ralf boscheck copyright © imd international, lausanne, switzerland not to be or reproduced without...

Ralf BoscheckCopyright © IMD International, Lausanne, SwitzerlandNot to be or reproduced without permission

EconCrisisCompetitivenessEuroPersp.ppt



Economic Crisis & Competitiveness

- A European Perspective - Ralf Boscheck

Lundin Family Professor of Economics & Business Policy



Europe’s Key Challenges

Competitive or Robust?

Crisis Chronicle



1857

18731929

1997

20012008

Political events, economic shocks, speculation, technological advance, coordination and policy failures, …

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

Dow Jones Average

Crisis Chronicle:

BC

GDP

%

t

BC

GDP

%

tDurationGrowth ProcessIndicators

Crises offer opportunities for renewal – yet, most search for a quick fix.



Average Growth of World GDP/Capita:

2000-2006: 3.2%1950-1973: 2.9%

1870-1913: 1.3%

IMF: 2007: 4.9%2008: 4.9%2008:* 3.9%2009: 3.0% 2010: 2.5%2010: 3.1%

Reinhard & Rogoff (2009)Blanchard (2009)

Managing Cycles!?

• Service/Cyclicality• WC management/Forecasting • Diversification/Unison• Public sector/Crowding out• Stabilizers/Accelerators• Fiscal discretion/Expectations• Monetary policy/Blunt measures• Financial market/Control

Crisis Chronicle:Economics rationalizes cycles – there is little advise to management.



Crisis Chronicle:

“New Normal”Subdued GrowthStimulus Packages Public & Private FinanceHigh Sustained Unemployment

-10

-5

0

5

10

15

US

EuroZ

one

German

y

Franc

eIta

lySpa

inJa

pan

UKChin

aIn

diaBras

il

2007

2008

2009

2010

-10

-5

0

5

10

15

US

EuroZ

one

German

y

Franc

eIta

lySpa

inJa

pan

UKChin

aIn

diaBras

il

2007

2008

2009

2010

2007

2008

2009

2010

Source: IMF October 2009

Most recent scenario suggests a return to “normality.” But step back!



Crisis Chronicle:

PiQi= wi + ri + i+ ii

wi/i Pi iwUS, M.Income, 2001/6 :- 4%/+

Prod.

wUSgrade, 2001/6:- 6%

GDPUS 2000/6 :7% 13%

Offshoring: Actual & PotentialCapital / Labour Ratio

PUS cons.dur. 95/05: - 25% • Savings Glut & Excess Liquidity• Central Banks Deflation & Forex• Impact

Sensitivities:Sensitivities:Return to Conventional Capital Flows

Labor Market & Social Adjustments

No: Asian Mercantilism Bretton Woods II

No: Income Composition Social Net

But: Non-diversified, Asset Bubble, Fiscal Responsibility, Regulatory Competition

But: Capital BoostExpPro to ImpSubs

‘Mercantilism & Iron Law of Wages’ vs. ‘Soft Landing & Protectionism’





Crisis Chronicle




Thomas L. Friedman’s The World is Flat has

been a long-time # 1 in the New York Times

best-seller list. On February 21, 2006 it ranked

# 1 on Amazon.

At the same day, Jeffrey Sachs’ The End of

Poverty: Economic Possibilities for Our Time

ranked # 515, Bhagwati’s In Defense of

Globalization ranked 20,602, and Joseph

Stiglitz’s Globalization and Its Discontents

ranked 52,196.

For a critique see Leamer, E.E. (2007) A Flat World, a Level Playing Field, …., A Review of Thomas L. Friedman’s The World is Flat, Journal of Economic Literature, Vol. XLV (March 2007), pp. 83-126.

Free trade is global Cooperation in a +game. Why ‘competitiveness’?


EconCrisisCompetitivenessEuroPersp.pptSee Heilemann, U., Lehmann, H., Ragnitz, J. (2007) Länder-Rankings – Komplexitätsreduktion oder Zahlenalchemie? Wirtschaftsdienst, Vol.7, pp. 480-488. Gundel, S., van Suntum, U. (2007) Ist die Kritik an internationalen Standortrankings berechtigt? Wirtschaftsdienst, Vol.7, pp. 473-479.

