Periodic Report Summary 3 - GRASP (Growth And Sustainability Policies for Europe) Project Context and Objectives:Growth and Sustainability Policies for Europe (GRASP) is a collaborative project funded by the European Commission's Seventh Research Framework Programme, Contract Number 244725.GRASP aims to address policy concerns associated with growth using an integrated analytical framework. This framework is built on the Schumpeterian growth approach developed by Philippe Aghion. It emphasises quality-improving innovation in imperfectly competitive markets and suggests that optimal growth policy may depend on levels of technological (and financial) development and on seemingly unrelated yet relevant policies. The policies correspond to a multi-layered vision of the policy drivers of growth. These layers are explored within GRASP. Each layer deals with gaps in current European research: R&D (roughly the focus of Lisbon Strategy); structural economic reform; legal, institutional and organizational reforms; global commitments and the fiscal layer. The project is organised in eight work packages:WP 1 : Innovation, IPRs & Growth; WP 2 : Sectoral Policies & Growth; WP 3 : Social Policies & Growth; WP 4 : Political Economy, Institutions & Growth in Europe; WP 5 : Law, Economics & Growth in Europe; WP 6 : Effectiveness of EU Trade Defence Policies; WP 7 : Fiscal Policy and Growth; WP 8 : The Level of Public Sector Expenditure & Taxation, Design & Competition & Growth3.1.1 The GRASP goals and the outcomeGRASP aims to identify policy options to consider for a redesign of European long-term growth strategies. The goal, spelled out in the proposal submitted to the European Commission (EC), was to generate research results on innovation policies but also on related drivers of a more dynamic, greener, socially and fiscally sustainable growth path than current policies have achieved. The outcome of almost four years of research/work/collaboration is a number of new conceptual ideas and a large number of fairly concrete recommendations in a wide range of policy areas. 3.1.2 The initial conditions anchoring the researchMany governments continue to, de facto, simply link the long-run growth and job prospects to investments, including public investments or financing of investments. These investments are however only loosely anchored to an industrial strategy, even if formal documents mention the need to develop a strategic vision of innovation policies to support long-term growth. The growth vision in many EU countries seems to be a moving target – e.g. the changing views on how government support the automobile, steel or the naval industries. In practice, this implies continued fiscal and political support to old industries losing competitiveness. The associated subsidies or tax breaks, impose a high opportunity cost in terms of other activities with higher growth and distributional payoffs to society. Moreover, they often fluctuate as the support is often constrained by the fiscal margin governments enjoy. In a growth context, this dominating view emphasizing the role of fiscal expenditures to meet long-term goals is somewhat hard to reconcile with the short-term fiscal strategies observed between 2009 and 2013. Most (if not all) countries have revealed short-term preferences for relying on across-the-board expenditure cuts rather than tax reforms to implement fiscal adjustments as if this had no significant impact on the scope and speed of structural changes in an economy. The basic statistical evidence shows that expenditure levels continue to be more important than the composition of public expenditures for most European economies. For instance, the long-term public expenditure commitment to green concerns (i.e. green subsidies) and to innovation (i.e. public support R&D) has proven to be highly sensitive to fiscal adjustments aimed at dealing with short-term adjustment requirements. Similarly the commitment to in-kind and in-cash transfers designed to support social-sustainability targets has been strongly damaged by fiscal cuts in many countries. Indeed, the evidence shows that fiscal transitions have deteriorated income-distribution indicators (i.e. the shrinking middle class) or increased public-debt levels (i.e. penalized the next generation of citizens). On the revenue side, the top 1% of earners continues benefiting in relative terms from complex and opaque personal labor and capital-income taxation in most countries. This allows these top earners to continue to increase their share of total national income while the middle class slowly but surely continues to shrink (the return of the ‘rentiers’ economies documented in Piketty 2013). Poverty indicators are also deteriorating fast, in many of the countries of the region, with the young and the retirees victimized more than proportionately. Similarly, the effective tax rates on corporate profits have continued to be much lower and with a stronger dispersion than the statutory tax rates would suggest. They have also continued to generate a much lower share of tax revenue than suggested by their share of national income, with little investment to show for in exchange for the lower effective tax rates. These observations raise obvious fairness concern, but from a growth perspective, they mostly point to dynamic efficiency concern. The empirical evidence shows that the middle class is a lot more important to the growth prospects of a country (e.g. look at the payoffs to emerging economies