enterprise and industry directorate general european commission eu’s economic reform challenges -...
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Enterprise and Industry Directorate General
European Commission
EU’s economic reform challenges - European Competitiveness Report
2006
Gert Jan Koopman, Director for Industrial Policy and Economic Reforms
Brussels, 1 December 2006
European Competitiveness Report 2006 2
The Competitiveness Report
• The European Competitiveness report is an annual publication produced since 1997, at the request of the Council (Resolution of 21 November 1994). This is its 9th edition.
• It is an analytical paper. It examines key developments and factors that explain competitiveness -and are relevant to policy- from the point of view of economic theory and empirical research.
European Competitiveness Report 2006 3
The Competitiveness Report
• The 2006 Report has been redesigned to serve the analytical foundations of the microeconomic pillar of Lisbon strategy. This brought it closer to the policy agenda.
• It reviewed a number of reforms:– Liberalisation of energy markets;– Business environment and better regulation;– Financing of innovation;– Designing innovation policies taking into account the lead markets
concept.
• and the competitive position of two industrial sectors:– the producers of Information and Communication Technology goods
and services; and– The pharmaceutical industry.
European Competitiveness Report 2006 4
Structure of presentation
I. Facts on EU growth and productivity performance
II. Key policy challenges: innovation, energy, business environment
III. Competitiveness of EU manufacturing sectors
European Competitiveness Report 2006 5
I. Recent economic performance: GDP and productivity growth
European Competitiveness Report 2006 6
EU-25 growth: contributions of employment and labour productivity
Note: The two components sum up to the average annual GDP growth rate in the respective periods. Data source: European Commission (AMECO).
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1990 - 1995 1995 - 2000 2000 - 2005 2005 2006f 2007f 2008f
%
Labour productivity
Employment
European Competitiveness Report 2006 7
Productivity levels by Member State
Note: Labour productivity defined as GDP per employed person.
Data source: European Commission (AMECO).
0
20
40
60
80
100
120
140
160
Austri
a
Belgium
Cypru
s
Czech
Rep
ublic
Denmar
k
Estoni
a
Finlan
d
France
German
y
Greec
e
Hunga
ry
Irelan
dIta
ly
Latvia
Lithua
nia
Luxem
bour
gM
alta
Netherl
ands
Poland
Portu
gal
Slovak
ia
Sloven
iaSpa
in
Sweden
United
King
dom
EU-25 US
EU
=10
0
European Competitiveness Report 2006 8
Average growth of labour productivity by country, 2000-2005
Note: Labour productivity defined as GDP per employed person.
Data source: European Commission (AMECO).
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Austri
a
Belgium
Cypru
s
Czech
Rep
ublic
Denmar
k
Estoni
a
Finlan
d
France
German
y
Greec
e
Hunga
ry
Irelan
dIta
ly
Latvia
Lithua
nia
Luxem
bour
gM
alta
Netherl
ands
Poland
Portu
gal
Slovak
ia
Sloven
iaSpa
in
Sweden
United
King
dom
EU-25 US
% p
.a.
European Competitiveness Report 2006 9
II. Key policy challenges: energy
European Competitiveness Report 2006 10
Electricity markets in the Member States
Source: European Commission report to the Economic Policy Committee, October 2006.
Quantity of active generators and
suppliers
Industrial price level Degree of interconnection
Austria Medium medium high Belgium Low medium high Denmark High medium high Finland High low medium France Low low medium Germany Medium high medium Greece Low medium medium Ireland Low high low Italy Medium high low Luxembourg Low low high Netherlands Medium medium medium Portugal Low medium low Spain Medium medium low Sweden High low high UK High medium low Estonia Low low high Latvia Low low high Lithuania Low low high Poland Medium low low Czech R Medium medium high Slovakia Medium medium high Hungary Medium medium high Slovenia Low medium high Cyprus Low high Malta Low medium
European Competitiveness Report 2006 11
Liberalisation of European energy markets Challenges and policy options
• The European energy markets have been going through a process of liberalisation since the early 1990s.
• Based on existing economic literature discussing both EU and non-EU experience, the Report presents an assessment of some of the effects of liberalising the European electricity and gas markets.
European Competitiveness Report 2006 12
Liberalisation of European energy markets Challenges and policy options
Liberalisation and efficiency• Liberalisation of energy markets will generate
efficiency gains if competition is increased.• As competition in energy markets is still limited,
we have not yet reaped the full benefits from liberalisation.
• Competition in energy markets will entice firms to shift their R&D efforts towards efficiency-enhancing technologies.
European Competitiveness Report 2006 13
Liberalisation of European energy markets Challenges and policy options
Liberalisation and security of supply
• Before liberalisation, security of supply was achieved by high level of overcapacity for which consumers paid the price.
