Do we really need less state intervention in the economics of innovation?
Do we really need less state intervention in the economics of innovation?
The public policies necessary to support growth change depending on the distance from the technological frontier. The policy on competitiveness and public support for investment in human capital are more important when one is closer to the technological frontier, whereas macroeconomic policy (monetary and fiscal), designed to reduce cyclical fluctuation, is more important in countries with financial markets which are little developed.
ladies and gentlemen homage presentation you have the floor anything yet maybe after the talk you will change your mind it's a very great pleasure to be here and you know in such impressive premises and I always say when I come to Italy there is a big difference you know between Italy you know trying to and Kendall Square I thought every everything is beautiful here weather there everything is just contrast between its it's very impressive to be so I I was asked to talk about innovation based economies and and I thought it would be fun to discuss to put some polemic some controversies in the debate there is this big question and we just went through an election in France which I didn't I wasn't my side but that question is very much at the heart of most political debates in Europe is that do we need less government or less state as we enter an innovation based phase okay so that's and I will argue that we is not so much less stay that we need but different type of government intervention so the the starting point of this kind of stories that you say well you have a EU okay the Western Europe particularly but now within a larger with the newcomers versus the US and the story is that up to the 1970s between Second World War and 1970 you was growing faster than the u.s. we had less unemployment than the US and so we seem to have a an economic engine which was working well which was delivering essentially almost full employment high growth rates were you know big rate of increase in income standards in in a standard of living and so the system was delivering okay and and then starting after the oil shock the the system didn't deliver so well I mean growth went down unemployment went up and and we stopped catching up with the US in term of our GDP per capita and and since the mid-1990s the us have been growing faster than we than we did is maybe this year maybe the first time where we might grow faster than the US but up to now since the mid-1990s the u.s. were growing faster so there is a kind of reversal you see 30 years after World War two we are doing better than the US lower unemployment rate higher rate of growth and now it seems that is the other way around we have more unemployment than the US and we have less growth than the US so something is not working with our with our economic engine and so what has to be done and so I was working on the report which was called the superior part it was a report to produce the produce coming tomorrow and so it was done for its pro do you set up the a group of people to think but they precisely this question why is it that Europe is not growing as fast as the US and and the main conclusion we came up with is to say well you know Europe had institutions so I will become more precise what I mean by institutions which were good for the needs of an economy that was catching up so what we were busy doing after World War 2 is to catch up with the US - you see to reconstitute our stock of capital to imitate more advanced technologies we had we had to catch up and we had good institutions for that and I will come back to the institutions we had for catching up but now we are more we exhausted we exhausted what we could get from catching up and now we are more into the business of innovating and for that do we don't have the right institutions so now the big debate is how should we change our institutions to - to trigger growth in Europe and that's the debate you've had in Italy as well you know Berlusconi Prodi none of them says that you should keep exactly as you were before but the way Prodi wants to change things is not the same way as Berlusconi and in France the way the left or the center would like to do it may not be exactly the same way Mr Sarkozy might be do do it although it may change along the way so we are having these debates we all agree that we do we have that the the animal is sick the animal has to be operated but we don't agree exactly on how it should be operated and how we should you know put Europe back on on a growth path okay in particular the debate is on the States is it just that we should reduce the role of the state and say lower tax lower size of governments is it just about that or is it something else and that's what I will try to talk about I may not be I may not be able to go through all the slides but you know at least we so the first idea is I already mentioned is that when you are country which is not very technologically developed where we are for example far behind the u.s. in terms of GDP per capita that's what I call Technology level so I say that I am very much below the technology frontier then imitation is a big source of growth you see if I imitate someone much more advanced than me I can I can grow much faster you see I can make a big leap just by imitating someone who is more advanced but as I become close to the technology front chair as then the extent to which I can grow just by imitating it becomes less and less and then I need to go into innovation I really need to innovate but to innovate you don't need the same institutions as you do to imitate so the so this is a table that just shows you that industries that are more frontier they invest more in R&D so R&D density increases as industries move closer to frontier so that shows really this table I will not go in the detail that there is a very close link between being close to the frontier and being very much investing in R&D and innovation you see you is the same thing when you are close to frontier you are very much into the business of doing R&D and innovating when you are far below you are more into the business of imitating okay so I don't want to spy so now the second idea the ogre that says you can't see the ah so the thing is not showing and this verse is the beginning oh my god oh okay so yeah that's good okay can you keep it as it was before I want to see my face okay very good so basic idea one imitation metals more metals more for country sectors which are not technologically advanced innovation matters more for growth for country sectors that are close to technology frontier and here we see that you know in fact it's it's a table that shows that that in fact industry that up as they get close to frontier they invest more in R&D R&D and frontier is the same thing you see it's very much the same thing so now the second idea is that to imitate and to innovate you don't need the same kind of institution for example when we were in the business of imitating or accumulating capital it's time to have government subsidies for example in France we had a very cold artists view of the stage you see we we give we give we develop okay trains things you know planes and so government subsidies okay we had Industrial Policy we would say duty we should do this we should do that we had a plan in France I don't know about Italy but we are very much of something of an industrial policy limited competition conventions was very limited in France and we had also limited labor market flexibility okay those were the institutions and we had education systems that were mainly emphasizing primary secondary education that's enough to imitate okay so those were the institutions of the 30 years after the war you know that made us grow fast at that time but now we need to innovate and to innovate I will show you that openness is important entry is important market flexibility is important and private finance in particular venture capital for new innovating firms is very important much more than state subsidies okay so we need to move toward more market oriented society okay and so that you can see so for example and so the conclusion is that as we become more developed we need to charge our institution in order to sustain growth we cannot just always keep the same we have to change so for example if you look at open there so let me just explain to you how this works you don't have a laser okay but that's no big deal so if you do yes I should I show you the microphone okay so if you