“Rankings – in the eye of the media consuming public - have an objective – ‘almost devine status that they would never attain if data would be reviewed in a more sober manner.”

“Measurement without theory or pure data mining.” (Heilemann et. al (2007))

1. No model of competitiveness not even a consistent conceptualization

2. There is often no defined goal parameter

3. Rankings often violate fundamentals of indexing

4. Lacking theory, the assumed link between competitiveness and variables is typically

monoton-linear making a 100% savings ratio or a 0 tax level desirable(!?)

5. There is no weighting logic across interdependent and often redundant variables;

the same is true for sub-indexes

6. The value of the qualitative data is questionable

Competitive or Robust?but are of little prognostic or therapeutic value.Rankings sell



Ranks 2005 2006 2007 2008 2009

Austria 17 13 11 14 16

Belgium 22 26 25 24 22

Denmark 7 5 5 6 5

Finland 6 10 17 15 9

France 28 30 28 25 28

Germany 21 25 16 16 13

Greece 41 36 36 42 52

Ireland 12 11 14 12 19

Italy 44 48 42 46 50

Luxembourg 10 9 4 5 12

Netherlands 13 15 8 10 10

Portugal 36 37 39 37 34

Spain 32 31 30 33 39

Sweden 14 14 9 9 6

United Kingdom 20 20 20 21 21

Ranks 2005 2006 2007 2008 2009

Argentina 49 47 51 52 55

Brazil 42 44 49 43 40

Chile 18 23 26 26 25

Colombia 38 34 38 41 51

Mexico 47 45 47 50 46

Peru 35 37

Venezuela 51 53 55 55 57

Total number of countries: 46 in 1997/1998, 47 in 1999/2000, 49 in 2001/2002, 51 in 2003/2004/2005, 53 in 2006, 55 in 2007/2008, 57 in 2009

Economic Performance

2005 2006 2007 2008 2009

Government Efficiency2005 2006 2007 2008 2009

Business Efficiency

2005 2006 2007 2008 2009

Infrastructure2005 2006 2007 2008 2009

Rank 20 8 6 622

26 27

28 19

Rank 30 28 23

Rank 32 28 25

6 9Rank 10 9 7

© IMD WORLD COMPETITIVENESS YEARBOOK 1995-2009

Competitive or Robust?Still, source data may provide clues for digging deeper.



"Logical incrementalism"

"Rational comprehensive

planning"

Business Policy

Assets & Capabilities

Market Requirements& Potential

External Stakeholders

Internal Stakeholders

Competitive or Robust?Moving from business to economic strategy is more than aggregation.



Coo

rdin

atio

n

Efficiencieslow high

Decentral

Central

Operations

Competitive or Robust?Economic principles: Clear centrally established rules, decentrally applied.

Regulation

Politics

Regional Governance



(PiQi)

Employment

i

w

Deal with Labor Market

Adjustment &

Income Re-distribution

Manage Demand,

Confidence & the Cost

of Money

Drive Productivity

Competitive or Robust?It focuses the mind on a few policy levers



(PiQi)

Employment

i

w

Regulatory Competition- labour rules & social standards- taxes & subsidies

Trade - tariffs & non-tariff barriers- preferential customs areas

Exchange Rates - devaluation - currency area rules

Public Finance- deficit spending - ….

Managing cycles requires an abilitiy to adjust and/or to shift adjustment costs

Competitive or Robust?It focuses the mind on a few policy levers and the broader context.




(PiQi)

Employment

i

w (PiQi)

Employment

i

w (PiQi)

Employment

i

w

Vom Schlusslicht zur Lokomotive!?

De el más listo de claseal vagón de cola!?

• Export-led: 2007 $263bn CA surplus

• 2002 Brown Test

• Recession impact: GDP, Production

• Bail-outs, budget deficit & adjustment

• Cost management, consumption & investments

• GDP99-07:3.9%

Export Fetishism !?

