erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Europe at the Crossroads: The Challenge from Innovation-based Growth

Jan Fagerberg (University of Oslo, Norway)

Abstract

Europe's performance relative to the USA and countries in Asia is a topic that greatly preoccupies policy-makers who are concerned that the EU is losing ground compared to other, more dynamic parts of the world. In many areas, Europe has not kept pace with the technological advances of competitors and seems to have lost its dynamism. Productivity growth has slowed down relative to competitors. While until recently there was a tendency towards convergence in productivity and income between European regions, there are now signs of a reversal of this trend. Export competitiveness has deteriorated in all areas except agriculture and raw materials. The losses have been most manifest in the technologically most sophisticated industries, particularly for ICT products. Europe has also failed to create employment on a scale at all comparable with the USA or Japan, with obvious repercussions for unemployment. Redressing this relatively disappointing performance will be neither easy nor quick, but if enduring answers to Europe's problems are to be found, it is essential that the scale and nature of these be carefully diagnosed and solutions found.

To some extent Europe's current problems is the price to be paid for past successes. European integration, most recently through the single market programme, has made product and factor markets more open and paved the way for the realization of economies of scale and a more efficient allocation of resources. From a long-run perspective, these policies have been extremely successful. Without them, it is doubtful whether Europe would have managed to catch up with the USA to the extent that it did. However, the rewards to catch-up in capital- and scale-intensive sectors producing for the mass markets have been cashed in long ago, and now the rules of the game have changed. Science-based industries, especially those drawing heavily on ICTs, have become the main driver of technological change and economic growth since the early 1980s. Although the ICT revolution has been under way for a long time, its major effects are just beginning to be felt and it is clear that Europe's performance in ICT, however measured, is far from satisfactory. It is our contention that a mere continuation of past policies will not suffice to reverse this discomforting trend. If appropriate steps are not taken now, it is our assessment that the current trends toward slow growth, increasing inequality and unemployment will continue, threatening social cohesion, the social model and the democratic values that Europeans hold dear. The story is easily told. Slow growth is mainly the result of failure to exploit the technological opportunities inherent in new and fast-growing technologies. This is not just a question of failing to be competitive in, say, the production of computers or other products embodying ICT (although that might have helped), but embedding the new technology in society at large. Regional disparities have been exacerbated by the very uneven diffusion of new technology, which has, hitherto, disproportionately favoured high-income, high-R&D regions specialized in high-tech manufacturing and above all services. By contrast, traditional agricultural regions or regions in the rustbelt have benefited very little if at all. Rather what has happened is that the relative prices of their products and factor services have declined. High unemployment is the flip side of this coin. Europe's continuing specialization in increasingly mature industries characterized by labour-saving innovation has meant that relatively few new jobs have been created. Low labour mobility has made matters worse by inhibiting effective redeployment of resources and has, arguably, been an impediment to technological advance.

Although the diagnosis is clear, agreeing on remedies is much less easy. What makes the problem so challenging is the need for actors and trends at very different levels to pull together. On the one hand the creation of technological advantage is in most cases a very local affair. At the other extreme, radical technological changes, particularly the ICT revolution, affect nearly all aspects of life, so that a holistic approach to change aimed at exploiting the opportunities afforded by these new technologies is needed. Because of path dependency in local technological, institutional and economic systems, and the complex conditions for getting the most out of ICT, this is very difficult to realize in practice. There is a large coordination problem here, and this may be why the more decentralized US system, and the much more authoritarian Japanese system, have both proved more effective in securing change than the multi-layered decision system in the EU.

The core message is that the problems that Europe faces in key areas such as growth, equality and employment are all related to its failure to take sufficient advantage of technological advances, particularly the ICT revolution. Consequently, a coherent European strategy for upgrading technological capability and quality competitiveness is long overdue. This cannot be reduced to providing support to selected industries (or companies) in order to make them more competitive in global markets. Rather, what Europe has to do is to take steps to embed new technologies, especially ICTs, in society. This should bring together regulation, science and technology policy, regional policy and employment initiatives. It is also important to ensure that macroeconomic policy complements rather than conflicts with supply-side policy, especially in the post-EMU environment when much will change. Equally, it is vital at the outset to recognize that boosting the long-run ability of the economy to create and use new technologies will require concerted action. The complementarities between policy areas, in particular, should be stressed.

Economic Research Center
Middle East Technical University
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