H:user/aig/vortrag/Industrial_Policy_London_PolicyNetwork_2012

1. Industrial policy: An essential element of a new strategy The quest for growth: ideas for a new political economy and a more responsible capitalism Conference: London, September 6th, 2012 Karl Aiginger H:user/aig/vortrag/Industrial_Policy_London_PolicyNetwork_2012.ppt

2. Outline • The goals of the European Society • Status of United Kingdom as of 2012 • Specific problems to be addressed • Policy change needed (incl. Industrial Policy) • Real change for Europe and the United Kingdom

3. Beyond GDP/ Welfare, Wealth and Work • GDP per capita, economic growth • The other goals in a welfare function: • Social inclusiveness, employment, housing • Ecological sustainability, energy efficiency, low carbon • Fair distribution of income and wealth, low regional disparities • health, education, democracy, life expectation, happiness * • Documentation of these goals: • Stiglitz-Fitoussi-Sen Report, Europe 2020 strategy • WWWforEuropeProject: Welfare, Wealth and Work.

4. WWWforEurope Project: large socioeconomic FP7 programme • Searching for a new path of development for Europe • More dynamic, more inclusive, more sustainable • 33 research organization, 4 years, lead WIFO • Policy Network as partner, University of Coventry (David Bailey) • Boards with a novel laureate, ex prime minister, ex Commissioner EU * • First tasks: European governance, problems of periphery •  Scientific Support for EU-2020 and policy change in Europe.

5. Economic status of Europe • Slow growth (medium run), recession 2012 • Double digit unemployment, youth 20 %, some countries 50% • Rather constant export shares, no trade deficit=>price competitive • Low R&D, limited ambitions in green technology • Increasing inequality; disequilibria between countries • Successful Euro (higher than at start) * • Procrusted Central Bank, no vision of European institutions 2030 • Public deficit &debt (lower than in US, but higher interest rates).

6. Europe´s assessment in a broader perspective • Jeffrey Sachs in Financial Times August 19, 2008: • Strong democracies, no US style underclass • Peace, negotiating instead of bombing • Low child mortality, high life expectancy • Preference for leisure * • World Bank (golden years project 2012) • Europe is an integration machine • Rapid transformation and catching up of socialist countries.

7. Outline • The goals of the European Society • Status of United Kingdom as of 2012 • Specific problems to be addressed • Policy change needed (incl. Industrial Policy) • Real change for Europe and the United Kingdom

8. Status of UK I • Double dip recession, GDP 2012 probably smaller than 2008 • GDP just a trifle above EU-15 (No 10) despite of devaluation of £ • Unemployment rate 8%, youth 21% (2011) • Social goals no 11, sustainability no15 (WIFO 2011) * • Manufacturing sector declining from max. 19% (1989) to 9% (2010) • Financial sector increasing from 7% ( 1997) to 9.4% (2011) * •  The financial sector has overtaking manufacturing.

9. GDP per Capita (1000 PPS) just above average – far away of top countries EU15 UK Germany Netherlands 2008: 27.7 28.1 29.0 33.6 2012: 28.1 28.4 31.0 34.2

10. Status of UK II • Investment/GDP lowest in G7 - falling from 22% (1989) to 15% (2011) • Trade deficit -6.0%; current account -1.7% of GDP (2012) • Public debt 91.2% of GDP and increasing (despite of austerity) • Highest household accumulated debt (100% of GDP) • Financial sector debt four times GDP – a bomb to explode • UK corporations (non financial): higher savings than D and F • Net lending position of non-financial corporations over 10 years * • Business profits not used for investment.

11. Outline • The goals of the European Society • Status of United Kingdom as of 2012 • Specific problems to be addressed • Policy change needed (incl. Industrial Policy) • Real change for Europe and the United Kingdom

12. Investment share in GDP low and decreasing EU15 UK Germany 2008: 22.2% 17.1% 19.3% 2012: 19.1% 14.4% 18.3%

13. UK is no leader in innovation • Innovation follower; no 6th (Innovation Score Board) • Falling back over last 10 years • R&D/GDP 2010: 1.77%, no 8; (1995: 1.91%, no 6) • Weak in firm research; low number of innovators • Business profits, government expenditure of about 50% of GDP are not used for research, innovation.

14. R & D in UK much lower than military spending S: Eurostat, SIPRI Military Expenditure Database.

15. Low and declining R&D ratio in UK

16. Share of manufacturing in GDP strongly decreasing (at current prices) EU15 UK Germany 2008: 13.8% 9.2% 19.9% 2010: 13.2% 8.9% 18.7%

17. Why manufacturing is important -Ranks for industrial base and performance after crisis

18. Business is saving, government is spending

19. Fiscal balances – Household sectorLabour share in income low, consumers indebted

20. Financial balances – financial sector Who saves most, why?

21. Outline • The goals of the European Society • Status of United Kingdom as of 2012 • Specific problems to be addressed • Policy change needed (incl. Industrial Policy) • Real change for Europe and the United Kingdom

22. Policy for the UK – seven priorities • Education (from lowest to highest)/Innovation (R&D) • Reshifting resources from finance to manufacturing • Making firms use profits for investment (incl. intangibles) • Bringing youth back to work • Looking for successful clusters • Foster sustainability and raise exports • Social innovations (organization, lifelong learning, health).

