Year XXVI, 1984, Number 1 - Page 32

 

 

North-South Relations and European Reform
 
by JOHN PINDER
 
 
Stagnation in South and North and the new Europessimism.
 
History seems to use coincidence to teach man a lesson. It was in 1974, in the Sixth Special Session of the UN General Assembly, that the Third World’s claim for a New International Economic Order reached its climax. The proposals emanating from the Third World contained a number of valid points. But they were vitiated by one fatal weakness. The Northern economywas seen as a given cake, from which a slice should be cut and given to the South. It had to be in the very same year that the long spell of Northern stagnation began to teach the hard waythat it is not a slice from a static cake but prosperity and growth in the Northern economy that enables it to transmit to the South some of the forces of growth.
Although there may have been no need for Europeans to be taught the same hard lesson, Europe’s South has suffered the same sad fate. A typical case is, unfortunately, Italy’s South, where thanks partly to Italian development policies, «progress is evident up to the beginnings of the ‘70s; after that, as the national economy began to be afflicted by serious problems, the development of the South came to a halt».[1]
Weak demand in the North inhibits exports from the South; and Northern industries in crisis see an interest in protection against competitors from newly industrialising countries (NICs). In principle, most European governments disavow protectionism. In practice, with over twelve million unemployed in the European Community, they require a strong will if they are to do so; and their will is sapped by the prevailing climate of European pessimism.
This new Europessimism found expression in the European Parliament’s 1982 report on the competitiveness of Community industry, produced following the submission to the Parliament of a Commission report on the subject. [2] The report thought it «quite likely that within a few years we shall find ourselves in difficulty, not to say in a position of inferiority, not just in relation to the USA and Japan, but also in relation to a growing number of newly industrialising countries» and believed the Community had become «a society withdrawn into itself which has adopted a defensive attitude towards a changing world ». [3]
The perception of inferiority towards America seems rather subjective. The table below, which the European Parliament uses to indicate positions in the league table of high technology industries (by using specialisation indices to indicate comparative advantage), itself shows, not a relative European decline, but a relationship between EC and US that is virtually unchanged between 1970 and 1980. It is true that Europe cannot match Silicon Valley and IBM (although much of IBM’s productions is in Europe). But given this American superiority in the core area of information technology, the implication appears to be that Europeans have been catching up on Americans in other fields, thus keeping the average décalage more or less constant; and this confirms the impression that in most fields of industry the Europeans have been catching up on the US since the mid-1960s, when Servan-Schreiber touched such a raw European nerve with his book about American technological supremacy. [4] That Servan-Schreiber had made what was, in 1967, an accurate observation but a poor forecast is confirmed by the table’s statistics, which show a widening of the American lead in 1963-70, before it levelled out in the following decade.
 
Changes in comparative advantage in exports of high technology products
(indices in relation to total world manufacturing exports)
 
 
1963
1970
1980
ECa
1.02
0.94
0.88
US
1.29
1.27
1.20
Japan
0.56
0.87
1.41
 
a including intra-EC trade
Source: Technological Innovation in European Industry, EC Commission DG II, January 1982, cited in Leonardi, Op. cit., p. 22.
 
