Philippe Aghion is the Robert C. Waggoner Professor of Economics at Harvard University. He received his PhD in Economics from Harvard in 1987. His research interests include contract theory, industrial organization, growth theory, economics of innovation and education. He is the author of 8 academic books among which “The Economics of Growth” (with Peter Howitt). Interviewed by Georgios Petropoulos PhD candidate, TSE Looking at your contributions and research activities I can tell that you are interested in many fields that at first glance do not seem to be closely related. On the one hand, mechanism design and contract theory; on the other hand, economic growth and economics of innovation. Of course I should not forget to mention political, experimental economics and economics of education. It is a very interesting mix. What is your motivation to work in so many different fields?
I was trained as an applied theorist. My thesis was on industrial organization and contract theory. I was particularly interested in the applications of incomplete contracts. But, basically what I tried to do was to incorporate growth theory with industrial organization and firms. I worked together with Peter Howitt on that. The idea was to develop a growth model where you look at growth from the point of view of firms and entrepreneurs. This did not exist before. With this model we could look at growth policy design: the effect of competition, education policy, finance, R&D policy, environmental policy, macro policy which I am doing recently. So, the idea was to have a framework with which we could talk about growth policy design but always to look at it from the point of view of the effects it has on firms, on entry, on turnover, on the nature of innovations chosen by firms and to be able to test those models. Initially, my first phase was to do theory. I worked with Peter developing various extensions of our initial model. But then I moved to the empirical part. First, with Richard Blundell at University College London where we did the work on competition and growth which was based on firm level data. That was a very new type of econometrics because before, the econometrics of growth was cross country. In contrast, we followed a more microeconomic approach using firm level and sectoral level data. That is what I have been trying to do so far. So, basically, your main contribution is that you developed a link between industrial organization and growth theory that did not exist before... Exactly! There wasn’t any link between industrial organization and growth theory before. This brings me to my second question. As the field of economics grows and expands with new developing areas, specialization is necessary. However, in the last years we observe that the borders between different areas are not so distinct. Do you think that in the effort for new substantial contributions we gradually move from the time of specialization to the time of generalization? Do you feel that economists should be specialized in a particular field of study or they should have broader horizons in order to be able to identify links between different fields in economics? I think that it is a little bit of both. You cannot be too broad. If you are too broad, you are too thin. So, you need to spend some time on a particular topic. To be trained as a researcher you have to write papers that are publishable in the best journals. So, you need to go intensive! You cannot just go extensive. But, I think that it is good to have a PhD training that acquaints you with some other secondary fields. In my case, it was useful that I learnt contract theory, industrial organization and macroeconomics. But, it is true that I did my PhD more in industrial organization and theory of contracts at that time. I think that specialization, especially in the PhD phase, is necessary. Let’s begin covering your research areas and let’s start with economics of education. In a recent study you showed how the governance structure of the EU and the US universities affects their research output. Why do you think that the top European universities cannot compete with the top US universities in terms of research and job market placements? Is it a matter of funding, governance...? I think it is actually both. In fact, part of my growth program has been devoted to education and its interaction with growth. The first thing we realized was that when you are an economy closer to the technological frontier, where growth relies more on innovation, especially on frontier innovation, not just on imitation, you need to have really good graduate schools. This is very important. If you are a catching up economy, it is less important. For a catching up economy, primary, secondary and good undergraduate programs are enough. You do not need to have necessarily very good graduate schools. But, when you become a frontier innovative economy, you need to have good graduate schools. That was one of the first conclusions of our studies. So, education is very much linked to the growth policy, to the growth work I have done. Then, the idea was to say that you should not only invest more in higher and graduate education but also govern differently. And this is true not only for education but also for industrial and macro policy. The way you govern the allocation of funding is very important. Further, we saw that it was important to invest more not only in graduate education but also in more autonomous