look at the graphs here on the horizontal axis you have the extent to which countries are close to frontier or far from frontier so or technologically developed or not developed so for example here I just look at so you look at you look in fact that so if you are very low below you see where to the left you are not developed if you are to the right you are developed that's the horizontal axis okay the vertical axis show the growth rate now what's interesting is that you get there for you this is a kind of cross-country regression and that gives you a relationship between how close to frontier you are and how fast you grow so you see that all these lines are decreasing and that is that in fact reflects the fact that when an economy is closer to frontier is more developed it grows less fast for example the Tigers grow very fast China grows extremely fast but when China will become much more developed down the road it will not grow at that ten percent a year so that's a normal thing when you become more developed your rate of growth tends to go down okay because you've caught up to large extent but the question is that which try does it go down and that depends very much on what you do so on the left hand side you have it's a pity that I don't you don't see on the left hand side yeah it's a pity that it's going is not going that you don't see what's written on the upper part on the left hand side you can read if the closed economy do some economies that have not made very much open open up to the two foreign trade okay so economies that have not opened to foreign trade you see when they get close to frontier and they have not opened to foreign trade they go they you see the the rate of growth goes down very quickly you see what I mean as they become developed so when they are far from frontier they grow fast it's okay so it's okay to not open up to the foreign trade when you are very far from frontier when you want very much on the left hand side you see but when you when you get move to the right you see when you don't open up the line goes down very fast whereas the two panels on the right hand side of those economies which open up and when you open up of course you go your rate of growth decreases a bit as you move closer to the frontier but it decreases less fast that mean you can preserve growth more you see that's the important diagram that you learn so if you close if you keep your economy close fine okay so so that shows that it's very bad when you are not developed it's okay to be open or close it doesn't make a difference but when you are technologically developed it makes a big difference to be open or to be close you should be open okay so that's what tells you as the country moves closer to frontier it becomes more and more important to open up trade okay which is a form of liberalisation we talked about trade liberalization no big deal if you don't liberalize far below frontier big deal if you don't liberalize close to frontier okay now you can look at entry entry is not the same thing as trade liberalization entry is how many days it takes a firm to be created okay you have this flavor and culture measures of how many days of administration it takes for a firm to enter okay and what you want to do is that typically in Europe we have very high entry costs compared to us okay and so we should reduce and recurs so now if you look we have exactly the same feature as with as with openness on the left-hand side the two panels on the left hand side are countries which are not reduced which have high entry barriers its countries where it's very costly and time-consuming to create a new firm and you see that in those countries it's very bad for growth as you approach the frontier you see you can see that the line goes down quickly you see where as on the right hand side you have those countries with low entry barriers and those it's fine for entry it's fine for growth when they are close to frontier you see what I mean they they maintained a and I wrote the rate of growth doesn't go down by as much as you become more developed because you have in fact open up you have reduced entry barriers so again the conclusion is no big deal to have entry barriers when you are far from frontier but big deal to have entry barriers when you are close to frontier ok so all those those things tell you where you should liberalize so you look like a liberal economy like a Chicago say you know liberalize liberalize Debraj which way you and confit should do is to eat you yeah thank you what European countries should do is to liberalize trade liberalize entry and that's it and that's what you need to do we should be pure liberals okay and that would suggest you will tell me well when you are telling your sir is that you should reduce the state have the state move out and just leave our allies and and off we go okay and I want to argue that in fact a closer look at the data suggests that in fact is not true we don't want to reduce the role of the state we want to just modify the role of the state okay that's the that's the that's the the view I want to define here so so far let's look at the R&D policy of course there is one thing you can do is to say of course you want to trigger to foster innovation and R&D investment first thing you will do is to subsidize R&D investment or to reduce tax for entreprises who innovate but I will tell you something that's not the main the most important policy I mean we may want to have R&D policies and I think it's important but it's just one aspect it's not the most important you see if it was some people believed at some point that R&D was like a magic powder okay you put R&D subsidies and you do like this and and then you make grow you see like plants that grow fast you see because you put the R&D it's not working that it would be very nice but that's not the way things work unfortunately okay so you have to go beyond that okay so now I want to go back to entry competition I seem to say before well when you are close to frontier when you are technologically advanced you should liberalize entry okay but does it mean that you have a reduced role for the state no because you see the way it works is like this here I have drawn on the now I have a laser you see so it's great so this line so this is done on UK firm level data so I take some in firms in the UK but you can do the same taking firms in Italy of firms in Russia or firms in India and I've done that for various countries and we get always the same picture so the blue line is the firm's that were that are so on the other on the horizontal axis is the entry rate is foreign entry so when I am high I have a high rate of foreign entry when I'm low I have a low rate of foreign entry okay and on the on the upper side is productivity growth which is like innovation and now the blue line is those firms that are initially technologically advanced they have a high productivity to start with and we see that when you liberalize entry those firms in fact it stimulates productivity growth in those firms so suppose I am a guy I am already doing well and you liberalize entry on my market I say wow I have to work harder to beat the entrant but I am confident because I'm already a good guy so I know if I work hard I can beat the entry the entry thread okay so the I innovate to escape the entry thread so those guys they you see they react positively to entry entry is good for innovation in firms that are already doing well okay they know they have a chance to beat the entrant to survive the entrance but the red guy are the other leg girls are those who are or not very developed and they say God if entry comes in whatever I do I will lose my profits why should I invest in innovation because anyway whatever I do will be lost by entry will be eaten up by entry so those guy are discouraged shows it typically those who are already doing well is like in a classroom there's been studies on classrooms when you put good people in a classroom those who are already doing well are stimulated and they work better and those who are laggards they do worse caroline hopes be and others have done this kind of study so exactly it works the same way with pupils as it work with firms so you see that the entry may be good overall for growth but it has different effects on the good people and those who are like girls some people benefit from entry some people lose lose from entry and now there is a question where you do with the workers all those guys who decline what do you do with the workers there that's why you need the state the state can