Book Reviews

25 março, 2007

105) Historia economica da Europa desde 1945, por Barry Eichengreen

The New York Times Book Review, March 25, 2007
Boom and Bust

Coordinated Capitalism and Beyond.

By Barry Eichengreen.
495 pp. Princeton University Press. $35.

Postwar European history falls neatly into two periods. From 1945 to 1973, the countries of Western Europe recovered rapidly from the almost unimaginable devastation caused by World War II and then took off, growing faster than the United States and more than twice as fast as their own historical trends. From 1973 to the present, however, their economies have struggled with low growth and high unemployment, lagging behind both international competitors and their own earlier success.

As a result of this divided history, the so-called European model has both cheerleaders and naysayers. Social democrats and others on the left focus on the first period, applauding the continent’s ability to generate high living standards while cushioning individuals and societies from the ravages of unfettered markets. Right-wing critics and free marketeers focus on Europe’s contemporary problems, arguing that the continent’s generous welfare benefits and heavy regulation condemn it to continuing decline.

Both views contain some truth. But since the same conditions that led to success in one era have produced problems in the next, neither interpretation fully explains the story. In “The European Economy Since 1945,” Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley, presents not only a comprehensive account of Europe’s postwar economic experience but also an important analysis of capitalist development more generally.

Drawing on his credentials as both an economist and a political scientist, Eichengreen argues that the key to understanding Europe’s initial triumphs and later troubles lies in recognizing that the recipe for growth varies, depending on one’s position in the economic race. In the years after 1945, Europe needed to recover from the war and catch up with the United States. This involved what economists call “extensive growth” — essentially, increasing the number of workers doing familiar kinds of jobs. Extensive growth requires adopting existing technology, using labor more efficiently and generating high levels of investment. After the war, Europe developed a variety of institutions well suited to these tasks.

Large trade unions, employer organizations and corporatist arrangements, Eichengreen shows, helped labor-market partners reach and sustain long-term agreements to limit wage demands, ensure high levels of investment and plan for routine industrial restructuring. Unions agreed to hold down labor costs and in return were given either representation on corporate boards (Germany), influence over government planning and policy making (Sweden and France) or the ability to dole out government jobs and funds (Austria). Strong welfare states helped cement this bargain, providing workers with generous benefits to offset their wage restraint and the unemployment generated by industrial restructuring.

Schools and training programs, meanwhile, were designed to turn out workers adept at handling existing technology and equipment. Banks developed long-term relationships with their corporate clients, lending money for business expansion that relied on known technologies. And the government bureaucracies of nationalized industries helped mobilize and coordinate the resources necessary for the relatively clear-cut tasks associated with catch-up growth.

All this worked just as it was supposed to, generating prosperity across the continent. By the early 1970s, however, the potential for extensive growth had been largely exhausted. Europe’s businesses and infrastructure had been rebuilt, its labor force transferred from agriculture to manufacturing, the latest technology imported and adopted. At this point, Eichengreen says, “the continent had to find other ways of sustaining its growth. It had to switch from growth based on brute-force capital accumulation and the acquisition of known technologies to growth based on increases in efficiency and internally generated innovation” — that is, to “intensive growth.”

The problem, of course, was that Europe was now saddled with institutions ill suited to the creativity and flexibility that intensive growth demands. As Eichengreen puts it, “the continent’s very success at exploiting the opportunities for catch-up and convergence after World War II doomed it to difficulties thereafter.” The new situation called for flexible and mobile work relationships, technological novelty and the financing of risky ventures — none of which Europe’s postwar institutions were good at. In other words, the same structures and practices that had led to the continent’s golden age have now produced a malaise. (Eichengreen adds that a similar dynamic has played out in Eastern Europe, since Soviet institutions were not bad at extensive growth but awful at intensive growth.)

Eichengreen backs up his argument with reams of data and detailed examples, yet he writes well enough to make his book accessible to general readers. He reminds us that economic development calls for much more than simply the unleashing of market forces; it demands institutions capable of generating the resources, skills and relationships necessary to handle the particular economic challenges a country has to face at a particular time. And by demonstrating how institutions helpful in one era can become counterproductive in another, Eichengreen has important lessons about the future to teach both policy makers and publics.

“The European Economy Since 1945” should make readers wary of universal prescriptions for economic policy, since it shows how the fit between policies and circumstances is clearly more important than the nature of either in isolation. The strategies and institutions a country should adopt will depend not only on its particular preferences, but also on what role it can reasonably expect to play in the international economy.

So what should the nations of Europe do now that the advantages of their “economic backwardness” have been fully exploited? Without settling the debate between the European model’s supporters and detractors, Eichengreen suggests that international competition is compelling Europe to abandon its distinctive model and become more flexible.

This will not be easy. Eichengreen himself stresses the difficulty of institutional change, and so readers may come away from his book concluding that Europe’s economic future is bleak — at least in a contest with other developed countries that provide few government benefits.

Yet thanks to political will and creative policymaking, as Eichengreen points out, some countries on the continent, particularly the Nordic ones, have managed to adapt successfully. They are keeping themselves internationally competitive even while continuing to provide social benefits in health, education and social insurance far above American standards. Others, like France and Germany, will have to follow their lead. Otherwise, they will probably face the decline the pessimists have long been predicting.

Sheri Berman, who teaches political science at Barnard College, is the author of “The Primacy of Politics: Social Democracy and the Making of Europe’s Twentieth Century.”


