«Original citation: Owen, Geoffrey (2012) Industrial policy in Europe since the Second World War: what has been learnt? ECIPE Occasional paper, 1. ...»
As for the European Commission, the relaunch of the Lisbon agenda in 2005 was followed by several initiatives aimed at encouraging European industry to exploit new technological opportunities. Although the Commission supported some expensive projects such as Galileo, the satellite navigation programme, and Iter, the nuclear fusion reactor, much of its activity was devoted to improving the environment for entrepreneurial firms in high-technology industries. Two particular areas of attention was the absence of a unitary patent in Europe, which increased the cost of protecting intellectual property compared to the US, and public procurement.
The Commission continued to support collaborative research, launching a series of Joint Technology Initiatives in such fields as innovative medicines, computing systems (the Artemis project) and nanoelectronics; all these were joint ventures between the Commission and the relevant industrial sector. The Commission also launched a “lead market” initiative, identifying markets which had high growth potential and in which European companies were well placed to compete. The first six were eHealth, protective textiles, sustainable construction, recycling, bio-based products and renewable energy.187 Some of these programmes were brought together in a revised version of the Lisbon strategy which was launched in 2010. Known as Europe 2020, it was made up of several “flagship initiatives”, one of which was “an integrated industrial policy for the globalisation era”. As with the Lisbon agenda, the main goal was to improve the framework conditions for European 44 No. 1/2012
ECIPE OCCASIONAL PAPERbusiness in a way that would be more conducive to innovation. But it was recognised that general policies – for example, in the area of standardisation or patents – affected different sectors in different ways, and that industrial policy was more likely to be effective if it took account of these sectoral differences. This has been described as the matrix approach, based on an understanding “that the effects of broad horizontal measures can vary significantly from industry to industry, that competitiveness needs specific policy mixes for specific sectors, and that some sectors may require complementary measures that are not necessary or relevant in other sectors”.188 Whether Europe 2020 will be more successful than Lisbon will depend much more on decisions taken in member states than on the activities of the Commission itself. As things stood at the end of 2011, when this paper was written, European governments were too preoccupied with the future of the euro and the weakness of the financial sector to devote much attention to industrial policy. But the issue of industrial competitiveness, and what governments could do to enhance it, remained a matter of pressing concern, both in Brussels and in national capitals.
5. CONCLUSION The events described in this paper throw up some clear lessons about what governments should not do in the field of industrial policy. What they should do is a more difficult question to answer.
Most of the errors relate to the first phase, between the 1950s and 1980s, although some of them were still being committed in the second. They stemmed from an exaggerated belief in the ability of governments to identify and correct market failures, and the consequent tendency to substitute the judgement of politicians and bureaucrats for that of entrepreneurs and business managers. There was also a failure to recognise that medium-sized European nations could not realistically expect to compete in all major industries and technologies.
Attempts to create competitive advantage through government direction and support were generally unsuccessful, while intervention in distressed industries, to arrest the decline or to make it less painful for employees, served little purpose other than to delay the shift of resources to more viable sectors.
Of the three large European countries discussed in this paper, the UK made the worst mistakes during the first phase, and suffered accordingly. The best performing economy was that of West Germany, where the use of interventionist policies was too limited to cause much damage. France’s experience was mixed, with expensive failures such as the Plan Calcul offset by some successes as in nuclear power and telecommunications. A weakness in French policy was the preoccupation with national champions, which created some strong companies but had a distorting effect on the allocation of resources.
The second phase, from the 1980s to the early 2000s, saw a shift away from selective intervention towards horizontal policies. The creation of a more open and more competitive European market, with stricter prohibitions on the ability of governments to protect and support their national companies, put pressure on firms to raise their productivity and to concentrate on businesses where they could earn an adequate return. The restructuring of European industry was also influenced by fiercer international competition, and by changes in the capital markets - more demanding investors, more hostile takeovers and more focus on shareholder value.
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ECIPE OCCASIONAL PAPERThe drive for a more integrated market has undoubtedly improved Europe’s economic performance. According to European Commission estimates, the first two decades of reform generated a permanent rise of about 2 per cent in the level of EU GDP and boosted employment by just under 1.5 per cent. But, as the OECD noted in 2009, these benefits were less than half of what could be achieved if the single market was to be completed more fully.189 This applies particularly to services, where the barriers to intra-European competition remain unnecessarily high. It is paradoxical, as a recent report from the European Commission has pointed out, that the principal beneficiaries of the single market programme have been manufacturing companies even though the manufacturing sector accounts for an ever smaller share of the European economy. Providers of services, by contrast, continue to be hampered by national restrictions. “For instance, the innovative small digital-services companies cannot access the single market and therefore have great difficulties in growing. They usually introduce their innovations in their national market first and then move to the US because the cost of accessing the US market is no more than the cost of accessing other national markets in Europe. This is creating large costs for Europe.”190 As David Encaoua among others has argued, part of the reason for Europe’s productivity lag vis-à-vis the US, and for the technology gap, is that the creative destruction process – the replacement of old firms by new ones, and the shift of resources from slow-growing to fastgrowing sectors – is slower in Europe than in the US.191 In high-technology industries, in particular, the US has a larger number of innovative small- and medium-sized enterprises, some of which grow to challenge and displace the incumbents. The solution, in Encaoua’s view, lies not only in a more vigorous competition policy but also in a range of other supplyside measures including labour market reform and a strengthening of the higher education system.
