Institutional Reforms for Growth,
Employment and Social Cohesion:
Elements of a European and National Agenda
Robert Boyer
CEPREMAP, CNRS, E.H.E.S.S.
142, Rue du Chevaleret 75013 PARIS, France
Phone: +33 (0)1 40 77 84 28 - Fax: +33 (0)1 44 24 38 57
e-mail:
November 1999
This paper has been prepared as background paper for the Portuguese Presidency of the European Union. It deals with the theme : “The recent evolution of Institutional forms and the reforms at stake to undertake this transition with growth, employment and social cohesion. Institutional forms at European and national level and policy mix”.
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Institutional Reforms for Growth, Employment and Social Cohesion:
Elements of an European and National Agenda
Robert BOYER
Executive summary
- After quite an uncertain period, some optimism about the future of Europe is observed, but it is far from sure that this movement will go on several years ahead, without further and significant institutional reforms. Three factors do motivate such a strategy. First, the EU has exhibited some weaknesses specially in terms of Information and Communication Technologies (ICT), job creation. Second, a totally new institutional architecture and style for economic policy are required, given the globalisation of finance, the internationalisation of competition. Third, after the Amsterdam treaty and the subsequent processes created by the European Councils, governments are facing a totally new institutional context, made both of new constraints (a common monetary and exchange rate policy) as well as promising opportunities (stimulate growth and employment by better co-ordination among national States via new processes).
- There is a European paradox. Seen from outside, the EU appears to be quite an impressive economic entity in terms of market size, quality of skills and diversity of scientific and technological knowledge. Observed from within, major co-ordination problems have recurrently emerged and have to be overcome if the member States want to reap and share the benefits of the closer integration implied by the Euro. They concern the policy mix, the transformation of the bargaining arena between firms and wage earners. The structural reforms and the dynamism and diversity of systems of innovation.
- What broad development strategy should Europeans adopt in order to foster growth and fight against unemployment for the next decade?
A deepening of mass-production via differentiation by quality and innovation seems within European reach, even if it is no longer the most promising strategy.
- The revolutionary impact of ICT has been mitigated in Europe by the legacy of post-world war II institutions, even if some countries have been quite efficient in coping with this challenge.
- Given its traditional strength and variety of academic systems and its concern for the training of workers, the EU could be at the forefront of a Knowledge Based Economy (KBE)…but probably the nature and density of relations between research and economic activity should be reconsidered and extended.
- A welfare reform driven development regime would be quite adequate to the old continent: the movement towards gender equality could benefit both production and demand and help in solving the problem of an ageing population.
- Last but not least, some regions of Europe are probably in a good position and able to cope with a finance led regime, with highly specific consequences upon the adaptation of industrial relations and State regulations.
Probably the emerging development regime will borrow some components from most if not all of these ideal models. And this perspective opens to a significant national and local variability in the institutional reforms required to promote a steady and job creating growth.
- The report argues that a recovery of investment is quite essential for employment performance, but this is not at all sufficient since capital formation has to be directed towards (and governed by) smart organisations that propitiate interactive and permanent learning and are inserted into regional, national and international networks. But given the large diversity of national institutions, benchmarking of best practices should be used carefully: more adaptation than pure adoption, innovation more than simple replication. In this respect, European initiatives should respect one of the old continent major assets: the large diversity of national innovation systems that may provide a lot of adaptability and potential economic performance at the European level.
- The report proposes four general orientations for institutional reform.
- The quality of the policy mix could be significantly improved by a relational approach, i.e. if all the relevant actors (the Central Bankers, Ministers of finance, business associations, unions,…) could exchange a lot of information about their analyses, objectives, intentions and decisions,. This could take place within the macroeconomic dialogue proposed by the Cologne Council.
- The Community and European level co-ordination should be restricted to the only domains where a large and significant spill-over flows from one country to another. The various methods available (harmonisation at the European level, ad hoc co-ordination process, general set of rules governing national decisions,…) should be carefully assessed since they are unequally efficient according to the size of externalities, the administrative costs involved and the context.
- Within Euroland, contrasted trajectories for employment patterns and evolutions coexist. Thus, there is a scope for bargaining among social partners in order to negotiate labour contracts that are structurally compatible with the single European monetary policy. The last decade suggests that there is no single best way, since both national employment pacts and a large decentralisation of wage negotiation seem to deliver a variable mix between employment creation and objectives of social justice. (According to the international specialisation, social legislation and political configuration, solutions to unemployment do exist and should be seized by social partners and governments.)
- A “time for reform” fallacy has to be resisted against. Why make unpopular reforms when the macroeconomic context is so good that public opinion and most government think: “the crisis is over, why bother?”. Conversely, when a major recession or structural crisis burst out, it is generally too late to implement the reform. Thus, the present recovery should be used in order to decide and implement the most necessary reforms and not to yield to the easy strategy “wait and see”.
