- mediate consequence is an increase dict their outcome, polluting the in real interest rates, discouraging investmentenvironmentandreduc- investment and provoking a down- ing investment in productive assets. turn in economic activity. (ii) Higher interest rates, by strength- 5 Policy Implications and ening adverse selection, would also Ways of Reducing increase the misallocation of avail- Financial Instability able loanable funds. If market rates Even in the absence of convincing em- areincreasedsignificantlyfollowing pirical evidence, it is quite clear that, higher market uncertainty, there is given its potential impact on economic a higher probability that lenders growth, financial stability should be will lend to bad credit risks, those fostered by public policy. There are, with the riskiest projects. More- at least, three principles that provide over, given this problem, the vol- analytical supporttosuchintervention. ume of credit is bound to contract, First,financial stability is apublic good: leading to lower investment and its consumers do not reduce the ability lower growth. of others of benefiting from it. Second, (iii)Market uncertainty also reduces as mentioned above, financial systems the willingness to enter into long- are subject to market failure (asymmet- term debt contracts since they be- ric information, moral hazard, and per- comemorerisky.Asaresult,alarger verse selection). And third, financial proportion of private (and even instability has negative externalities. public) debt tends to become of Problems in individual institutions or shorterdurationreducingthescope individual asset classes are bound, with of projects that can be financed. certainty, to have negative spillover (iv)Amarketthatisparticularlyvulner- effects over other institutions and asset able to instability is the foreign classes, thus generalising particular exchange market. Instability tends problems into systemic crises. to lead to a rose in the tendency to The recommended interventions denominate debt contracts in to preserve stability divide, following foreign exchange. This, in turn, in- Crocketts analysis, into actions to

222 Mario I. Blejer

strengthen institutional stability and ces. The most obvious suggestion has policies to prevent instability in crucial been the need to improve transparency market prices. and predictability of macroeconomic There are three, not mutually ex- policies and, in particular, stability of clusive, approaches to preserve institu- the aggregate price stability — i.e., in- tionalstability.Inthefirstplace,onecan flation control. But emphasis has also fully rely on market forces and let these been put on contingency regulation forces to be the guarantor of stability. or the use of circuit breakers. These Marketforcesstrengthen discipline and are procedures designed to stop trading enhance stability and public policy or toinducesomeother typeofrestrain, should be concerned with improving when price variation reaches unac- the functioning of markets, eliminating ceptable levels. Of course, these pro- the potential distortions. cedures could limit specific losses but But, in many occasions, it may be may result in very intrusive actions that necessarytoreinforcethesignallingand could undermine both confidence and informational roles of the markets by the actual ability of the market to reach providing (or fostering the develop- equilibrium. Equally questionable, ment) of formal safety nets. The most although sometimes advisable, is the prevalent forms of such safety nets are idea of direct public intervention in the establishment of deposit insurance key financial markets. The discussion schemes, and the provision of lender of here relates to the issue of asset price last resort facilities. While these, and bubbles and the role of public institu- other similar, mechanisms could en- tion in dealing with these matters. dow the markets with tools that would There is a vast literature on the issue prevent spurious bouts of instability but the general view emerging is that (and prevent isolated trouble from direct intervention to prevent or de- becoming systemic) they could result flate asset bubbles should be the excep- in enhanced problems of moral hazard tion rather than the rule. and perverse incentives. Clearly, an Within a policy context, one could optimal balance exists but it should pose the question whether there could becarefullycrafted.Thethirdapproach be too much financial stability, i.e., to enhance institutional stability is financial stability that stifles economic based on regulation. Clearly, the infor- growth. I believe that the answer is mational characteristics of financial yes,particularlyifstabilityisconfused markets make it a classical case for reg- withrigidity.Marketpricesshouldfluc- ulatory intervention. Prudential and tuate when economic conditions supervisory regulation tend to improve change and financial institutions should the functioning of the market but there be allowed to evolve and some to dis- is a need to avoid a regulatory overkill- appear if they become insolvent and ing that asphyxiates market develop- unviable. What is necessary is to have ment. Moreover, given the fast pace flexibility of market prices and struc- of technological change in the financial tures but prevent extreme movements industry, regulations need to be con- that generate uncertainty. Equally, stantly updated to prevent their obso- there should be public support to cor- lescence. rectmarketfailuresandcounterbalance Regarding market stability, the systemic risk. But exaggerated support discussion centers on policies to leads to misallocations, inefficiencies, strengthen the stability of key asset pri- and moral hazard. It is necessary, there-

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fore, to find the middle ground in this King, R. G. and R. Levine. 1993. Finance trade off, but this is more an art than a and Growth: Schumpeter Might Be Right. science. The only apparent rule is to In: Quarterly Journal of Economics 108. accompany the market instead of coun- 717—737. ter its tendencies. § Lensink, R., H. Bo and E. Sterken. 2003. Does Uncertainty Affect Economic Growth? An Empirical Analysis. University References of Groningen, Faculty of Economics. Crockett, A. 1997. Why Is Financial Stability McKinnon, R. I. 1973. Money and Capital a Goal of Public Policy? In: Maintaining Finan- in Economic Development. Washington cial Stability in a Global Economy. Sympo- D.C.: The Brooking Institution. sium sponsored by the Federal Reserve Mishkin, F. S. 2000. Financial Stability and BankofKansasCity.JacksonHole,Wyoming: the Macroeconomy. National Bureau of Federal Reserve Bank of Kansas City. 7—36. Economic Research. May.

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ManfredJ.M.Neumann ManfredJ.M.Neumann Professor University of Bonn

Comments on Mario I. Blejer, Financial Stability and Economic Growth

Mario Blejer has provided us with a wide-ranging discussion of a variety of aspects of financial system stability or instability and its repercussions for economic growth. It is a fascinating topic and I cannot agree more with Blejer when he states that our profession does not know much about the interdependencies between financial system stability and economic growth. Itcanbetakenasafact thatthelong- run development of economies is closely interrelated with the development of their financial systems. The financial system, intermediaries and markets, serves to allocate the savings of households — if it is efficient — to the most productive uses in the economy. Most financial arrangements trade on the future, hence are shaped by the expectations of market participants about the future rates of return and the probability of repayment. By allo- cating the savings the financial system distributes the risks of production and trade among the investors who are ManfredJ.M.Neumann

troubled by uncertainty and asymmet- as detrimental real demand shocks, ric information. It is not at all clear how negative productivity shocks or a financial system should be designed to sudden changes in preferences; and serve these purposes optimally. The (ii) if it functions such that it does not grand idea of Arrow-Debreu of a sys- become a source of its own of seri- tem of complete markets — where for ous uncertainty or risk. each random event in the future a con- If one accepts this notion, then one tingent contract can be written and has difficulty with Mario Blejers inter- traded today — is just an elegant theo- pretation on the sources of financial retical construct, an ideal that does not instability. He conjectures that the help much in deciding on the optimal proneness of financial markets to insta- design of financial institutions that are bility has been increased by the follow- indispensable under uncertainty. ing trends of the last decade: (i) a rising volume of financial transactions; (ii) a rising complexity of financial instruments; and (iii) an increasing integration of financial markets. I just dont see why those trends necessarily lead to more financial instability. The very fact that the supply of As regards the impact of financial financial services grows much faster market stability on economic growth todayand that a greater varietyof finan- it is easier to treat the topic from cial instruments is established grosso the negative angle by asking what does modo can be taken as evidence that financial instability do to economic thefinancialsystemshavebecome more growth.Andhereweareonsafeground efficient than they used to be in the past by recalling with Blejer the impres- in arbitraging profit opportunities and sively large losses of output in the redistributing the risks to be carried. aftermath of full blown financial crises, Similarly, a rising integration of capital notably combined currency and bank- markets creates a more refined net of ing crises. Argentinas recent loss of transmission, provides financial deep- about 12% of its output, for example, ening and permits more flexibility at is tremendous. But total costs are even lower transaction costs. Probably the higher if one takes the lost potential for most important aspect is the distribu- innovation into consideration. tion (or exchange) of risk. The larger It seems to me that any attempt the financial sector and the greater the at providing a definition of financial variety of financial instruments, the stability by pointing to the consequen- morediversificationofrisksisavailable, ces of financial instability does not yield the wider will be the distribution of much insight, given that we are inter- specific risks among investors, hence ested in the proper functioning of the the smaller is the portion of risk that financial system. each of them has to carry. I prefer to call a financial system a Consider, for example, the more stable one recent impressive development of (i) if it shows sufficient capacity for the the derivatives markets. These markets absorption of adverse shocks, such are a partial answer to the theoretical

228 ManfredJ.M.Neumann

challenge of a system of complete ger of spillover. But if the banking markets. It is noteworthy that accord- supervision works properly, if the link ing to BIS figures about 75% to 80% between the riskyness of loans and of the contracts are traded between capital requirements is strengthened, financial intermediaries. By improving and if stress tests that take macroeco- the allocation of risks among the nomic scenarios into account become members of the financial system these the rule, I do not see why the banking markets strengthen rather than impede system should create a serious financial the systems stability. crisis, regardless of the procyclical na- Blejer paints an impressive picture ture of the financial accelerator. of how institutional instability and mar- Similarly, I put to doubt the notion ket instability (i.e. excess volatility of that the securities markets are a source asset prices) negatively affect economic of its own of financial instability. While growth. He points to the danger of it is a fact that the volatility of share disintermediation when banks and prices exceeds the volatility of the other intermediaries fail to honour stream of dividends and that there is their commitments and interest rates herding behaviour,we have no convinc- rise in shrinking securities markets ing evidence that asset price bubbles because required risk premia are bid spring up from nothing. A unique ex- up. One might add that a bursting ception is the famous, utterly irrational bubble in equity or house prices, for speculation on tulips in the Nether- example, reduces consumption by cut- lands in 1636. ting into the wealth of households. And In sum, I take the position that it is there is more to scare us. notthefinancialsystem assuchthatcre- But it seems to me when dealing atesfinancialinstabilityorevencrises.It with the topic of financial instability maywellbethatIoverstatethecase,but it is important that we avoid to take this serves to draw your attention to the an assumption for granted which is hid- source of financial crises. The role of den in many contributions to the sub- misperceived public policies is — I am ject. The assumption is that the inter- afraid — bypassed by Blejer. It seems to mediation industry and the securities me that the dominant source of all markets are inherently unstable. Are major financial crises is ill-designed they really? Do we have overwhelming macro policies, assisted in some cases evidence in support of this claim? by poor or even lacking supervision of True, during the 19th century bank intermediaries and markets. All cur- panics have not been rare. Thus it is safe rency and banking crises that we have to predictthat a system of wild-cat bank- experienced during the past two dec- ing will not survive but break down adeswerecausedbyexcessivesovereign when the solvency of one or a few borrowing, by overly expansionary institutions comes into doubt. But this monetary policy or a combination of is a far cry from todaysbanking systems both and in some cases the financial that are regulated by government, criseswere aggravated by the insistence monitored by banking supervision, re- onkeeping thefixed exchangerate at an ceive liquidity from the lender of last untenable level. resort andarebound intodeposit insur- The recently coined term of a bub- ance schemes. True, time and again we bleeconomyhighlightsthefactthatthe will be confronted with failure at the emergence of larger asset price bubbles micro level and there always is the dan- is the probably most important threat

