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Five steps for closing the transatlantic productivity gap

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American companies embraced new information technologies 20 years ago, while Europeans are still hesitating. Bruno Maçães sets out a digital catch-up strategy.

The productivity gap between the United States and Europe has been widening steadily for 20 years. Labour productivity growth in the U.S. has accelerated from an annual 1.2% during 1973-1995 to 2.3% for 1995-2006. In the European Union, it declined from 2.4% to 1.5% during the latter period. Even if the two regions’ business cycles are not completely synchronised, the benefits they’ve derived from the Information and Communication Technologies (ICT) revolution clearly diverge.

Europe’s productivity slowdown is due to the later emergence and smaller size of IT investment in EU economies compared to the United States. In the U.S., productivity has grown faster than in the EU because of a larger share there of employment in the ICT producing sector, and faster productivity growth in services industries that make intensive use of ICT.

Post-World War II Europe had a relatively well-educated population and strong institutions, that favoured the rapid transfer and use of mainly U.S.-made new technologies. But since the mid-1990s, the patterns of productivity growth between Europe and the U.S. have changed dramatically. Labour market reforms meant that Europe’s labour input growth led to a decline in relative capital intensity. In the U.S. there was strong growth in industries producing information and communications technology equipment and a capital-deepening effect from investing in information and communications technology. In other words, for Europe the advent of the knowledge economy has been much slower.

EU governments should therefore use their array of policy levers, including tax, regulation, and procurement policies, to encourage greater ICT innovation

Since the onset of the financial and economic crisis in Europe, there has been widespread agreement that reforms are needed to boost the EU economy. GDP growth in the eurozone is stuck below 1%, unemployment above 11% and inflation is still falling, and at 0.3% in November 2014 was far from the European Central Bank’s 2% target. It is now dangerously near outright deflation. From a monetary standpoint, the ECB has been called to do its part by getting inflation back on track, but it cannot do everything on its own.

The importance of completing the Single Market for services and of reforming labour markets and social policies has been long emphasised by economists. But now we are being forced to seriously consider the possibility that growth will ultimately depend on encouraging the more widespread use of new technologies. Faster productivity growth will not only allow the EU to support a growing number of retired people without imposing higher taxes on those in work, but will also help maintain Europe’s global competitiveness.

Along with the EU’s productivity slowdown, there have also been low levels of investment. The EU is facing an investment gap that will hamper short-term recovery and long-term growth. The traditional catch-up and convergence model of the 1950s and 1960s has proved unsuccessful under some very different conditions, so it now appears that ICT’s increased adoption could become the key driver of productivity growth and an overall improvement in living standards.

Over the last decade, and with the encouragement of the European Commission, significant progress has been made by national governments with initiatives for improving productivity and competitiveness through ICT. The EU’s Digital Agenda is an example of how policy makers have tried to tackle the issue, but more work still needs to be done if suitable conditions for ICT investment are to be created.

First, EU governments must place productivity improvements at the core of their economic policies. There can be no negative relationship between higher productivity and job growth. The misguided argument that the more efficiently we work, the less work there is for workers to do must be abandoned. It is a view that fails to identify critical second order effects in which the savings from increased productivity are recycled back into the economy to create more demand that in turn creates more jobs. To improve living standards, EU governments must stop creating or maintaining inefficiencies through their neglect of ICT investment, and must instead engage in clear EU productivity enhancement policies.

Second, the EU should deepen the scope of its investments beyond ICT capital. Intangible capital may in many ways prove more important as it covers a broad spectrum of factors that include labour force skills, ICT training and institutional knowledge passed on across company divisions. Creating a skilled workforce and a school curriculum that has been designed in partnership with the ICT industry would help create the right environment for ICT investment.

Third, European institutions can actively support the digital transformation of industries through their own procurement of ICT products. The EU could purchase ICT goods and services in the early stages of development, and arrange with their suppliers training for officials to spur cooperation with the private sector. By doing so, the EU would address network externalities that exist in many sectors. The argument that ICT’s benefits will lead to externalities seems borne out by the concept of network effects and the notion that the larger the network the more valuable it becomes to individual users. EU governments should therefore use their array of policy levers, including tax, regulation, and procurement policies, to encourage greater ICT innovation and transformation.

Fourth, tax and trade policies can promote ICT by minimising the tax wedge on it. ICT investment by governments reduces costs and encourages the productivity effect. Trade policies can promote ICT adoption by providing expanded information and technology trade agreements, facilitating market access and increasing technological complementarities and knowledge spillovers.

