Crisis Management Means Securing Long-term Growth
Jean Pisani-Ferry & Bruno van Pottelsberghe | Bruegel | April 2009
The economic recession demands crisis management that
incorporates not only spontaneous aid measures, but also lays the foundations
for long-term growth. Poor crisis management could have fatal effects on the
long-term prospects of growth. Cases in point are Japan
and Sweden,
who experienced many economic hardships in the 1990s. Japan's faulty
crisis management strategy led to a limping economic recovery and saddled both
private and public budgets with high costs. Sweden, in comparison, reacted
deftly and used the crisis in a constructive manner to rejuvenate the economy.
The following policy instruments are at the disposal of governments today to
strengthen the economic growth-granted they be properly implemented:
Stimulus packages: State stimulus packages are a suitable instrument
allowing collapses in private demand to be compensated with strongly financed
state demand. These can either take the form of tax incentives or direct public
investment. However, currently investment has been flowing to economic sectors
that are not directly connected with commerce, for example into home
construction. In Europe, where most regions
are already equipped with high levels of infrastructure, investment in
construction may remain low. Instead of following the example of Japan, who in
the 1990s continued to build more streets and bridges that generated no
long-term growth, the state should primarily invest in science and education in
order to develop innovation and long-term development.
Labor market policies: A typical flaw in times of crisis comes in the form
of massive subsidies given to ailing enterprises. Maintaining such businesses
despite all economic logic simply because they employ a relatively large
workforce is unsustainable. Instead, it is essential to employ labor market
policy measures that allow businesses to maintain employment even in times of
crisis. One example is state subsidised part-time work in Germany. If Sweden
had introduced similar measures, it could have prevented the large amounts of
workers displaced from the market during the crisis.
Credit lines and productivity: The more banks themselves are
dependent on state aid, the more credit lines will tend to be given to
"preferred" customers-large businesses or those groups with a strong
lobby. It was precisely these conditions that drastically drove down Japan's
productivity levels in the '90s. This dysfunctional credit system especially
disadvantaged young, innovative businesses-with profoundly serious
repercussions for the entire economy. Economic policy should therefore take
care that young businesses without access to strong lobbies are also given aid.
Research
and Development: The Japanese managed to
maintain high levels of investment in research and development despite their
recession. Thereby many Japanese high-tech products became and remain
market-leaders in their industry, and further economic plunges have been avoided.
Now as private R&D investment is dwindling significantly, a typical cycle
in times of crisis, the state should utilize "anti-cyclical" measures
to insure that investment in R&D remain high even in times of
crisis-particularly when the demand for innovative products is on the rise.
This summary was prepared by the Atlantic Community editorial team from "Handle with Care! Post-Crisis Growth in the EU," published here by Bruegel Policy Brief, April 2009.