229 ManfredJ.M.Neumann

to financial stability, to the viability of notably, in the US. Doesnt this reflect intermediation and consequently to the fact that the European Central Bank economic growth. The lesson we have as well as the Fed flood the economies learnedisthatoncealargebubblebursts with liquidity in the desperate hope it may take many years if not a decade of achieving this way a stronger re- until the economy gets back to normal. covery? Japan is the unavoidable point of refer- It is true that it is difficult to difference. While there is some discussion entiate between a bubble that will burst among central bankers on what a cen- and a lasting shift in the relative price of tral bank might be able to do in order to capital that reflects the prospect of a deflate a bubble without inducing ad- strong upward-shift in productivity inverse side effects, I see close to none duced by technological innovation. But recognition by central bankers that giventhatprudencerequiresustofocus overly expansionary monetary policy on avoiding large mistakes rather than is catalectic to bubbles, i.e. prepares trying to fine-tune the economy (i.e. to the ground for a bubble to spring up avoidsmallmistakes),itseemsthatcen- and take off. tral banks are well advised to spend As an aside, it should be a matter of more resources on studying the bubble reflection, if not of concern, that, for phenomenon. To be sure, I am not example in Germany, where the econ- pleadingforaddingtothepricestability omyisinstagnationandwherethepros- objective an asset price target or for pects for a significant change to the direct intervention in a key asset mar- better are not bright, share prices have ket. But it seems to me that a forward nevertheless risen meanwhile by more looking monetary policy that takes the than 50% within a few months time. potential danger of becoming a source Similarly, share prices have risen on its own of instability into account strongly everywhere in Europe and, would try to avoid large swings. §

230

Klaus Liebscher Klaus Liebscher Governor Oesterreichische Nationalbank

Concluding Remarks

Over the past two days, many fruitful ideashavebeenpresentedanddiscussed referring to the topic Fostering Eco- nomic Growth in Europe. Let me briefly summarize the major findings and conclusions, as I see them. — The European Union (EU) is currently at an important crossroads. The ongoing wave of enlargement has made the need for institutional and legal reform acute. The proposal for a new EU constitution addresses the right issues. More effective EU decision-making processes are needed to support a more complete implementation of the Single Market. Also, the proposed strengthened Community monitoring procedures of Member States economic policies point in the right direction. The point was made that the Stability and Growth Pact is a core element of Economic and Monetary Union (EMU) and can, indeed, be regarded as an element of political union, which is often deemed a necessary complement to EMU. But, as was also emphasized, the Pact needs to be fully implemented in practice. — Monetarystabilityisakeycondition for sustainable growth. The Euro- systems approach to aim for low positiveinflation rates is in line with thebulkoftheoreticalandempirical Klaus Liebscher

findings on the optimal rate of in- ipation rates and that the problem is flation. Perceived differences be- mainly structural in nature. The EU tween the Eurosystems and the has made substantial progress over Feds monetary policies reflect the past tenyears. Thelabor market different economic structures in reforms undertaken so far have al- the two monetary areas. As was ready generated jobs in substantial emphasized, structural reforms numbers.For mostcountries,these increase an economys flexibility: reforms are estimated to have noti- the associated higher productivity cably reduced the structural rate of growth improves the short-term unemployment. The reforms are trade-offs faced by monetary pol- already paying off in terms of higher icy, thus enhancing its room for growth than would otherwise have maneuver. been achieved. However, the progress made so far varies sharply across EU Member States. The Nordic countries were frequently quoted as benchmark cases of successful reform, while other countries — among them the largest EU countries — still lag behind. It was also pointed out that a lot remains yet to be done and that — The basic message that I got from the more difficult parts of the re- session 1 was that there is no single forms are in many countries still main determinant of growth and to be tackled. Raising the retire- that a number of favorable condi- mentagewasseenasthesinglemost tions need to be in place together important element to enhance fu- for dynamic growth to develop. ture potential growth through an However,there appears to be a gen- increase in labor supply, while at eral consensus that investment in the same time ensuring the sustain- human capital and R&D furthers ability of government finances in growth. Information technology the face of ageing populations. is by itself no miracle cure; it — Session 3 offered views from indus- requires flexible labor markets to try. The main message, as I see it, reap its full benefits. It cannot be was the importance of maintaining excluded that Europe is yet to and enhancing Europes competi- see the productivity and growth tiveness. Inter alia, it was argued benefits from the ICT revolution. that making the setting up of a busi- In the context of human capital ness easier and more attractive is formation the issue was also raised of prime importance. A more in- how income distribution and vestment friendly climate which growth interact. As it turned facilitates change and is open to out, these interactions are far more modernization was seen to be of complex than thought so far. prime importance. A brain drain — Labor market issues were exten- in highly qualified natural sciences sively discussed. It was quite force- and engineering professions was fully argued that the priority should suggested as a potential bottleneck be raising employment and partic- for investment. Not only the

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quantity but also the quality of of their policy. Finally, the use of investment projects needs to be fiscal rules makes government pol- considered when, for example, icy more transparent and therefore evaluating public investment proj- more predictable, which provides ects. confidence to both businesses and — Session 4 included an interesting dis- consumers. cussion on the role of fiscal policy — A central message from session 5was and public sector reform. The main that developed financial markets paper presented found no relation- and financial stability are both im- ship between fiscal deficits and portant for growth. We should growth but a strong negative rela- further work on establishing fully tionshipbetweengrowthandpublic integrated and globally competitive debt. Similarly, countries that let financial markets in Europe. This the level of spending — mostly in also includes important regulatory transfer payments — grow were and institutional issues. The quality the same that experienced lower of financial regulation and super- growth. Interestingly, the paper vision pays off in the form of a did not find any relationship be- well-functioning system and helps tween spending for public invest- preventfinancialcrises.Thevarious ment and for public education on bodies for close coordination the one hand and growth on the among national supervisors and other. Growth in tax levels was as- the progress made in establishing sociated with falling growth rates. the Basel II framework — as I would In its Economic Outlook of last liketoemphasisedespitethedoubts winter, the OECD concluded that raised by some speakers — are im- transparency and well-designed portant steps in that direction. rules can help in setting and achiev- Overall, I think, we face a major ing fiscal consolidation. The case issue of reform implementation in study of the Netherlands that intro- Europe. As evidenced by various offi- duced fiscal rules 10 years ago, cial documents and ongoing official showed that the fiscal rules not only and institutionalized monitoring proc- led to an improvement in the fiscal esses, there appears to be a very far- balance and to debt reduction, but reaching consensus in European policy also to a reduction in government circles on the necessary reforms. But expenditure.Furthermore,besides the actual implementation of reform the discipline in public finance, fis- measures chronically lags behind our cal rules can also contribute to ambitions. As has been evidenced viv- economic growth through several idlyover thepast months inanumberof channels. In the short run, govern- countries in the context of, for in- mentrevenueisallowedtofluctuate stance, pension reform, implementing witheconomicdevelopment,soau- growth enhancing reforms often turns tomatic stabilizers can operate out to be politically very difficult. The freely. In the long run, economic challenge is, as was pointed out, to growth benefits from solid public convince the public and the various finances. In addition, given the me- interest groups of reforms which dium-term focus of the fiscal rules, may be unpleasant in the short run politicians are more likely to con- but are necessary and beneficial in centrate on the structural impact the long run.

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I think that we have successfully conference, as well as the organizers, pursued our objective of enhancing Mrs. Winter and others, who did a theunderstanding ofthe drivingfactors great job ensuring that everything for growth in Europe. Let me adjourn workedoutperfectly.Lastbutnotleast, this conference by thanking all who I would like to extend a very warm participated; especially our speakers, thank-you particularly to the many par- our discussants and very much our ticipants who joined our conference panelists. Furthermore, I would like from abroad. to specifically thank those who helped As the final item on our agenda,we to prepare this conference — with my have lunch to look forward to, and the special thanks going to Mr. Hoch- contribution of a very distinguished reiter and Mr. Mooslechner, for the, luncheon speaker, Mr. Levy, namely if I may say so, contributions and orga- his insights about Why Does the nization of the scientific part of this U.S. Grow Faster than the EU? §

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Mickey D. Levy Mickey D. Levy Chief Economist Bank of America

Why Does the U.S. Grow Faster than the EU? Pro-Growth Suggestions for Closing Gap

Since the early 1980s, U.S. economic growth has substantially exceeded EU growth, and the differential has widened since the early 1990s. This sustained outperformance by the U.S. has reversed the earlier trend of Euro- pean convergence of GDP/capita with the U.S. Looking forward, standard estimates of potential growth in the U.S. are significantly higher than those for theEU—perhaps3%to3.25%compared to 2% to 2.25% — and Germanys potential growth is below 2%. If sustained, the cumulative impacts of these differences on economic performance, job creation and standards of living are startling. Why the gap? The reasons are primarily fundamental: U.S. economic performance has benefited from generally sound underlying policies and fundamentals that support healthy growth, and also provide resilience to external shocks. Consider its following characteristics: — Efficient production processes and highly flexible labor markets — Low inflation and inflationary expectations Mickey D. Levy

— Sustained strong productivity gains that economic growth benefits from and low unit labor costs lower taxesandlowandstableinflation, — Healthy labor force growth and ris- and it is harmed by profligate governing hours worked ment spending, burdensome taxes and — Efficient and innovative capital regulations that raise the costs of markets and highly capitalized production, inhibit labor supply and banking system otherwise distort labor mobility, and — Relatively low tax and regulatory dull entrepreneurship and risk taking. burdens The clear message is that good policies — Healthy population growth aug- are rewarded by faster growth and mented by favorable in-migration higher standards of living, while mis- trends guided policies — even well-intended Economic policies and perform- ones — are damaging. ance in EU nations differ significantly from these U.S. characteristics. In to- An Assessment of U.S. daysremarks, I will discuss some of the Economic Policies and differences.Twoobservationsareclear. Performance Firstly, and optimistically, adoption U.S. economic performance in the of pro-growth economic policies by 1970s was horrible: bordered by EU nations would raise potential recessions in 1970 and 1980—1982 growth and performance, and history and punctuated by a steep contraction suggests that the pattern of conver- mid-decade, volatile performance was gence is relatively rapid. Secondly, characterized by rising unemploy- the U.S. is far from perfect: the EU ment, weak productivity and soaring can learn from some of the U.S.s past unit labor costs, declining inter- and current misguided policies; in national competitiveness and falling fact, several developments presently real corporate profits. Certainly, the unfolding in the U.S. will constrain two oil price shocks contributed its productivity and potential growth. negatively, but the dismal performance In addition, I will comment briefly on wasattributableprimarilytomisguided how several aspects of the Stability and economic policies. Erratic monetary Growth Pact provide ineffective guides policy generated dramatic volatility for fiscal policy, and recommend in the economy and accelerating excess changes that would enhance economic demand that resulted in high and stability and growth. volatile inflation. Fiscal policy involved Unlike many issues in public policy very high marginal tax rates — 70% on that involve conflicting research results the highest income bracket — which, and opinion, I find it instructive that combined with rising inflation, im- an impressive array of research and posed higher taxes on capital. Mount- anecdotal evidence provide consistent ing regulatory burdens raised the costs and convincing reasons why economic oflaborandproduction.U.S.economic growth in Europe has persistently policymakers lacked credibility. Amid lagged behind the U.S. With little rising inflation and interest rates, disagreement, academic research and selected banking regulations distorted analysis conducted at such institutions the financial intermediation process as the EC, OECD, ECB, IMF,the U.S.s and inhibited the efficiency of capital National Bureau of Economic Research markets. Toward decade-end, real and Federal Reserve System concur interest rates were negative and the