Creating a skilled workforce and a school curriculum that has been designed in partnership with the ICT industry would help create the right environment for ICT investment

Fifth, European businesses would be better able to benefit from ICT if they could achieve larger economies of scale. Business leaders have called for a more flexible approach to labour, product, and capital markets as that could unlock growth and innovation. Reforms might include tackling obstacles to private investment, the bringing down of energy costs, lower taxes on labour and capital and a degree of harmonisation of corporate tax rules while making labour markets more flexible.

Deepening the European Single Market is crucial if resources are to flow to their most productive use and stimulate improvements in technology. Harmonising data protection laws across the EU would increase legal certainty for companies looking to invest in European markets, particularly in cross-border services. Removing administrative barriers to ICT service providers when they enter EU markets would help to simplify market entry, reduce investors’ costs and the inefficiencies that impede investment.

The investment plan announced by the incoming European Commission late last year could do much to drive this strategy, provided the projects selected exploit innovation for greater multifactor productivity growth. The projected Transatlantic Trade and Investment Partnership (TTIP) would expand market access for EU companies and will increase their return on investment on more ICT projects. Europe’s future economic competitiveness hinges on its ability to embrace the digital economy much more quickly. Now it is up to governments to set the right conditions. If they promote a political agenda for market reform, investment will follow.

 

This article first appeared in the Spring 2015 issue of Europe’s World. Reposted per author’s permission.

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Economy

The Philippines’ Circular Future

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From the period of 2000-2019 The Philippines placed 4th as the most affected by climate-related disasters according to the Climate Risk Index. This is because geographically, it occupies an area that makes it a hotspot for tropical typhoons and other natural disasters. But the system of rural livelihood in the Philippines and it’s archipelagic state are also contributing factors to its vulnerability to the impacts brought about by the climate crisis, such as sea-level rise and extreme weather events.

Understanding these realities, the government has been proactive in developing the country’s adaptive and mitigating capacities.  These efforts are seen in their national and global initiatives such as the establishment of The Climate Change Act of 2009, a law that aims to prevent and reduce the adverse impact of climate change, as well as taking part in the Paris Agreement through its NDCs that commits to a 75% reduction in carbon emissions by 2030.

A Circular Economy

Beyond the health and social crises caused by COVID19 pandemic, it has also underscored the importance of fast tracking climate action and the need to rethink economic systems through circular models as supported by the Department of Finance Secretary Carlos G. Dominguez III. Currently, the House Bill (HB) 7609, also known as “Philippine Circular Economy Act of 2020” is being proposed to serve as a mitigation strategy to accelerate the country’s contribution to the 2030 Agenda for Sustainable Development through mainstreaming of circular and sustainable consumption and production strategies. Similarly, according to The Circularity Gap Report 2021 of the Circle Economy, the implementation of a circular economy would complement the efforts of the NDCs globally, as it will aid in keeping the global temperature rise to well below 2degC by 2032.[1]

Circular economy is a consumption production model that in essence would allow elimination of waste through maximizing the use of valuable resources within systems, the opposite of current linear economies in which products are disposed of after use. This can be achieved by ensuring that materials circulate within operating networks while also allowing natural systems to regenerate. In order to implement this effectively would require collective commitment from stakeholders across the value chain i.e. from the public and private sector, up to the consumers.

Inline with this pursuit, among other proposed key initiatives of the government that are being developed is the Single Use Plastic Regulation Act (HB 9147), a tiered phase-out plan for single-use plastics (SUPs) that aims to improve the country’s waste management and promote circularity. The HB 9147 is also aimed to foster engagement within the business community through the integration of an Extended Producers Responsibility (EPR) scheme. This EPR scheme will serve as a policy tool that would instill accountability from producers throughout the lifecycle of their products that utilize plastic packaging. This scheme will promote funding and collaboration among the private sector and the government through the shared responsibility in managing these waste. At the same time this will encourage innovation of more sustainable and eco-friendly designs for products and packaging.

Business opportunities in the shift from linear to circular pathways

Accordingly, these proposed policies should not be viewed as threats by businesses in order to reap the benefits it entails. Gary Steele, group CEO of TES, enumerates several opportunities that businesses can leverage from this scheme, such as improved reputation and customer relationship through extended value adding services. Steele recognizes that this system also decentralizes sources of raw materials needed for the production of goods, thus contributing to strengthening the supply chain. As such, a circular economy would open avenues for innovative business opportunities that would result from the recycling of waste materials and even repair of products among others. Ultimately these opportunities contribute to reduced cost and increased profits, making a strong case for the implementation in business models and marketing strategies.

