“Further, I argue that the cause of that dearth of dynamism lies in the sort of "economic model" found in most, if not all, of the Continental countries. A country's economic model determines its economic dynamism. The dynamism that the economic model possesses is in turn a crucial determinant of the country's economic performance: Where there is more entrepreneurial activity--and thus more innovation, as well as all the financial and managerial activity it leads to-- there are more jobs to fill, and those added jobs are relatively engaging and fulfilling. Participation rises accordingly and productivity climbs to a higher path. Thus I see the sort of economic model operating in the Continental countries to be a major cause-- perhaps the largest cause--of their lackluster performance characteristics.
There are two dimensions to a country's economic model. One part consists of its economic institutions. These institutions on the Continent do not look to be good for dynamism. They typically exhibit a Balkanized/segmented financial sector favoring insiders, myriad impediments and penalties placed before outsider entrepreneurs, a consumer sector not venturesome about new products or short of the needed education, union voting (not just advice) in management decisions, and state interventionism. Some studies of mine on what attributes determine which of the advanced economies are the least vibrant--or the least responsive to the stimulus of a technological revolution--pointed to the strength in the less vibrant economies of inhibiting institutions such as employment protection legislation and red tape, and to the weakness of enabling institutions, such as a well-functioning stock market and ample liberal-arts education.
The other part of the economic model consists of various elements of the country's economic culture. Some cultural attributes in a country may have direct effects on performance--on top of their indirect effects through the institutions they foster. Values and attitudes are analogous to institutions--some impede, others enable. They are as much a part of the "economy," and possibly as important for how well it functions, as the institutions are. Clearly, any study of the sources of poor performance on the Continent that omits that part of the system can yield results only of unknown reliability.”
- Entrepreneurial Culture, EDMUND S. PHELPS
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"In its third annual “Going for Growth” report, published on February 13th, the OECD does its best to explain why reform meets resistance (a relatively simple question) and how opposition might be overcome (a fiendishly difficult one). The report looks at “structural” reforms—policies that, for example, ease entry into goods markets; cut the costs of firing and hiring; or relax barriers to foreign ownership. Better policies should help close the gap between the richest OECD countries (measured by GDP per person) and the rest.
These reports typically reserve most of their concern and criticism for the OECD's European members. But just now, the Europeans may be feeling rather pleased with themselves. The euro zone's economy grew by 3.3% in the fourth quarter of 2006, compared with a year earlier, its fastest pace for more than six years. Better still, some of this improvement has structural causes. Markets are freer than they were, several million jobs have been created and the euro area's natural rate of unemployment seems to have fallen by around a percentage point since its last upturn. Probably, though, the pick-up in growth is mainly cyclical. As Jean-Philippe Cotis, the OECD's chief economist, writes at the start of this week's report, a strong recovery has “ambiguous consequences”, because it makes reforms “both easier to implement and seemingly less necessary to undertake.”
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