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realexchangeratewasfalling rapidly.In In the 1990s, fiscal restraint on the private sector, the peak in union domestic spending combined with participation and power contributed the sharp decline in defense spending to rising unit labor costs in absolute as part of the post-Cold War peace div- terms and relative to other industrial- idend sharply reduced government ized nations. U.S. businesses had begun spending as a percentage of GDP to transfer jobs and production over- and temporarily generated cash flow seas,andcitizenslamentedthehollow- budget surpluses. The government ing out of American industry. debt/GDP ratio fell sharply. Impor- Reflecting these policies and tantly, with the reduction of govern- trends, consensus estimates of future ment purchases/GDP, the portion of potential growth were approximately national resources directly absorbed 2%, similar to current estimates of by the federal government declined. potential growth in the EU. The 1980 U.S. Presidential election pitted those who favored only minor changes versus advocates of more radical reform, including calls for sharp cuts in taxes and spending, lower government regulations, and aggressive ac- tionstoreduceinflation.Theelectorate voted for regime change and radical reform. This facilitated above-trend growth A significant shift toward pro- in private consumption and invest- growth economic policies in the ment, and stronger productivity gains. 1980s and 1990s established the foun- The robust economic growth and dation for the dramatic economic im- surging equity markets alsowere major provement. A shift in monetary policy contributors to the fiscal surpluses. generated a nearly continuous decline Other economic policies have in inflation to the point where inflation- enhanced U.S. performance. Selec- ary expectations now are sufficiently tively reduced regulatory burdens have close to zero that they no longer distort lowered the costs and sped up the in- economic behavior. As inflation has troduction of new technologies and declined and the Federal Reserve has innovations into commerce (i.e., broad gained credibility,the volatility of infla- financial deregulation, energy and tion has diminished. In fiscal policy, truckingderegulation,recentimprove- marginal tax rates were slashed in ments in the drug approval process are 1981 and again in 1986, and significant but a few examples). Removing Social distorting provisions were removed Securitys earnings test reduced the from the tax code. The easing tax tax on earnings of older workers and burdens on capital through legislated hasraisedtheirlaborforceparticipation changes and lower inflation raised rates. Welfare reform enacted in 1995 expectedratesofreturnoninvestment. provided both financial incentives and Tax cuts enacted in 2001, 2002 and government support to transition wel- 2003 have reduced the top marginal fare recipients into the workforce. income tax rate to 35%, lowered ImplementationoftheNorthAmerican business taxes and provided tax relief Free Trade Agreement (NAFTA) in on dividends and capital gains. 1994loweredbarrierstotradebetween

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the U.S., Mexico and Canada and en- itsfinancialstructuresfacilitateproduc- hanced international trade. Immigra- tivity and economic growth. Through a tion laws facilitated a continued stream wide array of capital-raising vehicles, of in-migration, which has added to the capital markets efficiently allocate the growth, diversity and skills of saving into investment opportunities, the U.S. labor force. In the 1990s, encourage research and technological growth in the labor force contributed advance, and speed up the implemen- significantly to economic growth: em- tation of new innovations into com- ployment rose 20%, or 1.8% annual- merce. In a recent study, the EC found ized, and hoursworked rose even faster that financial development and integra- (2.1% annualized). tion provide significant benefits to the Theflexibilityandefficiencyof pro- economy, particularly to small and me- duction processes and labor markets dium-sized businesses.2) Importantly, contribute significantly to economic in the U.S., small and medium-sized growth and help mitigate the impacts firms are the largest source of job cre- of negative shocks. Labor flexibility ation and growth. is enhanced by relatively modest gov- Myriad different financial instru- ernment inhibitions and costs imposed ments and derivative markets improve onfiringemployees,changingjobfunc- risk management at financial institutions within companies or relocating tions and allow an efficient redistribu- workers. Labor mobility is very high tion of risk. To be sure, such capital across industries as well as geographi- market efficiencies may accentuate cally across states, which reduces the the costs of misjudgments and mis- duration of unemployment. This flex- takes; the recentcollapse of technology ibility allows businesses to quickly stocks inflicted painful losses on invest- adjust labor inputs and operating costs ors that had unrealistically high ex- to unexpected declines in product pected rates of return on investment. demand. But the benefits far outweigh the costs: This flexibility encourages techno- thepositivecontributionstoproductiv- logical innovation and business invest- ity and economic growth stemming ment. Not surprisingly, empirical from U.S. capital markets should not studies show that in the U.S. capital be underestimated. spending and innovations complement Several institutional characteristics employment gains. As IMF and OECD in American business raise efficiency studiesnote,U.S.productionprocesses and contribute positively to productiv- are characterized by employment- ity. Isolated abuses of stock options by friendly capital deepening and growth U.S. corporate executives often get in multi-factor productivity.1) In con- headlines, but the use of option and trast, empirical research suggests that stock-based compensation creates pos- in core Europe nations, capital is sub- itive incentives. Professor Martin Feld- stituted for labor,as businesses respond stein identifies the relatively heavy to a host of tax and regulatory burdens reliance on compensation incentives that raise the relative costs of labor. (stockandoptions)andtheoverwhelm- The extraordinary efficiency and ing emphasis in the U.S. on enhancing flexibility of U.S. capital markets and stockholder value as factors that en-

1 See Garibaldi and Mauro (1999), Nicoletti and Scarpetta (2003), and Nicoletti et al. (2000). 2 See Giannetti et al. (2002).

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courage risk taking, accelerate the growth stemming from global eco- adoptionofnewtechnologies,andcon- nomic weakness, and uncertainties tribute positively to production effi- related to the 2002 corporate account- ciencies and productivity. In contrast, ing scandals and, more recently, the he notes European businesses lesser Iraq War. Following the investment reliance on incentive options dull risk boom in the late-1990s, declines in taking and entrepreneurship, while capital spending reduced business managersattemptstoachievesatisfac- fixed investment as a percentage of tory performance for all of the stake- GDP. Healthy growth in investment holders, including all employees, in information processing equipment consumers and the government may and software, including telecommuni- play a large role in explaining why cations equipment, has resumed, sug- the adoption of IT has occurred at a gesting that in selected sectors, the substantiallyslowerpaceinEuropethan capital stock adjustment process has in the United States.1) ended. However, business investment in transportation equipment and in Recent U.S. Economic structures continues to fall sharply, Performance suggesting excess capacity in selected Following the 2001 recession, which sectors will continue to dampen near- was mild as measured by the slight term growth in capital spending. decline in real GDP but significantly While consumer spending has more severe in terms of declining pro- benefited from sustained increases in duction, inventories, capital spending real disposable income and low interest and profits, the U.S. recovery has been rates, the growing perception that the slow by historic standards. Real GDP substantial declines in wealth since has grown 2.7% annualized since the mid-2000 are permanent has weighed 2001Q4 recession trough, consider- heavily on consumer spending. Con- ably slower than most prior recoveries, sumer spending growth will get a boost employment and hours worked have from the recently enacted tax cuts in failed to rebound from their recession the Jobs and Growth Tax Act of trough levels, and the unemployment 2003. U.S. exports have rebounded rate has drifted up. Business investment very slowly from their recession has rebounded very modestly and un- declines, despite the sharp fall in the evenly. Labor productivity gains have U.S. dollar. Export growth is expected remained strong, supporting rising real to accelerate in lagged response to the wages, and profits have rebounded weaker currency. soundly, but they remain below their These inhibiting factors are ex- prior expansion peak. pected to dissipate, and economic Despite aggressive monetary and growth is expected to pick up. Real fiscal stimulus, the pace of recovery GDP is projected to grow approxi- has been inhibited by several factors, mately 2.75% annualized in the second including the adjustment of business half of 2003 and over 3% in 2004. This investment to the excess capital stock would be accompanied by sustained created in the 1990s, the dampening healthy increases in profits, and mod- impact on consumption of the decline erate job creation but a lingering high in wealth, the constraint on export unemployment rate. Inflation is pro-

1 See Feldstein (2003).

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jected to remain low; with nominal during the late-1990s boom, which re- spending growth remaining above sulted in budget surpluses, many state productive capacity, current concerns and local government officials used the about deflation are overstated. In finan- rapid growth in tax receipts for short- cial markets, real interest rates are term political gain, and put in place ex- expected to rise with improving pensive new spending programs. Now, economic performance and the stock faced with laws that require balanced market. (projected) operating budgets, many states and municipalities are raising Factors that May Diminish taxes.Insomesituations,likeNewYork U.S. Potential Growth and California, the increases may be If sustained, several fiscal trends in the dramatic. While the U.S. federal, state U.S. — rising federal outlays for defense and local spending and tax shares on and national security and rising state average are far lower than in Europe, and municipal spending and taxes — recent trends, if sustained, would would constrain long-run productivity reduce U.S. potential GDP growth 1 gains and potential growth. Following by roughly /4 percentage point annual- over a decade during which federal de- ized, with substantial cumulative fense spending fell in real terms and effects. federal government purchases shrank as a share of GDP,government outlays An Assessment of for defense and national security are European Economic Policies rising sharply. In the short run, with and Performance nominal spending accelerating mod- An analogous assessment of the charac- estly in response to monetary and fiscal teristics and policies that underlie core stimulus, the rising government pur- economiesinEuroperevealskeyfactors chases add to GDP, but in the longer that undermine performance. Many of run, the rising absorption of national thesecharacteristicsarereadilychange- resources by the government will able, so the prospects for future per- crowd out private consumption and formance hinge critically on whether investment. All things equal, this will policymakers (and ultimately the pop- lower private productivity and poten- ulations they serve) choose to imple- tial growth. This leaves aside crucial ment pro-growth reforms. questions about whether the absence In the 1980s, average annual eco- of this additional spending for defense nomic growth in the EU-15 was and security would leave the U.S. econ- 2.5%, nearly 1 percentage point lower omy vulnerable to far greater disrup- than the U.S., and its 2.2% average tion and productivity loss. In this sense, annualgrowthinthe1990swas1.4per- the policy is not a misallocation of centage points lower than the U.S. In resources but instead the necessary both decades, growth rates varied national response to heightened secur- widely within Europe. In Germany, ity risks, themselves the cause of the France and Italy, growth was decidedly lower potential growth path. below the EU-15 average, and their A more disturbing trend of signifi- negative gap to the U.S. widened cantlyhigher spendingandtaxeshasun- throughout the 1990s and has folded at the state and municipal levels. persisted so far this decade. During Whereas federal policymakers held the the 1980s, the unemployment rate line on spending as tax receipts soared averaged approximately 8.9% in

