4.

Industrial and competitiveness policy:

the Lisbon Strategy
 Industrial and competitiveness policy:
the Lisbon Strategy

 Industrial and competitiveness policy (ICP) - government policy

designed to improve a country’s economic performance;
 Horizontal, to provide a supportive environment for business
(fiscal, competition, regional, social, labour and environmental
policies),
 Vertical - designed to favor particular sectors of the economy;
 From 1950 to 1979 the prevailing orthodoxy was that
government could and should correct market failures;

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 Industrial and competitiveness policy:
the Lisbon Strategy
 Traditional industrial policy uses subsidies/tax breaks,
protection, regulation and public procurement. ICP also
includes deregulation, education reform, subsidization of
infrastructure and research;

 ICP instruments have shifted from tariffs to non- tariff barriers

(NTBs);

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 Industrial and competitiveness policy:
the Lisbon Strategy
 The economic case for ICP is based on market failure:
externalities and uncompetitive markets;
 There are three types of externalities that are important for
ICP:
 knowledge creation;
 network interactions;
 agglomeration/localization.

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 Industrial and competitiveness policy:
the Lisbon Strategy
 In the 1980s trade theory turned to models of imperfect
competition to explain phenomena such as intra-industry trade
between developed countries
 Infant industry argument;

 Imperfectly competitive markets are characterized by large,

profitable firms and high technology, which interact with
economies of scale;

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 Industrial and competitiveness policy:
the Lisbon Strategy

 Network externalities occur where consumer satisfaction

increases with the number of people using a particular good;

 The failure of old-style regional policy to create viable

industries in blighted areas, as well as the astonishing success
of Silicon Valley, has led to a renewed interest in the
economics of agglomeration;

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 Industrial and competitiveness policy:
the Lisbon Strategy

 One important implication for industrial policy is that while

the agglomeration may be very large, most of the firms of
which it is composed will be small;

 These factors have led to a range of government policies from

science parks, export processing zones and growth poles,
which have proliferated with varying results.

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 Industrial and competitiveness policy:
the Lisbon Strategy
 The importance of technological change in explaining
economic growth has long been recognized (Solow 1957;
Denison 1974).

 In Solow’s neoclassical growth model technology is

exogenous, but with Romer’s (1990) seminal contribution,
models where technological change is endogenous have been
developed.

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 Industrial and competitiveness policy:
the Lisbon Strategy
 Creation of new knowledge by one firm is assumed to generate
positive externalities for other firms;

 Countries in which technological research is carried out acquire

a comparative advantage in the form of human capital resource
endowments that may persist for some time;

 The results of research have to be transformed into marketable

innovation and this process emphasizes the role of entrepreneurs
and SMEs.

Slide 5-9
 Industrial and competitiveness policy:
the Lisbon Strategy
 That markets fail is indisputable, but government intervention
will not necessarily improve matters: governments may not
have the knowledge and ability to take action;

 Industrial policy may conflict with other policies, most

notably competition policy and trade policy;

 Decisions on industrial policy are long term, but politics is

driven by a short- term electoral cycle, so decisions may be
influenced by immediate considerations.

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 Industrial and competitiveness policy:
the Lisbon Strategy

 The 1957 EEC Treaty did not provide for a common industrial
policy;

 ICP was limited to Commission powers of supervision to

ensure that state aid did not distort competition in the common
market;

 State aid in the EU15 fell from 3 per cent of GDP in the
1980s, to 0.9 in 1992 and to 0.4 per cent in 2003;

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Industrial and competitiveness policy:
the Lisbon Strategy

Slide 5-12
Industrial and competitiveness policy:
the Lisbon Strategy

Slide 5-13
 Industrial and competitiveness policy:
the Lisbon Strategy
 The financial and economic crisis led to very high levels of aid
to the financial sector and threatened to undermine this EU
control of state aids, but the Commission managed to combine
sufficient flexibility and speed with continued control.

 EU R&D policy is inspired by the idea that Europe fails to

realize its full scientific c and technological potential because
its research efforts are dispersed, expensive and given to
wasteful duplication;

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 Industrial and competitiveness policy:
the Lisbon Strategy

 The introduction of an ‘Industry’ title in the TEU (1992; Article

173) gave the Community a broad mandate to promote the
competitiveness of European industry;

 In 2000 the Lisbon Strategy was introduced, ‘to become the most
competitive and dynamic knowledge- based economy in the
world, capable of sustainable economic growth with more and
better jobs and greater social cohesion’ (European Council
2000a).;

 The LS contained twenty-eight main objectives, 120 objectives

and 117 indicators.
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 Industrial and competitiveness policy:
the Lisbon Strategy
 The LS can be judged on two levels: whether it has changed
MS policies and whether these changes in policy have
improved EU performance;
 The LS does not seem to have had much impact on policy;
 The LS does not seem to have had much impact on the EU’s
economic performance.

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 Industrial and competitiveness policy:
the Lisbon Strategy

 the EU15’s productivity growth was relatively good from

1978 to 1997, but since 1998 it has declined as higher
employment growth has been at the expense of productivity;

 The USA managed to raise productivity growth and combine

it with employment growth.

 The LS has not improved the EU’s productivity performance.

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Industrial and competitiveness policy:
the Lisbon Strategy

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 Industrial and competitiveness policy:
the Lisbon Strategy
 The LS operated from 2000 to 2010 and a mid-point evaluation
was very critical: ‘Lisbon is about everything and thus nothing’;

 The results have been disappointing: the policy was overambitious,

too wide-ranging and with only a limited commitment from MSs
that would have to carry out the measures.

 The Commission has proposed a new Strategy, ‘Europe 2020: A

strategy for smart, sustainable and inclusive growth’ (CEU 2010b),
which has been adopted by the European Council (2010c).

Slide 5-19