GOLDEN GROWTH
Notes
There are numerous studies that employ growth accounting approaches to understanding the components of economic growth in post war Europe. Some landmark studies include Denison (1967) and Maddison (1987). 2 In this picture, human capital formation plays only a small role and it is not clear whether this reflects the tendency of growth accounting to underestimate human capital or whether the already high-quality human capital that persisted in Europe at the start of this period left little room for further contribution to productivity. See Crafts and Toniolo (1996). 3 Eichengreen (1994) makes the case for the domestic and international institutional underpinning of postwar growth. 4 In a model fit with ordinary least squares: OVERALL PRODUCTIVITY GROWTH = 3.1 – 2.6 EMPLOYMENT PROTECTION INDEX (t = –2.0), where higher values on the employment protection index reflect higher levels of protection. 5 In a model fit with ordinary least squares: OVERALL PRODUCTIVITY GROWTH = 4.7 – 1.2 PRODUCT MARKET REGULATION INDEX (t = –2.4), where higher values on the regulation index reflect more stringent regulation. 6 The term “afterglow” is here adapted from some political science literature to refer to institutions and obligations that governments continue to support even after such policies may no longer appear rational. For other applications of the term and concept see Lake (1993). 1
European model that led to higher employment protection probably prevented the development and exploitation of new technology. Higher employment protection correlates with lower overall productivity growth and ICT deepening (figure S1.7).4 Employment protections may deter investment in ICT equipment because practices central to developing this technology—such as flexible working and hiring practices—are more expensive (Gust and Marquez 2004). The higher-performing Western European economies that regulated their labor markets more lightly (Finland and the United Kingdom) generated large ICT-related productivity gains. In Finland, these effects were even larger than those in the United States. Likewise, heavy-handed general product regulation may deter ICT capital investment, either directly or through a more general increase in costs.5 Some of the Eastern European countries without the legacy of the Western European model were able to start from scratch and better exploit ICT (figure S1.8). Prospective EU member states should take note.
Afterglow The nexus of political institutions and market practices that developed in Europe after World War II lifted the continent to the heights of global prosperity. European integration not only headed off conflict, but also anchored trade and factor liberalization that bound Europe and brought the world together. Modern Europe’s most attractive feature may be the prospects it offers poorer countries. The European economic model has served as a “convergence machine,” taking in low- and middle-income countries and helping them become high-income countries. The machine can even count the currently troubled EU15 southern states among its successes (figure S1.9). The European convergence machine continues to anchor productivity-enhancing reforms and policy integration across Europe and even into Central Asia. But this machine cannot continue to deliver rapid growth and improved quality of life in the advanced economies of Western Europe. European policymakers have assembled protocols and commitments to encourage more innovation and dynamism. Yet, the policies at the center of Europe’s postwar growth model are not flexible enough for European economies to benefit from the technologies that supported high productivity growth in the rest of the world over the last 15 years. As Crafts and Toniolo (2008) note, the problem is not that European product market regulation and employment protections became more stringent, they just became more costly. The Western European model so effective in supporting catch-up has created “afterglow” institutions that are hindering growth in a new era.6 In areas aspiring to become part of the machine—notably the Balkan states and the eastern partnership countries—Europe’s afterglow structures will probably not preclude the many benefits of greater economic union. And as ties to advanced Europe become stronger and more sophisticated, the afterglow structures may not prevent productivity gains in the new member states. By contrast, these legacy structures must quickly become more flexible in Western Europe. Convergence to a rigid core will soon lose its appeal. Bryce Quillin contributed this spotlight.
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