help relocate the workers from the red firms to the blue firms you see and that's why you need a labor market policy to to accompany the competition policy you are putting in place and that's a very important role for the state that the study don't have before you see you see how the and that's a big problem we have in france we want to put flexicurity like they did in denmark i know there will be a session on flexicurity we'll talk about that or you want to do something of that kind it's exactly that problem you want to to be able to survive you see to say well I will liberalize product markets like taxi drivers and many markets at Brody and Padua scope are trying to liberalize but you did a labor market policy to accompany that movement okay now that might be a difference between Berlusconi and Prada Prada says I need a labor market policy maybe Berlusconi says I don't maybe the center left in France says that we need it and and the right says we don't know that we can have a debate on that okay the Nordic view versus the anglo-saxon view ok conclusion we need to accompany competition policies by labor market policy to help relocate labour from declining to expanding sectors so now you can take another example it's education so I told you when we were during the 30 years after World War Two we were in the business of catching up with the u.s. essentially to imitate to imitate primary secondary education is fine in Italy you have very good primary and secondary education and so in France although in France is declining a bit but it's okay I mean we have an ok primary secondary but that if you go to university in France you are in the third world it's terrible it's PO it's poverty its misery it's awful I mean just go there you will see it's all falling apart you know and and and so the question is is that a big deal or not a big deal around then again I have I have this is education and here on the left hand side I have those countries who invest essentially in no education and not in higher education and those are those countries that invite more invest more in higher education you see when you invest in low education nobody you and you are far below frontier that's fine no big deal you see those who invest more in low education or more in higher education they essentially grow at the same rate when they are Fabio frontier but look now close to frontier it's terrible when you invest in low education whereas those who invest in higher education they do relatively well close to frontiere you see what I mean so you have again like in the openness and the entry picture when you are fabulous frontier no big deal if you don't invest much in in higher education but when you are close to frontier and you have to innovate big deal not to invest in higher education and that's what Europe needs to do and that's why we are having now the ERC in Brussels the Bologna process we are now realizing that things need to be done this way okay and you can find that with the US as well when you are close to frontier you see your growth benefits a lot from research education when you are far from frontier you want to invest in Alabama it's mainly into your colleges that you want to invest you see and that's exactly the same across US states as you find across countries now we need therefore to invest more in higher education that's the role of the state who invest more in higher education well it has to be pushed by the state in France for example Sarkozy should invest more in higher education for the moment is busy giving money to you know the inheritance tax being suppressed to give things an avid I hope at some moment at some point you will put money where it should be put which is to invest in higher education now the other thing is that's good but what about the governance of universities is it enough to invest in higher education and governance of universities this is an interesting picture you have you heard about Shanghai the Shanghai ranking you know thereís been a ranking last year by University of Shanghai of universities around the world based on publication citations Nobel prizes medals whatever okay and and France was very badly ranking and I can tell you Italy is also very bad worse than France you see and now what's very interesting here is the sum of ramped proportion of some of rank so it gives you a ranking and on the other on the on the and here you have population so essentially if you do a 45 degree line those who are above the 45 degree are doing well those who are below the 45 degree are doing very bad so France and Italy are really the very bad the very bad guys okay we are doing we have very poor performance in terms of the Shanghai ranking compared to our population and now the question is what are the characteristics of the good performers who is doing well Switzerland Sweden UK all those guys are above the 45 degree lines okay and of course they have common points and they have differences but now what are the characteristics of good performers well what you can show that performance they have a high budget the student so when I say you have to spend more on higher education you need money but then you need other things wage setting by the university high wages high rig is controlled by the university so what you Rin and Laurie ddt'd wages that mean that people of the same age may earn very different salaries because one publish model and the other okay yeah you would like to reward performance not just age okay that's very important too and so in fact what we realize is that those countries who do well are those who first invest a lot in higher education but also give autonomy to the university the big world is autonomy and so that universities can hire can use the money they have to go on the market and compete for the good professors and and that's the that word in fact you know does the the basis of the whole system of a good system of universities so you need the combination between autonomy and and and money the bad performers more public low budget the student high on dog Emmy wage setting by the state high rigidity in wage and state approve the budget and those are characteristics mostly of the bad performers so what you get is that we need to invest more in higher education but at the same time you increase the autonomy of universities doesn't mean that you privatize them but you need more autonomy so again is not less state is different state the state should not be involved as much you know as before we said the wage we control everything we should not be control freaks but other side at the same time the state should very much be involved in in setting up an incentive system and a competition system that that in fact promotes excellence within the academic world you see and that's another again is not less state it's state differently okay so now let us down how long do I have I'm almost done oh I have another 20 minutes or I won't need 20 minutes no but we can go again because maybe the market flexibility is like great cause I can so let market flexibility so we said we can show that labor market activity is more growth enhancing for countries that are more technologically advanced okay because you need innovation and innovation requires entry exit turnover and that requires the market flexibility you see it's very important for a firm innovative activity economy to be able to move to another market and be able to hire and fire very quickly so you need labor market flexibility okay now the thing is that the state can help them by having a flag security what did the Danish do the Danish said okay firms can hire and fire freely but but when you fire a worker the worker is paid 90 percent of his salary so the state intervenes the state provides you know is at the head of a whole system of of training is not necessarily done by the state by the state is monitoring the training process and then we propose new jobs and if people refuse more than two new jobs they lose the subsidies okay so you have a system that reponsible is everybody but the state came as a broker without the state you would not do it the state is crucial to be a third party between the unions and the firms you see and and the role of the state is more important and it was before it's a role that did not exist before and now we can take different forms you see it Denmark is not Italy those countries differ but you need a role of the state you can't say just the state steps out of this the state has to be part of it to make it work okay and I think that's again a contention that I have so