Building momentum towards transformational change

However, the degree of circularity within the Philippines is still relatively low as noted in a study by the Asian Development Bank in 2020[2]. Reasons for this are mainly due to its large primary resource extraction sector, growing infrastructure development and poor waste management at municipal levels. Albeit laws such as the Ecological Solid Waste Management Act of 2000 have been implemented, the country’s lenient law enforcement and lack of infrastructure continues to serve as barriers to its waste management efforts.

That being said, it is imperative that the Philippines continues to develop an enabling environment for businesses to champion circularity through financial incentives, new legislations and the enforcement of already existing laws. Given the economic, environmental and social benefits that a circular economy presents, it’s vital that it continues to build on this current momentum in contextualizing and mainstreaming the concept of a circular economy in the country. It is important that the countries, including the Philippines, exhaust all efforts in contributing to climate action to prevent the forecasted catastrophic events that lie ahead. This would need transformational changes in our systems, one of which is a shift to a circular future.


[1] Circle Economy. (2021). The Circularity Gap Report 2021.

[2] ADB. (2020). Regional: Supporting Implementation of Environment-Related Sustainable Development Goals in Asia and the Pacific (Philippine Subproject) Circular Economy in the Philippines.

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Economy

Will Meritocracy Save The Post Pandemic World?

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The Reality of Human Endurance: Protection of self-incompetence is a condition of the human heart as our own self-discovery by our own mind only exposes us to our own fragility and our limits on our already acquired skills. Despite such skills always surrounded by additional untapped hidden talents, but when passages of excruciating pain required achieving transformative advancements the heart draws curtain to such adventures out of fear. 

Most importantly at times, self-discovery alerts us of a dormant self-destructive beast living in stagnation within us. To advance and search for any new thought, any new skill, or any new enlightenment,  it is always an odyssey for the mind, to search for wisdom is to fight monsters, like a warrior on a bold adventure of courage in a lonely journey.  Be a warrior and discover your own universe of hidden talents. Meritocracy awaits for you…

Most economies of the world already visibly damaged, Covid-19,a new sheriff in town, a dealer’s choice game on the table; needed is an ace card to bring meritocracy, performance, productivity and profitability or lose big time. Select a few nations of your choice, observe their levels of executions and digitization, study their bureaucracies and determine their rate of resilience and if and how they will survive over the next five years. Now, the real difficult questions

Why shut down the electricity of the building and climb the skyscraper via the staircase. After all the gross negligence by most nations to neglect digitization and to not to adopt almost free technologies is now visible as an unforgivable fault. Digitization, most critically needed in the main economic hubs, trade-groups, associations and the entire small medium businesses across the nation on integrated platforms. With the majority of nations locked up in an old mindset. They simply cannot zip up to the top floor, exhausted and breathless as they are climbing stairs and badly stuck on lower floors.  

Therefore, what is wrong with stubbornly bureaucratic mindset and why it refuses to showcase its diversity of talents and skills to the world. Most importantly, why are such questions not part of the daily national debates?  Why are layers of economic development leadership so shy, trade groups so afraid and political leadership so confused about it?  

The New Realities: Post pandemic recovery will take no prisoners. Out of the cage, the constant mutation of our economic thought has now morphed into an ugly monster. Alarm bells are ringing. The world has changed on economic behaviorism every millennia and this period is no different. Eventually modern intelligentsia of the world, seeking common good, one again will pass through the eye of the needle and arrive on the other side badly battered and bruised but a bit better. This is how humankind has saved itself from total obliteration. This is how the global populace has learned to linger as economic shifts of power are coming near you.

The Rise of Meritocracy: Unless bureaucracies unlearn to leave their broken past behind, embrace the future, digital platforms, global diversity and exportability, the paper-based mindset economies will only end up in waste-paper-baskets.  Meritocracy will eat bureaucracy for lunch. There is no other way. Soon it is going to be lunchtime. 

Adjustments: acquire mastery of such affairs on fast track; rediscover constant learning, constant disruptions and constant advancements, future needs a new global-age mindset. Understanding of the micro manufacturing and micro-exports logic is a key issue, the digital platforms and the sense to where commerce headed are the landscapes.  Unless western economies rediscover manufacturing, blended with technology, platform economies the billions will march down on the old system.

Century ago, the industrial age forced acquisition of heaviest machinery to advance, now there is nothing heavy investments, but the free flying minds on freely available technologies and platforms that are in charge.Today optimization of freely available technology requires little or no muscle power but definitely demands superior mental-powers. Upstanding how to use critical thinking and declaring lifelong learning as a normal requirement will bridge progress. Smartness today means to identify your hidden enemies; knowing what messages that draw you towards tribalism, hate and destruction, knowing what is Media and what is fakery, what is Social Media or if Political Rhetoric is nothing but a special agenda to divide and conquer. Do not become divisible.    