universities. So, autonomy is also important. There is a complementarity between autonomy and funding and the fact that you compete for grants. The fact that universities compete for grants is very important. Afterwards, we looked at other governance aspects and we saw that universities with boards of directors which have a significant fraction of external members seem to work well! So, we carried out a cross-country analysis and we examined different structures of governance. The board of directors may vary; you can have universities which are public, others which are private, universities with tuition fees or without tuition fees. But usually a governance structure with two main bodies, an academic senate composed of professors and a board of directors with a significant fraction of external members, works well. This is something we have been trying to push in France for example. I know that in Germany there are similar efforts towards such a governance structure in universities. Next stop, economics of innovation. Your work showing that the relationship between product market competition and innovation is inverted-U is quite influential, popular and criticized to some extent. What do you think are the implications of your work for the possible ways we could use competition to promote innovation? What do you think are the main reasons for the fact that Lisbon strategy does not appear to be as successful as it was expected? Do instruments such as liberalization and privatization really work? It is not enough to liberalize to have innovation happening. It is true that competition is a driving force of innovation because you innovate to escape competition. At first this was not obvious. Initially, there was a view that, since you innovate to get some monopoly rents, competition is a bad thing because it reduces these rents and therefore discourages innovation. This is the Schumpeterian effect. The downward sloping part of the inverted-U relationship is driven by this Schumpeterian effect. But, you have another effect which is called the “escape from competition” effect. It is that you innovate in order to escape competition with other firms. This effect drives the upward sloping part of the inverted-U curve. In fact, in most sectors that are frontier, it is the upward sloping part that matters. The backward sectors are more subject to the Schumpeterian effect. But, the more frontier sectors or frontier countries are more subject to the “escape from competition” effect. So, it’s true that liberalizing helps, but it is not enough. You also need to have knowledge as well as a good higher educational system – this is very important. This is something that I have looked at in particular studies in various countries. Liberalization is good for the sectors that are frontier, but it is very bad for the sectors that are behind. So, for liberalization to work well, it is required to have complementary policies that train workers and help them to move from lagging to frontier sectors as well as policies that promote research and good functioning and organization of universities. So, it is a set of policies that accompany liberalization that determines whether liberalization works well or not. Thus, in countries where liberalization did not work so well, one has to look at whether such complementary policies were set in place or not, and in most cases they were not! There are situations where liberalization does not always do the right thing. For example, Spain and other countries in the Southern Europe liberalized and invested massively in real estate and non- tradable goods. And this is not good! So, you may need the government to play a role to induce innovation and to direct it to sectors that are related to tradable goods. You need what I call an industrial policy, but it has to be a new kind of industrial policy, the one that is competition friendly. So, the role of the government is also very important. In the instances where there is too much investment in real estate, non-tradable goods, polluting innovations, there is a role for a smart state, a smart government policy, probably monitored by a European institution to make sure that competition is preserved. This is because the big danger is that industrial or sectoral policy will kill competition policy, which we do not want. So, from what you say, I understand that there is a long way for the realization of the goals of the Lisbon strategy. Yes, because, in fact, initially, the Lisbon strategy adopted the view that you should give R&D subsidies and it works. Then, we realized that you needed also liberalization. And now people realize that you need on the top of that a smart state. Many countries that liberalized did not have a smart state. They followed the Washington consensus which says: liberalize, privatize and stabilize; but a smart state is more than that. Influenced by the experience and the political intensity of the recent French presidential election, I would like to ask you the following question. What do you think about the role of the mass media in democracies? Do you identify any conflict of interest in their function? Do you think that stricter regulation needs to be imposed in the framework they operate? Yes, absolutely. The big problem for a country like France is that you need to modernize the state. For example, in the Northern Europe or in Germany, the government is transparent. They have very high standards in terms of fighting corruption