Andy Xie on Europe

[Toro]

Xie is a Hong Kong based economist for Morgan Stanley. From something he wrote a few weeks ago (sorry, no link)

While visiting 10 cities in one week could not allow an in-depth understanding of European issues, it gave me a snapshot.  Europe looked poorer to me than one year ago.  Most Europeans were quite pessimistic about Europe's future.  Job security was the issue on everyone's mind. … Many Europeans appear to want to hang on to their entitlements rather than to accept pro-market reforms.  Indeed, market (forget about capitalism) has become almost a dirty word in some quarters.  It struck me that Europe was living off its inheritance.  Discussions with clients and other observations left me with a sense that not enough thought is given to the future, and I thought for the first time that Europe could become a poor place in the 21st Century, similar what happened to Latin America in the 20th Century.  In such circumstances, Europe would not be positive for either stocks or bonds.  The returns on the former would be constrained by anti-market policies and the latter by poor government finances.

Several years ago, Byron Wein, who also works for Morgan Stanley, said that Europe risked becoming an open air museum if it didn't change its economic policies.

[mirror]

This is a very interesting post and I am surprised that no one has responded to it by now. I wonder if that means every one agrees with you.

[Toro]

This is a very interesting post and I am surprised that no one has responded to it by now. I wonder if that means every one agrees with you. 

<{POST_SNAPBACK}>

Well, that would definitely be a first.

[SirSpanky]

Wowsers. This makes me wanna bone up on my understanding of Europe. I have friends who are on a temp job (temp so far's been 4 years) over there, and they have only good things to say about the economy.

[mirror]

I was just reading back through some of Paul Well's posting on his Macleans' website and he also has a blurb on this subject. He takes about Canada's role, or lack of one, as well. Europe has to integrate for to have a good future that much is obvious, but do the political leaders have the will to make it succeed?:

July 19, 2005 Europe: Wakeup call. Canada: Snooze button.

One of the reasons for this has been a slow-down in business funding of R&D. In 2002 business funding grew at a slower rate than GDP, though this was compensated for by a slightly higher growth of government funding, as well as growth in R&D financed from abroad. In 2002, business financed 55.6% of domestic R&D expenditure in the EU, compared to 63.1% in the US and 73.9% in Japan, and this share is decreasing. If the trend is not reversed, not only will the EU miss the overall target of two-thirds of R&D expenditure financed by the private sector in 2010, but the situation will have worsened.

The most worrying conclusion of the key figures is that Europe is becoming a less attractive place to carry out research. Between 1997 and 2002, R&D expenditure by EU companies in the US increased much faster than R&D expenditure by US firms in the EU (by 54% compared to 38%). The net imbalance in favour of the US increased five-fold between 1997 and 2002, from about €300m in 1997 to almost €2b in 2002. Additionally, US investment has been growing at a much greater rate in areas outside the EU – about 8% per year in the EU and 25% per year in China.

These trends are worrying in the context of Europe’s intention to becoming a leading knowledge-based economy. A recent impact assessment by the European Commission showed that investment in R&D at European level has a positive effect on productivity and economic growth. The study also showed that funds spent at European level were successful in mobilising additional business spending. If Europe is to become an integrated research area where the best research can be carried out, able to attract investment from all over the world, there must be a substantial and wide-ranging European level programme, as proposed by the Commission in April 2005. Otherwise, Europe will remain a series of national programmes, with little coherence. Enterprises will keep relocating their research and innovation activities to other continents offering attractive public support and larger research, innovation and commercial markets. A recent public opinion survey showed that EU citizens support spending more on research at both national and European level.

[Guest eureka]

And yet, certain small countries in the EU are on pace to attain a better econonomy than the US. European integration never did do much economically. I recall reading studies many years ago that showed the actual increase in living standards in the original 6 attritutable to the Common Market was just 1% There are other reasons than economics for the unification of Europr.

The artice shows the same negative aspect of US investment anywhere. It is the same drag on R & D that afflicts Canada. US companies do not do R & D offshore. They are only interested in selling the products of American Research.

Personally, I believe that Europe is on a path to surpass the US in every way while developing a far better civil society.

[Toro]

And yet, certain small countries in the EU are on pace to attain a better econonomy than the US. European integration never did do much economically. I recall reading studies many years ago that showed the actual increase in living standards in the original 6 attritutable to the Common Market was just 1%  There are other reasons than economics for the unification of Europr.