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Europe compared to 7.3% in the U.S. The inference that the economic In the 1990s, the gap widened, as Euro- growth differential may be explained pean unemployment averaged 9.4% by European workers simple desire andtheU.S.averaged5.8%.Moreover, to enjoy leisure and work less than the duration of unemployment is the seemingly industrious American significantly higher in Europe. workers is misleading. Instead, every In recent years, real European indication suggests that the work-lei- GDP/capita growth has kept pace with sure tradeoff and theway labor and cap- the U.S., but this provides a limited and italareusedinproductionprocessesare misleading assessment of Europes driven primarily by financial incentives performance. U.S. population growth created by tax, regulatory and macro- has been consistently higher than economic policies. Moreover, the pol- Europes, reflecting higher natural icies and institutions that constrain and increases, driven primarily by significantly robust birth rates, and higher net in-migration. This population growth differential, which has contributed to a narrowing of relative GDP/ capita ratios, reflects favorable policies and standards of living (actual and expected) in the U.S. relative to Europe. Although far from perfect, U.S. immi- gration laws are less restrictive than in distort hiring and firing decisions dont most European nations. In addition, just affect labor markets; they heavily immigrants into the U.S. seem to be influence business production proc- more readily integrated into society esses, investment plans and technolog- and the workforce than in Europe, con- ical innovation. Tax and regulatory tributing positively by gaining skills and policies that raise the relative costs earning relatively higher wages, attain- of labor lead to a substitution of capital ing higher standards of living, and pay- forlabor,buttotheextenttheyraisethe ing taxes. These differences, reflected costs of introducing new products, in endogenous growth models, have innovations or production processes, significant implications for labor force they reduce efficiency and growth. growth, pension budgets, and eco- A host of inhibiting policies and fac- nomic performance in general. tors underlie Europes slower employ- A recent OECD study disaggre- ment gains, higher unemployment, gates the components of GDP growth fewer hours worked and general labor and attributes much of Europes short- market rigidities. Among the stand- fall to the differential in hours worked outs: onerous tax burdens, employ- (employment adjusted for average ment protection laws and legal regula- hours worked), while core European tions with respect to hiring and firing, labor productivity, capital deepening minimum wages and employees com- and total factor productivity have gen- pensation rights and the level and du- erally kept pace with the U.S., with the ration of unemployment benefits all exception of the late-1990s U.S. eco- combine to reduce the demand for nomic boom.1) labor and limit its supply.Heavy union-

1 See Nicoletti and Scarpetta (2003).

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ization and other regulations accentu- (it tends to be extended and enhanced ate these impacts. during recession), and there are a wide FromanAmericanviewpoint,taxes array of workers rights, but in gen- in Europe seem particularly burden- eral they tend to generate significantly some. In the U.S., the highest marginal fewer distortions on business decisions tax rate on individual income has been tohireandfirethaninEurope.Europes reduced dramatically, from 70% in unemployment benefits, more gener- 1980 to 35% currently,with the recent ous and of longer duration, contribute enactmentoftheBushAdministrations to labor immobility and its longer du- 2003 tax reform legislation. Lower and ration of unemployment. The problem middle-income households are pro- of aging populations faces both Europe vided significant credits, exemptions and the U.S., but more generous pen- and deductions to increase their take sion and unemployment benefits and home pay; Social Security taxes are earlier retirement laws in Europe are onerous (15.3% of wages up to a limit), widely recognized as primary factors but refundable earned income tax that encourage earlier job separation credits dramatically ease the burden and reduce labor force participation for low-income workers. among older people.2) In the U.S., On average, in most European na- the recent elimination of Social Secur- tions,totaltaxesonlaborareover50%, itys earnings test has encouraged significantly higher than in the U.S. The higher labor force participation among extraordinarily wide wedge between older people. In Europe, specific labor real labor costs to European employers regulations have led to increasing reli- and take home pay toworkers is a major ance on part-time workers, which adds depressant. European workers choose to total employment but crowds out to work less not because they are lazy full-time workers and reduces hours compared to their American counter- worked. In both Europe and the parts, rather because high taxes dis- U.S., reliance on part-time workers courage their work effort; European has increased in recent years. In the businesses respond to the same disin- U.S., the trend has functioned as a centives by limiting labor inputs. An way for employers to tailor hours array of empirical studies find a strong worked to product demand, and fur- inverse correlation between taxes on ther increase productivity growth. In the one hand and employment, real Europe, it is having similar effects GDP growth and real GDP/capita but in large measure still represents on the other.1) Importantly, these a somewhat distorted response to results explain labor patterns and the large web of labor regulations differences in economic performance applying to full-time employees. among European nations as well as Actual labor market performance Europes slow growth relative to the reflects these policy differences. Dur- U.S. They also explain differences ing the 1980s and 1990s, average acrossU.S.states,wherelabormobility annual employment growth in core is very high. Europe was 1.5% less than the U.S. In the U.S., unemployment com- and the negative gap in aggregate hours pensation typically lasts for 26 weeks worked was even larger. One study of

1 See for example Bassanini and Scarpetta (2001), and Heitger (2000). 2 See OECD (2003).

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potential growth and output gaps notes lead nations to enact anti-growth fiscal that in 2000, hours worked per person policies. I question whether a single employedwas 17.6% higher in the U.S. deficit measure can adequately capture than in Europe.1) That differential has the general intent of fiscal responsibil- widened significantly since 1981, as ity. This presents a major problem: average hours in Europe have declined empirical research shows a clear in- sharply while they have risen modestly verse correlation between government in the U.S. spending and economic growth, and Certainly, recent reforms in se- between taxes and growth, but no clear lected European nations have reduced correlation between deficits and eco- the relative costs of labor and generated nomic growth. Yet budget deficits positive results; the EC reports that are the key operative in the Stability there has been significant progress in and Growth Pact. many areas of the Lisbon Strategy, and since 1996, 12 million new jobs have been created in Europe.2)Yet the EC report notes that reforms have not been comprehensive and labor market improvement has been uneven; in particular, the labor force participation rates of older workers remain low.

Stability and Growth Pact TheU.S.budgetdeficitisapproach- The EUs Stability and Growth Pact, ing 4% of GDP.Budget deficits in sev- intended to foster stability and growth eral core European nations, including through fiscal responsibility and low Germany and France, are similar. and stable inflation, may actually harm But in the U.S., total federal spending European economic performance. In islessthan20%ofGDPandtotalspend- particular, its deficit criterion is mis- ing for federal, state and local govern- guided: it does not provide a proper ments is approximately 35%, while in guideline for the promotion of fiscal European nations, on average, general responsibility and may result in fiscal government spending is approximately policies that are neither stabilizing 47.5%. Surely,simple budget imbalan- nor conducive to growth. Resulting ces alone do not capture the economic policies and economic conditions implications of the governments may also strain the monetary union spending and tax regimes. The signifi- and the smooth functioning of the cantly larger shares of government ECBs monetary policy. Corrective spending and taxes in Europe constrain measures are required. growth compared to the U.S. Certainly,thePactsrequirementto Current circumstances illustrate limit budget deficits to 3% of GDP has howthePact may bedestabilizing.Con- contributed to lower deficits in EU-12 sider 2 EU nations that need to reduce nations. But the Pact has not lead to their deficits from 4% of GDP to 3% any material reduction in government tomeetthePactsdeficitcriterion.One spending or taxes. Moreover, it may cuts social spending by 1% of GDP and

1 See Denis et al. (2002). 2 See European Commission (2003).

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the other raises taxes by 1%. While sented by public expenditure and tax- both meet the letter and intent of ation, the way the spending and tax the Pact, are both policies equally programs absorb and allocate national fiscally responsible, with similar eco- resources, and the incentives and dis- nomic outcomes? No: the tax-hiking- incentives imposed on household and nation will lag economically, while the business decisions, are far more impor- spending-reduction nation will outper- tant to economic performance. U.S. form. fiscal policy also tends to be driven The potentially destabilizing impli- by concerns and misperceptions about cations of the Stability and Growth Pact deficits, but the general viewof the role for the ECBs monetary policy and the ofgovernmentandtheprivateeconomy monetary union should not be over- intheU.S.favorsasmaller publicsector looked. To the extent the Pact con- than in Europe. strains potential growth in Europe, theECBsflexibilitytomeetitsinflation Suggested Pro-Growth target is constrained. Moreover, it Policies heightens the ECBs already difficult, Europes persistent underperformance if not impossible, task of smoothing in the last several decades highlights aggregate demand and maintaining a the sharpening tradeoff between its low variance of inflation across EU welfare and income maintenance pro- nations that impose different spending, grams on the one hand and economic tax and regulatory policies and have growth on the other. European policy- widely different economic characteris- makers must choose: maintain welfare tics and potential growth. In the case and income redistribution, or pursue described above, expected economic stronger economic growth and job performance and rates of return will creation. Slow growing core European tend to rise in the nation that cuts nations may come under additional spending compared to the higher tax pressure to reform as newly-inducted nation; this significantly strains the EU nations join selected small Euro- smooth functioning of the single cur- pean nations such as Ireland and Portu- rency and single central bank monetary gal as attractive destinations of jobs, regime. production and capital. With inflation Relying on a deficit/GDP ratio to low and ECB monetary policy accom- guide fiscal policy — or to coordinate modative, I expect any transition costs fiscalpolicesacrossnations—isallowing ofthefiscalreformIrecommendwould the tail to wag the dog: deficits are be trivial relative to the substantial merely the difference between spend- benefits of faster economic growth. ing and taxes; focusing on these resid- In recent years, selected reforms in uals has its place, but it is usually a dis- product, service and capital markets traction from the underlying spending have been achieved, and the EC has and tax structures, their economic noted progress in line with the Lisbon impacts, and the key fiscal policy Strategy. Obviously, further reform of choices that are implicit. The impacts regulations that distort labor, product ofdeficitsper se—orcyclically-adjusted and service markets are required. deficits — on economic performance, On the fiscal policy front, if Euro- interest rates and a host of other indi- pean nations aretruly seriousabout lift- cators are largely ambiguous. In con- ing economic growth and standards of trast, the shares of the economy repre- living, significant cuts in government

