«EU INDUSTRIAL POLICY: ASSESSMENT OF RECENT DEVELOPMENTS AND RECOMMENDATIONS FOR FUTURE POLICIES STUDY Abstract Following disregard in the 1980s, ...»
Main policy challenges and guiding principles underlying the formulation of an industrial policy The prolonged economic and financial crisis in Greece has made industrial policy subject to several rounds of revision (see below). The main challenge for Greece has been to maintain competitiveness whilst adopting the Euro. The underlying cause for this is that following the breakdown of the Bretton Wood system in 1972, Greece resorted to devaluations of the drachma as a way to regain short-term competitiveness (Lazaretou, 2003). From a structural viewpoint this has left Greece in a very weak competitiveness situation that is too focused and reliant on price competitiveness and lacks an orientation towards the innovative potential of the country and its industry (EC, 2014).
The concentration of industry around the capital and the port of Piraeus has been one of the main challenges for industrialisation in Greece in the twentieth century. Greece has built a relatively successful base around the country’s tourism industry, which today is the main contributing factor to a positive trade balance in services (UN, 2013, WTO, 2014) and overall balanced trade. However, dependence on economic activities that are more vulnerable to crises and to exchange rate movements, such as tourism, has recently pushed Greece to consider measures of selective intervention aimed at reindustrialisation (OECD, 2011). Thus, traditional industries such as food and machinery have been on the rise during the crisis. Despite this, there has been a constant and quite significant decline in manufactured exports especially since 2009 (WB, 2014). The fastest growing export items during the crisis were natural resources such as oil, fish and agriculture (UN, 2013).
The country is in a situation where temporary measures are sought that can help to put momentum into building a stronger and more export-oriented manufacturing base.
Manufactured food products, pharmaceutical products, textiles and machinery for traditional industries such as food and textiles, are some of the areas that Greece can build on and seek to upgrade (WTO, 2014).
Principal measures and arrangements The most important measures of industrial policy are: 1. to reduce energy costs in Greek industries; 2. to enhance the business environment for entrepreneurs; and 3. to connect scientific research with the production side of the economy (GL Digest, 2012). For example, business sector R&D is among the lowest in the EU (OECD, 2010). Another important PE 536.320 93 EU Industrial Policy: Assessment of Recent Developments and Recommendations for Future Policies contemporary initiative concerns the introduction of spatially targeted and differentiated investment subsidies. This initiative was also followed up by the new Investment Incentives Law (see below).
Some of the above measures are implemented through the following investment
1. A general 100% tax break for all entrepreneurs irrespective of sector.
2. Regional cohesion aid for up to 70% of the investment (maximum allowance) (see also below).
3. Technological aid for up to 80% of the investment.
4. Youth entrepreneurship (20-40 years old) is supported by 100% of the investment and by up to €1 million for the first five years.
5. Large investors are subsidised by up to 60% of the investment.
6. Initiatives targeting the technological, administrative, organisational and business modernisation of existing enterprises are supported by up to 100% of the investment.
7. Partnership and networking initiatives leading to the formation of clusters (at least five or ten firms depending on the region) can also seek support for up to 100% of the investment (GoGreeceNow, 2014).
In short, very generous investment subsidies are available for almost any type of business investment, whereas tax incentives in Greece currently target only entrepreneurs.
The recent trends and initiatives related to industrial policy in Greece suggest that the country is seeking to align its policies with the horizontal policy stance of other EU countries, where the emphasis is on the areas of capital, land and institutions, related to entrepreneurship policies and alleviating barriers to finance among SMEs.
If policy has been selective in Greece it has been towards activities within the areas of technology and energy in particular.
Example of a relevant policy initiative Greece’s new investment incentive law includes a plan for regional cohesion. Given that Greece has been a long-term recipient of EU Structural Funds since becoming a member of the EU in 1981, this should be seen rather as a revised version of old cohesion plans and investment subsidies than a new initiative (Filippaios and Kottaridi, 2004, see also OECD, 2011 for an initial assessment)).