An American lead in information technology is certainly worrying, but it seems legitimate also to remember that industrial productivity has been dynamic in Europe during the past decade while in America it has been static, and that the microelectronic revolution will have its main effect on industrial processes, and to some extent products, across almost the whole range of industrial sectors in which Europeans have since the end of the 1960s been more dynamic than Americans. Further evidence that the Americans may have become more rather than less like the Europeans comes from the similar response of both to the amazing rise of Japan, as reflected in the table and shown in the record of Japanese market penetration and Euroamerican protection. Japanese superiority in a growing number of branches of manufacturing should certainly spur Europeans to action; but whether it should cause us to feel ourselves «a society withdrawn into itself», expecting to be generally «in a position of inferiority», must depend not only on whether our reactions to Japan can be sufficiently effective, but also on whether there is only one Japan or whether there are other large populations capable of a similar performance.
This brings us to the NICs, in relation to which pessimism is surely a less appropriate attitude for Europeans to adopt than recognition that we face competition that we will have to meet. The European Parliament was worried that «certain Member States’ exports are even specialising in product areas where they are – or will be – competing with newly industrialising countries ». [5] But just as North America, Western Europe and Japan developed all the industries that first arose in Britain, so we must expect the South to develop all the industries that now exist in the North. The question therefore is not whether Europeans will eventually have to compete with the NICs across the board, but whether Europe can be more successful than Britain has been in retaining its industrial dynamism while others are catching up. In an age when the microelectronic revolution is replacing the concept of mature sectors, having stable technologies that can be transferred for use by cheap, semi-skilled labour in the NICs, by that of dynamic technologies in factories from which labour in a traditional sense has disappeared, it is defeatist to expect that Europeans will be unable to retain sufficient dynamism in relation to the NICs.
While it is reasonable to expect the Japanese to derive industrial advantage from their peculiar society and culture for many years to come, the grounds for expecting European inferiority in relation to the Americans and the NICs appear to be more psychological than objective. There is no good reason to suppose that Europeans cannot achieve adequate economic progress over the long run, provided that pessimism does not inhibit their capacity to act. The fashionable Europessimism seems, however, itself to stem from a sense of incapacity for action, which has political and intellectual rather as much as economic origins, and which interacts with the pessimism in a vicious circle that could involve a needless economic decline. Without a sound analysis and the ability to draw the necessary conclusions for policy and political institutions, Europeans risk falling back on simplistic and obsolete reactions that would serve to reinforce the vicious circle, not to break it.
 
Obsolete reactions or a practical approach.
 
Having established a postwar consensus for the mixed and open economy, which was the foundation for unprecedented prosperity and growth, Europeans appear, in their mood of uncertainty and pessimism, susceptible to the urge to abandon it in one of two directions: protection or laisser-faire liberalism.
The doctrine of protectionism was discredited by the catastrophes of the 1930s and 1940s followed by the success of the 1950s and 1960s. When, on top of this, we are embarking on a new industrial revolution which will increase the need for specialisation and, in some sectors, scale, to make protection into a doctrine is hardly a credible activity. But to resist ad hoc measures of protection that could eventually have the same result requires arguments that are convincing both politically and intellectually. The laisser-faire brand of liberalism that has emanated from Chicago has convinced many intellectuals and politicians. But neither theory nor practice should lead one to believe that this doctrine will have staying-power in the modern economy.
Doctrinaire monetarism and contemporary laisser-faire liberalism have their theoretical base in a version of neo-classical economics, which has a high-powered static equilibrium analysis but no adequate theory of economic development and growth. While, therefore, one can have confidence in the ability of policies based on this family of doctrines to cut out some uneconomic activities (though even in this, a certain reluctance to recognise the extent of market imperfections makes the policies less effective than is claimed), there are no good grounds for confidence that enough economic activities will be generated to ensure technological progress and economic growth. On the contrary, if new competitors are intruding into markets where high research, development and investment costs have been financed through oligopolistic pricing policies, as they were during the successful period of postwar Western expansion, one might expect profits to become too low for firms to invest in technological progress and the creation of enough new jobs; and the vicious circle of low profits, low investment, slow adjustment and continued low profits resembles European experience in the last decade too closely for comfort.
In practice, the only example of an economy being caught up on by others over a long period is Britain. To those for whom contemporary political polemics loom larger than the lessons of history, this may be diagnosed as an English sickness caused by protection and the welfare state. In fact, the decline relative to others, first America and Germany, later Japan, France and other European countries, began more than a century ago; and during the first fifty years of relative decline, Britain was the only country to adopt a policy of complete free trade, while all the others grew behind systems of protection. Even since the first world war, the British economy has not been more protected than the average; and since the second world war, the welfare state has not been more extensive than that of other countries that grew twice as fast.[6] The British economy is still the most open of all the medium-sized industrial countries, by the empirical measure of imports of goods and services, which are about one third of GDP.
None of this is intended to make a case for a doctrine of protectionism, as distinct from the use of measures of protection in given cases to ease adjustment or give time to achieve international competitiveness. But both theory and practice do indicate that comprehensive doctrinaire beliefs, based on what, given the present state of knowledge, can only be inadequate understanding of how the modern economy works, will be a worse guide for action than a more practical approach, which considers the likely effects of particular policies on technological progress and economic growth, paying more attention to the experience of the successful countries such as Japan, Austria, Germany and France than to doctrinal preconceptions. It is this approach that can enable us to roll back Europessimism, and hence the self-defeating reactions of laisser-faire or protectionism, by offering the convincing prospect of a recovery of Europe’s economic health.
 