now I want to finish up with macroeconomic policy that's a very important issue because of the euro area okay so there is a big debate and you might know about is that about ECB the European Central Bank and the stability and growth pact and and and the picture is this I always like to show that picture that picture there this is the variation in structural deficit of other years and this is a variation of short-term interest rate so this is like budgetary policy and it is monetary policy here you have a recession between 2000 after 2000 we enter recession when to the US this is the u.s. the US what do they do in recession they lower short-term interest rate and they increase structural deficit a lot the UK Mallis does do also the same with big swings but the eurozone they do nothing they don't move they barely move you see if I if you are cross your phobia don't look at this feature this feature is terrible we are not moving we are like this not moving at all you see and the question is is that a big deal or not a big deal and I want to argue that it is for an innovative economy what is my reasoning there is that in principle recessions you could say are good for innovation is when you are in a recession that you question yourself and you say I should innovate maybe I should escape the recession by doing something else you know when in your life things don't go well maybe that's when you start questioning what you should do in life so in a priori you're shooting well recessions is not bad news you can just decide to do something else the problem is that if you want to do something else is to invest elsewhere and you need to to invest you need to borrow you need because you don't have the money you need to borrow when you are credit constrained when you are pretty constrained the problem is that it's very hard to borrow in recession so recession are typically the periods where you would like to invest somewhere else but because your cash flow is very low in recession it's also the time where it's harder to borrow you see so there you have a problem is that typically when you are in economies with credit constraint where firms are credit constrained they suffer a lot from recessions and booms you see that in recession they cut their R&D typically they cut their innovative investment whereas in fact they should be doing more of it in recessions you see and so the question is well what what should the government do ensure the government just stay out and the idea is that no the government should should in fact replace and do what the credit market cannot do the credit market I cannot lend you much as a credit as a creditor when the state can come and and provide a boost you know to complete what the credit market cannot do cannot do and that's the idea there is to say in fact counter safari in particular what I call counter cyclical budgetary policy is the idea that the government spends more particularly on investment in recession to boost the firm's that need a boost because otherwise you see the fact that there are credit constrained and they are in recession you know can damage can damage the R&D there are innovative investment so what you do is that you say whether I should have a counter-cyclical fiscal policy the government should do more deficit in recession and then repay the deficit reduce the deficit in an expansion phase okay now you will ask I will ask around here I won't show you a tables but this table don't fall don't look at it it just tells you that this table just tells you that when you have frost creakle government investment or government deficit is very bad for growth and and that you should it's very good for growth to have counter cyclical budget deficit in fact that's what this table is telling you okay but now look let's look at cross countries you see this is a very interesting picture that we give a bit like we had before that's over the years the extent to which the budget deficit became more or less counter cyclical so this is the UK you see the UK has become very much more counter cyclical of other years the u.s. also a bit more counter cyclical but you see the MU zone the MU area has not become more counter cyclical you see we have remained you see we should become more counter cyclical and we don't and and that's a big problem now how can you solve that problem well there are various ways of doing it for example we need a government of the true euro government there is something that's missing in Europe you see in England they have the Bank of England and the Treasury okay and mr. Gordon Brown speaks with mr. Mervyn King you see in their respect each other they don't spit at each other they respect each other and together they determine the inflation target and they they talk they determine the macro policy together it's a dialogue between the bank which has independence in implementing the policy but in defining the policies done by the bank and the government and in Europe you don't have such things you have the ECB which is a free electron they are on their own there is nobody there is no counter but there is no golden brown in the euro zone that can tell that can talk to the ECB and says you know where there is maybe something wrong with your actions right or maybe we should rethink the inflation target or there is no such thing and the countries in the euro zone have a big problem being counter cyclical in fact they do adapt reciprocal mainly and so what you could do various things like rainy day funds or react you know various things that could be done to restore the current of cyclical fiscal policies but all those require more coordination within the euro area and they require through government of the euro area so I think this is will be certainly discussed over the years I'm sure you will hear these discussions that's one of the things Sarkozy wants to push so when it does good things I won't go against him but that's part it's a big debate there start to have a much more voluntarist an effective macroeconomic policy in Europe so my general conclusion is that innovative economies do not require a less state but they require state differently okay you need to accompany competition policy by relocation policies to help workers relocate from lagging sectors to more advanced sectors you need to invest in flex security so that people are willing to take risk because they know that mobility will not be at their own expense only that the risk our shared equitably between firms and workers you need to invest more in higher education because innovation requires higher education you need to be more activist macroeconomic policy because otherwise firms are discouraged to invest in R&D because they know that R&D investment will be badly hit in recessions unless the government's that steps in to help them and you need also to rethink in the shrine policy you can't beat us before all top-down you can either be also be all but a map some areas like you know a bus or some big investment that require coordination may still require a sub top-down policy or for example global global those are areas where top-down is important where government role is important but in others you should have more bottom-up policy so it's not a new way of thinking about government intervention in the industrial fair and finally there is a whole question of agenda setting of reforms I know that's another debate we have in France what should you be doing first and which kind of reform should you do together I think there is no whole thinking to do when but you want to implement innovation enhancing reforms how you do your agenda setting given that you have a budget constraint given that reforms are costly and you cannot spend in everything at the same time on the other hand some reforms are more effective if done jointly than if done sequentially so that that you know there is a whole set of question about agenda setting and that concludes what I wanted to say very grassy buggy on the guest oh speaking also so passionately we'll have time now for questions and answers we have another time constraint in this case so I open the floor to questions if any or comments do you have any comment on the observations made by Professor Ariane I would say that I absolutely agree with what he said and I'm I would like to express to him my solidarity because his party has lost in France we won in Italy and yet we are not satisfied either you see so well I can start with a remark or a question about the new role that he attributed to the state in function of development and innovation of a