Time for action

Escaping the downward cycle

In times of economic crisis it is only to be expected that people are a spot downbeat.  Indeed, such was frequently the mood in our round of interviews with entrepreneurs and economists.  But the fact is that there are good reasons for pessimism, reasons that extend beyond the current economic crisis.  Simply put, this is because we are caught in a vicious circle.  

As outlined in chapter one, there is increasing consensus among entrepreneurs that this country’s economy is gradually losing its international competitiveness along a range of dimensions, from the tax burden and inflexible labour markets to (the lack of) innovation and the (in)efficiency of government administration.   The structural foundations of our economy need fixing; but this at a time when our ability to do so is undermined both by the economic recession and the fact that the costs associated with our ageing population will begin to accelerate.  Our welfare system will require more money in the coming years; but it is this very welfare system that is undermining our ability to generate that money. 

Action is needed, in fiscal and economic policy, at the universities and research institutes, but also—according to many of the individuals interviewed for this edition—more broadly in our schools and organisations so as to set in motion a process of cultural change.

Foundations: fixing the welfare model

Among the economists and employers’ associations we spoke to there appears to be reasonable consensus about the fiscal and economic policies this country should be pursuing.  Indeed, it is largely in line with the advice being offered by the OECD in its latest country report.(1)  The main obstacle to the remedy is finding the social and political agreement to implement what is in effect a painful set of interventions.   In brief, there are at least five things that need to happen:

Structural reform is needed to make the labour market more flexible.  The current legal framework for the labour market was designed for the industrial economy of the 1960s and 1970s, when lifetime employment was the norm.  But that context has changed dramatically.  Today’s economy is characterised by rapid change; or at least, the need for rapid change.  Hence, career trajectories need to become more flexible.   This is not to say that workers do not need protection.  On the contrary, reference is often made to the Scandinavian flexicurity model, whereby the emphasis is placed on ongoing training and development to enable more rotation in the labour market.  Today’s policies do exactly the opposite; they discourage rotation.  Of particular relevance to entrepreneurship is the discrimination in the social benefits ‘statute’ of the self-employed versus civil servants and employees.  

Better competition policy (and execution) is needed to improve the efficiency and flexibility of the economy.  For example, there is not enough competitive pressure in a number of key markets, like telecom and energy, with the result that prices are too high compared to some of our neighbouring markets.   Also, some sectors dominated by the self-employed and micro-enterprises (e.g. restaurants, construction, retail, etc) are subject to complex regulations that end up shutting out new entrants, new business models and new technologies.  

Taxes on wages need to decline for at least two reasons: one, to ease the distortive effect of the high tax wedge on the labour market (i.e. improve the incentives for work), and two, to lower the total wage cost for employers, so as to improve the international competitiveness of the economy.   However, simply reducing taxes is no option for a government that is faced with a major budget deficit and an ageing population.  This is why two other things need to happen.

Improve the tax system to make it more efficient, more effective and less distortive.  The OECD makes two points.  Firstly, we need to reduce the imbalances between the federal and the regional governments (vertical imbalance) and between the regional governments (horizontal imbalances).  This basically comes down to a closer alignment of fiscal capacity with spending responsibility.  Thus, if the federal government is asked to cover the costs of the ageing population (as it currently is) then it needs more fiscal capacity (i.e. more income); alternatively, that spending responsibility needs to be devolved to the regions.  Similarly, the imbalance between the regions (income tax revenue goes to the region of residence, not work) makes the position of Brussels unsustainable.   Secondly, we need to shift the tax burden from wages to consumption, since the former is the most distortive tax for growth due to its impact on the labour market and our international competitive position.

Control government spending.  The costs associated with the ageing population need to be kept under control, specifically pensions.  The OECD makes the frightening point that if we carry on as usual, then social contributions would have to increase by 50% to cover the costs of ageing.  Urgent reform is indeed needed.  According to the OECD there are at least two opportunities for reform: pensions and government administration.  While there is no room to lower pension payouts (they are too low already), the legal retirement age does urgently need to be raised.  With regard to the efficiency of government administration, the OECD wonders (as do many foreign observers of Belgium) why we need to duplicate government services in areas like energy, employment, environment, international trade, etc.  Although the point may be valid, a re-federalisation of these responsibilities is politically unfeasible, certainly in Flanders.  More likely is a further regionalisation (toward a con-federal model) to better align tax and spending responsibilities.   Either way, government will have to do its job more efficiently—and with fewer people.  

Obviously more things can be done, specifically to stimulate more entrepreneurship.  For example, one such point is to ease the administrative and tax burdens on the sale or passing on of an existing business.  A recent Unizo survey indicates that about a quarter of the Flemish SMEs will be put on the market within the next five years and that their owners are struggling to find buyers or even family members interested in taking over the business.  This is a waste since entrepreneurs who buy an existing business have a higher success rate than those who start from scratch.