and nepotism. For example, in Sweden, a minister had to resign because they found out that she had bought a Toblerone chocolate with the credit card of the ministry. Just for a Toblerone she had to resign!! In France, we are very far from that. When I talked about a smart state, I said that the state has to select priorities where to invest in favor of innovation. It can be horizontal targeting: R&D, education, smart industrial policy or small business act, and also vertical targeting: the state favors sectors that are growth enhancing. But, if you do not have transparency, targeting may turn into corruption because then you will give to your friends, you will not have objective criteria to allocate investments in a growth enhancing way... So, it is very important to have independent media. In France, the big problem is that the most of the big media, the big newspapers or television, are in the hands either of the state (the head of the television is named by the president of the Republic himself now; this was not the case in the past) or of groups that benefit from public procurement contracts. So, these groups make sure that they do not displease the presidents because otherwise they stop having these public procurement contracts. We should find ways to make sure that such groups do not influence political actions. The other thing is about justice. For example, the executive power intervenes too much in the choice of judges. That should be much more independent. Moreover, while most of the Northern European countries have developed very good institutions to evaluate public policies and the effects of laws, while in the US there exists the Congressional Budget Office, in France there are no commissions or institutions for evaluating public policies and laws. So, all that part, you see, is missing in France very much. France needs to upgrade itself to become immune to nepotism. My final question is motivated by the current Eurozone crisis. Nowadays, in Europe we experience a very sharp recession which led to fiscal imbalances and stagnation. What do you think is the impact of the imposed austerity measures on economic growth? Is there really a trade-off between austerity and growth? Should we go for austerity policies or policies that promote economic growth? How can we recover faster from this stagnation? I think that the choice is not between austerity and growth. I think one actually needs both. One needs to combine fiscal and budgetary discipline with growth enhancing policies. Both things are needed, not the one or the other. So, you can no longer implement Keynesian policies where you stimulate public spending everywhere to stimulate demand and then stimulate growth. Those days are gone! There are areas where the state can save money, but there are areas in which the state should invest. Then, there are sectors where you can save money. For example, with the progress in the ICT revolution, monitoring costs have gone down. Thanks to the ICT and computers, the information revolution, there are a number of services the operating cost of which can be reduced. So, it is important to have good governments to make sure that the money spent is well used. That’s what a smart state is. It is not either austerity or growth. Also, it is important austerity to be well shared. In some countries people refuse austerity because they think some people get away with it. For example, in countries where people do not pay taxes, how can you implement an austerity program when you know that some people get away with everything? It is very hard! For this reason, it is very important to have a transparent and fair fiscal system. You need some austerity somewhere, but you need to invest in growth somewhere else. And you need to combine both. In fact, I very much believe in the triangle of budgetary discipline, growth and social justice. I very much believe that these three things work together. I think this is what, for example, Mario Monti is trying to do in Italy with a very narrow political margin that he has. He knows that he has to ask everyone for a sacrifice so that they feel that everyone contributes in a fair way. He knows that fiscal and budgetary discipline is needed not only to get good ratings but also to be able to conduct countercyclical macroeconomic policy. Otherwise, it is very hard to conduct such policies as it is very hard to borrow in recessions. Growth is obviously also important because if you do not have growth, you cannot have fiscal discipline in the long run. So, those three sides of the triangle are really complementary.
1 Commentaire
George Alogoskoufis is Professor of Economics at the Athens University of Economics and Business. He was a member of the Hellenic Parliament from September 1996 till October 2009. Between 2004 and 2008 he served as Greece’s Minister of Economy and Finance and was a member of the Eurogroup and the Ecofin Council. His research focuses on unemployment, inflation, exchange rates, economic growth and monetary and fiscal policy. He has published five books including "The Drachma: From the Phoenix to the Euro", a monetary and economic history of Greece since the 19th century, which was awarded the Prize of the Academy of Athens. Since the beginnings of 2010, the Greek economy emerged as the first casualty of a sovereign debt crisis that still threatens to destabilize the euro area and put the fragile recovery of the European economy from the recession of 2009 at risk.