• Less overcapacity will lower energy prices but could also lead to larger price volatility.
• Consumers can protect themselves through long-term fixed price contracts.
• The internal energy market will promote reliability of networks, provided that interconnections are sufficient.
European Competitiveness Report 2006 14
Liberalisation of European energy markets Challenges and policy options
Liberalisation and environment
• Impact of liberalisation on environment ambiguous as aggregate effect can be positive or negative, depending also on initial conditions.
• Liberalisation can strengthen the effect of market based environmental instruments such as the European Emissions Trading Scheme.
European Competitiveness Report 2006 15
II. Key policy challenges: business environment
European Competitiveness Report 2006 16
The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from
empirical researchEffects of product market reforms (PMR):• Product market reforms in OECD countries over the period 1985–1995 contributed to an increase
of 0.2 – 0.3 percentage points in total factor productivity growth in the long run;• Moving to US levels of regulation in the EU would lead to a labour productivity growth rate
increase of 0.15 percentage points in the long run;• Regulatory reforms aligning the overall regulatory stance with that of the most liberal OECD
country could increase the annual rate of total factor productivity growth in continental EU by between 0.4 and 1.1% over 10 years.
PMR facilitating firm entry• Entry liberalisation in service would boost annual multi-factor productivity growth in the overall
business sector by about 0.1 to 0.2 percentage points in certain countries. Indirect effects would boost manufacturing annual productivity growth by 0.1 to 0.2 percentage points in certain European countries, most notably Germany, France, Italy and Greece.
• Increasing the current firm entry rate by one percent lead to an increase in labour productivity by 0.60% and an increase in employment growth of 2.67%.
• A 1% increase in the entry rate leads to an increase in output, employment and labour productivity growth rate of 2.2%, 2.7% and 0.6% respectively A 1% increase in exit rate reduces output growth rate of 0.8% (one year lag), while increases labour productivity growth by 0.7% (2-year lag)
• Reducing the level of state control and entry barriers to entry to the best OECD practice would Increase long-term employment rates by between 1.3 and 2.5 percentage points (lower-bound estimate).
European Competitiveness Report 2006 17
The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from
empirical research -2PMR enhancing competition• Product markets reform aiming at increasing competition would lead to a GDP
increase of about 2% in the medium run (acceleration of output growth by almost a quarter of a percentage point annually over a period of 7 to 8 years).
• Competition-friendly product market reforms reducing the price-mark-up in the euro area by 10 percentage points would produce a long term increase in the GDP level in the euro area of 4.3%.
• Product market reforms reducing the price mark-up in the euro area to US levels would bring a GDP level increase in the euro area of 8.6% (relative to its baseline level) in the long run.
Reduction in administrative costs• A reduction of 25% in administrative burdens in the EU would lead to a real GDP
level increase of 1% in the short run and a real GDP level increase of 1.4% in the long run.
European Competitiveness Report 2006 18
The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from
empirical research –an exampleThe Ease of Starting a Business and Per Capita GDP
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
Starting a Business
Source: European Commission calculations on the basis of data from the World Bank “doing business” database.
European Competitiveness Report 2006 19
The Regulatory Environment in the context of the strategy for Growth and Jobs: findings from
empirical research –an exampleCumulative GDP effects by 2025 of a 25% reduction in administrative costs (DG ENTR
and CPB, 2006)
0
0.5
1
1.5
2
2.5
3
Pe
rce
nta
ge
of
GD
P
European Competitiveness Report 2006 20
The Regulatory Environment in the context of the strategy for Growth and Jobs
Situation in Member States: • Different sets if indicators: OECD, WB, ID, Fraser
Institute/World Economic Forum;• The group of countries with less restrictive
regulatory environments: Cyprus, Denmark, Estonia, Finland, Ireland, Luxemburg, the Netherlands and the UK;
• The group of countries with a more restrictive regulatory environment comprises the Czech Republic, Greece, Italy, Lithuania, Poland, Portugal and Spain.
European Competitiveness Report 2006 21
The Regulatory Environment in the context of the strategy for Growth and Jobs
National efforts, in terms of setting up:• explicit Better Regulation strategies;• Impact assessment systems• Simplification programmes;• Systematic consultation of stakeholders;• Programmes for measuring and reducing administrative
costs. Conclusion: we are at the beginning of a long process.
Those starting from a less favourable position should do more.
European Competitiveness Report 2006 22
II. Key policy challenges: innovation
European Competitiveness Report 2006 23
The Financing of Innovation
The rationale for public intervention:• Limited appropriability of innovation
– Response: direct subsidies and fiscal incentives
• Imperfections of the capital markets: (information asymmetries, adverse selection and moral hazard).– Response: business angels, venture capital, loans and
guarantees.