of the growing middle class) than the top 1% may be – simply consider the size effect of the marginal propensity to consume of the two groups to see why. It also shows that corporate tax loopholes are not the most fiscally cost effective solution to stimulate investment and jobs. In addition, loopholes and exceptions tend to maintain in business firms that are no longer competitive at a high cost to society for the benefit of a few. Academics know it, politicians know it and many other economic agents know it. But the complex political economy of reform analyzed as part of GRASP shows that distortions in incentives allowed by lack of transparency and accountability at all levels of society (including particular among politicians and technocrats) is bound to slow reforms or to lead them to further reduce political transparency and accountability. What these examples show is that the identification of the impediments to growth and of growth opportunities needs to go beyond investment in physical and human capital and in R&D. Many growth researchers have been arguing to do this for developing countries (e.g. the growth diagnostics à la Hausman, Rodrik and Velasco). But the most adequate approach in the more mature European context may be the neo-Schumpeterian vision of growth diagnostics promoted by Aghion, Howitt and others. The neo-Schumpeterian vision of growth helps identify policy alternatives to current approaches that allow governments to address the longer-term transformation needs while minimizing the shorter-term transitional costs. It also internalizes growth-related institutional and political issues as identified by Acemoglu (MIT) or Rodrik (Princeton) and their various co-authors as well as the research conducted on behalf of the Growth Dialogue research team led by D. Leipziger (GWU), a follow up to the Growth Commission task force coordinated by D. Leipziger and M. Spence for the World Bank. In a nutshell, the approach is broad enough to allow the revelation of normally ignored or underestimated constraints on the ability of economies to make the most of the innovation allowing a dynamic growth. 3.1.3 The value added of the GRASP contributionsThe various GRASP research teams have provided real added value by defining these constraints in the European context. The explicit identification of many of the more subtle constraints has the added advantage of increasing their transparency and the opportunity allows decision makers to be more aware of the precise challenges they need to address. The broader perspective anchored in a common general framework leads to a wide range of sector specific policies focusing on the achievement of higher and more socially and environmentally sustainable growth for the long run, all of which have some connection with innovation.A simplistic Schumpeterian extrapolation of the focus adopted here is that achieving the ultimate goal boils down to the stimulation of quality-improving innovation. A more subtle and more realistic interpretation recognizes that thinking in terms of industrial (or more recently digital) innovation literally is simply not enough anymore. The idea of innovation needs to apply to a much broader set of policy and political dimensions. This is not just about changing the technology of production to improve productivity and increasing the diversity of products to increase potential markets by shifting away from traditional less competitive sectors. It also has to be about identifying the direct and indirect interactions between policy and improvements in the actual use to new ideas and knowledge in the European context. The theoretical and empirical results point to a broad set of policy failures. These are the result of wrong incentives built in misleading or incomplete laws designed, implemented and enforced by well-intended institutions, progressively captured by political interests at a high cost to today’s and tomorrow’s consumers and taxpayers. These failures, as much as any lack of ideas, would currently slow the effectiveness of long-term growth policies in Europe. The research points to multiple imperfections across and within countries. These include imperfections in key domestic and international markets, at both the macro and the micro level but also imperfections among institutions and administrative, legal and political processes defining and supporting policies. Coming up with specific suggestions to deal with all of these imperfections has not been straightforward given the complexity of the issues that emerged from the research.Notwithstanding the challenges (discussed in section 3) the teams faced between 2009 and 2013, the research has generated useful insights and illustrations on each of the key dimensions covered by GRASP. These insights are summarized in issue-specific sections. Each of these has largely been produced by the teams who lead the research on the topic. For every section, the philosophy has been the same: (i) take stock of the collective knowledge on the issue, (ii) discuss the main contributions of the GRASP researchers and (iii) make policy recommendations as specific as possible —to national policymakers and when relevant and possible to the European Commission. Every section has also identified areas for further research. To find out more about the GRASP project, please visit the project website www.grasp.cepr.org.Project Results:RASP builds on the idea that in order to be able to assess the quality and effectiveness of public