European integration, mixed economy.
 
A policy for industrial development should not be seen only, or even mainly, as a policy for particular sectors. Macroeconomic instruments such as interest and exchange rates are more important. Yet the EC lacks an effective policy towards American interest rates or the Japanese exchange rate, although these are critical for European competitiveness and development.
High interest rates caused by the impact in European capital markets of borrowing to finance the American budget and payments deficits are one of the principal impediments to European industrial investment. This distortion could be countered in various ways: by Community-wide subsidisation of interest on loans for industrial investment; by restricting, as the Japanese do, the access to capital markets; better than either, by building up the European Monetary Fund (EMF) and the European Currency Unit to a point that gives the EC a real bargaining power to influence American monetary and exchange-rate policy. The EMF, disposing of an important share of EC member states’ reserves, would likewise be able to influence the Japanese exchange rate, for example by buying yen in order to help establish a better equilibrium between Japan and the international economy, and in particular to remove the element of distortion in Japanese export pressure on European markets.
Proposals such as these may seem to the reader to lack credibility. But some such action would certainly be seriously considered if the EC disposed of adequate common monetary instruments. It is the Community’s absence as an actor on the world monetary stage – one aspect of the lack of an effective government for the EC economy – that inhibits us from thinking properly about what needs to be done. Can it really be regarded as an incredible alternative that we should recognise our need for such instruments and such a government if we are to be able to steer our common economy on to a path of economic development?
Nor should the case for the microeconomic aspects of industrial policy be ignored, and for common Community action with respect to those as well. The role of public finance in research and development follows from the social benefit of the resulting technologies when diffused beyond the originating firms,[7] and from the big scale of some crucial projects. Policy to promote technological diffusion and the smaller-scale projects is within the reach of EC member governments; but some of the developments of which the Americans and Japanese are capable can hardly be financed by the European governments individually. The Esprit programme of common research by leading EC firms in the field of information technology is a modest response to the Japanese efforts to develop a fifth generation computer or to what the Americans can finance in relation to their defence effort and within their largest firms. But it is wise to start small in such a difficult matter as Community support for multinational research and development, provided that this is seen as a launching pad for more ambitious efforts.
The EC has begun to open up the member states’ public sector markets to competitive tendering from other member countries; but in the vital field of telecommunications the process has hardly begun. Progress with this policy is one condition of European development in information technology.
The reduction of capacity in Europe’s crisis industries has been retarded by the weakness of the Community’s institutions. For economic as well as political reasons, firms can prolong the life of capacity which serves only to undermine a sector’s strength. Even in the steel industry, where the ECSC Treaty gave the Community more policy instruments than it can apply to other sectors, its financial and regulatory instruments have been inadequate to secure a reduction of capacity than would have been undertaken as a matter of course in a crisis sector in Japan. With respect to man-made fibres, the Commission refused to recognise the legitimacy of the producers’ plans for a concerted reduction of capacity, thus failing to set a precedent for a combination of competition policy and industrial policy that could have accelerated the return of a number of other sectors to competitive health.
Since the instruments of external trade policy belong to the Community, it can use these too to promote adaptation in crisis sectors, by making protection conditional on adequate adjustment measures. The EC could also employ temporary protection of new industries, particularly in the field of information technology, in order to enable firms to achieve international competitiveness. If we doubt the Community’s political capacity to make sensible choices about such things, we should approach such policies in an experimental way, as has been done with the Esprit programme, applying them in only a very few cases until successful experience has been acquired.
The most popular slogan among opponents of industrial policy is that governments cannot pick winners; and it is true that political considerations will often bias a government’s choice. But this slogan misses the point that in some countries, such as Britain, the financial institutions themselves are ill-equipped to choose industrial investments within a long-term perspective; and it is a legitimate aim of policy to promote the development of institutions that are so equipped. One of the most effective ways of doing this would be to encourage integration among financial institutions of the EC member countries; for the skills in relation to industrial investment that are possessed by, for example, the German Grossbanken would then be more readily transferred to countries such as Britain that are less well-endowed in this respect. Here again, the EC has been extraordinarily slow to realise the benefits of a truly common market.
The aim of this short list of possible elements in a Community industrial policy has been to show that a constructive analysis, not inhibited by ideology or by acceptance of a passive role for the Community, can offer various approaches to the relaunching of European industrial development, of a sort that should replace doctrinaire or lethargic attitudes by a realistic propensity for action.
 