• The chapter looks at what MS propose to do (in their NRPs) and draws conclusions on possible policy gaps.
European Competitiveness Report 2006 24
The Financing of Innovation – the findings
0
5
10
15
20
25
Fiscalmeasures
Directgrants
Businessangels
Venturecapital
Loans
• Wide variation on delivery mechanisms for grants and tax incentives;
• New measures favour tax incentives more;
• Particular attention to seed and early stage venture capital;
• Schemes change frequently and often are complex.
No.
of
Mem
ber
Sta
tes
European Competitiveness Report 2006 25
The Financing of Innovation
Policy gaps:• Need to facilitate venture capital mobility;• More consideration should be given to facilitate
debt finance of innovation;• There is scope for mutual learning and exchange of
best practice;• Need for more systematic evaluation of existing
measures. Not to forget: finance is an important but small
part of the innovation process.
European Competitiveness Report 2006 26
The Lead Markets approach in Innovation policy
• Objective: What is a lead market? Is there a case for policy intervention? If yes, through which mechanisms?
• Varied meanings of the term in economic literature.
• Most common definition: the market where an innovation is first widely used that later becomes successful internationally regardless of where that innovation was invented
European Competitiveness Report 2006 27
Lead Markets: stylised international diffusion pattern of an innovation design (source: ZEW)
0
10
20
30
40
50
60
70
80
90
100 Penetration ratein percent
Lead market
Lag markets
t
European Competitiveness Report 2006 28
Lead Markets: diffusion of Internet in selected countries (source: ITU)
0
100
200
300
400
500
600
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03
France
USA
Germany
User per 1000 people
Japan
European Competitiveness Report 2006 29
The Lead Markets approach in Innovation policy: conclusions
• The conclusion of the Report is that innovation and technology policies should incorporate those factors that contribute to a successful lead market strategy:– incorporation of foreign market needs, preferences of
global customers, global trends;– emphasis on lowering costs of production;– allowing competition among different innovation
designs.• There is little empirical evidence in support of
policies to administratively create lead markets for specific “champion” products and technologies.
European Competitiveness Report 2006 30
III. Competitiveness of manufacturing sectors
European Competitiveness Report 2006 31
Manufacturing sectors in EU-25 with highest production growth in 2001-2005
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Recycling Chemicals andchemical products
Motor vehicles,trailers and semi-
trailers
Medical, precisionand opticalinstruments,watches and
clocks
Food products andbeverages
Totalmanufacturing
% p
.a.
European Competitiveness Report 2006 32
Manufacturing sectors in EU-25 with steepest decline in production in 2001-2005
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
Office machineryand computers
Tobacco products Textiles Wearing apparel;dressing; dyeing
of fur
Tanning, dressingof leather;
manufacture ofluggage
Totalmanufacturing
% p
.a.
European Competitiveness Report 2006 33
Sectors in EU-25 with highest productivity growth in 2001-2005
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Chemicals andchemical products
Radio, televisionand
communicationequipment and
apparatus
Coke, refinedpetroleum
products andnuclear fuel
Pulp, paper andpaper products
Basic metals Totalmanufacturing
% p
.a.
European Competitiveness Report 2006 34
Sectors in EU-25 with slowest productivity growth in 2001-2005
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Furniture;manufacturing
n.e.c.
Recycling Wearing apparel;dressing; dyeing
of fur
Tobacco products Tanning. dressingof leather;
manufacture ofluggage
Totalmanufacturing
% p
.a.
European Competitiveness Report 2006 35
Sectors in EU-25 with strongest Revealed Comparative Advantage in 2004
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60
Machinery and equipmentn.e.c.
Publishing, printing,reproduction of recorded
media
Chemicals and chemicalproducts
Other non-metallic mineralproducts
Other transport equipment
RCA index
European Competitiveness Report 2006 36
Sectors in EU-25 with weakest Revealed Comparative Advantage in 2004
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00
Wood and products of woodand cork
Textiles
Wearing apparel; dressing;dyeing of fur
Radio, television andcommunication equipment
and apparatus
Office machinery andcomputers
RCA index
European Competitiveness Report 2006 37
The competitiveness of the EU ICT sector
The importance of ICT, direct:– In 2003, the ICT sector represented 3% of total EU25 employment and
4% of GDP. – In 2003, ICT services accounted for 70% of total EU25 ICT sector
employment, 80% of value added and for about 90% of its enterprises. – In 2003, the EU15 ICT sector contributed to 45% of total EU15 market
economy labour productivity growth.
• The importance of ICT, indirect:– ICT impacts on the rest of the economy through ICT investment, ICT
production and ICT use. ICT uptake is one of the major drivers enabling firms in the rest of the economy to increase their productivity and competitiveness.