Greece offers a graduated scheme by both investor size (small, medium and large) and by region (A, B and C development level). Subsidies through these two dimensions vary typically from 15% to 50% of the investment. The ceiling for maximum allowable public support is 70% of the total investment for re-investors and 80% for new investors. The target group for subsidies under this scheme is investors that address local needs or capitalise on local competitive advantages.
In relation to this initiative focusing on regional cohesion, Greece has applied to the EU Commission to be allowed to adopt a policy similar to the Polish and British, using special economic zones as leverage in the endeavour to attract more investment into the country.
However, it is uncertain whether the EU Commission will allow Greece to adopt the zones policy. It seems the present allowance discussed above towards regional cohesion and clusters is based on investment subsidies alone, whereas a tax incentive scheme as applied for would make public support a more permanent or built-in feature of the system.
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Despite the generous public support for investment in Greek regions, over time the results of the incentive schemes have often been quite modest (Filippaios and Kottaridi, 2004).
This also suggests that the current and revised plan for creating more regional cohesion with the new law of 2011 is likely to be futile unless it is combined with new and more radical plans for solving some of the fundamental problems of investors such as their need for transparency, rule of law and better provision of public goods including infrastructure (EC, 2014).
PE 536.320 95 EU Industrial Policy: Assessment of Recent Developments and Recommendations for Future Policies
REFERENCES EC (2013): State Aid Scoreboard 2013, DG Competition, The European Commission, Brussels, accessed on 16 October 2014, http://ec.europa.eu/competition/st ate_aid/scoreboard/non_crisis_en.html.
EC (2014): Reindustrialising Europe, Member States’ Competitiveness Report 2014, SWD (2014) 278, DG Enterprise and Industry, The European Commission, Brussels.’ EC (2014b): EU Cohesion Funding – Key Statistics, DG Regio, The European Commission, Brussels, accessed on October 16, 2014, http://ec.europa.eu/regional_policy/thefunds/funding/index_en.cfm.
ECPR (2014):State Aid: Commission Approves Greek Regional Aid Map 2014-2020, European Commission – IP/14/527, 7 May 2014, accessed on 13 October 2014, http://europa.eu/rapid/press-release_IP-14-527_en.htm.
Filippaios, F., & Kottaridi, C. (2004). Investment Patterns and the Competitiveness of Greek Regions. Review of Urban & Regional Development Studies, 16(2), 93-112.
GL Digest (2012): What is the Aim of the Investment Incentives Law?, Greek Law Digest, 27 April 2014, http://www.greeklawdigest.gr/topics/banking-system-financeinvestment/item/41-investment-incentives-law.
GoGreeceNow (2014): Doing Business in Greece, http://gogreecenow.com/ invest/doing-business-in-greece/, accessed 5 October 2014.
Lazaretou, Sophia (2003): Greek Monetary Economics in Retrospect: The Adventures of the Drachma, Bank of Greece Working Paper, no. 2, April 2003, OECD (2010?): Greece at a Glance, Policies for a Sustainable Recovery, Organisation for Economic Co-operation and Development iLibrary, document is not dated, http://www.oecd.org/greece/44785912.pdf.
OECD (2011): OECD Economic Surveys: Greece, Organisation for Economic Cooperation and Development iLibrary, August 2011.
OECD (2014): Statistical Profile of Greece, Organisation for Economic Co-operation and Development iLibrary, 9 September, 2014.
The Economist (2012): Government proposes introduction of ‘Special Economic Zones’, The Economist, 29 August 2012.
The Economist (2013): Daring to hope, fearing to fail, The Economist, 4 May 2013.
THETOC (2014): Inter-ministerial Committee to Discuss Greece’s Industrial Policy, The Times of Change, 31 July 2014, http://www.thetoc.gr/eng/economy/ article/inter-ministerial-committe-to-discuss-greeces-industrial-policy.
UN (2013): International Trade Statistics Yearbook, United Nations, Trade Statistics Division, New York.