• Employment, output prices, CA deficit

• Labor market & productivity

• Labor market (in-) flexibilities

• Taxes & subsidies Reform Agenda:• Labour Markets, Energy• Education, Science & Technology• Finance

Fixed Exchange Rate Shelter !?

A robust model? Based on performance or shelter? How sustainable is it?





Crisis Chronicle



EU Key Challenges:Customs & Monetary Union: numerous, diverse & institutionally trapped

• Socio-economic base• Institutional infrastructures

• Mindsets

• Complementary specialization

- for all!

AccessionRules

• Purgatory



EU Key Challenges:

IrelandRemains Young

2007 2050 2007 2050

Germany Grows Older

2007 2050

BulgariaGeriatric Society

• Implications for Social Security Models• Labour market contracts

• Social policies• Immigration & Integration policies

With fertility rates below 2.1, EU’s Median Age in 2050 will be 48 ...



and the EU’s centers of economic gravity will have shifted.

• The return of the urban centers & the rise of knowledge clusters: The case of London

• Creative Economies replace Roger Brunet’s “banana”.

• In the LaSalle-Index, London, Munich & Paris are top followed by “emerging” centers in the South and East: Warsaw outperforms Vienna, Valencia beats Brussels, Bilbao outclasses Düsseldorf

• Eastern Europe offers a second line of manufacturing centers

• European regions change their social, economic and carbon footprints

EU Key Challenges:



Demographic Challenge: • Required Actions?

• Increase Qw (immigration, family

policies), employment rate, hours

worked, retirement age

• EU average fertility rate (2003): 1.48• 2005/2030: - 20.6m working population• Potential EU GNP growth to fall from 2-2.25% to 1.25 in 2040• +65 group: 52,3% (40m) • Life expectancy rises

Source: Eurostat

EU GDP & Productivity, USA = 100

GDP per capita

Hourlyproductivity

Hours workedper capita

1970

1980

1990

2000

0

20

40

60

80

100

• Increase productivity (education,

R&D, technology & physical

infrastructure)

• Cut claims

Today, drastic adjustment are vital just to maintain the status quo, …

EU Key Challenges:



Lisbon Strategy:(March 2000)

• Objectives & Evolution: • 70% employm. rate • 3% GDP for R&D• Global leader

• Process & Monitoring• “Soft law & “process fatigue”

• March 2005: Re-launch• Lack of clarity, buy-in, incentives, sanctions, stakeholder control• From “key strategy” to sidelined ritual

• Kok Report 2004• no governance

yet, the EU’s key strategy is a mere ritual blocking change.

EU Policy

National Authority

Local Responsibility

National Authority

• “Europe 1992” – for real!• Labour Market Efficiency:

• Transferability of social security benefits

• Technology Policy?• Capital market efficiency

• Competition in Education:• Accreditation of degrees• Opening up provider markets

EU Key Challenges:

EU-USInformation society -1.25Innovation & R&D -1.67Liberalisation -0.42Network industries -0.04Financial services -0.3Business environment -0.97Employment/social inclusion -0.23Sustainable development 0.2

Source: World Economic Forum

EU-USInformation society -1.25Innovation & R&D -1.67Liberalisation -0.42Network industries -0.04Financial services -0.3Business environment -0.97Employment/social inclusion -0.23Sustainable development 0.2

Source: World Economic Forum



• EP election 2004/Eurobarometer - Voter turnout & approval ratings at all time low

• The EU faces two fundamental alliance problems:

- Deference

- Procedural and substantive consensus

• too large numbers,• growing cultural differences,• closure of political elite, • parts cannot adapt jointly

• core does not further economic benefits,• prolonged economic decline• excessive delay of reform.

• Disintegration occurs once:

Ireland supports the EU’s Constitutional Reform – It’s a Failure!EU Key Challenges:

• Legitimacy, democracy & accountability, …

Coordination


Decentral

Central Brussels

Madrid

Barcelona

• Rejected, overruled & enshrined?