The artice shows the same negative aspect of US investment anywhere. It is the same drag on R & D that afflicts Canada. US companies do not do R & D offshore. They are only interested in selling the products of American Research.

Personally, I believe that Europe is on a path to surpass the US in every way while developing a far better civil society.

The fact that US companies do not spend as much on R&D in other countries is not indicative of "bad" US investment. R&D occurs for a number of reasons, and corporations are under no obligation to spend research dollars anywhere, especially if the infrastructure is not in place conducive to research. Nor should they be.

One may prefer European life to American life, but Europe is certainly not surpassing the US in every way.

[Guest eureka]

You seem to be saying the same thing except that you say it is not "bad" investment.

Of course it is not "bad" for the US. It is, however, very "bad" for the countries who fall behind in their productivity because of this not "bad" investment of the USA.

[Toro]

Are the US car company's investments in Canada "bad investments"?

No.

Investment create jobs and wealth. Its silly to say that foreign investment is bad because the foreign company doesn't spend as much on R&D. Foreign investment in and of itself is good most of the time.

[Guest eureka]

The auto industry is a special case where comparative advantage comes into play. It is also one where a fair amount of R & D is done in Canada.

Investment is not necessarily good or bad and can be both. It is certainly a limited good for the host country where R & D is done in the investing country and can actually be bad since it restircts the ability of the host to develop its higher facilities.

As it did in Canada for a very long time; and still does to a degree. Why do you think Canada was termed "a hewer of wood...?"

[Toro]

The auto industry is a special case where comparative advantage comes into play. It is also one where a fair amount of R & D is done in Canada.

Investment is not necessarily good or bad and can be both. It is certainly a limited good for the host country where R & D is done in the investing country and can actually be bad since it restircts the ability of the host to develop its higher facilities.

As it did in Canada for a very long time; and still does to a degree. Why do you think Canada was termed "a hewer of wood...?"

Most foreign investment occurs because of comparative advantage. The reason why investors invest in a place because it offers some advantage. Otherwise, it wouldn't occur.

Foreign investment almost always a good because it creates jobs and spurs economic activity when there almost certainly would be none. Canada has been an beneficiary of foreign direct investment during its history. The fact that Canada has been tagged (by itself) as a hewer or wood and drawer of water is not relevant to the amount of foreign investment in the country. Criticis of foreign investment assume that if the foreign investment did not occur, domestic investment would suffice. That is almost always never the case. The reason why companies invite foreign investment in the first place is because of either a lack of domestic savings and/or expertise. Simply by restricting FDI in Canada does not mean Canada would increase its value added production. In fact, it would almost certainly detract it. Also, the reasons why value-added activity occurs are complex, but are generally more conducive in the US than in Canada.

And I don't mean to drop names, but I once quizzed a Canadian minister of industry several years ago about why R&D spending lagged in Canada relative to the US. He responded that it was because the car companies spend much less in Canada than they do in the US. Otherwise, the levels are the same. Now, I don't know if he is correct in that as it sounded like spin to me, and I've never chased down the amount of R&D auto companies do in Canada, but I don't believe that your assertion is correct.

[Guest eureka]

Actually, a lot of R & D for the auto industry, and the engineering is done in Canada. Mostly, though, through American trained personnel.

You are still ignoring the lack of high end jobs created by restricted Foreign Investment. That is a substantial loss to an advanced economy. Your reasoning would apply only to a develping economy. Take the European economies, and Japan. Not only have they now the R & D in their own countries, but they have, in some areas "leapfrogged" the US to where the US is buying into their advances.

[Toro]

You are still ignoring the lack of high end jobs created by restricted Foreign Investment. That is a substantial loss to an advanced economy. Your reasoning would apply only to a develping economy. Take the European economies, and Japan. Not only have they now the R & D in their own countries, but they have, in some areas "leapfrogged" the US to where the US is buying into their advances.

If a company wants to invest, say $100 million, in Canada, the option is to take the $100 million - and all the jobs and benefits associated with that investment - or $0. Even if all the jobs are grunt jobs arising from that $100 million, there is no loss associated with the investment and it is not damaging to an advanced economy. Economics is not a zero-sum game.

As for your argument about Europe and Japan, I'd suggest you take a look at the economic performance over the past 15 years compared to the US. Private capital flows into new technologies is overwhelming in favour of the US over Europe and Japan combined. That doesn't mean that Europe or Japan (or Canada) will not develop a competitive advantage in some areas, but it is America which is leading the world in cutting edge technology.