country well in relation to that could you provide us with some practical example that she could positive aspect could you mention perhaps one European country which has been particularly proactive in terms of innovation using as a sort of guarantor of the past but with this new role that you mentioned well you know I have the feeling that for example some Nordic countries I mean I know that Sweden is undergoing other reforms but I think several countries continue beyond countries for example Denmark in particular or Finland I think are interesting examples where where they have tried uc2 to promote innovation to push very much and they've done you know they moved into mobile phones into Internet into you know the ITC revolution but in a way that was facilitated I think by by the flexicurity you see concern and so i for me you know that there is we have to learn we there are things to learn it's not that we can transpose you see there are differences so it's not that we can copy because and I think a week our view that there are differences you know in terms of trust and and norms between France and Denmark that makes the Danish system not immediately transportable to France for example but I see me that that so it shows that you can combine the two and and so I think we have to learn from their example what if a yellow fuzzy possible odorous until ability could be asked and on translate into English unfortunately using a microphone unless the gentleman uses a microphone no translation is possible thank you and you should speak into the microphone we cannot hear him at all an article with a a moral theory Bertie it was her read and there an explanation was provided in relation to the needed when you are far from the frontier and then being different when you're close to the frontier so the question is how can we reconcile what you said today and with the article and then the second question is the following do you think that today we could be a new at the beginning of a new period of catch-up for European economies which have basically wasted eight or ten years in missing the opportunity to absorb or a catch up with the technology level acquired by the US but no indeed can catch up also because the productivity grows in the US has reached a limit and after Walmart unless we go back to the previous situation what can we do yeah you refer to the my paper with a similar NZ but your paper they are the point we were trying to make was that for example we are taking the example of competition policy saying first that competition can be good close to frontier but not necessarily good far from France I was kind of infant industry argument we were flashing out there and we said then there is a problem is the transition there are some institutions good when you are far from the frontier when you are not very developed cease to be good when you become close should you put in place the ones that are good for video frontier and cease to be good when you are close if you know that it be may be difficult to change for example should we shouldn't Europe right away from the Second World War onwards have very liberal policies so that we would not have the problem of transition because maybe we would not have grown as fast during the 30 years after the war but we would not be now stuck into the problem of having to to change our institutions and that's a big debate there that Schleifer Stiglitz and others have been part of okay and and which which raises this problem of transition but I was the problem we were raising there we were not saying that competition is not good close and and with that on that was exactly confirmed to this we were raising in that paper the problem of the transition is that given the transitions may be difficult shouldn't you have a kind of Washington Consensus which is to say liberalize always maybe it's not always good but then you avoid the transition problems and that's a huge debate and I think still there is a case to be made against the wedge in the pure Washington Consensus view but that's that's the that was the big question raised there and we can maybe have more discussions on that a young girl thrown it's irregular anybody else wishing to take the floor or ask questions Filipe I noticed in the first part of your talk you had a lot of models and a lot of graphs but as soon as you got to talking about the funding of universities the data and the graphs disappeared and so did most of the theory and I'm a little bit suspicious of your your recommendation that the the big secret in improving universities is to pay people more because I don't really understand where the accountability and the competitive forces are going to come from in a system that will in the end still be essentially state controlled in the UK there's been a huge increase in spending on doctors UK doctors are now some of the best paid doctors in the world but their productivity hasn't changed a bit because they're essentially not accountable history very well in fact I didn't show why I show one graph on the higher education but because I didn't want to get too technical but in fact of all the things is probably the one I've worked most on for the past six years without the work with Caroline in Hawke's Bay which you will be in London I'm giving the government lectures next week on that subject for two days at UCL so and I could show you we've done it's been in fact work where we really will regress growth on higher education and lower education and whether or not states are close to frontier like California Massachusetts or far below frontier like Alabama and those are regressions wherein we instrument we use political economy instruments so we can really instrument for education spending which could never be done in cross country regression so in fact we can really instrument and we see wherever we do that closer to frontier higher more spending in higher education is growth enhancing that's a constant and the other thing we see and we did that both on the I showed a picture on the European thing but we did regressions on on on US public universities and what we show there is that there is what we call is a jargon interaction term which is positive and significant between money and autonomy when you give money more money and public university in the u.s. is more autonomous the effect of giving money on growth or on fabrication is much bigger so there is clearly so it's very interesting because we see that in the picture but the descriptive analysis we did for European universities is confirmed by the more rigorous regressions we did using just University data that autonomy and money goes hand in hand inside you it's the combination the winning the winning combination is that one and and those are very well instrumented they are the the u.s. regressions are I think you will you will see them you come to the government but I think there are they were all to the merit of Caroline hooks be so I don't not you know being there I think serious regressions and they confirm what you already see you know in a more impressionistic way looking at the European data that's what's interesting is that is the combination of the money and the governance which which works well actually our personal demand being wasted Zhanna the other questions yeah please may I be allowed to go back to the example of Finland and address some details well the Finnish case very much in common with Nokia an international leader in the telephone sector but I don't believe that the role of economic policy is particularly clear here if we want to study the reasons which let's fill in to becoming the country it is today we could talk about investments in research and development or investments in education but a fundamental element in this history of Finland goes back to the 19th century and in particular to the relationship of Finland to Russia and of course the idea was that of leading Finland to detach itself from the state on the one hand there was the habit on the part of the state to provide useful services to absolutely not the norm in the rest of Europe or in the rest of the world because the telephone sector the telephony sector was absolutely free there well and the result has been that a market has ensued much earlier than elsewhere well this habit has been a substantial component for the success of Nokia and this explains why the Finns are particularly good in their telecom sector well this has very much to do with the economic policy supporting innovation with we could conclude conclude that what happened in Finland