• European coordination is needed but needs to be limited to areas where

• global markets are distorted• economies are beyond national scale• limited ability to upload local/national regulation as global standards

• Decentralized coordination is best as it improves • the quality of policy • economic efficiency• civic virtues

• Actions:• Review of economics of governmental activities• Design of a true constitution & small scale apparatus for appellation & adjudication• Strive for mobility to enforce regulatory competition & choice

Coo

rdin

atio

n


Decentral

CentralBrussels

Madrid

Barcelona

EU Key Challenges:A Real Overhaul is Needed: A Common Market!





Crisis Chronicle



1. Fiscal discipline

2. Reorientation of public expenditure

3. Tax reform

4. Financial liberalization

5. Unified and competitive exchange rate

6. Trade liberalization

7. Openness to FDI

8. Privatization

9. Deregulation

10. Secure Property Rights

Source: Williamson, J. (ed.) (1990) Latin American Adjustment:How Much Has it Happened? Washington, D.C.: Institute for International Economics.

The World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform (2005) emphasizes “humility, policy diversity, selectiveand modest reforms.”

“(S)tabilize, privatize, and liberalize” became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counselled,”

“(T)here is no unique universal set of rules . . . [W]e need to get away from formulae and the search for elusive ‘best practices’. . .” (p. xiii)

Rodrik, D. (2006) Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform, Journal of Economic Literature, Vol. XLIV (December 2006), pp. 973–987

Latin American PerspectiveThe old truth is dead -



(PiQi)

Employment

i

w (PiQi)

Employment

i

w (PiQi)

Employment

i

w

Latin American PerspectiveTwo clusters of countries?

Starting Point:Aver. 5.5% GDP 2003-8Poverty level: 44%(02) to 33 (08)IMF 09:-1.5%; 10: +1.6Popul. p.a.

Impact of Recession:• LA top 5 Exports 2008 (Aug-Dec): Volume / Value: cut by 1/3•Capital flow 2007 $184bn; 2008 $85bn 2009: E($43bn; cost of capital• Tax revuenues?• Link to US economy: Mexico vs. Brazil• Classical LA challenges: financial system, currencies, finance • IMF, World Bank, Inter American Development Bank

Robustness• Tight financ. mkt. regulation• Flexible exchange rates• Inflation targeting • Responsible fiscal policy • Maintaining (X-M) • Accumulated reserves to pay off debt• Demand stimulation

Brazil, Mexico, Chile, Peru, Colombia …• 30% devalutation of currency – X boost• 1% GDP stimulation (Chile/Peru: 10%)• Interest rate cuts • CBs provide $ to pay-back • Funds – (Chile: 12% of GDP): prime the pump vs repay debt?

• reducing reserve requirements?

Argentina, Ecuador, Venezuela…• Fixed / committed currencies • Pension plan last resort• Linking up with China (3x IMF rate)• Trying to stop capital flight

Long live the old truth? Be Robust!



What is the Scope of Business Responsibility?Between M.Friedman and CSR?

Society

Firm

+

-- +

Society

Firm

+

-- +

Stakeholders:Unaware?Aware: Maintain Aware: Change - FairnessAware: Change - Sustainability

Firm:Unaware?Aware: Accept as License to Operate & Outperform Aware: Change: Exit, Haggle, Play Market s.t. …

Firm:Unaware?Aware: Protect, Disguise, Justify, Play Market;Aware: Change – Not fair Aware: Change – Sustainability, Self-regulation, Strategic Use

Stakeholders:Unaware?Aware – Accept Aware – Change: FairnessAware – Change: InefficiencyRemedies: Markets, Fiscal Means, Regulation, Ownership Control

Collective Action Problem!?

Market!



What is the Scope of Business Responsibility?Negotiating Win-Wins?!

Society

Firm

+

-- +

Society

Firm

+

-- +

Sanctions

Avoidance (Pareto Optimal)

“Win-Win”

s.t. Corporate GovernanceTimingMarket PowerCollective Action



Economic Crisis & Competitiveness- A European Perspective -

Ralf Boscheck

Lundin Family Professor of

Economics & Business Policy

ralf boscheck copyright © imd international, lausanne, switzerland not to be or reproduced without...

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