Why Is Lisbon Failing

1
Why Is Lisbon Failing?

• Charles Wyplosz
• Graduate Institute of International Studies,
  Geneva
• and CEPR
• Zermatt Symposium, August 2005

2
Why Lisbon?

• General perception that Europe is failing
• Observation that some countries successfully
  reformed themselves
• Spread good practice
• Learn from each other
• Name and shame

3
Many problems with that idea

• Do we know whats wrong in Europe?
• Are reformers successful?
• Can reforms be emulated?
• Is Lisbons the right recipe?

4
Whats wrong in Europe?
Source Groningen Growth and Development Centre
and the Conference Board
5
The tempting interpretation

• Labor productivity
• Easy interpretation
• Labor costs discourage hiring
• Labor costs choke productive investment
• Labor market regulation makes it worse
• Need reforms

6
The labor productivity collapse
Source Groningen Growth and Development Centre
and the Conference Board
7
End of story? Not too fast! Look at reformers
Source Groningen Growth and Development Centre
and the Conference Board
8
End of story? Not too fast! Look at different
measures
Source Groningen Growth and Development Centre
and the Conference Board
9
Whats going on?

• Many pitfalls in the story
• Fallacy of causality
• High productivity gains allow to raise wages
  without raising labor costs
• High wages require an increase in productivity

10
Fallacy of causality
SourceOECD
11
Whats going on?

• Many pitfalls in the story
• Fallacy of causality
• High productivity gains raise labor costs
• High labor costs raise (apparent) productivity
• Former raises growth, latter lowers growth

12
Whats going on?

• Many pitfalls in the story
• Fallacy of causality
• Fallacy of measurement
• Labour costs much more than wage costs, direct
  and indirect
• Labor regulations matter

13
Whats going on?

• Many pitfalls in the story
• Fallacy of causality
• Fallacy of measurement
• Fallacy of composition
• The big picture hides all-important details
• Some sectors do well, others stagnate or regress
• Wrong specialization low growth potential

14
So what happened in the 1990s?

• Employment (rates, hours)
• Prof. Gordons story ICT
• Not in production
• Adoption
• Not in industry, really
• In services, chiefly retail and wholesale trade
• Lack of competition in services (70 of GDP)
• Regulation
• Land-use restriction

15
The Lisbon Strategy

• The Kok Report
• Lisbon strategy is failing
• Unrealistic objectives
• A mess of targets, instruments, indicators
• No ownership peer pressure does not help
• A bureaucrats dream

16
A bureaucrats dream
17
Deeper reasons for failure

• Labor market reforms no role for EU
• Productivity enhancement no role for EU
• Implementation of Single Market overlooked
• Research always good but misses the point

18
Labor markets no role for EU

• Home-made distortions
• Different distortions in different countries
• Competition strengthens incentives to remove
  distortions
• Lobbies interests (unions) are aligned
• EU has no legitimacy to act in this area
• Can the Lisbon strategy reinforce incentives to
  reform?
• Peer pressure becomes peer protection

19
Raising productivity no role for EU

• Productivity per hour high in manufacturing, low
  in services
• Competition sets the incentives right
• Use the Single Market
• The Bolkestein saga
• Defense of national/European champions

20
Research and development

• Europe lags in many fields
• Why?

21
Research and development

• Europe lags in many fields
• Europe spends less

22
Research and development

• Europe lags in many fields
• Europe spends less. Why?
• Wrong industries?
• Spends in the US?
• No partners in universities?
• Poor quality
• Poor incentives
• Restrictions

23
Two thoughts on RD

• Need top universities
• Lack of competition, but Bologna
• No European market for researchers
• Public money with wrong allocation/controls
• Mix-up education and research
• Would it matter a lot?
• No scientific gap but brain drain
• Only a matter of specialization, second order
  now, but in future?