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 / Summer 2005 / Issue 39(originally published by Booz & Company)


Eurosclerosis Revisited

Michael J. Mandel, chief economist at Business Week, agrees that the tension between faster growth and greater income inequality puts politics at the heart of the New Economy debate. In Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think, he notes: “There’s a strong liberal antipathy to exuberant growth, which can be summarized by a simple syllogism. Technological change increases income inequality, increases insecurity, and erodes the power of skilled labor by automating or ‘deskilling’ jobs. Income inequality and insecurity are bad, and so is reducing worker power. Therefore technological change is bad.” Mr. Mandel also recognizes that the wage gap between the college-educated and the rest of the population has widened: “As information technology has pushed into the workplace over the past decade, it’s put a premium on people who are quickly able to learn new skills and figure out new ways to use the technology,” he writes. (For a complete review of Mr. Mandel’s book, see “Best Business Books 2004,” s+b, Winter 2004.)

If the politics of jobs disruption is difficult in the United States, it’s all the harder in sclerotic — and socially cohesive — Old Europe. However, the balance of political opinion in Europe may be shifting in favor of economic reforms that strengthen European competitiveness, including promotion of ICT as a basis for growth. In theory, the EU has been pushing for high-tech growth since the Lisbon Summit in 2000. But the so-called Lisbon Agenda suffered from having so many policy “priorities,” from more jobs to a cleaner environment, that it allowed politicians to describe virtually anything they did (including nothing) as economic reform. Nearly halfway through the 10-year strategy, the Lisbon Agenda is widely recognized as a dead duck — and not just by European businesspeople chafing against the many public intrusions on private enterprise, but by politicians, too.

One signal of the shift in opinion toward a more growth-oriented agenda was the publication in mid-2003 of a significant report entitled An Agenda for a Growing Europe: The Sapir Report, commissioned by Romano Prodi, the former president of the European Commission. The group of experts he assembled, led by French economist André Sapir, were up-front about the problem others have cited: Europe has been growing more slowly than the U.S. because of much slower adoption of ICTs. If one combines this problem with the aging EU population and the effect of a shrinking work force on potential growth, the report argues, European leaders have no choice but to move beyond rhetoric declaring that “growth must become Europe’s number one priority.”

In that vein, the report is bold in giving short shrift to the widespread notion in Europe that the gap in economic performance reflects a preference for a different social model. Still, it recognizes the central political dilemma: the long-term benefits of technology-driven growth, including higher standards of living, will come only at the short-term cost of disruption in jobs.

The transatlantic gap in the adoption of information and communication technologies has been thoroughly documented by the Organization for Economic Cooperation and Development. A summary of its extensive research titled ICT and Economic Growth: Evidence from OECD Countries, Industries, and Firms was published in August 2003, although the group’s Web site has a number of more recent working papers. One indicator used in the report — the adoption rates of new technologies — shows how much businesses spend on new technologies. Between 1980 and 2000, the share accounted for by ICTs increased to 28 percent from 14 percent of total investment spending in the U.S. The U.K. saw an even bigger jump, to 22 percent from 5 percent of total annual business investment. But this contrasts sharply with Germany, where the proportion of investment spending on new technology rose a mere 5 percent, from 12 to 17 percent, and with France, where it rose from 6 percent to a paltry 13 percent share.

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Transatlantic Economic Trends Resources: Works mentioned in this review

  1. Dale W. Jorgenson, Mun S. Ho, and Kevin Stiroh, “Will the U.S. Productivity Resurgence Continue?” New York Federal Reserve, Current Issues, December 2004, Volume 10, Number 13; Click here.
  2. Frank Levy and Richard J. Murnane, The New Division of Labor: How Computers Are Creating the Next Job Market (Princeton University Press, 2004), 200 pages, $24.95
  3. Michael J. Mandel, Rational Exuberance: Silencing the Enemies of Growth and Why the Future Is Better Than You Think (HarperBusiness, 2004), 224 pages, $24.95
  4. André Sapir, Philippe Aghion, Giuseppe Bertola, Martin Hellwig, Jean Pisani-Ferry, Dariusz Rosati, Jose Vinals, and Helen Wallace, An Agenda for a Growing Europe: The Sapir Report (Oxford University Press, 2004), 208 pages, $95.00
  5. Organization for Economic Cooperation and Development, ICT and Economic Growth: Evidence from OECD Countries, Industries and Firms (2003), 104 pages, free; Click here.
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