Dead Men Left

Monday, September 05, 2005

Europe "heading for Third World status"

Ah, the Telegraph - a truly dependable source for grammatically-precise nutiness. What, for example, to make of the startling news headlined above? It would seem the government - as is its wont - has commissioned an "independent" selection of prophets and seers to gaze deep into their crystal balls and foretell of strange and terrible Events that shall come to pass.

Europe risks becoming a "second- or third-world region" within a generation because strict labour laws are preventing companies from restructuring properly, according to the author of a Government-sponsored report out today...

Mr Lewin warned that without more investment in ICT then "Europe will lose the technology and fall behind and become a second- or third-world country within decades".

..."within decades", rather than, say, a week.

A quick glance at Indep's report (PDF) reveals it to be the usual extended apology for the Lisbon Strategy: the EU's grand quest after free market redemption, where "more and better jobs" will mysteriously arrive by paying people less and making it easier to sack them.

Fortunately, this particular Holy Grail has been kicked a long way out of the Barroso gang's reach after the shredding of the proposed Constitution and the quiet fading of the Bolkestein directive. Our knights of the Round Table are not wholly deterred, however, and with Tony Blair's rallying cries ringing in their ears, Europe's surly and ungrateful peasants can be brow-beaten into submission.

And so another round of hectoring from the UK government to sclerotic, sluggardly European countries to tighten belts is heralded by a flimsy report whose persuasive power relies on the cunning juxtaposition of pretty graphs besides ugly claims.

Take ICT. We all know that the internet is destined to feed the world, clothe the hungry, and rebuild levees. But I bet you didn't know how to use it properly, did you?

The productive and profitable use of ICT requires changes in the organisation, management and the location of activities. Change will involve the entry and exit of firms, the hiring and firing of labour, and the need for more general purpose skills.

To use a term coined by economist Joseph Schumpeter the productive and profitable use of ICT requires "creative destruction". Fundamental change is required to benefit fully from ICT, and greater investment in ICT capital and skills alone in the current European environment would deliver poor returns...

Barriers to the reallocation of labour – including undue restrictions on hiring and firing and impediments to labour mobility – should be lowered. Barriers to the creation and destruction of firms and to market integration should also be lowered in order to allow innovation and "creative destruction" to flourish...

Poor old Joseph Schumpeter. I don't think he was ever so crass as to urge "creative destruction" as a desirable instrument of policy; and yet here we have the headline report of a government-sponsored conference demanding firms be allowed to "reallocate labour" as they see fit, whilst lay-offs and redundancies are presumed to aid "innovation".

The sole empirical basis offered for this is a single graph, purporting to show a negative relationship between "labour-market flexibility" and productivity growth in ICT. We are asked to conclude that more "flexibility" produces more productivity growth. Yet to demonstrate an apparently EU-wide problem, all the countries included - bar one - are within the EU: so where's the standard of comparison? The closest we get is the inclusion of the US, which, sure enough, appears to have high "labour market flexibility" and high productivity growth. If the US is to be included - why not, for instance, also throw in other OECD countries? If the authors' conclusion was correct, it would be reinforced by doing so.

Elsewhere, however, it is grudgingly admitted ICT does not necessarily produce faster growth: "While South Korea has, and continues to have, a rapidly growing economy, a productivity growth acceleration in ICT-using sectors did not occur in the mid 1990s." The IMF working paper (PDF) cited by Indep notes that

...the evidence from the McKinsey Global Institute research on productivity growth in France, Germany and the United States, does not clearly indicate which [labour-market] reforms should be implemented. Take the case of the retail food sector, for instance. McKinsey finds that labor productivity in that sector was actually 7 percent higher in France than in the United States in 2000. In addition, the degree of IT use in that sector was about the same in France, Germany and the United States in 1999, with the United States holding only a small lead... is equally possible to argue that the euro area is only lagging the United States in terms of adoption of ICT technologies in some service sector industries.

But there's more. There's something a little peculiar about all the graphs dragged out to demonstrate how the EU now lags behind the US, how it suffers from chronic unemployment, how generally inflexible and flabby the whole place is. They all show the Atlantic-sized gap emerging in the early 1990s. Unemployment peaked in 1994 and remains higher than the US. Productivity growth falls below the US' in 1993, and remains low.

What's important about these dates is that they occur after the ratification of the Maastricht Treaty and the great strides made then towards a liberalised market across the EU. The rise in unemployment, and the slump in productivity occur precisely during the period in which neoliberalism was making its most determined advance in Europe.

Yet if the Indep report was correct, all this should have lead to declining unemployment and accelerating productivity growth. Instead, quite the opposite took place. After over a decade of receiving the quack medicine peddled by the likes of Indep, ordinary punters across Europe are becoming noticeably irate. How long before the neoliberal doctors pack up?