– ICT capital contribution in EU15 amounted to 32% of total EU15 GDP growth between 1995 and 2004.
European Competitiveness Report 2006 38
The competitiveness of the EU ICT sector
Strengths…• The EU ICT sector is successful in producing
sophisticated and high-quality ICT products (scientific instruments, electronic components and telecommunication equipment).
• It is particularly strong in chip design, software development and ICT services.
• One of the key strengths of the EU ICT sector is its human capital.
• Strategic R&D is performed in the EU while less knowledge-intensive market oriented R&D is located in South-East Asia.
European Competitiveness Report 2006 39
The competitiveness of the EU ICT sector:export shares in ICT manufacturing industries 1995 and 2004 (percent).
0
2
4
6
8
10
12
14
16
18
20
Cyp
rus
Latv
ia
Slo
veni
a
Gre
ece
Lith
uani
a
Luxe
mbo
urg
Est
onia
Mal
ta
Slo
vaki
a
Por
tuga
l
Pol
and
Den
mar
k
Aus
tria
Spa
in
Cze
ch R
ep.
Fin
land
Bel
gium
Phi
lippi
nes
Italy
Sw
eden
Hun
gary
Tha
iland
Irel
and
Fra
nce
Mex
ico
Uni
ted
Kin
gdom
Net
herla
nds
Mal
aysi
a
Tai
wan
Kor
ea
Sin
gapo
re
Ger
man
y
US
A
Japa
n
Chi
na
ICT 1995 ICT 2004
EUEU
EUEU
EU
European Competitiveness Report 2006 40
The competitiveness of the EU ICT sector
…and weaknesses• The ICT manufacturing trade deficit was 55 billion
euros in 2004.• Large parts of ICT hardware production software
coding have been relocated to South-East Asia.• The ICT uptake in other parts of the economy is slower
than in USA and Japan.• Lower investment growth than in emerging economies
threatens lower value added activities in the EU.• Lower R&D intensity than US or Japan, R&D
concentrated in larger companies.
European Competitiveness Report 2006 41
The competitiveness of the EU ICT sector
Conclusions• The answer to the challenge from low-cost producers
lies in further climbing up the quality ladder.• Raising R&D investments of the EU ICT sector and
ensuring the availability of skilled labour will be crucial for the EU ICT sector’s future competitiveness.
• Policies that matter most for the EU ICT sector’s competitiveness include those fostering R&D and innovation, entrepreneurship, IPR, e-skills, ICT uptake and completing the Single Market (i.e. Growth and Jobs strategy).
European Competitiveness Report 2006 42
Pharmaceuticals
• A fast growing global market of around 450bn€ in 2005. Two major players:– US market: a little less than 50%– EU: around 30%
• In both markets, production, employment and productivity are rising.
• Moreover, the EU has a positive and growing trade balance while the US turned negative, especially with the EU.
• US investments in the EU explain these trends.
European Competitiveness Report 2006 43
Pharmaceuticals
The bad news
• the pharmaceutical innovation system becomes global and is increasingly dominated by the US:
– Increasing share of US held patents;– Increasing value of US patents (on basis of
citations);– Central US position in collaborative R&D
projects.
European Competitiveness Report 2006 44
Pharmaceuticals
The bad news (continued)• The central role of smaller, dedicated
biotechnology firms in the innovation system: Much more present in the US, both as initiator and developer, of collaborative R&D projects.
• The fast rise of China, Brazil, India in pharma R&D.
European Competitiveness Report 2006 45
Pharmaceuticals
Different market dynamisms – US market more concentrated and more
contested than EU: new drugs command much higher prices, when patents elapse –or more innovative drugs appear- prices drop abruptly;
– Product turnover much slower in Europe;– European markets remain fragmented by
different regulatory regimes; but,– A visible price convergence exists in the EU.
European Competitiveness Report 2006 46
Pharmaceuticals
Factors: • Parallel trade;
• regulation at national level;
• External reference pricing.
Lower price group: SP, PT, EL, EU-10.
0,2
0,4
0,6
0,8
1
1,2
1,4
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
GRC(□)ESP(○)
New Member StatesPOL LTULVA ESTSVK HUNCZE
POR(X)
DEN(-) BEL(■) LUX(+)ITA(◆ )IRE(◊)
DEU(◆ )AUS(∆)
FRA(◊) SWE(+) FIN(■) NET (+) GBR(*)
Price convergence in EU25, median prices, 1994-2004 (EU-15 average price = 1).
European Competitiveness Report 2006 47
Pharmaceuticals
Policy implications• Sector level: Pharmaceutical Forum
– Cost-containment policies and innovation;– Unifying effectiveness testing of drugs.
• Horizontal level: Strategy for Jobs and growth:– R&D; – Innovative entrepreneurship.