Playing to win
A sizeable part of the EU's activity has the ultimate aim of improving the continent's industrial competitiveness. But just how does Europe shape up in comparison with the US and Japan? This annual report on competitiveness has the answers.
In March last year the EU set itself the goal of becoming the most competitive and dynamic knowledge-based economy in the world. In support of this ten-year objective, the European Commission produces an annual Competitiveness Report which analyses the current state of play in great detail.
For example, despite a long record of growth, the EU's standard of living - measured by gross domestic product (GDP) per capita - has, since 1970, hovered between 65% and 70% of that in the USA and still lags behind Japan, even after the economic difficulties in the Pacific region. Although living standards are rising in the EU, they are rising even faster in the USA. This failure to "close the gap" appears to be due both to the higher employment rate in the USA (more Americans are in jobs) and also higher labour productivity, which is only now faltering after five years of consistent improvement.
Sensitive to quality
One factor in the high US productivity appears to be that companies have invested more in information and communication technology (ICT) than either their European or Japanese competitors. In 1999 expenditure on ICT represented 7.3% of GDP in the US but only 5.8% in the EU, a gap that has persisted throughout the 1990s.
The major part of the report looks at structural change in the European economy. For example, one aspect of globalisation is that EU exports now have to compete with countries paying much lower wages than in Europe. Is this sustainable? The answer is yes, provided EU firms compete on quality rather than on low prices. The EU's manufacturing trade surplus conceals a deficit in price-sensitive goods, such as construction materials, iron and steel, which is outweighed by a surplus in quality-sensitive goods, such as machinery and chemicals. In a quality-sensitive industry a competitive edge is gained by continuously improving quality rather than by lowering prices - and Europe seems to be well-placed to build on its present advantageous position.
Knowledge is good for you
The increasing importance of the services sector has been driven by a specific set of services: the knowledge-based services. These services contribute to economic development, not only through their own growth in employment and income, but also through their potential to improve performance in the economic system via knowledge transfer and progressive specialisation. They are capable of stimulating productivity growth through various sources of competitive advantage. The data leave no doubt that the rise of the knowledge-based economy is under way.
Within the EU, industries which buy a lot of inputs from knowledge-based services display higher labour productivity, higher growth, more stable employment and higher quality differentiation. Yet within the Triad (EU, USA and Japan), it is the USA which is strong in this type of industry, while the EU is more specialised in industries which depend less on knowledge-based services.
Business-to-business use of e-commerce
Another under-appreciated facet of competitiveness is e-commerce: not the headline-grabbing rise and fall of the dot.coms, but the much more significant growth of the internet as a medium for business-to-business (B2B) transactions. Four-fifths of e-commerce is conducted between businesses rather than with the public at large and, despite the paucity of reliable statistics, all forecasts predict a strong rate of growth.
One example is the "e-exchange", an electronic market place where businesses can trade with each other. Established markets like the London Tea Market or the Dutch Flower Exchange have already moved on-line, as have a thousand new markets in the last year alone. Largely invisible to the general public, B2B e-commerce is a potentially huge sector of great importance to the European economy.
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