- How could these general ideas be implemented within the European agenda for the coming years? By an ordered flow of reforms in order to transform a short run recovery into a medium-long term growth. By chance, the complex architecture of the Amsterdam treaty, the Cardiff, Luxembourg and Cologne processes addresses these issues, but they are so complex, interrelated and overlapping that their possible inconsistencies by recomposing them and grouping all the mechanisms promote a coherent set of positive spill-over from one domain to another. Thus, more clarity and efficiency could be brought into these processes by recomposing them according to their contribution to one or another of the key strategies presented earlier. The idea is to stop the various vicious circles that have generated a recurring and rising unemployment and to promote one or another of four major virtuous growth circles.
A relational approach to the policy mix may enhance a steady boom of the investment, directed towards material and immaterial components, thus generating favourable expectations about the stability of a given win/win strategy. This should be the major concern for ECB and Ministries of finance.
- Organising the shift from ICT to KBE is another method for initiating a virtuous circle, built upon innovation, growth and job creation. This strategy is up to Ministers of science, technology, education, in close connection with social partners.
- Welfare systems if adequately reformed, may well be a major trump for Europe. A better implementation of gender equality and the phasing out of early retirement could trigger a surge in demand, innovation, and activity that would ease the financing of welfare systems. This is a matter for social affairs Ministers and social partners.
- Coping with a finance led regime may be on the agenda of countries already specialised in financial inter-mediation and business related services. The objective of the ECB should incorporate the curbing down of asset inflation, social partners should negotiate profit sharing and pension fund management and the supply of welfare could be progressively transformed by the privatisation of some components. The task of Central bankers, Ministers of finance, and social partners could be to define rules of the game ensuring the financial economic and social stability of such a regime.
The public opinion in each society may prefer one or another of these strategies. Clearly the subsidiarity principle preserving national political preferences, is important indeed for the long run viability and legitimacy of European integration.
Institutional Reforms for growth, employment and social cohesion:
Elements of a European and National Agenda
Introduction: In response to the next decade'S challenges, it is time to reform......
The turning point of the nineties has pointed out some of Europe's recurring weaknesses of Europe......
Cope with the complete reversal of the post-World War II institutional architecture......
European integration: work in progress…not at all the end of history......
The dilemma of the European Union......
A potential economic giant…......
…in search of a post-Amsterdam strategy…......
…facing severe and new economic and political co-ordination problems......
Strengths and weaknesses of European Union......
From Fordist mass-production to Toyotism?......
The rise of information and communication technologies: a shift in the productive basis......
Towards a knowledge based economy?......
Are contemporary economies service led?......
A constant deepening of competition, the basis of a new growth regime?......
Is a finance led regime possible for the EU?......
Each growth regime calls for a specific institutional architecture......
Some general principles for national and European policies.......
Convert the diversity of Social Systems of Innovation into a strength......
Besides benchmarking, tailor economic policy to each national configuration......
Organisational redesign: as important as tangible investment or RD!......
Networking: the buzz word of the early 21st century?......
Adapting and reforming economic institutions......
At what level should externalities be internalised?......
Mixing short term management with long run structural policies......
The Euro: working out a new and satisfactory policy mix...... 13
Same monetary policy, but different unemployment performance......
Adjusting wage and employment negotiations to the common monetary policy......
Redesigning all legal and tax incentives in order to promote the adoption of new growth regimes......
Recompose the European budget around growth and social cohesion objectives......
How do these ideas fit into the European agenda?......
Convert the current recovery into a long term boom......
The Broad Economic Policy Guidelines: a mirror image of the new institutional architecture...... 18
Making virtuous circles? A method for co-ordinating complex European procedures......
Putting the subsidiarity principle at work......
Mapping institutional reform into the various European processes......
References......
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Institutional Reforms for Growth, Employment and Social Cohesion
Elements of a European and National Agenda
Robert BOYER
LIST OF FIGURES
Figure 1 – The post W.W.II capital-labour accord shaped most other socio-economic institutions......
Figure 2 – The Euro implies a new hierarchy and architecture of each national socio-economic regime......
Figure 3 – European Union : a potential economic giant….......
….But a lot of co-ordination problems......
Figure 4 – European countries suffer from both low wage and high wage employment gap in the services......
Figure 5 – What strategy against European unemployment?......
Figure 6– ...... The impact of technological co-operation upon the sales of new or improved products.
Figure 7 – The Euro sets into motion a series of complex transformations, both at the national and European level,
with unintended fallout......
Figure 8 – A possible outcome of the macroeconomic dialogue: a better policy-mix.......
Figure 9 – Why economic policy remains difficult within Euroland......
Figure 10 – European Union : the same macroeconomic environment but contrasted unemployment rate evolutions...
Figure 11 – Good news: the new hierarchy among institutional forms is taken into account by the structure
of European treaties and subsequent decisions......
