1. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt

2. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Economic Crisis & Competitiveness - A European Perspective - Ralf Boscheck Lundin Family Professor of Economics & Business Policy

3. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Europe’s Key Challenges Competitive or Robust? Crisis Chronicle

4. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt 1857 1873 1929 1997 2001 2008  Political events, economic shocks, speculation, technological advance, coordination and policy failures, … Dow Jones Average Crisis Chronicle: Duration Growth Process Indicators Crises offer opportunities for renewal – yet, most search for a quick fix.

5. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Average Growth of World GDP/Capita: 2000-2006: 3.2% 1950-1973:2.9% 1870-1913:1.3% IMF: 2007: 4.9% 2008: 4.9% 2008:* 3.9% 2009: 3.0% 2010:2.5% 2010:3.1% Reinhard & Rogoff (2009) Blanchard (2009) Managing Cycles!? Service/Cyclicality WC management/Forecasting Diversification/Unison Public sector/Crowding out Stabilizers/Accelerators Fiscal discretion/Expectations Monetary policy/Blunt measures Financial market/Control Crisis Chronicle: Economics rationalizes cycles – there is little advise to management.

6. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Crisis Chronicle: “New Normal” Subdued Growth Stimulus Packages Public & Private Finance High Sustained Unemployment Source: IMF October 2009 Most recent scenario suggests a return to “normality.” But step back!

7. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Crisis Chronicle:  P i Q i =  w i + r i +  i + i i  w i /  i  P i i w US,M.Income, 2001/6 : -4%/+  Prod. w USgrade, 2001/6 : -6%   GDP US2000/6 :7%  13% Offshoring: Actual & Potential Capital / Labour Ratio P US cons.dur. 95/05 : - 25% Savings Glut & Excess Liquidity Central Banks Deflation & Forex Impact Sensitivities: Return to Conventional Capital Flows Labor Market & Social Adjustments No: Asian Mercantilism Bretton Woods II No: Income Composition Social Net But: Non-diversified, Asset Bubble, Fiscal Responsibility, Regulatory Competition But: Capital Boost ExpPro to ImpSubs ‘Mercantilism & Iron Law of Wages’ vs. ‘Soft Landing & Protectionism’

8. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Europe’s Key Challenges Competitive or Robust? Crisis Chronicle

9. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Competitive or Robust? Thomas L. Friedman’s The World is Flat has been a long-time # 1 in the New York Times best-seller list. On February 21, 2006 it ranked # 1 on Amazon. At the same day, Jeffrey Sachs’ The End of Poverty: Economic Possibilities for Our Time ranked # 515, Bhagwati’s In Defense of Globalization ranked 20,602, and Joseph Stiglitz’s Globalization and Its Discontents ranked 52,196. For a critique see Leamer, E.E. (2007) A Flat World, a Level Playing Field, …., A Review of Thomas L. Friedman’s The World is Flat, Journal of Economic Literature, Vol. XLV (March 2007), pp. 83-126. Free trade is global Cooperation in a +  game.Why ‘competitiveness’?

10. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt See Heilemann, U., Lehmann, H., Ragnitz, J. (2007) Länder-Rankings – Komplexitätsreduktion oder Zahlenalchemie? Wirtschaftsdienst, Vol.7, pp. 480-488. Gundel, S., van Suntum, U. (2007) Ist die Kritik an internationalen Standortrankings berechtigt? Wirtschaftsdienst, Vol.7, pp. 473-479. “Rankings – in the eye of the media consuming public - have an objective – ‘almost devine status that they would never attain if data would be reviewed in a more sober manner.” “Measurement without theory or pure data mining.” (Heilemann et. al (2007)) 1. No model of competitiveness not even a consistent conceptualization 2. There is often no defined goal parameter 3. Rankings often violate fundamentals of indexing 4. Lacking theory, the assumed link between competitiveness and variables is typically monoton-linear making a 100% savings ratio or a 0 tax level desirable(!?) 5. There is no weighting logic across interdependent and often redundant variables; the same is true for sub-indexes 6. The value of the qualitative data is questionable Competitive or Robust? but are of little prognostic or therapeutic value.Rankings sell

11. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Ranks20052006200720082009 Argentina4947515255 Brazil4244494340 Chile182326 25 Colombia3834384151 Mexico4745475046 Peru3537 Venezuela515355 57 Total number of countries: 46 in 1997/1998, 47 in 1999/2000, 49 in 2001/2002, 51 in 2003/2004/2005, 53 in 2006, 55 in 2007/2008, 57 in 2009 EconomicPerformance 20052006200720082009 GovernmentEfficiency 20052006200720082009 BusinessEfficiency 20052006200720082009 Infrastructure 20052006200720082009 Rank2086622 2627 2819 Rank302823 Rank322825 69Rank1097 © IMD WORLD COMPETITIVENESS YEARBOOK 1995-2009 Competitive or Robust? Still, source data may provide clues for digging deeper.

12. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt "Logical incrementalism" "Rational comprehensive planning" Business Policy Assets & Capabilities Market Requirements & Potential External Stakeholders Internal Stakeholders Competitive or Robust? Moving from business to economic strategy is more than aggregation.

13. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Coordination Efficiencies lowhigh Decentral Central Operations Competitive or Robust? Economic principles: Clear centrally established rules, decentrally applied. Regulation Politics Regional Governance

14. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt  (P i Q i ) Employment i w Deal with Labor Market Adjustment & Income Re-distribution Manage Demand, Confidence & the Cost of Money Drive Productivity Competitive or Robust? It focuses the mind on a few policy levers

15. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt  (P i Q i ) Employment i w Regulatory Competition - labour rules & social standards - taxes & subsidies Trade - tariffs & non-tariff barriers - preferential customs areas Exchange Rates - devaluation - currency area rules Public Finance - deficit spending - …. Managing cycles requires an abilitiy to adjust and/or to shift adjustment costs Competitive or Robust? It focuses the mind on a few policy levers and the broader context.

16. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Competitive or Robust? Vom Schlusslicht zur Lokomotive!? De el más listo de clase al vagón de cola!? Export-led: 2007 $263bn CA surplus 2002 Brown Test Recession impact: GDP, Production Bail-outs, budget deficit & adjustment Cost management, consumption & investments GDP  99-07 :3.9% Export Fetishism !? Employment, output prices, CA deficit Labor market & productivity Labor market (in-) flexibilities Taxes & subsidies Reform Agenda: Labour Markets, Energy Education, Science & Technology Finance Fixed Exchange Rate Shelter !? A robust model? Based on performance or shelter? How sustainable is it?

17. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Europe’s Key Challenges Competitive or Robust? Crisis Chronicle

18. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt EU Key Challenges: Customs & Monetary Union: numerous, diverse & institutionally trapped Socio-economic base Institutional infrastructures Mindsets  Complementary specialization - for all! Accession Rules Purgatory

19. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt EU Key Challenges: Ireland Remains Young 2007 2050 2007 2050 Germany Grows Older 2007 2050 Bulgaria Geriatric Society Implications for Social Security Models Labour market contracts Social policies Immigration & Integration policies With fertility rates below 2.1, EU’s Median Age in 2050 will be 48...

20. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt and the EU’s centers of economic gravity will have shifted. The return of the urban centers & the rise of knowledge clusters: The case of London Creative Economies replace Roger Brunet’s “banana”. In the LaSalle-Index, London, Munich & Paris are top followed by “emerging” centers in the South and East: Warsaw outperforms Vienna, Valencia beats Brussels, Bilbao outclasses Düsseldorf Eastern Europe offers a second line of manufacturing centers European regions change their social, economic and carbon footprints EU Key Challenges:

21. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Demographic Challenge: Required Actions? Increase Q w (immigration, family policies), employment rate, hours worked, retirement age EU average fertility rate (2003): 1.48  2005/2030: - 20.6m working population Potential EU GNP growth to fall from 2-2.25% to 1.25 in 2040  +65 group: 52,3% (40m) Life expectancy rises Source: Eurostat EU GDP & Productivity, USA = 100 GDP per capita Hourly productivity Hours worked per capita 1970 1980 1990 2000 0 20 40 60 80 100 Increase productivity (education, R&D, technology & physical infrastructure) Cut claims Today, drastic adjustment are vital just to maintain the status quo, … EU Key Challenges:

22. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Lisbon Strategy: (March 2000) Objectives & Evolution: 70% employm. rate 3% GDP for R&D Global leader Process & Monitoring “Soft law & “process fatigue” March 2005: Re-launch Lack of clarity, buy-in, incentives, sanctions, stakeholder control From “key strategy” to sidelined ritual Kok Report 2004 no governance yet, the EU’s key strategy is a mere ritual blocking change. EUPolicy National Authority LocalResponsibility National Authority “Europe 1992” – for real! Labour Market Efficiency: Transferability of social security benefits Technology Policy? Capital market efficiency Competition in Education: Accreditation of degrees Opening up provider markets EU Key Challenges:

23. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt EP election 2004/Eurobarometer - Voter turnout & approval ratings at all time low The EU faces two fundamental alliance problems: - Deference - Procedural and substantive consensus too large numbers, growing cultural differences, closure of political elite, parts cannot adapt jointly core does not further economic benefits, prolonged economic decline excessive delay of reform. Disintegration occurs once: Ireland supports the EU’s Constitutional Reform – It’s a Failure! EU Key Challenges: Legitimacy, democracy & accountability, … Coordination Efficiencies lowhigh Decentral Central Brussels Madrid Barcelona Rejected, overruled & enshrined?

24. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt European coordination is needed but needs to be limited to areas where global markets are distorted economies are beyond national scale limited ability to upload local/national regulation as global standards Decentralized coordination is best as it improves the quality of policy economic efficiency civic virtues Actions: Review of economics of governmental activities Design of a true constitution & small scale apparatus for appellation & adjudication Strive for mobility to enforce regulatory competition & choice Coordination Efficiencies lowhigh Decentral Central Brussels Madrid Barcelona EU Key Challenges: A Real Overhaul is Needed:A Common Market!

25. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Europe’s Key Challenges Competitive or Robust? Crisis Chronicle

26. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt

27. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt 1.Fiscal discipline 2.Reorientation of public expenditure 3.Tax reform 4.Financial liberalization 5.Unified and competitive exchange rate 6.Trade liberalization 7.Openness to FDI 8.Privatization 9.Deregulation 10.Secure Property Rights Source: Williamson, J. (ed.) (1990) Latin American Adjustment: How Much Has it Happened? Washington, D.C.: Institute for International Economics. The World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform (2005) emphasizes “humility, policy diversity, selective and modest reforms.” “(S)tabilize, privatize, and liberalize” became the mantra of a generation of technocrats who cut their teeth in the developing world and of the political leaders they counselled,” “(T)here is no unique universal set of rules... [W]e need to get away from formulae and the search for elusive ‘best practices’...” (p. xiii) Rodrik, D. (2006) Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank’s Economic Growth in the 1990s: Learning from a Decade of Reform, Journal of Economic Literature, Vol. XLIV (December 2006), pp. 973–987 Latin American Perspective The old truth is dead -

28. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Latin American Perspective Two clusters of countries? Starting Point: Aver. 5.5%  GDP 2003-8 Poverty level: 44%(02) to 33 (08) IMF 09:-1.5%; 10: +1.6 Popul.  p.a. Impact of Recession: LA top 5 Exports 2008 (Aug-Dec): Volume / Value: cut by 1/3 Capital flow 2007 $184bn; 2008 $85bn 2009: E($43bn; cost of capital Tax revuenues? Link to US economy: Mexico vs. Brazil Classical LA challenges: financial system, currencies, finance IMF, World Bank, Inter American Development Bank Robustness Tight financ. mkt. regulation Flexible exchange rates Inflation targeting Responsible fiscal policy Maintaining (X-M) Accumulated reserves to pay off debt Demand stimulation Brazil, Mexico, Chile, Peru, Colombia … 30% devalutation of currency – X boost 1% GDP stimulation (Chile/Peru: 10%) Interest rate cuts CBs provide $ to pay-back Funds – (Chile: 12% of GDP): prime the pump vs repay debt? reducing reserve requirements? Argentina, Ecuador, Venezuela… Fixed / committed currencies Pension plan last resort Linking up with China (3x IMF rate) Trying to stop capital flight Long live the old truth?Be Robust!

29. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt What is the Scope of Business Responsibility? Between M.Friedman and CSR? Stakeholders: Unaware? Aware: Maintain Aware: Change - Fairness Aware: Change - Sustainability Firm: Unaware? Aware: Accept as License to Operate & Outperform Aware: Change: Exit, Haggle, Play Market s.t. … Firm: Unaware? Aware: Protect, Disguise, Justify, Play Market; Aware: Change – Not fair Aware: Change – Sustainability, Self-regulation, Strategic Use Stakeholders: Unaware? Aware – Accept Aware – Change: Fairness Aware – Change: Inefficiency Remedies: Markets, Fiscal Means, Regulation, Ownership Control Collective Action Problem!? Market!

30. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt What is the Scope of Business Responsibility? Negotiating Win-Wins?! Sanctions Avoidance (Pareto Optimal) “Win-Win” s.t. Corporate Governance Timing Market Power Collective Action

31. Ralf Boscheck Copyright © IMD International, Lausanne, Switzerland Not to be or reproduced without permission EconCrisisCompetitivenessEuroPersp.ppt Economic Crisis & Competitiveness - A European Perspective - Ralf Boscheck Lundin Family Professor of Economics & Business Policy