What a difference a century makes, during 1922, the Union of Soviet Socialist Republics formed, Tomb of Tutankhamen discovered, BBC formed and Gandhi put in Prison by the British. Our 2022 will unfold the post pandemic economic realities. With dozens of elections, reshuffling of cabinets, recycling of promises and Teleprompters on garage sales the socio-econo mood swings will test freedom to yell the truth.

Global shift of powers now defined. Colossal economic failures identified. Global opinion solidifies. Universal struggles start to appear. Neither, super-taxing bearers of the Pandora papers will save the economies nor will the real surprises out of the Pandora’s Box from hyperinflation to hyper-deflation will save us. Candle light visit to tragic landscapes of Beirut speaks volume as it sinks to the dark ages. Uplift mobilization of entrepreneurialism will save nations. Advancements towards “meritocracy” are personal development trends, therefore, a call of the times, a new truth, and new reality. Change and change again, statues are for the birds to poop on…

The rest is easy 

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Economy

Work safely from Paradise

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Due to the pandemic, Caribbean nations have been among the most impacted and most devastated economies, as most of them rely on tourism to keep their economies afloat. Tourism has decreased dramatically as a result of the Covid-19 pandemic and the suspension of air travel, with the Caribbean countries seeing a 69% percent drop. This has inevitably caused a major shock to Caribbean economies, requiring them to adopt measures to mitigate the pandemic’s economic consequences. Caribbean nations have made a number of steps to lure remote workers to their country, including launching a range of programmes. This has been accomplished by creating new visa categories and using targeted marketing to entice remote workers and freelancers to come and remain in Caribbean countries, allowing them to “Work from Paradise.”

This approach has also been warmly received by the broader Caribbean population, as it allows remote employees from other parts of the world to come and work in the Caribbean without displacing local workers. Increasing income from foreign travelers/remote employees is also helping to improve local trade and the Caribbean economy, making this a win-win situation for Caribbean countries. Given the ongoing movement from traditional workplaces to remote working and digital workspaces, there is a fantastic opportunity for Caribbean countries to fill this new niche and grow their economies. Countries whose economy are based on tourism can genuinely benefit from this potential, since digital nomadism is expected to grow even more in the post-covid era. Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, Bermuda, Cayman Islands, Curacao, Dominica, and Montserrat are among the Caribbean countries that have introduced digital nomad visas and similar programmes to improve their economies. Emphasizing the low cases of Covid in these countries make them more than ideal locations to work safely.

Such visa programs have received widespread support across the world, as seen by the enormous popularity of Barbados’ Welcome Stamp, which allows remote workers to stay as digital nomads in Barbados for a period of 12 months. This has aided in the inflow of income into the country, boosting the Caribbean nation’s economic condition. To take advantage of these digital visa programs even more, Caribbean nations have been investing in infrastructure, communications, and healthcare to improve their facilities and entice more digital nomads to their country. This has also led in economic growth, owing to the increased focus on communications infrastructure, which has resulted in quicker and more reliable internet access. Not only has this boosted the economy, but it has also benefited local businesses and the Caribbean public because of the enhanced, stable access to the digital domain. Barbados’ capacity to swiftly attract digital nomads and investments due to its fast internet speeds demonstrates the necessity of good digital infrastructure and a fast, stable internet connection. The advantages to other Caribbean countries’ economy will surely be larger than merely attracting digital nomads if they invest in internet infrastructure as well. Having personally visited and have done business in many of these Caribbean nations, it is not a bad thing working from paradise.

Apart from focusing on remote workers and digital nomads, Caribbean countries have been working on a variety of fronts to strengthen their economy. To begin with, several Caribbean nations are concentrating on regional domestic tourism as an underserved market and are thus recruiting Caribbean residents to strengthen their tourist-based economies. This is assisting in bringing in revenue for pandemic-affected countries. Second, to stimulate economic growth, Caribbean nations are investing in both physical and digital infrastructure to give their economies a boost amid the Covid pandemic. This infrastructure investment has not only helped their economies float, but it has also brought in some much-needed cash, thanks to greater, reliable access to digital markets. Finally, Caribbean nations are focused on stabilizing and assisting small and medium-sized businesses to keep them active and operational and avoid additional income and revenue losses. The Caribbean economies are trying to not just stabilize, but also to increase their economic growth, using tactics and strategies like these to take advantage of the new global realities brought about by the Covid pandemic. If all the Caribbean nations take use of the pandemic’s productive potential, they will be able to ride out the pandemic wave with little to no economic consequences in the long term.

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