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spending and taxes are required. The ened) with enactment of pro-growth goals should be shrinking the scope tax cuts. of governments, narrowing the tax I am very aware of the technical wedge between businesses costs of la- details that would need to be ironed bor and workers take home pay, and out, and the severe political opposition lessening distortions to business and to pension reform and fiscal restraint. household decisions. Pension reform Selected EU nations face very high is imperative to reduce spending and debt-to-GDP ratios, and even tempo- the governments mounting unfunded rary increases in deficits may be per- liabilities, and to reduce incentives to ceivedasnegative.Moreover,maintain- retire early. Importantly, while it may ing the credibility of the Stability and be necessary to phase in certain spend- Growth Pact is important. However, ing cuts and pension reform, tax cuts, the Pacts central focus on deficits, including sharp cuts in marginal rates, which provided an important guide- are preferred immediately. This, obvi- line in the 1990s, has lost its value ously,isinconsistentwiththedeficitcap and places the Pactscredibilityat stake. imposed by the Stability and Growth Incremental tinkering and creative Pact. budgeting to meet the Pacts deficit The Pact should be altered as it per- objective have not enhanced economic tains to fiscal policy. The deficit cap growth materially or reduced debt- should be modified to reflect economic to-GDP ratios in troubled EU nations. conditions; afull employment (or high- Policy reform that lifts economic employment) budget deficit cap would growthisthebestwaytoreducedeficits be appropriate. But a more radical and debt. modification is necessary to create a In the U.S. in the 1990s, a series guideline for policymakers to reduce of deficit reduction laws and the fiscal scope of governments, move Congressional budget procedures toward the type of fiscal responsibility linked to deficit reduction resulted that was intended in the Maastricht in spending cuts and tax increases Treaty, and reduce high taxes that (but no Social Security or Medicare reduce economic growth and job cre- reform). However, U.S. federal spend- ation. This requires adding several new ing and taxes as a percentage of GDP criteria to the Stability and Growth were far lower than in Europe, and Pact: placing caps on government European fiscal and budgetary policies spending and taxes. Measured as a per- require more draconian restraints. centageofGDP,thesecapsshouldbeset This is particularly true in light of well below the current average spend- the economic and budgetary conse- ing and taxes in EU nations, and they quences of Europesunfavorable demo- should be phased in over a number of graphics. years, similar to the criteria established Such changes would allow each in the Maastricht Treaty. Because large nations automatic fiscal stabilizers to spending cuts, particularly involving operate without obstruction, and pension reform, must be implemented would provide broad guidelines for over timefor purposesoffairnessandto fiscal responsibility. Controversial, yes, allowolder people to adjust, near-term but they would force policymakers to tax cuts would temporarily widen make the difficult fiscal decisions that budget deficits. The Pacts deficit caps they can now avoid under the existing should be modified (temporarily loos- Stability and Growth Pact. §

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References Giannetti, M., L. Guiso, T. Jappelli, M. Bassanini,A.andS.Scarpetta.2001.The Padula and M. Pagano. 2002. Financial Driving Forces of Economic Growth: Panel Market Integration, Corporate Financing Data Evidence for the OECD Countries. and Economic Growth. European Commis- OECD Economic Studies 33. sion. November. Denis, D., K. McMorrow and W. Ro‹ger. Heitger,B. 2000. Unemployment and Labor 2002. Production Function Approach to Market Rigidities in OECD Countries. The Calculating Potential Growth and Output Impact of Taxes. Kiel Institute of World Gaps— Estimates for the EU MemberStates Economics, Working Paper 985. May. and the U.S. European Commission, Eco- Nicoletti, G. and S. Scarpetta. 2003. nomic Paper 176. September. Regulation, Productivity and Growth: European Commission. 2003. Choosing OECD Evidence. OECD, Economics to Grow: Knowledge, Innovation and Jobs Department Working Paper 347. January. in a Cohesive Society. Report to Spring Nicoletti, G., S. Scarpetta and O. Boy- European Council, March 21. land. 2000. Summary Indicators of Feldstein, M. 2003. Why Is Productivity Product Market Regulation with an Exten- Growing Faster? National Bureau of Eco- sion to Employment Protection Legislation. nomic Research, Working Paper 9530. OECD, Economics Department Working February. Paper 226. April. Garibaldi, P.and P.Mauro. 1999. Decon- Organisation for Economic Co-opera- structing Job Creation. IMF Working Paper. tion and Development — OECD. Washington, DC: International Monetary 2003. The Policy Agenda for Growth. Fund. August. OECD.

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Franz-Weninger-Stipendien Franz Weninger Award Franz-Weninger-Stipendien Franz Weninger Award

U‹ berreichung der werden vom Direktorium der OeNB Franz-Weninger-Stipendien auf Vorschlag einer Fachjury vergeben. der Oesterreichischen Die Franz-Weninger-Stipendien Nationalbank des Jahres 2003 wurden folgenden Herr Gouverneur Dr. Liebscher u‹ber- Personen zuerkannt: reichte am 13. Juni 2003 im Rahmen — Dr. Elisabeth Springler fu‹r der 31. Volkswirtschaftlichen Tagung die Dissertation ªBescha‹ftigungs- der Oesterreichischen Nationalbank effekte durch Finanzmarktliberali- (OeNB)dieFranz-Weninger-Stipendien sierung? Griechenland als ,critical an drei Preistra‹ger. Das Franz-Wenin- case study ger-Stipendium wird von der OeNB — Mag. Patrick J. Butler fu‹r die jedes Jahr fu‹r hervorragende Disserta- Diplomarbeit ªThe Accuracy of tionen und Diplomarbeiten auf dem Analyst Forecasts: IPOs at the Gebiet der Geldtheorie und Geld- Neue Markt in Frankfurt politik vergeben und erinnert an den — Mag. WolfgangSchwarzbauer vor sieben Jahren to‹dlich verunglu‹ck- fu‹r die Diplomarbeit ªStock ten Leiter der Volkswirtschaftlichen Markets and Real Economic Abteilung der OeNB. Die Stipendien Activity §

253 Die Vortragenden Speakers Die Vortragenden Speakers

Karl Aiginger — Purdue University, Indiana, USA Date of Birth (1978) October 23, 1948 Other Activities Present Positions — Expert for European Commission, — Senior Research Fellow, Deputy Di- Austrian Government rector at the Austrian Institute of — Lectures at the University of Vienna, Economic Research (WIFO) Vienna University of Economics and — Professor of Economics at the Univer- Business, University of Hunan sity of Linz (China), Webster University — Research Fellow European Forum, — On the Editorial Board or Steering Stanford Univesity Committee of: International Jour- — Editor of the Journal of Industry, nal of Industrial Organization, Competition and Trade (JICT), jointly EMPIRICA — Austrian Economic with Andre« Sapir Papers, EARIE — European Associa- Professional Experience tion for Research on Industrial Eco- — Economist at the Austrian Institute of nomics, NO‹ G-Austrian Economic Economic Research (as of 1970) Association — Managing Editor of Empirica — — Referee for: Economic Journal, Euro- Austrian Economic Papers (1975— pean Economic Review, Journal of 1992) Industrial Economics, Small Business — Visiting Scholar at Stanford University Economics, Journal of Economics, (1982) Journal of Empirical Economics, — Deputy Director of the Austrian International Journal of Industrial Institute of Economic Research Organization (1984—1987) — Supervisory board of OIAG (holding — VisitingProfessoratMIT,Boston,USA company of industrial firms) (1993— (1991) 2000) — Professor at the University of Linz (as Selected Publications of 1992) — A Three Tier Strategy for Successful — Deputy Director of the Austrian European Countries in the Nineties. Institute of Economic Research WIFO Working Paper 205. 2003 (1996—1998) — Do American and European Industrial — Professor at GSB and IIS, Stanford Economists Differ? In: Review of University (June—December 2002) Industrial Organization. (With M. Research Interests McCabe, D.C. Mueller and Ch. — Industrial economics and industrial Weiss). 2002 policy — The New European Model of the Re- — Industry studies, clusters, small busi- formed Welfare State (NEM-RWS). ness European Forum Working Paper 2. — Competitiveness, economic perform- Stanford University. December 5, ance of countries 2002 — Theory of uncertainty, expectations — Growth Difference Between Europe business cycle and the US in the Nineties: Causes — Comparative economic policy strat- and Likelihood of Persistence. Euro- egies pean Forum Working Paper 1. Stan- Education ford University. November 15, 2002 — Economics at the University of Vienna — Competitive Economic Performance: (1966—1974) The European View. Conference on

255 Die Vortragenden Speakers

Transatlantic Perspectives on US-EU Other Activities Economic Relations: Convergence, — Supervisory Board Positions Conflict & Cooperation. Harvard — AT & S Austria Technologie & Sys- University, April. (With M. Landes- temtechnik AG mann). WIFO Working Paper 179. — FACC Fischer Advanced Compo- June 2002 site Components AG — HTP High Tech Plastics AG Hannes Androsch — Innovest Finanzdienstleistungs AG Date of Birth — nCoTec Ventures Limited April 18, 1938 —O‹ sterreichische Philips Industrie Present Position GmbH — Industrialist (as of 1994) —O‹ sterreichische Salinen AG Professional Experience — Member of the Advisory Board of — Secretary, then consultant for econo- Montanuniversita‹t Leoben mic issues for the Social Democratic — Hannes-Androsch-Foundation parliamentary party (1963—1967) (Austrian Academy of Sciences) — Tax consultant (1966) Selected Publications — Member of Parliament (1967) Author of numerous articles in news- — Certified auditor and tax consultant papers and magazines (1968) — Die politische O‹ konomie der o‹ster- — Deputy State Commissioner at the reichischen Wa‹hrung: Ein U‹ berblick Zentralsparkasse (until 1970) u‹ber die o‹sterreichische Wa‹hrungs- — Austrian Minister of Finance (1970— politik von 1760—1984 vor dem Hin- 1981) tergrund der internationalen Ent- — Member of the National Executive wicklung. Vienna: Orac. 1985 Committee of the Social Democratic — Warum O‹ sterreich so ist, wie es ist. Party (SPO‹ ) (1972—1983) EineSyntheseausWiderspru‹chen.Vien- — Member of the SPO‹ Party Presidium na: Kremayr & Scheriau/Orac. 2003 and Deputy Party Chairman of the SPO‹ (1974—1981) Mario I. Blejer — Vice-Chancellor (1976—1981) Date of Birth — Chairman of the OECD at minister June 11, 1948 level (1979) Present Position — Chairman of the Interim Committee — Adviser on Financial Stability to the of the International Monetary Fund Governor of the Bank of England (1980) and Director of the Banks Centre — General Director of the Creditanstalt- for Central Banking Studies Bankverein (1981—1988) Professional Experience — Consultant at the World Bank (1988— — Governor of the Central Bank of Ar- 1989) gentina (2002) — Founding of AIC Androsch Inter- — Central Bank of Argentina, Deputy national Management Consulting Governor (2001) GmbH (1989) — International Monetary Fund, Senior Education Adviser (1980—2001) — College of International Trade, — The Hebrew University of Jerusalem, Vienna; Degree in Business Adminis- Department of Economics, Walter tration (1959) Rathenau Professor of Economics — Ph.D. in Economics (1968) (1996—1999)