Figure 12 – Strategy one: Use the dividend of faster growth to lower the tax and remove welfare related barriers to job
creation and launch the macroeconomic dialogue......
Figure 13 – Strategy two: Convert the information and communication technologies (ICT) into the basis for
Knowledge Based Economy (KBE)......
Figure 14 – Strategy three: Gender equality and responses to ageing as the source of a new service led growth.
Figure 15 – Strategy four: Riding the financial globalisation......
LIST OF TABLES
Table 1 – A comparison of the degree of co-ordination among the triad......
Table 2– ...... What growth regime for the early 21st century?
Table 3 – Net job creations take place in quite diverse sectors, not only in high tech ones.......
Table 4 – Can European growth be finance led?......
Table 5– ...... Alternative emerging growth regimes and the redesign of institutional forms
Table 6 – Three Social Systems of Innovation are coexisting within EU......
Table 7 – Toward a Knowledge Based Economy : the need for new policies in order to cope with the
related externalities......
Table 8– ...... At what level should each economic institution and economic policy component operate?
Table 9 – The new style for economic policy: a condition for optimising the European policy mix......
Table 10 – What reform of industrial relations in order to cope with European monetary policy?......
Table 11 – The institutional setting for strategy one......
Table 12 – The institutional setting for strategy two......
Table 13 – The institutional setting for strategy three......
Table 14 – The institutional setting for strategy four......
Table 15– ...... Mapping of institutional reform into the various European processes
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“The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify (…) into every corner of our minds” John Maynard Keynes, December 13, 1935.
“The outstanding faults of the economic society in which we live, are its failure to provide for full-employment and its arbitrary and inequitable distribution of wealth and incomes”.
John Maynard Keynes, General Theory, Chapter 24, 1936.
Introduction: In response to the next decade’s challenges, it is time to reform
The recovery of the EU economy has brought a lot of optimism among European business and consumers. Hasn’t GDP growth gone up from 2.7 % in 1997 to 2.9 % in 1998, propelling an unprecedented job creation? The forecast for 1999 and 2000 are extrapolating this recovery, since the growth rates are supposed to reach respectively 2.1 % and 2.7 %. Would the European sclerosis be over, since the national and European institutions would now be in line with the requirements of global finance? This report proposes a balanced view: many reforms have already been done, but they are quite unequal across the fifteen member States and in any case new challenges are to be met during the coming years. It argues that since the 90s, the Europeans are living a brand new period that deserves careful and new analyses. Thus, most of the items on the political agenda should be reassessed and probably redesigned according to three major concerns.
The turning point of the nineties has pointed out some recurring weaknesses of Europe
It is now clear that the 90s exhibit intense and multi-faceted transformations with quite unequal consequences for the three members of the triad:
- The previous Fordist productive paradigm has progressively led to alternative principles, based on a knowledge economy (OECD, 1999; see Soete’s contribution).
- Nevertheless the dynamism of financial innovations has overcome the speed of technological and industrial advances (Boyer, 1999b).
- The so-called globalisation of finance and diffusion of export led growth strategies to Newly Industrialised Countries (NICs) has propagated local financial crises to the rest of the world.
- A large de-synchronisation of the business cycles has nevertheless been observed since the early 90s, with some impact upon the misalignment of exchange rates Euro/Dollar and Yen/Dollar.
- More basically, the miracles of 60’s (France, Germany , Scandinavian countries, and even Japan, East Asian NICs,…) have turned into seeming failures and major crises. Therefore, many experts think that any government struggles to implement market friendly institutions.
- The perception of a crisis of the welfare State, specially of its financing, has been triggered by the post-1973 growth slowdown and more recently by the prospect of an ageing population (See Gosta Esping-Andersen’s contribution).
Most European countries have been adversely affected by these structural transformations. It took a long time for economic and political decision makers to take the measure of the far reaching consequences of this turning point. Many firms are lagging in terms of the diffusion of information and communication technologies (ICT) and still more in the production of the related hardware and software components. Macroeconomic performance has been poor, specially when compared with contemporary American or past European growth during the 60s. Last but not least, unemployment has resisted to many therapies, at least for medium size European countries. The legacy of the 90s in terms of macroeconomic disequilibrium calls for new directions for economic policies. But this is not the only argument.
Cope with the complete reversal of the post-World War II institutional architecture
It is now more and more evident that these difficulties have a deeper root than a mere mismanagement of the European policy mix after the German reunification and the costs associated to the preparation for the launching of the Euro. Much converging research suggests that the institutions that were at the core of the Golden Age unprecedented growth have been destabilised by the very success of this regime and the related surge of new trends within the world economy (Boyer, Saillard 2000; Aglietta 1999, Baslé, Mazier, Vidal 1998). A sharp contrast emerges when the 90s are compared with the 60s.