Selective industrial policy is not part of that reform agenda. Others take a different view, arguing that, in the face of competition from China and other emerging economies, sectorbased policies can play a role in strengthening European industry. In a recent paper three European economists call for an end to the “laissez-faire complacency” which, in their view, has led several countries to allow the uncontrolled development of non-tradable sectors, especially property, at the expense of tradable sectors.192 European authorities, they believe, have underestimated the danger of a specialisation whereby the most advanced countries concentrate on upstream R & D and services, while outsourcing everything else to emerging economies. The concept of sectoral industrial policy should be revisited, but without repeating the mistakes of the past. Sectoral aid should not seek to create European champions but should be allocated evenly within the targeted sector, rather than to one or several pre-selected firms.
How should the sectors be chosen? This question is at the heart of the industrial policy debate. Ha-Joon Chang, drawing on the experience of Japan and other East Asian countries, emphasises the need for target industries to be selected “realistically”, in the light of each country’s technological capabilities and world market conditions; the success of East Asian countries such as South Korea owes a lot, in his view, to the fact they did not try to make too big a leap.193 These economies were in a catch-up stage and thus in a different situation from the advanced countries of Western Europe. But Chang believes that even in a frontier economy there are industries that firms do not enter because of high entry costs, and government support can play a critical role. He instances the Airbus as an example of what a well-executed industrial policy can achieve.
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ECIPE OCCASIONAL PAPERMany people in Europe, especially in France, would like to see the Airbus model replicated in other industries194 When the A380, the super-jumbo airliner, was unveiled in Toulouse in 2005, President Chirac hailed the Airbus as a triumph for European industrial policy. “Let us pursue the success of Airbus on other fields” he said. “Let us achieve the same outcome for the energy of the future, for tomorrow’s transport and telecommunications, for the medicines of the future. Let us do it together, with a truly European ambition”.195 No one could dispute that the Airbus project is a remarkable demonstration of European industry’s ability to match the US in an exceptionally demanding sector. Yet it has been immensely costly to the European taxpayer, and the gains to consumers have probably been quite modest.196 Moreover, as Paul Seabright has pointed out, the economic and technical characteristics of the aircraft industry make the Airbus a special case.197 Fixed costs of production are very high, as are economies of scale; variable costs fall sharply as the volume of production increases. Unlike some other high-technology industries such as computers, customer requirements are relatively easy to define, and relatively stable. As Seabright notes, “designing new aircraft is largely a matter of throwing money at the challenge of carrying a given number of passengers for a given distance at reasonable speed and safety and minimum fuel cost. Paradoxically, this is one of those industries where an open cheque-book....may actually be a recipe for success.” Another European industry from which more useful lessons can be learned is mobile telephony. As noted earlier in this paper, the creation of the GSM standard created a Europewide market in mobile communications and generated substantial benefits for consumers in the form of better quality and lower prices. One of the winners from that process was the Finnish company, Nokia; until its recent troubles Nokia has been regarded as one of Europe’s few successes in high technology. Yet, as Christopher Palmberg and Pekka Ylä-Anttila have explained, the rise of Nokia was not the result of a government master-plan, or of “picking winners”. What the Finnish government sought to do during the 1990s was to create an environment which would encourage investment in knowledge-based industries, especially those linked to information and communications technology. The government focused on education, R & D and innovation with the overall aim of making Finland an attractive location for internationally competitive firms. This involved an increase in public spending on R & D and an enhanced role for the National Technology Agency (an arm of the Ministry of Trade and Industry) in setting up technology programmes in government laboratories and in industry; the agency also promoted partnerships between public research institutes and the private sector.
An important lesson is that policies towards industry must be consistent over the long term and not dictated by short-term cyclical or political considerations. As Palmberg and YläAnttila conclude, “it is our overall judgement that the Finnish policies were able to find a proper balance between activism and non-interference. The role of government was to act strongly enough where the market was not working, i.e. in R & D and education, and to create and communicate a common vision of future national strengths without intervening too much in the functioning of markets”.
A consequence of the Finnish government’s policies, as these two authors acknowledge, is that Finland may have become too dependent on the ICT sector and on Nokia in particular.
“The central policy challenge today is to find an appropriate balance between a strong focus on ICT on the one hand and a diversified industrial base on the other”. Nokia itself has been struggling in recent months to adapt to unexpected changes in its market; its slow reaction
to the threat posed by “smartphones” from Apple and other suppliers led to a sharp fall in the company’s share price and raised questions about its future.