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— NewYorkUniversity,GraduateSchool Economies. (Edited with M. S´reb). of Business, Associate Professor of Kluwer Academic Publishers. 1999. Economics and International Business (1983—1984) Jean-Philippe Cotis — The Hebrew University of Jerusalem, Date of Birth Department of Economics, Lecturer September 24, 1957 (1977—1981) Present Position — Boston University, Department of — Chief Economist and Head of the Economics,AssistantProfessor(1976) Economics Department at the OECD — Center for Latin American Mone- in Paris tary Studies (CEMLA), Mexico City, Professional Experience Mexico, Senior Researcher (1975) — Director of the Economics Depart- Research Interests ment at the French Ministry of — Fiscal policies Economy, Finance and Industry (as — International macroeconomic issues of 1997) — Economic and financial reforms — Economic Adviser to the Minister Education (1993—1994) — B.A. cum laude, Economics and — Economist at the IMF (1986—1988) Jewish History, Hebrew University Research Interests (1970) — Labor markets — M.A. cum laude, Economics, Hebrew — Macroeconomic policies University (1972) — Taxation — M.A., Economics, University of Education Chicago (1973) — Graduation from the Ecole Supe«rieure — Ph.D. Economics, University of des Sciences Economiques et Com- Chicago (1975) merciales (ESSEC) and the Ecole Other Activities Nationale dAdministration (ENA) — Referee of numerous international Other Activities journals — ChairoftheEconomicPolicyCommit- Selected Publications tee of the European Union (2001— — Financial Policies in Emerging Mar- 2002) and of OECDs Working Party kets. (Edited with M. S´reb). MIT No. 1 Press. 2002 — Various teaching assignments, includ- — Transition: The First Decade. (Edited ing the Ecole Nationale dAdministra- with M. S´reb). MIT Press. 2002 tion, ESSEC, Ecole des Mines and Har- — Inflation Targeting in Practice: vard(KennedySchoolofGovernment) Strategic and Operational Issues and Selected Publications Application to Emerging Market — Are Automatic Stabilizers Still Effec- Economies. (Edited with A. Leone tive? The French Case in the Nineties. et al.). Washington, D.C.: Interna- In: Hairault, J.-O., P.-Y. Henin and tional Monetary Fund. 2000 F. Portier (eds.). Business Cycles and — Major Issues in Central Banking, Macroeconomic Stability: Should We Monetary Policies, and Implications Rebuild Built-In Stabilizers? Boston, for Transition Economies. (Edited Dordrecht and London: Kluwer with M. S´reb). Kluwer Academic Academic. 1997. 255—280 Publishers. 1999 — Le partage de la valeur ajoutee: — Balance of Payments, Exchange Rate, Quelques enseignements tires du and Competiveness in Transition paradoxe franco-americain. (Explain-

257 Die Vortragenden Speakers

ing Past Changes in the Wage Share: Research Interests Some Lessons from the Franco- — European economic growth American Paradox. With English — The Industrial Revolution summary.) (With E. Rignols). In: — Historical data on British economy Revue-de-lOFCE 0(65). April 1998. Education 291—344 — Trinity College, Cambridge; First — Le chomage dequilibre en France: Class Honours, Economics Tripos, Une evaluation. (Equilibrium Unem- parts I & II; Wrenbury Scholarship ployment in France: An Assessment. for best degree in economics at With English summary.) (With R. Cambridge in 1970 Meary, N. Sobczak). In: Revue-Econ- Other Activities omique 49(3). May 1998. 921—935 — Editor, Economic History Review (as — Croissance tendancielle, croissance of 1999) potentielle et Output Gap: Les analy- — Research Fellow,Centre for Economic ses de la direction de la prevision. Policy Research (as of 1985) (Trend Growth, Potential Growth — Elected Fellow of the British Academy and the Output Gap: Analyses by (1992) the Direction de la Prevision. With — Honorary Professor, University of English summary.) (With H. Joly). Warwick (as of 1995) In: Economie-Internationale 0(69). — Founding Academician, Academy of 1st Trimester 1997. 191—207 Learned Societies for the Social Sciences (1999) Nicholas F. R. Crafts Selected Publications Date of Birth — Long-Term Growth Prospects in March 9, 1949 Transition Economies: A Reappraisal, Present Position Structural Change and Economic — Professor of Economic History, Lon- Dynamics. (With K. Kaiser). Forth- don School of Economics (as of 1995) coming Professional Experience — Sectoral Output Trends and Cycles in — LecturerinEconomicHistory,Univer- Victorian Britain, Economic Model- sity of Exeter (1971—1972) ling. (With T. C. Mills). Forthcoming — Lecturer in Economics, University — EconomicGrowth.In:Mokyr,J.(ed.). of Warwick (1972—1977, on leave Oxford Encyclopedia of Economic 1974—1976) History. Oxford University Press. — Visiting Assistant Professor of Eco- Forthcoming nomics, University of California, Ber- — The Conservative Governments Eco- keley (1974—1976) nomic Record: An End of Term — CUF Lecturer in Economics, Uni- Report. London: IEA, 1998 versity of Oxford and Fellow in — Britains Relative Economic Perform- Economics, University College, Ox- ance, 1870—1999. London: IEA. 2002 ford (1977—1986, on leave 1982— 1983) Jon Cunliffe — Visiting Professor of Economics, Stan- Date of Birth ford University (1982—1983) June 2, 1953 — Professor of Economic History, Uni- Present Positions versity of Leeds (1987—1988) — Managing Director, Macroeconomic — Professor of Economic History, Uni- Policy and International Finance, H. versity of Warwick (1988—1995) M. Treasury

258 Die Vortragenden Speakers

— Member of the Treasury Management Education Board — Economics, Amsterdam Professional Experience Other Activities — Managing Director of the Treasurys — MemberoftheEconomicandFinancial Finance, Regulation and Industry Committee of the European Union Directorate — Chairman of the Financial Services — Joined the civil service in 1980 Committee of the European Union (Departments of Environment and — Alternate Governor of the IMF Transport) — Deputy member of the Group of Ten Research Interests — Member of WP-3 of the OECD — EU and international finance issues — Management of the Governments Bernhard Felderer debt and reserves Date of Birth — Leading the Treasuryswork on opera- March 21, 1941 tional independence of the Bank of Present Positions England — Director of the Institute for Advanced — European Monetary Union Studies, Vienna (as of 1991) — International financial system — Professor of Economics at the Univer- Education sity of Cologne, Germany (as of 1995) — Manchester University Professional Experience Other Activities — Research Assistant of Prof. Fritz — Treasury representative on the Mone- Machlup at Princeton University, tary Policy Committee of the Bank of New York, USA (1966—1967) England — Visiting Professor at the University of — U.K. Governments representative North Carolina, Chapel Hill, USA on the EUs Economic and Finance (1967—1968) Committee — Assistant Professor at the University of — Member of the OECDs WP-3 Com- Karlsruhe, Germany (1968—1974) mittee — Professor of Economics at the Univer- sity of Cologne, Germany (1974— Kees van Dijkhuizen 1990) Date of Birth — 6-month appointment of the Soviet November 18, 1955 Academy of Sciences, consulting and Present Position teaching, mainly in Novosibirsk and — Treasurer General, Ministry of Fi- Moscow (1977) nance (as of mid-2000) — Director of the Economics Seminar at Professional Experience the Faculty of Economics and Social — Director General of the Budget, Min- Sciences at the University of Cologne, istry of Finance (1999—2000) Germany (1987—1990) — Director Inspectorate of the Budget, — Professor of Economics at the Univer- also Deputy Director General of the sity of Bochum, Germany (1991— Budget, Ministry of Finance (1997— 1995) 1999) Research Interests — General Economic Policy Depart- — Macroeconomic theory ment, Ministry of Economic Affairs — Economic policy (1985—1996; as of 1992 Director) — Economics of population — Budget Affairs Directorate, Ministry — Theory of distribution of Finance (1981—1984) — Theory of economic growth

259 Die Vortragenden Speakers

Education — Forschungsfinanzierung in Europa. — Studies in Law and Economics at the Trends — Modelle. (With D. F. J. University of Vienna (1959—1964) Campbell). Vienna: Manzsche Ver- — Studies in Economics at the Faculte« lags- und Universita‹tsbuchhandlung. de Droit et Sciences Economiques 1994 of the University of Paris (1964—1966) — Doctoral degree, Vienna (1964) Karl-Heinz Grasser — Habilitation, Karlsruhe / Germany Date of Birth (1973) January 2, 1969 Other Activities Present Position — Member of the General Council of the — Federal Minister of Finance (as of Oesterreichische Nationalbank 2000) — During the years in Germany consult- Professional Experience ing activities for the German Govern- — Speaker for Tourism and European ment and individual companies Integration in the parliamentary group — Consulting in different European of the Freedom Party (1992) countries in transition: Ukraine, — Secretary General of the Austrian Rumania, Slovakia, Russia (as of 1991) Freedom Party (1993) — Participation in Hearings of the Ger- — Managing Director of the Freedom man and Austrian Parliament as an Partys educational centre (1993) expert — Second Deputy Governor of the — Frequent advices for the Austrian Province of Carinthia (1994) Government and the Austrian Social — Vice President for Human Resources Partners on a largevarietyof economic and Public Relations at Magna Europa policy issues (1998) Selected Publications — In addition, Managing Director of — Wirtschaftliche Entwicklung bei Sport Management International schrumpfender Bevo‹lkerung. Berlin— (SMI) which belongs to the Magna Heidelberg—New York—Tokyo: Sprin- Group (1999) ger-Verlag. 1983 — Up to the end of 1999: Member of — Makroo‹konomik und Neue Makroo‹- the Managing Board of the Sir Karl konomik. Heidelberger Taschen- Popper Foundation, still a member bu‹cher. (With S. Homburg) Berlin Education etc.: Springer-Verlag. 1984 (1st edi- — Master degree in Applied Business tion), 1985 (2nd edition), 1987 (3rd Administration (1992) th edition), 1989 (4 edition), 1991 Other Activities (5th edition), 1994 (6th edition), — Austrian Governor at international 1999 (7th edition), 2003 (8th exten- organizations: sively reworked edition) — World Bank Group —Bevo‹lkerung und Wirtschaftsent- — Asian Development Bank wicklung.(WithM.Sauga).Frankfurt: — Inter-AmericanDevelopmentBank Campus-Verlag. 1988 — Inter-American Investment Cor- — Public Pension Economics, Supple- poration mentary Issue of the Journal of — African Development Bank Economics (Zeitschrift fu‹r National- — African Development Fund o‹konomie), 10 refereed articles in- — European Bank for Reconstruction cluding a survey of the editor. and Development Vienna-New York. 1993 — European Investment Bank

