Structural Change, Competitiveness and Industrial Policy

Painful Lessons from the European Periphery

Aurora A. C. Teixeira, Ester Silva, Ricardo Mamede, Aurora A. C. Teixeira, Ester Silva, Ricardo Mamede

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781134683505
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The onset of the global crisis has emphasised the persistence of substantial differences in development and social progress within the euro area. The specific case of countries located in the southern periphery region has come to the centre stage, due to the harsh economic conditions that all these countries have experienced in the recent past.

In the aftermath of the American subprime credit bubble, these countries' high indebtedness raised doubts as to their ability to sustain public finances, with the financial crisis developing and gaining momentum due to the fragilities presented in the economy. To varying degrees of severity, all of these economies have since been forced to introduce strong fiscal tightening programmes in order to achieve fiscal consolidation, which have translated into recession and rising unemployment.

This book undertakes a comprehensive analysis of the causes of the crisis in southern European countries, showing that the 'Achilles heel' of these economies is rooted in the dismal evolution of productivity and in a specialisation pattern excessively based on the so-called 'traditional', low, and low-medium tech industries, which yield low margins, declining export shares and, ultimately, withering international competitiveness. Such evidence suggests that the southern European periphery industrial growth model has reached its limits, demanding a multidimensional policy approach capable of overcoming the magnitude and complexity of the present crisis.

Without denying the need to adjust public and private balance sheets, it is argued that finding a sustainable path out of the present problems requires addressing the challenges of productivity growth and competitiveness in the long term.

Part I

The context

EMU, convergence, austerity

1 Introduction

Structural change, competitiveness and industrial policy

Ester Gomes da Silva and Aurora A.C. Teixeira

Industrial policy, understood as the set of policy instruments that stimulate specific economic activities and promote structural change, has long been absent from the forefront of the policy agenda in Europe, and particularly in the countries of the southern periphery (Greece, Portugal, Spain and Italy). Still, the profound crisis affecting these countries cannot be understood without acknowledging that growth dynamics in the real economy have been exhausted, leading subsequently to credit bubbles and the deviation of capital into high-risk financial assets to pump the growth engine, and the inability of broad macroeconomic instruments to deal with it. Apart from economic and financial disruptions, competitiveness problems of the southern European periphery, strongly related to their structural deficiencies, are also a major cause for concern. A new set of policy measures seems thus to be in order to stimulate structural change towards the accumulation of knowledge and the creation of conditions for sustainable growth, under the challenges imposed by economic globalisation, financial market distress, and technological, institutional and societal challenges.

The onset of the global crisis has emphasised the persistence of substantial differences in development and social progress within the euro area. The specific case of countries located in the southern periphery region has come to the centre stage, due to the harsh economic conditions that, although to varying degrees, all these countries have experienced in the recent past.

After a few decades of convergence to the European core, southern European economies have faced increasing growth difficulties since the turn of the century. In the aftermath of the American subprime credit bubble, these countries’ high indebtedness raised doubts as to their ability to sustain public finances, with the financial crisis developing and gaining momentum due to the fragilities presented in the economy. To varying degrees of severity, all of these countries have since been forced to introduce strong fiscal tightening programmes in order to achieve fiscal consolidation, which have translated into recession and rising unemployment. Despite the widespread contours of the crisis, involving the economic, financial and institutional spheres, the adjustment of public and private balance sheets has been at the forefront of political strategy in the periphery of the Eurozone. Excessive public deficits were taken as the culprit, and from this view, fiscal consolidation has been seen as the major priority, acting both as a means to correct macroeconomic imbalances and to ensure the return to the growth path (e.g., European Commission 2011; Forni et al. 2010). Reality has shown otherwise. The excessive focus on a single dimension of the overall problem has made it impossible for indebted countries to escape from their debt trap and has been accompanied by mass unemployment, weakening of knowledge and production capabilities, and rising inequality.

In this volume, we undertake a comprehensive analysis of the causes of the crisis in southern European countries, showing that the ‘Achilles heel’ of these economies is rooted in the dismal evolution of productivity and in a specialisation pattern excessively based on the so-called ‘traditional’, low, and low-medium tech industries, which yield low margins, declining export shares and, ultimately, withering international competitiveness. Such evidence suggests that the southern European periphery industrial growth model has reached its limits, demanding a multidimensional policy approach capable of overcoming the magnitude and complexity of the present crisis.