23. Industrial policy past/future • Past: isolated policy • Sectoral/horizontal; picking winners • Conflict with competition policy; shielding from competition • Future systemic, fitting to the targets of society • Married with innovation and education policy • Building on comparative advantages, but one step ahead • Supported by external and domestic competition.

24. The Systemic Industrial and Innovation Policy (SIIP) in a nutshell Pulling forces Vision of a new growth path (welfare beyond GDP) Societal goals (health, climate, social cohesion) Excellence in specific technologies (e.g. energy) ) IIP Procure - Competition Policy ment Industrial Innovation Trade Education Policy Policy Policy Internal Regional Market Policy Pushing forces Competition, openness and globalization Activated, trained and retrained labor force ( flexicurity ) Competitive advantages (supported by policy ) Climate change, ageing

25. Five instruments of SIIP for UK • Promoting business starts: industry, software parks, spinoffs • Less administration & less taxes • Industrial Funds: not state owned but state procured via tendering to existing bank • Marginal tax credit so that firms use profits for increasing investment (incl. intangibles); not saving • Cluster policy plus upgrading and social/ecological goals • Areas of excellence with specific emphasis on competition (subsidies for 3 or more firms, never for one champion).

26. The best environment for a new industrial policy I • Collective bargaining with elements of flexibility and contracts for change on firm level • Shift investment from large physical projects to smaller ones and business starts • Reduce fiscal drag for 2 years against promise to cut expenditure automatically in recovery • Rescind some reduction in shovel ready programs: schools, universities, social housing • Reduction of low VAT, increase of 3rd VAT on luxury goods • Reduction of compulsory insurance for people < 25.

27. The best environment for a new industrial policy II • Readdress distribution issue (wage rate and dispersion) • This reduces debt, welfare bill and increases consumption • Looking for elements of the Nordic socio-economic model • Connect welfare payment with learning, innovation in kindergarten and schools * • Tax financial transactions (from full FTT to double stamp tax, taxing short run transaction of banks) • Decide to be active part of Reformed Europe, instead of twinkling to US and complaining isolation from former Empire.

28. Definition of UK’s role in EU • Positive definition needed: “extended home market” in globalization • Go for a double track integration model with trend • Make better rules for and more coordination with Euro outsiders * • Honest assessment of role of national states in globalized world 2050 • UK had produced 7% of world output 1950, 3% 2010, 2% 2030 • Europe including neighbors may achieve a constant share of 30% • European integration and extension will go on: with or without UK * • UK wants to have a say in EU, but not to comply with decisions.

29. Share of UK and Europe in world GDP

30. Outline • The goals of the European Society • Status of United Kingdom as of 2012 • Specific problems to be addressed • Policy change needed (incl. Industrial Policy) • Real change for Europe and the United Kingdom

31. Real change for Europe needed • More dynamics, externally (extension) and internally • Lower unemployment, lower disparities, and disequilibria • Higher share of wages and investment into real sector • Leading in education, innovation, gender equality • Leading in energy efficiency, clean technologies • Changing from GDP to Beyond GDP as benchmark of success.

32. WWWforEurope: a new growth path • The vision: transformation of Europe • The goals: more dynamic, social sustainable • One driver of change: a systemic industrial policy * • The horizon: 4 years • Firsts tasks: • European governance • Solving problems of periphery.

33. Real change for UK • Boost investment and manufacturing • In a competitive environment • Develop UK 2030 and Regional Visions 2030 • Improve education (specifically at lower end) • Vocational training, lifelong learning • Become a leader in innovation (firm based, SME and clusters) • Increase wage rate and decrease dispersion • Instead of fostering household debt •  Social and environmental innovations chance and not costs.

34. Real change will not work if … • Financial sector larger than manufacturing/ • Less regulated/less taxed/high bonuses, attract best human capital * • Government expenditure more than half of GDP • High taxes on work and real sector • financial transaction not taxed * • Business firms accumulate surpluses and are net lenders • But do not invest • Military spending is higher than R&D • UK-exceptionalism (besides that of US, F, D).

35. UK and Europe • An attractive role for UK in EU is necessary • Without Europe the role of UK in globalizing world evaporates • Europe incl. Neighbours: 30%, UK: today 3%, 2050: 2% • European integration makes and regional conflicts obsolete • Isolation, looking for US or lost empire is no alternative *) • Cooperating with new neighbors from North Africa to Black Sea • UK alliance with neighbors to create a wider EU is a chance.

36. Industrial policy: An essential element of a new strategy The quest for growth: ideas for a new political economy and a more responsible capitalism Conference: London, September 6th, 2012 Karl Aiginger H:user/aig/vortrag/Industrial_Policy_London_PolicyNetwork_2012.ppt

37. Wage share in income: low and declining (dispersion increasing; GINI) EU15 UK 1991: 69.4% 77.5% 2011: 68.1% 70.8%

38. Income distribution in UK • Wage share no 16 and decreasing • Gini 25th and increasing inequality • Poverty 22 and decreasing up to 2005 • 80:20 income ratio 26 S: Stylized facts on the interaction between income distribution and the great recession Prepared for the NERO meeting of OECD in Paris on June 18th

39. Financial balances in UK

40. Financial balances – business sector

41. Financial balances – government

42. Globalisation not seen as a great opportunity – compared with Nordic countries Question: Globalisationis an opportunityforeconomicgrowth

43. Euro zone: better but not good