Gridlock

The virtues of growth

It is an obvious fact, but sometimes forgotten or ignored: this country’s prosperity is inextricably linked to the success of the companies that operate here.  It is they who generate the economic value and jobs that make possible our spending power as consumers, our social security, and all the other things we like doing to improve the state of our world.   Economic success obviously isn’t the only driver of our quality of life, but it certainly is pivotal, since it pays for many of the real happiness drivers (good food, a home, healthcare, comfortable retirement, education, entertainment, liveable cities, etc.).  

Some things are still free, thankfully, but even those things we cherish as free are indirectly made possible, or made so much more valuable, by the fact that we live comparatively long and comfortable lives.  Growth also appears to have social, political and even moral consequences.  Adam Smith first proposed the argument, but Harvard economist Benjamin Friedman did the historical analysis to hammer home the point.(1)  Economic growth seems to make people more tolerant, less prone to violent dispute and keener on democracy.  Economic decline, on the other hand, is association with social strife, intolerance and authoritarianism.   Economic growth may have a bad name in some quarters, being associated with environmental degradation, stress and materialism.  Indeed, the negative impacts of economic growth need to be managed but the lesson of history is clear: we need more growth in the world, not less.

Trailing behind

So how are we doing in this country?  In the preparation of this article we looked at the economic statistics, the numerous international rankings and we talked to the people who have their finger on the pulse of this country’s economic life.   We also compare Belgium with countries we should be comparing ourselves against, i.e. countries like the Netherlands, Switzerland and Denmark—small, northern European, high-cost economies.   The conclusion of our foray: it is high time to sound the alarm bell.

To start with the obvious: Belgium is still a prosperous country.  In the World Bank’s (2008) international ranking of countries on the basis of per capita GDP at purchasing power parity we’re the 17th most prosperous country in the world.  But that’s some way behind Denmark (11th), the Netherlands (7th) and Switzerland (6th).   So we have a respectable base, but what about growth?  In the 8-year period 2000-2007 Belgium’s GDP (in volume) grew at an average rate of 2.2%.   That’s on par with our reference group but since 2004 the performance begins to diverge.  In the 3-year period 2005-2007 our economy grew at an average rate of 2.5%, beating Denmark (due to its burst housing bubble in 2007), but trailing both the Netherlands (3%) and Switzerland (3.27%).  From 2008, we all started hurting as the economic crisis began to bite.  

Competitiveness

So what happened?  Compared to our reference group, why is our economy smaller and, especially since 2004, growing at a slower rate?  In addition, does this tell us anything about our future growth prospects (obviously the more relevant question)?  The answer seems to lie in the international competitiveness of our economy.    The World Economic Forum’s Global Competitiveness Index to some extent reflects the per capita GDP rankings.  Belgium is ranked 18th, trailing the Netherlands (10th), Denmark (5th) and Switzerland (1st).   But compared to the average for other innovation-driven economies our status report is pretty indistinguishable.   The most problematic factors for doing business are likely to sound familiar to any Belgian entrepreneur: restrictive labour regulations, high tax rates, inefficient government bureaucracy and poor access to financing.  Belgium is not unique in this—in fact, these burdens seem to be the mark of many innovation-driven economies.  But against Denmark, the Netherlands and Switzerland the differences are clear.  Not only do those economies score much better in the above problematic factors, they also score better in areas like innovation, institutions, macro-economic stability and technological readiness.  In other words, even in our supposed strengths we’re trailing behind the types of economies we should be in step with (given our potential).  This suggests that we have a structural handicap, which will undermine our growth prospects.  Indeed, some of the leading indicators do not look good.  

FDI

Our economic prosperity is due to a number of historical factors that have played in our favour.  These include our location at the centre of the northern European economic zone, the productivity of our workforce and our stable institutions and legal framework.  Since the 1960s, both foreign direct investment and home-grown entrepreneurship has pushed our economy forward.  The result is a highly internationalised, export-driven economy.  Direct investment from US and German multinationals lie at the base of our (petro)chemical and automotive industries but have also contributed to the sophistication of our financial and professional services sectors (banking, law, PR, accounting, etc).   In the past two decades investment has continued with the result that many of our largest companies (in steel, energy and financial services) are now owned by foreign multinationals.   But indications are that the level of FDI is beginning to decline.  Over the past 5 years, for example, Belgium has attracted less than half the US direct investment amounts invested in countries such as the Netherlands and Switzerland.(2)

Entrepreneurship

The 1960s also witnessed plenty of entrepreneurship, the impact of which is still with us today.  The bedrock of our economy—the numerous small and medium sized business in the food industry, textiles, automotive components, building materials, etc—took shape in those early post-war decades.   Today, the picture is less positive.  Although in many ways the country is still remarkably entrepreneurial, we are lacking the high-growth, job-creating type of entrepreneurship.  This is put into perspective by the work of Professor Luc Sels’ team at the Catholic University of Leuven and the Global Entrepreneurship Monitor (the Belgian data of the GEM is managed by Professor Hans Crijns’ team at the Vlerick Leuven-Ghent Management School).   

