Proposals for economic reform of Europe keep coming. The process does not constitute a unified, reasoned debate so much as an ongoing political auction in which special interests seek votes for the policy change that will benefit them.
Some say the bar to a good economy is the continent's inflated welfare state and the solution is retrenchment, beginning with raising retirement ages. Others say the impediment is the entire overgrown public sector and the solution is to cut tax rates.
The latest view, endorsed by the European Commission, blames a shortage of infrastructure and proposes more bridges and tunnels. This approach will never reach the heart of the matter. The West's core social values make high economic performance a moral imperative like free speech or trial by jury. Further, the Continent will undoubtedly need some transformative changes of its economic institutions to establish high-performance economies.
To reach broad agreement on those changes requires facing some basic questions so far ignored. A real debate on basic reform has to start with an explicit conception of economic performance -- of what constitutes a good business life.
Productivity is an important element. Only a high-productivity economy can promise all or most working-age persons a range of careers at high wage rates. But high productivity is not the only element of high performance. The other element is thriving, prospering participants. This requires jobs to be rewarding in more than pecuniary ways -- enlisting the minds of employees, engaging them in problem solving, leading them to discover some of their talents and expanding their abilities.
This personal growth, while an end in itself, is also a source of job satisfaction, which in turn boosts participation in the labor force, and of high employee loyalty, which lowers unemployment, making more good jobs available.
What is needed for high performance? Basically, it is productive change, which I call economic dynamism.
For employees to develop, they must be embedded in a stimulating workplace, with new problems to solve, harder tasks to be mastered, added abilities to strive for.
Less obviously, a country does not want misguided or pointless change; it wants investments that appear to the financial sector as productive. The late 1990s produced evidence that low dynamism was associated with weak economic performance, particularly low prosperity. Of the 12 large Organization of Economic Community Development (OECD) economies, three -- Germany, Italy, and France -- were conspicuously un-dynamic: they missed the 1990s investment boom or were awfully late to it. These same economies also ranked at or near the bottom in unemployment and labor-force participation, both before the boom and now.
What are the requirements for dynamism? Yale University's Robert Shiller has suggested that I believe that Europeans lack dynamism owing to a deficiency of entrepreneurial "spirit." I have pondered the expressed uneasiness of Europeans about making money, and speculated that their schooling might drain away some playfulness and creativity. But that is not my explanation of Europe's problem. For one thing, it is hard to decide whether such cultural patterns are causes or effects of dynamic economies.
My thesis is that the degree of dynamism in a nation's economy hinges on its development of some key economic institutions -- company law and corporate governance, the population's preparation for business life, the development of financial instruments such as the stock market and so forth.
Such general institutions as the rule of law and provision of enough personal and national security to safeguard earning, saving and investing are needed for any market economy, even market socialism; they are insufficient for dynamism.
Evidence exists for this thesis. One could have predicted in advance of the recent boom how the 12 large OECD economies would rank simply by knowing the percentage of the population with a university degree, the OECD index of barriers to entrepreneurs and the breadth of the stock exchange (measured by the market value of outstanding shares relative to GDP years before the boom).
This evidence linking employment to dynamism and tracing dynamism to favorable institutions, such as a well-developed stock market, and to obstructive institutions, such as myriad licenses for entry by new firms, is an advance in our understanding of healthy economies. It is useful to know that there is vastly more to creating economic dynamism than private property; and that high unemployment is not to be laid solely to labor market restrictions.
Is there any evidence directly associating high performance -- that is, high employment and high productivity -- with the presence of institutions believed helpful to dynamism and the absence of those believed harmful?
Such evidence emerges even with the small sample of just 12 large OECD economies. A cross-country analysis estimates that university education is good for all three elements of economic performance: the employment rate (relative to the working-age population), the unemployment rate (relative to labor force) and labor productivity too.
Scoring high on the OECD index of barriers to entrepreneurs is bad for all three elements of performance. A high level of job protection is bad for productivity but does not have a clear effect on either employment rate or unemployment rate.
I have suggested that the organizational structure of the continental economies limits their performance.
This corporatist structure -- labor unions, workers' councils, employer confederations and big banks -- facilitates direct interventions in economic decision making to give interest groups protection and veto power. In fact, among the 12 large OECD nations, a higher degree of corporatism as commonly measured is loosely associated with lower employment and lower productivity.
The reason for these negative effects appears to be that high corporatism is strongly correlated with stifled entrepreneurship and obstructive job protection. The corporatist structure by itself does not detract from performance. Here again, the truth lies in the nuances.
This is precisely why Europe should be debating the continent's real problems, not locking their economies into corporatism by enshrining the "social market economy" in the emerging EU constitution.
Edmund Phelps is professor of economics at Columbia University and director of its Center on Capitalism and Society.
Copyright: Project Syndicate
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
The past few months have seen tremendous strides in India’s journey to develop a vibrant semiconductor and electronics ecosystem. The nation’s established prowess in information technology (IT) has earned it much-needed revenue and prestige across the globe. Now, through the convergence of engineering talent, supportive government policies, an expanding market and technologically adaptive entrepreneurship, India is striving to become part of global electronics and semiconductor supply chains. Indian Prime Minister Narendra Modi’s Vision of “Make in India” and “Design in India” has been the guiding force behind the government’s incentive schemes that span skilling, design, fabrication, assembly, testing and packaging, and
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.