it's something which cannot be easily transferred to other countries there was a high recession in Finland and the existing firms were eliminated and as a consequence the Nokia managers were encouraged to bring about a real revolution here to which extent can the Finnish case be replicated oh but FINA I want I don't want to Finland but I think there is something interesting to say about Finland as well is that here is the example Finland with an economy that went through a big crisis and we saw the 1990s with the fall of the Soviet Union and and there was a back against the wall effect and that first this economy to reform and in didn't do it in the same way as the UK did it with Thatcher so I think that's something interesting and one one of the aspects by the way of the eurozone is that we disk with policies which were not very reactive macroeconomic we we did not help reform so much but also we had a kind of an aesthetic effect of the eurozone I believe that there is a kind of an aesthetic effect you don't perceive the crisis as Shafi as you would if you see your own currency falling as within in France you know in 83 where we realized we had to to change things so I think the Finland is an interesting case of a country that find itself against the wall okay and then reacted in a way which was not identical to UK because it preserved the social model more and and and still implemented very very big structural reforms but still while preserving a certain number of social of social conquest I think there is this appear article that we did after the report where instead in fact if you have two kinds of countries you have three kinds of countries essentially you have two kinds that work that we respond and do well UK and the Nordic okay and then you have the Continental where we are okay and so the Continental the UK they have high growth but high inequality and and and a number of social costs okay the Nordic they managed to grow fast to reform and to reduce those costs and the Continental the evening done I mean they did not reform that he don't do the short reform they are not going fast but they maintain relative equality and he said well you could go from the continental instead of going through the UK model you could also the Nordic model of course but I mentioned Finland before but I think of Denmark I think of having the idea that you can do structural reforms with at a lower social cost than it is in the UK and I think it makes a convincing point that the social cost was lower in terms of inequality in terms of the you know in the Nordic countries than it was in the UK which shows that there is not only one way of reforming there are several ways and in fact what we see in the debate in France or in Italy is precisely that everybody agrees we should reform but we don't agree on whether we should follow the UK way the Sagittarian way or a more nerdy approach and I think that's what I was trying to convey and that is true that Finland has his own peculiarities by the Recon side what's interesting you know it's interesting the Finland or the knowledge because Prescott goes around and Prescott or Lucas it says you know the big thing to grow fast in Europe is lower tax okay that's the thing and in fact this is this is rubbish it's not true some countries have not lower tax so much and they managed to do it very well other countries have decided to lower the but the key things are the structural resource not the fact that you lower tax on that that's what I was after when I mentioned the knowledge egress is the UK are demanding questions ladies and gentlemen we still have some time good afternoon just two questions of my part well they refer to the university system well the first question is the following what is the best university model according to you we have the u.s. the British model lot of investments and very few Research Center's very few famous universities whereas the Italian system is marked by the presence of many universities widespread on the territory which offers the possibility to many people to have access to university even though the same people don't have easy access to the market to the labor market the second question refers to China you know the China used to be quite far away from frontier until some years ago and as a result of a series of economic policies it has greatly developed in recent years this means that they will have to change their approach to the university system but do you think that there's going to be an impact also in terms of social policies so long as long questions I wanted to tell you something it's very interesting when we looked at this your apparent survey that I was mentioning in fact in in Britain they spend less I mean there is less spending but they gave autonomy okay and so what you see in the UK is high mean high variance you see some universities are doing very very well and a number of others while doing poorly okay that's what you get because you have little money to spend and it goes to some places and others with such a suspend exercise or the various schemes but others do very poorly Switzerland invests more and Switzerland it will even though its mom state she'd managed system Switzerland they have high mean high variance low variance in Switzerland you have high mean but also many universities do relatively well you see but they put more money into the system as well so again when you look at universities you have a bit like the sepia paper I was mentioning before you could go to UK waste I don't spend more I just give out on me more autonomy and then I have the variance but I have higher mean but a high variance or I could decide I spend more into the system so that I preserve the relative equalities that maybe that will have more inequality among universities but still the genie will be under control and still the I bet better that the average level the mean level will go up because in Italian France we have a dramatic problem that we need to increase the mean you see we need to enter the shine guy ranking much better that we have so far and there again you have the two ways of doing it you see and and that you see that from the data but you see that from the from the analysis shaluinn degree the Valentin here in the front stream of like the developed countries but I would like to know what's the role or like the brick especially preserved Russia India in China in innovation and technology so it's a rather vague question but I would like to know your personal opinion about that to take into account that you have an ICT revolution or that your mouth and Brazil should enter so there are so what should they do differently I think Brazil for it typically in a number of those countries I know that I've seen with Brazil I know South Africa a bit better because I've been working in South Africa the big problem in South Africa is lack of competition and apparently in Brazil you have a problem of lack of competition you should open up more than they have Brazil has a problem that they invest too much in higher education compared with lower education but that comes from the high level of inequality in that country is that in fact essentially the system was in fact you know designed by the rich for the rich so that there you had kind of most the spending was in higher education but it reflects it was not adequate to the level of development but that came from exactly that political economy problem sorry India and China a la India is very interesting because India has gone through or bigger if structural reforms in the mid 80s and in the early 90s and what they did is to liberalize trade and entry which I was mentioning before but again you can see there that it was very good for firms that we are doing well but very bad for those well a girl's also what you can see that it worked very well in states where you had already labor market flexibility but you have some states of India where you have more labor market rigidity and there I didn't work so well so that's very interesting that the same reform not only may work differently for firms that are more advanced or firm that are less advanced but also in states that have different type of what I would call slow moving institutions so the Indian case is very interesting on its own I've I've done a lot of work on one paper on on India again with this view that you have to adapt the policy to the environment you see be the technological development financial development all those the labor market institutions that you have in the state that's the process or guilt for