The Greek fiscal situation became the centre of international attention after the elections of October 2009. The fiscal deficit of Greece worsened during the crisis, not unlike in many other economies in the euro area and the rest of the world. In addition, after many years of strong economic growth, in 2009 the Greek economy entered into a prolonged recession, the end of which is not yet visible. The international financial crisis hit the Greek economy at its Achilles heel: The refinancing of the country’s high public debt. Greece’s public debt was accumulated mainly during the 1980s. Although the fundamentals of the Greek economy had improved significantly in the twenty years to 2008, during preparations for entry into the euro area, but especially since Greece’s entry, public finances and international competitiveness remained as persistent and significant problems throughout the period. There were two periods of significant improvement in the fiscal situation, but there were also many instances of relapse, especially around election years. After a steep rise throughout the 1980s, public debt had stabilized at about 100% of GDP since the early 1990s. Greece had no problem refinancing its debt until the end of 2009. However, in the circumstances of the international financial crisis, the refinancing of the debt started becoming a problem, and spreads over the German benchmark rates started to widen. The problem became much more serious after the elections of October 2009, when Greece found itself in the centre of a wave of criticism by the international press, international organizations, rating agencies and the European Commission. Despite the fact that the fiscal situation in 2009 worsened throughout the world, in many countries much more than in Greece, Greece found itself in the centre of a confidence crisis. This happened for three reasons. First, and foremost, because of the high level of Greece’s public debt. Greece’s public debt had stabilized since the early 1990s at roughly 100% of GDP, versus 70% for the average of the Euro area. The second was the sudden announcement of the dramatic deterioration of the projected deficit and debt for 2009, by the new government elected in October 2009. This took the markets by surprise and contributed to the confidence crisis, as the previous administration insisted throughout 2009 that it would achieve a much lower deficit. The third reason is related to the delay of the new administration to start tackling the fiscal slippages of 2009, and the shortcomings of the fiscal program initially adopted, which appeared to be leading to a further widening rather than a contraction of the fiscal deficit. Under these circumstances, Greece faced a severe confidence crisis, a sustained speculative attack on its bonds, and the eventual setting up of a special European Support Mechanism, with the participation of the IMF. Since the end of April 2010 Greece has effectively been excluded from international financial markets. Greece found itself in the middle of a dual confidence crisis. It lost the confidence of international investors, and was thus unable to borrow internationally, and it lost the confidence of domestic consumers and investors, and thus entered into an unprecedented deep and long recession which makes its fiscal predicament even worse. At the end of April 2010 the Euro Area countries agreed to provide to Greece €80bn in bilateral loans, coordinated by the European Commission, with an additional amount of up to €30bn available from the IMF. A rolling quarterly review process of Greek efforts to address the fiscal situation before the installments are paid out was set up. Euro area countries contribute to the loan package according to the ratio of their contributions to the European Central Bank. Interest rates were set at about 5 per cent, higher than the cost of raising the funds in the markets. At the same time, it was decided to create the European Financial Stability Facility (EFSF), that would be able to issue bonds or other debt instruments on the market, to raise the funds needed to provide loans to countries in financial difficulties. Issues would be backed by guarantees given by the euro area member countries, and would amount up to € 440 billion. Under the conditions of the European bailout, the Greek government agreed to follow a drastic 5 year program of fiscal adjustment and structural reforms. The initial measures aimed to reduce the budget deficit by five percentage points of gross domestic product in 2010 and another four points in 2011. Greece was required to reduce its fiscal deficits below 3 per cent of GDP by 2014. The Greek program has two main aims: first, to restore the sustainability of the Greek fiscal situation and, second, to improve the competitiveness of the Greek economy. The original adjustment program has been officially revised twice already, in the face of insufficient fiscal adjustment and another revision of Greece’s fiscal accounts. The first revision followed the decision in the autumn of 2010 to include public enterprises in the general government accounts, while the second revision, in the spring of 2011, became necessary because of the failure of the 2010 budget to meet the program targets. A third revision was under way, but the calling of new elections in May and then June 2012 has led to its postponement. However, the revised programs have a similar structure to the original program and rely on similar policies. They rely on drastic but gradual fiscal adjustment and reforms to improve the competitiveness of the Greek economy. In addition, as it appeared unlikely that Greece would be able to return to the markets in 2012, in July 2011, Euro Area countries agreed “to support a new program for Greece and, together with the IMF and the voluntary contribution of the private sector, to fully cover the financing gap. The total additional official financing will amount to an estimated 109 billion euro.” The maturity of official loans to Greece was extended and interest rates were reduced. The European Financial Stability Facility (EFSF) was also given new powers to make short- term loans, provide funds to recapitalize banks and in “exceptional” circumstances even buy back bonds of debt-laden governments. There are many who doubt that Greece can indeed get out of its fiscal predicament through the stabilization program agreed between Greece, the European Commission, the ECB and the IMF. Financial market analysts, prominent economists and influential