intervention in Europe, and to make credible and useful suggestions to improve its average rate of growth, it is essential to assess the extent to which growth-enhancing policies or institutions depend upon (technological) development. These policies include broad sectoral policies, such as education, infrastructure and social policies, as well as the institutions that support these policies (for instance, the organization of the British higher education curriculum is still very different from the one in France, Belgium or Spain). These policies also include more targeted policies, for example on intellectual property rights or the design of the tax system. Because Europe now offers a wide range of countries at very different stages of development, as well as with very different initial conditions that represent very different policy and institutional challenges, it is unlikely that a “one size fits all” set of broad sectoral or more targeted policies will be appropriate across the whole set of countries. In other words, the optimal mix of growth enhancing policies will almost certainly differ for each member state.The policies correspond to a multi-layered vision of the policy drivers of growth. These layers are explored within GRASP. Each layer deals with gaps in current European research: R&D (roughly the focus of Lisbon Strategy); structural economic reform; legal, institutional and organizational reforms; global commitments and the fiscal layer. This multilayer approach brings together economic, legal and institutional research to allow a multidisciplinary diagnostic. It is this diversity of perspectives that allows a “Schumpeterian diagnostic” to identify themes of effectiveness of policies and adequacy and sustainability of growth.In the third project period, partners were responsible for finalizsing the research on each of these research subcomponents. CEPR coordinated and lead preparation of a single policy oriented Schumpeterian diagnostic of policies, which lead to team recommendations in the final scientific report which aim to improve knowledge on drivers of growth, recognizing European economic and social diversity.Each of these research areas generated inputs needed to conduct a full Schumpeterian diagnostic of growth. Each layer defines a set of well-targeted research, sometimes purely economic, but also often legal and institutional as well, to allow the consortium to generate a multidisciplinary diagnostic of the quality of growth-related policies.This report covers the period 1 November 2012 – 31 October 2013. In the final 12 months of the project, GRASP aimed to deliver 11 papers, 3 research workshops, 1 final conference and 1 policy report.The following sections provide an outline on how GRASP has progressed. Section 3.2.2 provides an overview of the progress by work package, noting any major issues or achievements. Section 3 provides a summary of the project management of GRASP, overseen by the Centre for Economic Policy Research (CEPR) as well as efforts made towards the dissemination of GRASP research.Potential Impact:By bringing together researchers who publish in top international journals and having them focus on such a multi-faceted area as growth in the European context, one can be confident that the project will generate a flow of research that will extend the frontier of scientific knowledge. Building a team with experts from across Europe is key in this respect, given that such diversified knowledge cannot be found in any single country.The ambition of the project goes however beyond pure academic research: it aims at having an impact in the policy arena, given that it addresses very topical issues. Interest can indeed be expected from within policy circles as well as the knowledge-producing sector (universities and research institutes; private research institutions). As detailed in the next subsection, note that our research will be able to go beyond academic circles, thanks to the dissemination channels set up by CEPR.The goal of this project is thus to produce frontier research on the topic and to use it to produce policy conclusions that will be the subject of extensive prior consultation with stakeholders from the research and policy communities.1.3 Dissemination of Project resultsThe GRASP website has been developed and is regularly updated with information on the project, including the latest deliverables. The dissemination of project results to public takes place through a combination of channels, including the GRASP website at http://grasp.cepr.org/ ; publications and presentation of papers at the conferences and workshops organised for the project and at other meetings organised by CEPR and network partners.The first research papers have already been published upon approval of the consortium participants and are available on the project website.All meetings organised for the project are intended to ensure active and effective stakeholder engagement, at which researchers present the results of research carried out, followed by a discussion with other stakeholders. At the final stage of the project, this annual stakeholder workshop will be expanded to include a larger number of researchers and stakeholders, and will so constitute the final policy and dissemination meetingList of Websites:www.grasp.cepr.org Other report summaries Periodic Report Summary 2 - GRASP (Growth And Sustainability Policies for Europe) Periodic Report Summary - GRASP (Growth and sustainability policies for Europe)