North and South in Europe and the world.
 
Although the main contribution to prosperity in Europe’s South must came from economic growth in the EC as a whole, the Community’s regional policy can also play a significant part. More resources for the European Regional Development Fund (ERDF) should become available after the size of the Community budget has been enlarged; and the Commission’s policy is «to assess the regional impact of Community policies and draw the logical conclusions».[8] But the Community is still far from «a convergence of opinions... on the need to undertake all public intervention in the economy in relation to the development of the South», such as prevailed in Italy by «the beginning of the 70s ».[9] This can come only with the development of the Community into a more genuine polity, one condition of which is a reform of the Community institutions in a more federal direction.
General prosperity in the Community is likewise the best contribution it can make to the growth of the Southern part of the world. But here again, specific policies for the South can be important. The European Development Fund performs a function similar to that of the ERDF within the Community; and the Lomé Convention and Generalised Scheme of Preferences open the EC market to some extent to exports from the South. But the EC’s protection is directed particularly against the NICs; and while the Southern countries themselves apply a brake to the most effective vehicle for technological transfer, to the extent that they fail to do what they reasonably can to reach a modus vivendi with multinational companies, the Community should also do what it reasonably can to ensure that such a modus vivendi is reached. If the Community is to succeed in maintaining a strong technological progress in future, it will need the framework of a widening market, just as the widening of Western Europe’s national markets through the EC market provided a framework in which to develop the industries of the 1950s and 1960s. This implies the future perspective of a process of mutual liberalisation between the Community and not only the US and Japan but also the more advanced of the NICs; and this process is bound to be a difficult one, requiring a common EC foreign policy to set the hard economic choices in a broad enough context, just as the postwar international liberalisation was in tune with the American and European foreign policies of that period.
 
European reform.
 
Both European prosperity and North-South relations require, then, active monetary, industrial and external policies for the Community, which can hardly become effective without a reform of the Community institutions, following the principles that underlie the European Parliament’s Draft Treaty establishing the European Union;[10] and constructive North-South relations, on which continued European prosperity will ultimately depend, will in turn require that the European Union be seen in the perspective of a long-term process of integration in the world economy. These conditions are politically demanding, even daunting. But there is an underlying trend that can give cause for a certain optimism. The prolonged troubles of the 1970s caused many economists to remember Kondratieff, with his concept of a long cycle of alternate phases of technological progress and stagnation. Behind the apparent stagnation of the 1970s, the first stirrings of the coming microelectronic revolution could be detected; and now that all-pervading technology is all around us, with others such as bio-technology, lasers and new materials hard on its heels. This Kondratieff upturn offers the prospect of a revival of industrial dynamism; and if the experience of each previous upturn is any guide, this should be followed, despite luddite fears to the contrary, by a renewed expansion of employment. The upturn of the cycle that is now coming to an end was the occasion for the establishment of the Community within the postwar international trading order. Should not the next upturn give people the confidence to convert the existing Community into a European Union, and the present international economic disorder into a new order in which liberal economic relations can prevail?
 


[1] Aristide Savignano, «Credit Institutions and the Development of Southern Italy», Mezzogiorno d’Europa, April/June 1983, p. 150.
[2] The Parliament’s report was reproduced in Silvio Leonardi, «The Competitiveness of Community Industry», in G. Leodari and A. Mosconi (eds), Strategies and Policies of the European Community to improve the Competitiveness of European Industry, Venice, CESIV-European Centre of Studies and Information, 1984, pp. 17-44.
[3] Ibid., pp. 27, 30.
[4] J.-J. Servan-Schreiber, Le Défi Américain, Paris, Denoël, 1967.
[5] Leonardi, Op. cit., p. 27.
[6] For example, public expenditure is now about 45 per cent of GDP in the United Kingdom, compared with 69 per cent in the Netherlands.
[7] Some of the evidence for this was discussed in Andrew Schonfield, «Innovation: Does Government have a Role?», in Charles Carter (ed.), Industrial Policy and Innovation, London, Heinemann for NIESR, PSI and RIIA, 1981, p. 8 ff.
[8] Programme of the Commission for 1984, Brussels, 1984, p. 29.  
[9] Aristide Savignano, op. cit., p. 149.
[10] European Parliament, February 1984.

 

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