financial newspapers have almost continuously been expressing serious doubts, arguing that Greece’s fiscal situation is unsustainable without further debt write-offs and exit from the euro area. The fiscal adjustment effort is taking place in a framework of falling real GDP and rising unemployment. According to the 2nd revision of the Greek Stabilization Program of May 2011, the deficit of the general government is projected to fall from 15.4% of GDP in 2009 to 2.6% of GDP in 2014. Yet, the debt to GDP ratio is projected to rise from 127.1% of GDP in 2009 to 153% of GDP in 2014. This is because of the negative differential between growth and the real interest rate, and the fact that Greece will continue having primary deficits until 2012. It is only in the fourth and fifth year of the program that Greece is projected to have substantial primary surpluses. Although the program appears front-loaded at first sight, in actual fact it also envisages a steep fiscal adjustment effort at the end of the program period as well. Many international analysts have been advocating that Greece ought to further restructure its public debt, as, even if the stabilization program succeeds, it will be very difficult to persuade the markets that it has achieved fiscal sustainability. After all, the stabilization program itself envisages that the public debt to GDP ratio will reach almost 153% of GDP in 2014, from less than 100% in 2008. In fact, a restructuring of Greek debt has already taken place, following the agreements of July and then October 2011. Under the terms of the so-called Private Sector Involvement (PSI), institutional investors such as banks, pension funds and hedge funds have agreed to exchange their holdings of Greek bonds for new bonds of longer maturities, at a steep discount. For the period 2011-2019, the total net contribution of the private sector involvement is estimated at 106 billion euros. In exchange, adequate resources to recapitalize Greek banks, if needed, have been pledged. The question on everybody’s lips is whether the Greek program can succeed and under what conditions. This question acquires additional significance since the dual elections of 2012 that have ushered in a new three party government. My answer is a qualified yes. The Greek program can succeed if Greece were to exercise long-term fiscal discipline as envisaged in the program and respect the rules of the stability and growth pact moving gradually into a budget surplus which will have to be maintained for a number of years. However, the program must undergo significant further adjustments that will speed up the recovery of the Greek economy. Greece’s crisis is not simply a debt crisis. It is a dual confidence crisis, due to the mismanagement of the expectations of international creditors and domestic consumers and investors. Thus, to resolve the crisis, confidence needs to be restored on both fronts. The main difficulty of the Greek program is that it has so far failed to address the confidence crisis that has led to its adoption. The Greek program ought to be modified to break this vicious circle. Three conditions are required for the restoration of confidence. First, a clear pledge from all relevant parties that Greece will remain in the euro area. This is a commitment that has repeatedly been made by Greek political authorities, but the commitment lacks credibility as long as Greece’s partners do not back it up unequivocally. Unless the fear of Greece’s exit subsides, there will be the risk of further capital flight that stifles the Greek economy of liquidity, exacerbates the problems of the Greek banking sector, and causes a deepening of the recession. The second is an effective tax reform that will restore the stability and predictability of the Greek tax system. This is a necessary precondition for a recovery of the Greek economy that will also help the fiscal adjustment effort. Greece can achieve the necessary fiscal adjustment with much lower business taxation, much lower property taxes and a much simpler income tax schedule for households than the one envisaged in the program. It is right and proper to rely more on consumption taxes, such as VAT and excise duties, in an economy where consumption is clearly excessive relative to the productive potential. A radical reform of the direct and property tax system, which will create expectations of stability and predictability, is probably the best tool for restoring the confidence of domestic investors, and thus allow the Greek economy to recover. The tax regime that was put in place at the end of 2009 is unduly complicated, contains significant disincentives to economic activity and investment, and is being revised far too frequently, almost every three months. All these elements work against both the recovery and the fiscal adjustment of the Greek economy. The third and final priority would be a detailed program of reductions in public expenditure that should be the main tool of further fiscal consolidation. The program should include loss making public enterprises, local authorities, the administration of the social security system, health and education. This is the most difficult condition as it will involve hitherto untouchable areas, and requires detailed planning and a clear political strategy to implement it. However, it is much more central for the fiscal consolidation effort than any of the other two conditions. Structural reforms should be concentrated in this area as a matter of the highest priority. Structural reforms that do not directly contribute to the fiscal consolidation effort could be introduced more slowly, without significant risks. The first sign of success will be the stabilization of the debt to GDP ratio. Under the current program this is not envisaged before 2014. This is due to the prolonged and deep recession, which serves to destabilize the debt to GDP ratio. Under current projections, the recession is set to continue well into 2013. To address the dual confidence crisis, the Greek program ought to be revised in a way that enhances its credibility, and produces some early results. So far, both Greece and its European partners have failed in restoring confidence. This does not mean that they cannot learn from past mistakes and eventually succeed. This is possible, if the Greek program is adjusted so that the recovery of Greece’s economy is speeded up and its credibility enhanced. This would be good for both Greece and the rest of the world. |
Archives
Octobre 2016
Categories
Tout
|