The GEM is interesting because it measures entrepreneurial activity in the strictest sense of the word, that is, people involved in starting up a business or managing a new company.  On that score, we come dead last in the GEM’s international rankings (2.85% vs the EU’s 5.85%) and we’re declining over time.  The positive side of the GEM’s story is that those starting entrepreneurs are pretty focused on innovation, job creation and internationalisation (quality instead of quantity).  

While Belgium scores deplorably on the GEM, Luc Sels’ research—which is based on larger databases and uses a much broader definition of entrepreneurship (including all types of self-employed activity)—shows that entrepreneurial activity in Belgium, at 9% of the working age population, is on par with the European average and in fact higher than countries like Denmark, Sweden and Finland.   The problem is that much of this entrepreneurship is focused on the low-threshold sectors like retail, restaurants and services—in other words, this isn’t the high-growth, innovative, job-creating, export-orientated entrepreneurship this economy needs.  Furthermore, a recent survey by UNIZO suggests that our entrepreneurial base is ageing.  According to this 2009 survey, one in four Flemish entrepreneurs is considering to pass on or simply close down his or her business within the next five years.  But many report that they are struggling to find successors or buyers.  Often the next generation does not have an interest in carrying on the business, or there are no potential buyers out there.  

Interestingly, Professor Sels’ data also clearly exposes a key structural handicap: the fact that the active proportion of the working age population (entrepreneurs + employed people) is appallingly low.  This is a point that is emphasised by other commentators like Johan Van Overtvelt of think tank VKW Metena.   

Structural fault lines

Historically, our high productivity has been an absolute boon for the economy.  Indeed, it still is.  Belgium ranks in the top 5 when it comes to labour and capital productivity.  But as VKW Metena points out, our societal productivity (productivity per member of the working age population, as opposed to productivity per active worker) is a lot less impressive.(3)  Quite simply, this is because too many people aren’t productive at all.  This is partly due to the fact that people retire too early and partly because we have a high structural unemployment rate.  Furthermore, of the people who are at work, nearly one in three are employed by government; and this at a government administration that scores poorly for its efficiency.(4)  It is these sorts of dynamics that are beginning to stretch our welfare model to breaking point.  They limit our tax base, keep the cost of our social security system unaffordable and will accentuate the problem of our ageing population.  Talk about a vicious circle. The low activity grade and high proportion of public employment keeps taxes high (to pay for unemployment benefits, pensions, government salaries, etc) which creates a high ‘tax wedge’ (the difference between labour costs to employer and the net take home pay of the employee) which in turn is a disincentive to work.  According to the OECD we have the highest tax wedge in the world.  To illustrate, VKW Metena calculated that if you add up all direct and indirect taxes, a single child-less individual is relinquishing to the state 72.7% of every Euro earned.

Export stumbling

High productivity notwithstanding, the tax wedge and other factors like the automatic indexation of wages is beginning to hamper the competitiveness of our exporters.  In its latest quarterly report, VKW Metena makes the point that this country’s economic growth has historically been driven by export.  But the contribution of net export (export minus import) to GDP has been declining since 2004.  Also, our exporters’ market share of international markets is declining.  Even if you factor out the impact of the emerging economies and compare Belgium’s market share against other developed economies then still it is clear that we are losing market share, with a particular steep decline noted since 2004. VKW Metena’s argument is that the above is due in part to the high wage costs relative to our neighbours and main trading partners.  Over the past two decades the Belgian wage cost per production unit increased 8% compared to the weighted average of our three neighbouring countries: Germany, France & the Netherlands.   But from 2004 onwards this trend has inclined rapidly (in line with the two other trend lines in our export position), especially against Germany.  In other words, it seems that one of our main growth engines, export, is beginning to sputter, just when we need it to pull us out of recession.

The problem with the wage cost argument is that it has led to intractable dispute between the employers’ associations and the trade unions.   Which is unfortunate because no one is seriously arguing for lower take-home pay; the tax wedge is the real culprit.   But it is not only about cost; the labour market also is too rigid, a point emphasised in the WEF’s Global Competitiveness report and the OECD’s latest country report on Belgium.

It’s about attitudes too

Finally, there appears to be a cultural issue.  Luc De Bruyckere, chairman of the Flemish employers association, calls it the culture of contentment.  Hans Crijns argues that we are the victims of our own success.  Minister Q talks about our risk averseness.  Entrepreneurship is an attitude; and we could do with more of those attitudes.  Wilson De Pril (Agoria) and Karel Van Eetvelt (UNIZO) argue that we have become ‘immune’ to the faults in the system, not only the underlying structural faults, but even the current economic crisis.   People appear to believe that the problem will sort itself out.   Indeed, as VKW Metena points out, in the last economic crisis in 1982 the problem did sort itself out via a dramatic devaluation of the Belgian Frank.  Today we do not have that option.  Our only option is to reduce government spending and create more economic value.  But to facilitate that we need strong policy and plenty of ambitious entrepreneurs.

(1)Friedman, Benjamin. (2005). The Moral Consequences of Economic Growth. Thanks to Johan Van Overtvelt for the tip.
(2)American Chamber of Commerce in Belgium. www.amcham.be
(3)VKW Metena.  Beleidsnota 26.  September 2008. 
(4)Itinera Institute. Slank, zwaarlijvig of onbegrensd? Een analyse van de publieke tewerkstelling in België tussen 2001 en 2007. September 2008;  WKW Metena. Beleidsnota 34. September 2009