cellphone Doberman eltra or service the only other questions please or remarks I have a very precise question suppose you create a euro area let's get back to the macro policy suppose you create a euro area political government what policy levers does it have now and what ones would you give it in order that it could achieve anything except shouting at the European Central Bank to change its policies well I mean we are working we have within the Bruegel thing we have we are working with the jumpy zany and grouper on him and sappy and others on thinking about that so we are in the middle of it so I could not give you a defense but things for example we had in my various light examples you know what would be helpful there is something called rainy day found you know what ready they found out those are phones by countries that you put a side manner in good times to use in bad times but now for a country individually to do that is very hard because it's very hard to say that it's a manner that could not be claimed if you do it with a third party like the euro government you can do it much more easily that's an easy one another thing that you could do with the euro government is to tell your country that the structural reforms okay you do structural reform flexicurity that's costly that will force you maybe to go beyond the 3% deficit you know the deficit will be your debt ratio will be higher than what the stability and growth pact says well because you are doing the structural reform we may allow you to borrow to take with you an advance on this that you might reimburse later when you are using the growth that you generate with this structural reform another thing is to maybe the euro area could become a zone of labor market mobility that you could transfer functions for example within the euro area more easy it would be very hard to do right away within the 26 see you countries but maybe within the you aria you could do that more easily another thing is that for example discussing exchange rate you know suppose now the dollar or the yen are in crazy levels who who can discuss with those guys who can determine who can represent the eurozone to talk nobody nobody can talk to China or nobody can talk that's why the president of a eurozone with power could do you see and and those are the kind of thing we think are important but those are kind of ideas we are fleshing out that you know should be attributions besides being to the to the ECB exactly like Gordon Brown is a partner to Martin King grants Apostle John a be emerald Amanda for Quinn Medicine question here Graziella average post army important laws I would like to move a bit away from the scientific level and ask a couple of questions which are more general perhaps and then I you can also take your time in providing me with an answer I'm not in a hurry you see my first question is for listening to you in relation to your proposal about a continuous flexibility when it comes to the behavior of the state and also in relation to the policy for training of labour and the social welfare system so thinking about all these things I actually come to think of two problems first of all the size because if you bring as a model Sweden or Nordic countries really there will have relatively small countries which are very cohesive so to say and it is easier there to implement the reforms that you said and it is more difficult to do the same in a country which is much bigger where there are many regions where population is more much more numerous and so problems vary a lot so my first question is what social costs do you pay in the moment when you go for this continuous variations indeed today we have for instance a generation of young people who have a problem of identity because they really don't know what they will do tomorrow so if we have this continuous change in the role of the state what about it's the impact of that and then when I listen to very scientific and specialized I always come to think of the problem of sustainability environmental sustainability what about is the cost of all this in terms of environmental sustainability the financial world and the state in relation to to again to sustainability how do the two things relate so and this of course leads us back to the social aspect I think that this is a fundamental issue and I think that it was missing a bit from what you said thank you I can't do justice to I can't do justice to all you of the whole broad question I will try to do it for example France today ok so it's true that compared to Denmark Denmark they have big unions most people are unionized I think unionization is everything compulsory for anybody and you have essentially one big Union in France you have several unions and the rate of unionization in France is very low although the coverage rate is very high ok so it's true we need to move in front towards and I think that on this Zucco Z and Royale agreed that we need to increase the rate of unionization in France to really have the elements of a social dialogue so I think we need to go in that direction so a big program in France is the low rate of unionization people are afraid of being members of unions so there are things you can do to deal with that problem but for example before even if you do that in France we have employment agencies which are a mess because this was one for looking for employment and want to give subsidies and you should have the same agency I should say you know the employment I look for the employment for you and I give you the subsidy if you behave in a certain way so we need to reorganize our employment agencies in France and also because in France you have one agent for 140 unemployed so you have one civil servant in charge of 140 unemployed so they have no time to devote to them in in in Denmark you have one 440 so you see it's much easier for someone who works in an employment agency in Denmark to look after he's unemployed because there are much less of them so we need to spend normal that's pending we need to spend so once we will have people who follow you follow the people said you should go I advise you to do this I advise you to do that I follow your training then we trust is coming in you see what I mean and then a lot of things become possible but for that you need to spend money and that's why I was mentioning the structural reforms before universe to be very parsimonious with how you spend your money money should be spent not to give not for inheritance to suppress inheritance tax like stuff cause he wants to do money should be spent on financing precisely this kind of reform which are very costly you see and that's what maybe the eurozone government also could help and say well you need to spend seventy billion euros to set up this new agencies with this well we have to do that and then your emboss me later on so that's that's what I thought you see what whether the kind of thing I was doing then on the environment you see the thing is the following before what we call on the generous growth Theory before yeah you know the this view that grows comes from innovation people have the view that growth was coming from capital accumulation and they had the view that growth could never be sustained because at some moment accumulating capital is exhausting natural resources and at some amount we got to stop exhausting natural resources and we will stop growing so there was very much this view that we would hit the zero growth you see what I mean that we have to learn to no growth not grow at all but now since we know that innovation is a big engine of growth it changes everything because with innovation you can escape the resource constraint yes because you can find new sources of energy you can find ways of saving more and more on the energy that you have and in fact when you look at the effect of the oil shock they've been empirical studies that show that countries that didn't have oil managed to grow even as at least as fast as those who did because they had to innovate more it was an incentive for them to innovate a bit studies you see that show that those who didn't have the early was a blessing for them because they had to escape the oil shock by innovating and that I think opens up a lot and all now the whole thing is how you you try to direct the innovation in the right direction in things that you know make the a growth sustainable and that's where the debate is now is how you can direct the innovation but that I think is a fascinating Avenue for thinking and research and I think it will pay out great apology on a