TCS Daily

Stop Talking, Start Doing

By Hans H.J. Labohm - August 11, 2005 12:00 AM

Why is innovation so important? It is the engine of productivity growth, as well as economic and social development. In a competitive world national prosperity depends on society's ability to revitalize itself. This has always been the case. But today it is even more important in light of new trends, including the ageing of the population with the ensuing reduction of the labor force, and dramatic chances in worldwide competitive relationships, because of the emergence of powerful players like China and India. Competing with them on labor costs will be well nigh impossible. Therefore, if the old developed economies want to keep their place in the world pecking order, they will have to boost innovation.

This has also been underlined in the EU's Lisbon Strategy, launched in March 2000. That year's Lisbon summit was designed to mark a turning point for EU enterprise and innovation policy aimed at integration of social and economic policy, with practical initiatives to strengthen the EU's research capacity, to promote entrepreneurship and to facilitate the take-up of information society technologies. Its ultimate goal was making Europe "the world's most dynamic and competitive knowledge-based economy by 2010, capable of sustainable economic growth with more and better jobs and greater social cohesion".

However, a mid-term review of this strategy by a high-level expert group chaired by the former Dutch prime minister, Wim Kok, conceded that these goals will not be achieved. The Kok report painted a gloomy picture of the progress made over the strategy's first five years, stating that the "disappointing delivery" is due to "an overloaded agenda, poor coordination and conflicting priorities". However, the report put most of the blame on the lack of political will shown by member states.

In order to rally sufficient support, political texts like the Lisbon Strategy are always the result of give and take. That makes them somewhat ambiguous. The political right was satisfied by the "economic growth" part of it, while the left welcomed the "better jobs and greater social cohesion" bit. At first sight it seems as if the social dimension has prevailed over the last five years. Attempts by various EU countries to introduce reforms, especially in the labor market, to promote growth and employment, have faltered, because they were considered to a threat to the "acquired rights" of the labor force.

That is sad, because securing those rights requires an adequate level of competitiveness of the industries concerned. So far, it has been impossible to convince European trade unions that "acquired rights" do not play any role whatsoever if consumers express their preferences for certain goods and services in the marketplace. They just want to buy if the price/quality relationship of those goods and services is to their liking. In other words, the preservation of "acquired rights" can only be achieved if producers, who ultimately have to guarantee them, do not price themselves out of the market.

European industry and employers federation UNICE has pointed out that the EU's failure to make progress towards the Lisbon goals is mainly due to insufficient economic reform in the member states. In particular, industry believes that excessive costs and regulation stand in the way of getting Europe's competitiveness back on track. UNICE has therefore called to "Free Gulliver" by cutting red tape for businesses. For industry, the focus must be on: better regulation with compulsory business assessment for new legislative proposals; reforms of social security systems; increased investment in R&D and innovation by member states, universities and industry; reductions of company tax levels; better education on entrepreneurship; more flexible regulation of labor markets; and implementation of internal market legislation.

The European trade unions, on the other hand, reject what they regard as a one-sided application of the Lisbon strategy to legitimize "neo-liberal policy approaches". They want the Lisbon Strategy to be implemented in a manner that is economically, socially and ecologically "balanced".

It is difficult, if not impossible to reconcile these opposing views. The result is paralysis.

So far, structural reform, including labor market reform, has by and large failed in Europe. An alternative, and politically less controversial, way to promote economic development is innovation policy. But the question is how? One can hardly escape the feeling that, on balance, Europe's knee-jerk reaction to its innovation deficit is more government activism rather than less. It is handled as a top-down process instead of a bottom-up process, where private business calls the shots. The French are especially eager to launch new big public projects, like Concorde and Ariane in the past.

Following the example of Finland, various European countries have established blue-ribbon commissions to serve as innovation platforms. These commissions usually comprise of all kinds of important people, including CEOs of successful businesses. But they labor under a couple of handicaps. The most fundamental perhaps is that they lack information. As Hayek once explained, there is no central store of knowledge in society. Information exists "as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess".

But there are also more mundane flaws, e.g., attendance. Inaugural meetings often start with much fanfare, but after that absenteeism sets in. The most prominent members of the commission often leave the participation of subsequent meetings to some deputy, if at all. After all, they do have their responsibility towards their shareholders, who don't like them to waste their time on nebulous initiatives that do not directly boost their profits. Moreover, these sorts of commissions will hardly be able to attract any emerging innovative entrepreneurs, who often are too busy working on their projects. Mainly, the meetings are attended by dutiful civil servants, who of course lack any understanding of the subject matter. If they had, they would be successful entrepreneurs themselves. So, all in all, these kinds of commissions are "Fremdkörper" (alien bodies) in a market economy and are, more often than not, bound to fail.

That does not mean they are completely useless. They might be able to remove certain institutional barriers to innovation, e.g., funding of education and generic research, as well as procedural impediments to recruit highly qualified experts from abroad. More importantly, they might promote a certain awareness and sensitivity among participants who might learn what is good and what is bad for innovation. But they cannot offset the growing degradation of the business environment, because of the pernicious shift in the balance between economic incentives and disincentives that Europe has been facing over the past decades.

In other words, if Europe still wants to realize its self-declared Lisbon targets in the future, it will have to tackle the reform of its labor markets, the liberalization of its service sector, lower company taxes, reduce regulation and establish an adequate level of education and research, rather than embarking on all kinds of grandiose public projects in the name of innovation.


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