WEFO (2014): The Global Competitiveness Report 2013-14, The World Economic Forum, Geneva.
World Bank (1975): Current Economic Position and Prospects of Greece, Report No.
810a-GR, November 17, 1975, The World Bank, Washington D.C.
World Bank (2014): World Development Indicators, The World Bank, Washington D.C.
WTO (2014): Country Profile: Greece, World Trade Organisation, March 2014, http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Country=GR&Language=S.
Main policy challenges and guiding principles underlying the formulation of an industrial policy During the 1950s and 1960s, the North of Italy faced a period of rapid growth – the so called “economic miracle” – during which the industrialisation process started. The leading instruments for Industrial Policy included state-owned enterprises, public holdings (in the 1950s) and a (government controlled) credit system in the 1960s (Rota, 2013). In particular, the development model in the South was characterised by the establishment of capital-intensive and large-scale (state-owned) industries (e.g. chemicals and metallurgy), which – due to their size and product specialisation – remained isolated entities and only in a few cases were able to create links with local SMEs. In the Centre-North the development of the mechanical and metallurgical industries allowed for a more diversified and balanced structure with small firms able to compete and cooperate thanks to a flexible organisational structure that facilitated their coordination, such as the district.
At the end of the 1960s dramatic changes affected the country in terms of the prices of labour, raw materials and energy. The South suffered most because of the inability of large firms to react quickly to external shocks. In contrast, the Centre-North was able to adapt to the new macroeconomic scenario thanks to the flexibility of the SME system.
In the 1970s while the other advanced European countries’ strategies and merger alliances were creating large conglomerates able to compete in the oligopolistic European markets, the priorities of Italian industrial policy were to support firms in crisis and to enlarge the sphere of public sector intervention. This approach also continued in the 1980s.
In the 1980s and 1990s, the indications of the EC (e.g., the creation of a competitive environment with minimal government intervention and horizontal measures) had a significant impact on the way in which industrial policy was formulated in Italy. The Italian productive system experienced a deep regulatory reform from the 1990s onwards, characterised by a large privatisation programme (Bianchi Labory 2011)81. Also, direct subsidies and state aid decreased over the period 2002-2011 by around 70% On this occasion, the Institute for Industrial Reconstruction (IRI) was closed down. It was founded by the fascist government in the 1930s and played the role of a holding, owning most of the industrial system.
(Di Maio, 2013)82 while the objectives pursued by state aid changed over the years, by shifting from supporting the accumulation of capital to promoting R&D and internationalisation activities.
The current approach recognizes different weaknesses of the industrial system that should
1) the size of firms: Italy has a strong prevalence of micro-companies of fewer than 10 employees (46.1% of employment, compared to the EU average of 28.7%, see EC, 2013), a source of concern since firm size is strongly correlated with exportorientation and innovation.
2) the financial structure of SMEs, which are less capitalised than in other countries, a factor limiting SMEs dimensional growth and their capacity to make investments in new products and technologies.
3) the relatively underdeveloped Italian venture capital and private equity market, forcing SMEs to rely more on short-term borrowing than in other countries.
Principal measures and arrangements Only recently has a structured national vision for industrial policy been developed in Italy, with the “Industria 2015” programme. Launched in 2006, the programme has brought to the forefront some issues reflected in the communications and initiatives recently adopted by the European Commission, such as the central role of the manufacturing sector and of technological innovation, as well as the aggregation and the creation of networks. The two specific objectives of the Programme are: i) to develop industrial activities in the field of high technology; and ii) to upgrade and strengthen SMEs through research and technical development, reduction in costs, promotion of investments, and increase in size. The two main pillars of the strategy are: 1) the deregulation of the service sector (e.g. insurance companies, banks, distribution, etc.) with the objective of promoting more competition in those sectors and improving productivity, 2) a national innovation policy strategy whose objective is to coordinate the policies of each region and to create five areas of economic activity (see below). The “Industria 2015” programme makes use of three innovative instruments: 1) Projects for industrial innovation; 2) Networks of enterprises; 3) Innovative finance.