be mother intervening much professor Yan is there any other request for for the fool just one more additional question actually or request for the floor my question is not a technical one and is the following if we consider for instance the situation of Alitalia today so my question is the state intervention with companies or businesses such as this one which is on the verge of bankruptcy is it useful or not do you think that it is useful for the state to intervene in such a case or should the state simply that the company go bankrupt in my area of expertise but I think there are examples sometimes where because you have imperfect credit markets where having state intervention for a while for example putting my first state capital in some firms that have big role that have big externalities on the rest of the economy can be warranted you see for example Alstom in France the government decided to put money to mix Alstead survive and then Alstom but I think that there is a way of thinking is like my counter-cyclical policy you see when I said when you have a recession the state can help one way this time can help some time is to take participations in firms during recessions but then when things go well again the state can can we draw you see what I mean so it's a way runoff does the problem is you go to advert up down policies that we how you pick the winners and that always very dangerous because you may not pick the right firms to support or not to support but I think that when you have firms that have lunch discussed big externalities on the rest of the economy then there are situations you see those are cases where they may be a case from government like for example Airbus now should we let others not just like this or should we should government's intervene to keep us alive and I think it has importance to keep us alive or some some strategic sectors that you want to keep alive so so so now the whole question and that does the more general question you ask is how you now design Industrial Policy you cannot be top down on everything you have to be top down selectively and bottom up on the rest how you select that's the question but on the idea that in some selected sectors or cases the state in recession could step in to help the firm survive at that time and then we draw I think that's an idea which I think is a is a works I think and I think it makes sense you see you cannot just have a less severe attitude say whatever happens I'm out that's now the question is should you be out by taking party capital participation or like with Boeing and the US government through just saying I have you know orders public orders is public orders enough or you need to go further and that's the question I'm not capable of answering here Ronald Rowe well Ibuki that I say my question is well renewal can it also be extended to international organizations such as the World Bank and the International Monetary Fund and then perhaps development policies for countries and you know a lot about Ethiopia and Eritrea in the fact that oftentimes we could not shift from imitation to innovation did not manage to go from one level to the other from the level coming before the frontier and the one after the francha so that was the question which is very diffused all of international organizations there is clearly a crisis these days that IMF is not clear what what role IMF plays these days and also what world the World Bank plays and should it be adapted to the new the new conditions a new era now you have a lot of private actors now you have countries like Venezuela want to bypass the World Bank now you have NGOs also that bypass working complementarity and and I think there is a big issue now of what of identity for IMF and World Bank I mean they have to redefine the role I think it's and I think that's a huge that's a huge question things that the World Bank did recently which was good was to help microfinance the world bank intervened to help microfinance institutions so there was a kind of complementary is like a co-financing between the World Bank and the private you see further for microfinance institution that is an area where the World Bank has been with others that with the American in inter-american Development Bank succeeded not successful but they have to rethink how they operate because the the West first the mother McNamara mother which was very top-down and failed and was untrue they are saying well you should be very liberal but it is not that they have imposed an alternative model you see I mean and and and and you have these big crisis of identity now there is another question when it comes to control cyclical financing to businesses and funding to universities well this situation how can this how can it be applied to Italy in a situation when we have in general medium and small sized enterprises and in a country where we have a deficit exceeding 100 percent in duration to the GDP so the state budget is always very very poor it's a big it's yeah that's a good question maybe there are things the number of things that can be done probably to deal with the budget with a budget problem but I think that's an area where you know I was mentioning that maybe the euro government could help countries of example they say I invest in you know certain kind of investment which are structural I include higher education as one of those then maybe some facility could be provided you see for that purpose but on the transi it has to be on a transitional basis and it has to be say you know if you don't repay you have of course to pay more it's like interest rate and if you don't repay at the time you have to repay you pay more so that you put the country on the hard budget constraint somehow and maybe there are things that could be thought also that that allows countries like Italy to spend to spend more and reorganize well so for example if Italy says I come up with autonomy plan for universities it's not just that I give more money but I come up with a plan to reorganize completely the university system well then is something that you know the euro government could say well because you are using this money to reorganize the system that's something that we know we might consider you see and why we might help that way but if you just say I want to spend more on universities without changing that's typically something that you know there is no it's not clear that you know which one should one should you know provide you with facilities just to give more money it should be budget against growth not budget against nothing no meant individually so anka super tutto referring to the fact that the italians mainly based on small and medium-sized enterprises will these enterprises be in a position to innovate I do believe that they need for example new graduates do you think that they will be in a position to react accordingly what a big I've looked a bit at what any bits grow entry and growth of small and medium sized firms in Europe and the main factor that comes in so one aspect is labour market flexibility but the main factor is credit in fact the main reason why entreprises don't grow and don't innovate enough in Europe is because they like credit so is it because the banking system is not sufficiently competitive is it because bankruptcy laws are not good enough and you don't have enough creditor rights and therefore creditors are not willing to take risks is it because you don't have enough co-financing by venture capitalists and business engines but there is a lot there that you see a big source that the main probably factor that he needs private sector of growth and innovation by small and medium-sized enterprises is credit is the reform of the credit market and there there are various and that's not something we understand very well we know that credit is important and we don't know exactly is it thank bank concentration is it bankruptcy law is it the lack of venture capital we don't yet understand exactly what are the main sources that make the credit sector an inhibiting force for for new investment for new innovative investment and that's a big sector that's very much you know has been overlooked you see for example disappearing thought or other report I've done I've not said much on the fine and we've said a lot on the labor market and product market but very little on the credit market and I think that needs to receive much more attention very similar concluded I think that we may conclude here may I be allowed to thank the organizers of this festival for providing us with this valuable opportunity