Without denying the need to adjust public and private balance sheets, it is argued that finding a sustainable path out of the present problems requires addressing the challenges of productivity growth and competitiveness in the long term.

In the context of the (nationally driven or externally determined) austerity adjustment programmes that are being put in place in southern euro area countries, the answer to such long-run challenges has been focused on changes in the regulation of labour and product markets, which aim to increase the flexibility and cost-competitiveness of the overall economy. It is the purpose of the present volume to discuss to what extent the above-mentioned changes, which constitute the prevailing strategies to overcome the crisis, can or should benefit from a greater focus on policies designed to foster structural changes in these economies. More precisely, attention is given to a number of factors that lie at the basis of economic backwardness and the erosion of international competitiveness: the limited capability for change in the southern periphery, visible in the maintenance of a low-skill and low-tech bias in the productive structure and, more recently, in an overall tendency for adverse structural change—premature deindustrialisation, with manufacturing being replaced by non-tradable activities; a noticeable mismatch between labour market needs and the supply of skills conveyed by the education system; the strong relevance of small and micro-sized firms, which face greater difficulties in financing their growth opportunities; low innovation records and low investment shares in GDP, with a strong relevance of ‘infrastructure’, rather than ‘soft’, productive investment.

The structure of the book reflects these concerns, providing an assessment of the multidimensionality of the current crisis and discussing the ways to overcome it, based on a more active strategy to successfully restart growth in the southern European periphery. We argue that there is a role for more governmental and European support to build up strategic intelligence for structural change processes in these countries, with a focus on the real economy and international positioning.

Part I is dedicated to the challenges posed by the co-participation in the Eurozone of countries with very different productive, social, and institutional structures. The coordination problems stemming from increasing integration in monetary and financial terms, while economic union lagged behind, are approached, taking into account the experiences of southern European countries after joining the European and Monetary Union (EMU).

In Chapter 2, “The unsustainable divergence of national productive systems: Seven lessons from the Eurozone crisis”, Robert Boyer argues for an eclectic approach in order to achieve a full understanding of the crisis and the ways it affected south-western European economies. The author emphasises differences in productive systems within the EU, and particularly the North/ South divide, as the main root cause underlying the present crisis, in a context marked by a strict adherence to mainstream economics on the part of central banks, ministries of finance and financiers. Due to a poor institutional design and a general lack of concern for financial regulation, these differences were aggravated by the inception and development of the EMU, making southern economies particularly vulnerable to the effects of the subprime world crisis. Boyer draws attention to the need for improved governance of the EMU, and to the importance of the implementation of innovation, industrial and income policies in order to counterbalance the loss of autonomy in terms of national economic policy, determined by the adoption of a common currency.

The poor institutional design of the EMU is also underlined as a major factor accounting for the spread and severity of the crisis in Chapters 3 and 4, by Fernando Teixeira dos Santos and Miguel St Aubyn, respectively. Being developed at the macro level of analysis, these contributions explicitly recognise the multidimensionality of the crisis and the need for a multidimensional (policy) response. According to Teixeira dos Santos, former Portuguese Minister of Finance (2005–2011), the lack of common fiscal instruments for crisis resolution, combined with excessive optimism about the functioning of the Eurozone and an increasing deregulation and globalisation of finance, were fundamental sources of distress. The unbalanced policy mix between, on the one hand, strict rules regarding national fiscal policies in order to meet fiscal targets and, on the other, soft coordination schemes with regard to real convergence among member states, led to the neglect of real economy issues and to the persistence over time of significant disparities in competitiveness, potential growth and living standards. When the euro area was hit by the sovereign debt crisis, the institutional frailties became clear and less competitive economies, which benefited from easy money after the introduction of the euro and thus delayed the implementation of reforms to correct macroeconomic imbalances, were subject to an abrupt change in markets’ assessment and pricing of risk. The overarching impact of the crisis and the inadequacy of European fiscal instruments and policies to deal with it are illustrated with the Portuguese case.

Teixeira dos Santos concludes his chapter arguing for the need for a coordinated adjustment policy involving all members of the euro area. In the absence of such policy, it is argued, individual member states will be left in an austerity-trap situation that will ultimately affect the performance of the euro area as a whole and the credibility of its institutions. Miguel St Aubyn develops this argument a bit further, assuming that the transformation of the institutional design of the Eurozone towards the creation of a political union would provide a sounder political response to the probl...