260 Die Vortragenden Speakers

Jens Henriksson Professional Experience Date of Birth — Ministry of Finance (as of 1982) January 11, 1967 — Economist Present Position — Head of Economic Policy Unit — State Secretary at the Ministry of Fi- — Director General, Head of the nance, Economic Policy (as of 2002) Economics Department Professional Experience Education — Editorial writer at the daily newspaper — Bachelor of Science in economics, Arbetet (1993—1994) University of Hull, U.K. (1980) — Political Adviser to the Minister of — Visiting graduate student, London Finance, Go‹ran Persson (1994—1996) School of Economics and Political — Political Adviser to the Minister of Science (October 1985—March 1986) Finance, Erik Aß sbrink (1996—1998) — Licentiate in Political Science (eco- — Chief Political Adviser to the Minister nomics and statistics), University of of Finance, Erik Aßsbrink (1998—1999) Helsinki (1987) — Chief Economic Adviser to the — Doctor in Political Science (econom- Minister of Finance, Bosse Ringholm ics), University of Helsinki (1991) (1999—2002) Other Activities Education — Chairman of the Incomes Policy — Master of Science in electrical engi- Information Committee and several neering and control theory, Lund working groups Institute of Technology (1988—1992) — Permanent expert on the Ministerial — Bachelor of Science in business and Economic Policy Committee of the economics, University of Lund Finnish Government (1990—1993) — Alternate Member of the Monetary — Graduate studies in economics at Committee (1995) University of California San Diego, — Alternate Member of the Economic USA (1993—1994) and Financial Committee of the EU — Graduate studies in economics at (1999) Stockholm School of Economics (as — Chairman of the OECD High Level Ad of 1998) Hoc Group on Sustainable Develop- Other Activities ment (2001) — Secretary in the Joint Economic Selected Publications Council of the Social Democrats and — KESSU IV. An Econometric model of the Trade Union (1995—1999) the Finnish economy. (With E.-L. — Chairman of the Joint Economic Kaski). Ministry of Finance. 1992 Council of the Social Democrats and — Tax Policy, Unemployment Benefits the Trade Union (as of 1999) and Structural Unemployment. In: Policies Towards Full Employment. Martti Hetema‹ ki OECD Proceedings. Washington, Date of Birth D.C. and Paris: OECD. 2000, 87—111 September 14, 1956 Present Positions Mickey D. Levy — Permanent Under-Secretary of State, Date of Birth Ministry of Finance February 21, 1950 — Head of the Economics Department, Present Position Ministry of Finance — Chief Economist for Bank of America

261 Die Vortragenden Speakers

Professional Experience — Member of both the Governing — Conducted research at the American Council and the General Council of Enterprise Institute and the Congres- the European Central Bank (as of sional Budget Office June 1998) Research Interests — Represents the OeNB at the Bank for — Federal Reserve and monetary policy International Settlements Governors — Fiscal and budget policies Meeting (as of June 1995) — Economic and credit conditions — Austrias Governor to the Interna- — Banking industry tionalMonetaryFund(asofJune1995) Education Professional Experience — M.P.P., University of California, — Raiffeisen Zentralbank O‹ sterreich AG Berkeley (1968—1995) — Ph.D., University of Maryland — Member of the Executive Board — B.A., University of California (1980—1995) Other Activities — Chief Executive Officer and Chair- — Member, Shadow Open Market man of the Board (1988—1995) Committee — President of the Vienna Stock Ex- — Member, Panel of Academic Advisors, change Council (1990—1995) Federal Reserve Bank of New York — Member of the supervisory boards Selected Publications ofseveralbanksandothercorporations — Dont Mix Monetary and Fiscal in Austria and abroad (1980—1995) Policies. The Cato Institutes 18th An- — Member of the General Council of nual Monetary Conference cospon- the Oesterreichische Nationalbank sored by The Economist, October (1988—1998) 2000. Reprinted in: Wirtschaftspoli- — President of the Oesterreichische tische Bla‹tter 4. 2001 Nationalbank (1995—1998) — The Federal Reserves Announce- Education ments. Federal Reserve Bank of Phil- — Law degree (Dr. iur.) from the Uni- adelphia Policy Forum. November versity of Vienna 2001 Selected Publications — Slaying the NAIRU Myth. In: Jobs and Author of numerous publications and ar- Capital. The Milken Institute, Vol VI, ticles in the areas of monetary policy and No. 3. Summer 1997 economics — Budget Surpluses and the End of Fiscal Restraint.ShadowOpenMarketCom- Robert A. Mundell mittee. November 2000 Date of Birth — Federal Reserve Policy and Financial October 24, 1932 Market Performance During Presi- Present Position dentialElectionYears:MythsandReal- — Professor of Economics at Columbia ity. Bank of America, Economic and University, New York Financial Perspectives. January 2000 Professional Experience — Taught at the University of British Klaus Liebscher Columbia, the Stanford University Date of Birth and the Bologna Center of the School July 12, 1939 of Advanced International Studies of Present Positions the Johns Hopkins University, Italy — Governor of the Oesterreichische — International Monetary Fund (joined Nationalbank (as of September 1998) in 1961)

262 Die Vortragenden Speakers

— Professor of Economics at the Univer- — The International Monetary System: sity of Chicago and Editor of the Jour- Conflict and Reform. Montreal: nal of Political Economy (1966—1971) Private Planning Association of Can- — Summer Professor of International ada. 1965 Economics at the Graduate Institute — Man and Economics. New York: of International Studies in Geneva, McGraw-Hill. 1968 Switzerland — International Economics. New York: — Columbia University (as of 1974) Macmillan. 1968 Research Interests — Monetary Theory: Interest, Inflation — Economic theory of international eco- and Growth in the World Economy. nomics Pacific Palisades, CA: Goodyear. 1971 — Transition economies — The Euro as a Stabilizer in the Interna- — Theory of the monetary and fiscal tional Monetary System. (Edited with policy mix A. Clesse). 2000 — Theory of inflation and interest — Supply-side economics Education — University of British Columbia Michael Mussa — University of Washington Date of Birth — London School of Economics April 15, 1944 — M.I.T. (Ph.D. in 1956) Present Position Other Activities — Senior Fellow at the Institute for Inter- — Nobel Memorial Prize in Economic national Economics (IIE) Science (1999) Professional Experience — Adviser to a number of international — Economic Counselor and Director of agencies and organizations including the Department of Research at the theUnitedNations,theIMF,theWorld International Monetary Fund from Bank, the Government of Canada, 1991—2001 several governments in Latin America — Member of the U.S. Council of Eco- andEurope,theFederalReserveBoard nomic Advisers — President Ronald and the U.S. Treasury Reagan (August 1986—September — Consultant to the Monetary Commit- 1988) tee of the European Economic Com- — Member of the faculty of the Graduate mission (1970) School of Business of the University of — Member of the nine consultants to Chicago (1976—1991) theCommissionthatprepareda report — Member of the department of Eco- in Brussels on European monetary nomics at the University of Rochester integration (1972—1973) (1971—1976) — Member of the Bellagio-Princeton Research Interests studygrouponInternationalMonetary — International economics Reform (1964—1978) — Macroeconomics — Chairman of the Santa Colomba Con- — Monetary economics ferences on International Monetary — Municipal finance Reform (1971—1987) Education Selected Publications — B.A. in Mathematics and Economics, Author of numerous works and articles on UCLA (1996) economic theory of international eco- — M.A. and Ph.D., University of Chi- nomics cago (1974)

263 Die Vortragenden Speakers

Selected Publications Selected Publications — Argentina and the Fund: From Tri- — Steuergesetzgebung: Standortbestim- umph to Tragedy. July 2002 mung aus o‹konomischer Sicht. In: — Global Economic Prospects: Through Kirchhof, P. and M. J. M. Neumann the Fog of Uncertainty. In: Policy (ed.). Freiheit, Gleichheit, Effizienz. Briefs 2. 2003 Bad Homburg. 2001. 23—33 — Global Economic Prospects. In: Policy — Does Inflation Targeting Matter? Briefs 9. 2002 (With J. von Hagen). In: Federal — Prospects for the World Economy: Reserve Bank of St. Louis Review From Global Recession to Global 84(4). 2002. 127—148 Recovery. In: Policy Briefs 2. 2002 — Transparency in Monetary Policy. In: — The Euro Versus the Dollar: Not a Atlantic Economic Journal 30(4). Zero Sum Game. In: Journal of Poli- 2002. 353—364 cy Modeling. July 2002 — The Political Economy of Inflation, Labour Market Distortions, and Cen- Manfred J. M. Neumann tral Bank Independence. (With B. Date of Birth Herrendorf). In: Economic Journal December 15, 1940 113(484). 2003. 43—64 Present Position — Professor of Economics at the Institute Lucas Papademos for International Economics, Univer- Date of Birth sity of Bonn (as of 1981) October 11, 1947 Professional Experience Present Position — Professor of Monetary Economics, — Vice-President of the European Cen- Free UniversityofBerlin(1973—1981) tral Bank (as of 2002) — Researcher, University of Konstanz Professional Experience (1969—1972) — Lecturer of Economics, Columbia — Economist, Deutsche Bundesbank University, New York (1975—1977) (1967—1969) — Assistant and Associate Professor of Research Interests Economics, Columbia University, — Monetary macroeconomics New York (1977—1984) Education — Senior Economist, Federal Reserve — Dr.rer.pol. University of Marburg Bank of Boston (1980) (1966) — Professor of Economics, University of Other Activities Athens (as of 1988) — Editorial board member: — Economic Counsellor (Chief Econo- — Journal of International Money mist), Bank of Greece (1985—1993) and Finance, Empirica-Austrian — Head of the Economic Research Journal of Economics, Open Eco- Department, Bank of Greece (1988— nomies Review, Journal of Eco- 1993) nomics — Deputy Governor, Bank of Greece — President, International Atlantic Eco- (1993—1994) nomic Society (2001—2002) — Governor, Bank of Greece (1994— — Academic Advisory Council of the 2002) Federal Ministry of Economic (as of Research Interests 1992; 1996—2000 Chairman) — Stagflation and monetary policy — Research Advisory Council of the — Structure of financial markets Deutsche Bundesbank (as of 2000) — Economic policies in the EU