Strategy: invest in the future 

The point is often made that in Belgium we have all the potential—given our education and know-how—to create innovative companies but that we somehow fail to valorise that potential.  Since WWII we have competed internationally on the basis of our high productivity; but today we need to make the transition to a knowledge-based or innovation-driven economy.  The problem is that we seem to struggle doing so.  What can be done to facilitate that transition?  To address that question, one needs to look at the effectiveness of the innovation ‘ecosystem.’  

At a regional level (since innovation policies are the remit of the regions), much appears to be done to stimulate innovation and entrepreneurship.  In Wallonia there is the Marshall Plan which pumps R&D money into a number of key strategic sectors like biotech and logistics.  More recently, Flanders launched its strategic plan, Flanders in Action (Vlaanderen in Actie – VIA), which also is an attempt to prioritise a number of strategic sectors (logistics, healthcare) and themes (innovative entrepreneurship) for investment.   Unfortunately, such plans are hampered today by the budgetary pressure on government.   

The universities are doing their bit too.  All major universities in the country have set up Tech Transfer divisions that seek to valorise the knowledge developed by academics, via patenting, licensing and the creation of spin-off companies.   Some universities have set up incubation centres for innovative companies. The Catholic University of Leuven, for example, owns two such locations, offering office and lab facilities to young, innovative companies.   Perhaps the most promising initiatives, however, are ‘softer’ in character.  These focus on the development of entrepreneurial competencies among students by changing teaching methods and incorporating more entrepreneurship courses in curricula—note Professor Luc Sels’ (dean of the economic faculty at the Catholic University of Leuven) reflections on the matter.   The University of Hasselt’s initiative ‘ondernemerstalent’ (Entrepreneurial Talent) is also illustrative in this regard; in the way it enables projects to be set up around students’ business plans.

Internationally too there are interesting lessons.   The ICEHOUSE in Auckland, New Zealand (associated with the University of Auckland), is perhaps better known as a physical incubation centre, but its CEO Andy Hamilton thinks that their training programmes for SMEs, where entrepreneurs teach entrepreneurs, are having the bigger impact.  In India, the Centre for Innovation, Incubation and Entrepreneurship attached to the renowned Indian Institute of Management (IIM) in Ahmedabad, focuses on what it calls ‘virtual’ incubation services, where the emphasis is placed on technical and professional advice, and levering the institute’s extensive business network, as opposed to offering physical infrastructural services.  In a similar line, London Business School has ditched its residential incubation programmes entirely.  Instead they are teaching a lot more entrepreneurship and creating new multi-disciplinary courses (e.g. mixing science and business graduates, or art and business graduates, in a single class) that stimulate entrepreneurship.  What is interesting about these initiatives is that they are all reasonably easy to get off the ground.   They are concerned more with leveraging the existing knowledge and resources at the universities and in business world, by creating new partnerships and ways of working together.  Importantly, these initiatives need not only come from government or the universities.  Many such initiatives are coming from entrepreneurs themselves; witness the emergence of entrepreneurial networking groups like the Betagroup (see interview page X), OpenCoffee Club and BizCamp. 

Culture change

Indeed, it is these ‘softer’ measures that people like Luc De Bruyckere, Vincent Van Quickenborne or the members of the Economic Circle of the King Baudouin Foundation(2) appeal for to engender a change in attitudes and values in society at large.  In this regard they highlight the role of education to stimulate creativity, initiative and a sense of responsibility.  Thus, teaching methods should focus more on team-work and problem-solving as opposed to simply ‘knowing things.’  Schools need to forge closer links with entrepreneurs.  Teachers need to be attracted from the business world.  Students and teachers need to be given more international experience.   Similarly, in the youth movements and sporting organisations there is opportunity to help engender these values.  

Facing the mirror

Finally, entrepreneurs themselves have a major responsibility.  Many of the entrepreneurs we spoke to for this project acknowledge that the Belgian business world has probably done a poor job in communicating the value of entrepreneurship to society at large.   The business lobby and the trade unions seem locked in an intractable ‘us versus them’ dispute.   An honest appraisal of the greater good too often is lost in the bitter process of point scoring.  Corporate social responsibility or sustainability is the remit of the hallowed, like Boss Paints or Colruyt, but certainly not standard business practice.  Entrepreneurs complain that the reputation of entrepreneurship in this country is too negative, that in the public perception entrepreneurs are seen as crooks and thieves, defrauding the ‘system’ to line their personal pockets.   An exaggeration, obviously, but few will deny that Belgian business can be rather messy.  Entrepreneurs can justifiably ask more from government and the education system; but there also is opportunity for entrepreneurs to play a more constructive and open role in this society.  It is sorely needed.

(1)Organisation for Economic Co-Operation and Development. OECD Economic Surveys: Belgium. 2009.
(2)Economic Circle of the King Baudouin Foundation. We need AIR: Autonomy – Innovation – Responsibility.  Roularta Books.