264 Die Vortragenden Speakers

Education — Associate Professor, Institut dEtudes — Bachelor of Science in Physics, M.I.T. Europe«ennes, Universite«Librede (1970) Bruxelles (as of 2000) — Master of Science in Electrical Engi- Professional Experience neering, M.I.T. (1972) — Staff Member of the Department of — Doctor of Philosophy (Ph.D.) in Eco- Economics, Institute for Advanced nomics, M.I.T. (1977) Studies, Vienna, (1979—1998) Other Activities — Lecturer, Vienna University of Eco- — Member of the Governing Council of nomics and Business Administration the European Central Bank (as of (1988—1998) January 2001) Research Interests — Member of the Trilateral Commission — Macroeconomics and the labor market (as of 1998) Education — Chairman of the Advisory Board of — Habilitation, University of Econom- the Hellenic Observatory at the ics, Vienna (1997) European Institute, London School — Doktor rer.soc.oec., University of of Economics (as of 1998) Vienna (1983) Selected Publications Selected Publications Author of numerous articles and essays, — Structural Reforms in Labour and including: Product Markets and Macroeconomic — From the Drachma to the Euro. In: Performance in the EU. (With W. EconomicBulletin15.BankofGreece. Roeger). In: Solow, R. M. (ed.). July 2000. 7—14 Proceedings of the International — Why Price Stability? In: Herrero, Economic Association Conference A. G. et al. (eds.). WhyPrice Stability? 2002. Vol. I. Forthcoming Proceedings of the First ECB Central — EU Enlargement, Migration and the Banking Conference. Frankfurt am Labor Market. A Tentative Assess- Main: European Central Bank. No- ment. In: Addison, J. T.and P.Welfens vember 2000 (eds.). Labor Markets and Social — The Euro, the Greek Economy and Security. Issues and Policy Options the Banking System. In: Bulletin of in the US and Europe. 2nd Edition. the Hellenic Banking Association Springer-Verlag. 2003 24. 2001. 5—13 — Wage Discipline in EMU. A Feature — The Greek Economy: Performance of the Early Years. Only? In: Buti, and Policy Challenges. In: Bryant, M. and A. Sapir (eds.). EMU and R. C. et al. (eds.). Greeces Economic Economic Policy in Europe. The Performance and Prospects. Bank of Challenge of the Early Years. Edward Greece and the Brookings Institution. Elgar. 2002 2001 — Monitoring Wage Developments in EMU. In: Empirica 28. 2001. Karl Pichelmann 353—373 Date of Birth — Unemployment in Europe. (Edited April 15, 1956 with M. Landesmann). Confederation Present Positions of European Economic Associations — Research Adviser, European Commis- Conference Volumes. Macmillan Press sion, Directorate General for Eco- Ltd. 2000 nomic and Financial Affairs (as of 1998)

265 Die Vortragenden Speakers

Klaus P. Regling — Minister for Economic Affairs in Date of Birth the Austrian Federal Government; October 3, 1950 (coalition government formed by Present Position the Social Democratic Party of Austria — Director-General for Economic and and the Austrian Peoples Party) Financial Affairs, European Commis- (1989—1995) sion (as of July 2001) — Minister for Foreign Affairs and Vice- Professional Experience Chancellor with the fourth and the — International Monetary Fund, Wash- fifth Federal Government Cabinet ington (1975—1980) formed by Chancellor Franz Vranitzky — German Bankers Association, Co- and with the first Government logne (1980—1981) Cabinet of Chancellor Viktor Klima) — German Ministry of Finance (1995—2000) (1981—1985) Education — International Monetary Fund, Wash- — Law Studies at the University of ington and Jakarta (1985—1991) Vienna (Dr. jur.) — German Ministry of Finance (1991— Other Activities 1998; from 1995 Director-General — Elected Chairman of the Austrian for European and International Finan- Peoples Party at the 30th Party Con- cial Relations) gress (1995) — Managing Director, Moore Capital — President Julius Raab Foundation Strategy Group, London (1999—2001) Selected Publications Education — Mehr Privat — weniger Staat. (With J. — University of Hamburg, Bachelorsde- Hawlik). 1983 gree in Economics (1971) — Staat la§ nach. (With J. Hawlik). 1985 — University of Regensburg, Masters — Ideen die gehn. Mitarbeiterbeteili- degree in Economics (1975) gung. 1985 Other Activities — Das rot-wei§-rote Weltkugelbuch. — Member of the Economic and Finan- (With A. Komarek). 1998 cial Committee — Im Namen der Zukunft. 1999 — Alternate Governor of the EBRD — Member of the Board of the European Vito Tanzi Investment Bank Date of Birth November 29, 1935 Wolfgang Schu‹ ssel Present Position Date of Birth — Senior Consultant at the Inter-Amer- June 7, 1945 ican Development Bank, Washington, Present Position D.C. (as of July 2003) — Federal Chancellor as of February 4, Professional Experience 2000 — Professor of Economics, American Professional Experience University and George Washington — Secretary of the Parliamentary Caucus University, Washington, D.C. (1967— of the Austrian Peoples Party (O‹ VP) 1976) (1968—1975) — Head of Tax Policy Division, Inter- — Secretary general of the Austrian Busi- national Monetary Fund (1974—1981) ness Federation, one of the three — Director of Fiscal Affairs Department, branches oftheAustrian PeoplesParty IMF (1981—2000) (1975—1991)

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— Senior Associate, Carnegie Endow- Institute of Economic Research ment for International Peace (Decem- (WIFO) (1956—1958) ber 2000—June 2001) — Girozentrale and Bank der O‹ ster- — Consultant to World Bank, United reichischen Sparkassen AG (1958— Nation, Stanford Research Institute, 1975; as of 1968 Chief Executive Organization of American States Officer) — Undersecretary for Economy and — Member of Parliament (1975—1991) Finance, Italian Government (June — Leader of the Austrian Peoples Party 2001—June 2003) (O‹ VP) (1975—1979) Research Interests — Managing Director of CONSTANTIA — Public finance Industrieverwaltungsges.m.b.H. — Macroeconomics (1979—1985) Education — Member of the Executive Board of — B.A. in economics, George Washing- CONSTANTIA Industrieholding AG ton University, Washington, D.C. (1986—1989) (1959) — President of the Federal Association — M.A. in economics, George Washing- of Austrian Savings Banks (1989— ton University (1961) 1991) — M.A. in economics, Harvard Univer- — Member of the Executive Board of sity, Cambridge, Mass. (1963) Management Trust Holding AG — Ph.D. in economics, Harvard (1966) (1989—1999) Other Activities Education — President of the International Institute — Dr. iur. (1955) of Public Finance (1990—1994) Selected Publications Norbert Zimmermann — Policies, Institutions, and the Dark Date of Birth Side of Economics. Edward Elgar. April 14, 1947 2000 Present Position — Public Spending in the 20th Century. — Co-owner and Chairman of Berndorf Cambridge University Press. 2000 Aktiengesellschaft (as of 1988) — Income Distribution and High Quality Professional Experience Growth. MIT Press. 1998 — IBM Vienna, Systems Engineer and — Economic Policy and Equity. IMF. Sales Representative (1971—1974) 1999 — Spar O‹ sterreichische Warenhandels — Managing Fiscal Decentralization. AG, Controller, managing the Finance Routledge. 2002 Department of the Spar Head Office in Upper Austria (1974—1978) Josef Taus —Bo‹hm Ges.m.b.H., CEO, responsible Date of Birth for organisation, personnel and mar- February 8, 1933 keting (1978—1986) Present Position — Berndorf Metallwaren Ges.m.b.H., — Member of the Supervisory Board of CEO, (1986) Management Trust Holding AG (since Research Interests 1999) — Demographic development Professional Experience — Future working habits — Contributedtothepublicationsof,and — Generation conflict served as adviser to, the Austrian

267 Die Vortragenden Speakers

Education Other Activities — Vienna University of Economics and — Member Kuratorium, Deutsches Business Administration Institut fu‹r Wirtschaftsforschung — Traineeships in Great Britain and USA (DIW) (as of 2002) Selected Publications — Member Scientific Board, Rheinisch- — Zukunftssicherung fu‹r Familienunter- Westfa‹lisches Institut fu‹r Wirtschafts- nehmen. Vienna: Ueberreuter forschung (RWI) (as of 2002) — Menschen am Werk. Unternehmens- — Member Kommission fu‹r Konjunktur- geschichte. Berndorf AG fragen, seco, Bern (2000—2002) — Member Editorial Board, Nordic Journal of Political Economy (as of Josef Zweimu‹ ller 1995) Date of Birth — Member Editorial Board, Applied February 11, 1959 Economics Quarterly (as of 2002) Present Position Selected Publications — Professor of Economics, University of — Benefit Entitlement and the Labor Zurich (as of 1997) Market: Evidence from a Large-Scale Professional Experience Policy Change. (With R. Lalive). In: — Research Associate University of Linz Agell, J., M. Keene and A. Weichen- (1985—1988) rieder (eds.). Labor Market Institu- — Assistant Professor, University of Linz tions and Public Policy 2003. MIT (1988—1996) Press. Forthcoming — Assistant Professor, Institute for Ad- — Job Creation and Job Destruction vanced Studies, Vienna (1995—1997) in a Regulated Labor Market: The — Associate Professor, University of Case of Austria. (With A. Stiglbauer, Linz (1996—1997) F. Stahl, and R. Winter-Ebmer). In: Research Interests Empirica 30. 2003. 127—148 — Labor economics — Learning for Employment, Innovating — Income distribution for Growth. (With J. Falkinger). In: — Economic growth Journal of Institutional and Theoreti- Education cal Economics 156. 2000. 455—472 — Master of Economics, University of — Schumpeterian Entrepreneurs Meet Linz Engels Law: The Impact of Inequality — Ph.D. in Economics, University of on Innovation-Driven Growth. In: Linz Journal of Economic Growth 5. — Postdoctoral Fellow, University of 2000. 185—206 California Berkeley, and Visiting — Inequality, Redistribution, and Eco- Scholar, Stanford University nomic Growth. In: Empirica 27. — Habilitation, University of Linz 2000. 1—20

268 Publisher and editor: Oesterreichische Nationalbank Otto-Wagner-Platz 3, A 1090 Vienna Editor in chief: Gu‹nther Thonabauer, Secretariat of the Governing Board and Public Relations Edited by: Scientific coordination: Eduard Hochreiter, Economic Studies Division Editorial processing: Alexander Dallinger, Economic Analysis Division Design: Peter Buchegger, Secretariat of the Governing Board and Public Relations Layout and typesetting: Erika Gruber, Printing Office Photographs: Foto Knoll Paper: Salzer Demeter, 100% woodpulp paper, bleached without chlorine, acid-free, without optical whiteners Printing and production: Oesterreichische Nationalbank, Printing Office Published and produced at: Otto-Wagner-Platz 3, A 1090 Vienna Inquiries: Oesterreichische Nationalbank, Secretariat of the Governing Board and Public Relations Otto-Wagner-Platz 3, A 1090 Vienna Postal address: P. O. Box 61, A 1011 Vienna Telephone: (+43-1) 404 20, ext. 6666 Fax: (+43-1) 404 20, ext. 6696 Orders: Oesterreichische Nationalbank, Documentation Management and Communications Services Otto-Wagner-Platz 3, A 1090 Vienna Postal address: P. O. Box 61, A 1011 Vienna Telephone: (+43-1) 404 20, ext. 2345 Fax: (+43-1) 404 20, ext. 2398 E-mail: [email protected] Internet: http://www.oenb.at

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