First Chapter
‘The European Economy Since 1945’

In the second half of the twentieth century, the lives of Europeans were transformed almost beyond recognition. In 1950, many of the continent's residents heated their homes with coal, cooled their food with ice, and lacked even rudimentary forms of indoor plumbing. Today, their lives are eased and enriched by natural-gas furnaces, electric refrigerators, and an array of electronic gadgets that boggles the mind. Gross domestic product per capita, what the income of a typical resident of Europe will buy, tripled in the second half of the twentieth century. The quality of life improved even more than suggested by this simple measure. Hours worked declined by one-third, providing an enormous increase in leisure time. Life expectancy lengthened as a result of improved nutrition and advances in medical science. To be sure, not all was sweetness and light. Unemployment rose. Tax burdens soared. Environmental degradation, political repression, and limits on consumer sovereignty were pervasive under the authoritarian regimes that dominated Eastern Europe for four decades after World War II. But by any objective standard, the last half century has left Europeans today enormously better off than their grandparents were fifty years ago.

Not all parts of the continent shared equally in this prosperity, of course, and not all portions of the last half century were characterized by equally rapid growth. Southern Europe grew faster than Northern Europe. Western Europe grew faster than Eastern Europe. Growth was slower after 1973 than before. This slowdown was most pronounced in Eastern Europe, where it culminated in a crisis of central planning that brought down not just the command economy but its authoritarian political superstructure as well. These are important qualifications, but they do not change the fact that the post- World War II period, and specifically the quarter century from 1948 to 1973, was a period of extraordinarily rapid change and a veritable golden age of economic growth.

What made possible the rapid economic growth of a continent that was devastated by World War II? Initially, Europe could grow rapidly simply by repairing wartime damage, rebuilding its capital stock, and redeploying men drafted into the wartime task of destroying output and productive capacity to the normal peacetime job of creating them. The rapid economic expansion of the early postwar years largely reflected this process of "catch-up growth." The continent could then sustain its rapid growth by exploiting the backlog of new technologies developed between the two world wars but not yet put to commercial use. The 1920s and 1930s had been decades of instability and crisis, to be sure, but they were also a period of rapid technical change. Among other things, they saw the development of Lucite, Teflon, and nylon, improvements in the design of the internal combustion engine, and organizational changes such as the spread of assembly-line methods and modern personnel-management practices. Most of these innovations were developed in the United States. But a depressed investment climate and then the disruptions of war made the 1930s and 1940s less than propitious times for Europe to emulate America's example. Consequently, by the end of World War II, the United States had opened up a huge lead in levels of output and productivity. But this also meant that there existed an extraordinary backlog of technological and organizational knowledge ready for Europe's commercial use. By licensing American technology, capitalizing on American produ ers' knowledge of mass-production methods, and adopting American personnel-management practices, Europe could close the gap. This aspect of growth in the second half of the twentieth century is known as "convergence," the tendency for levels of per capita income and productivity to converge toward those prevailing in the United States.

For all these reasons, 1945 was a favorable jumping-off point for the European economy. Looking back on the extraordinary economic progress of the subsequent fifty years encourages a tendency to regard what followed as preordained. In fact, many things had to go right, and there was considerable uncertainty about whether they would. Catch-up, which entailed capital formation, the reallocation of labor, and the efficient use of these factors of production, required Europe to mobilize savings, finance investment, and maintain wages consistent with full employment and respectable profit rates. It required getting a range of complementary industries, each of which was necessary for the viability of the others, up and running simultaneously. Convergence required mechanisms for transferring to Europe and adapting to its circumstances the backlog of technological and organizational knowledge developed in the United States.

These were complex tasks. When we place ourselves in the position of contemporaries at the start of the period, as we will do in chapter 3, it becomes clear that any number of things could have gone wrong, as they had in the 1920s and 1930s.

That they did not go wrong now reflected the fact that Europe possessed a set of institutions singularly well suited to the task at hand. Catch-up was facilitated by solidaristic trade unions, cohesive employers associations, and growth-minded governments working together to mobilize savings, finance investment, and stabilize wages at levels consistent with full employment. The problem of getting a set of interdependent industries up and running simultaneously was solved by extramarket mechanisms ranging from government planning agencies, state holding companies, and industrial conglomerates in Western Europe to wholesale nationalization and central direction of the economy in the East. The capacity expansion needed to efficiently operate these scale-intensive technologies was financed by patient banks in long-standing relationships with their industrial clients.

In a nutshell, then, opportunities for catch-up and convergence were realized because of the conformance, or more colloquially the "fit," between the structure of the Western European economy and the economic and technological imperatives of the day. The result was a period of exceptionally rapid growth from the end of World War II through the 1960s.

Critical to Western Europe's success was the security of private property rights and reliance on the price mechanism. But the rapid growth of the postwar golden age depended on more than just the free play of market forces; in addition it required a set of norms and conventions, some informal, others embodied in law, to coordinate the actions of the social partners and solve a set of problems that decentralized markets could not. Hence the "coordinated capitalism" of this book's title.

This codified set of norms and understandings-what economists mean when they refer to institutions-did not materialize overnight. To a large extent it was inherited from the past. It is not surprising that inherited institutions could be adapted to the needs of post-World War II growth, since the challenges of this period resembled those that had confronted Europe in earlier years. Modern industry had developed later on the continent than in Britain and the United States, at a time when the capital intensity of industrial technology was greater. These more demanding capital needs were met by great banks capable of mobilizing resources on a large scale. As industrial production grew more complex and industrial sectors grew increasingly interdependent, it became more pressing to get a range of industries up and running simultaneously; hence the more prominent role of the state. Late-industrializing economies whose initial growth spurt depended as much on assimilating and adapting existing technologies as on pioneering new ones naturally developed systems of human capital formation emphasizing apprenticeship training and vocational skills as much as university education. Thus, it was no coincidence that Europe had in place following World War II a set of institutions useful for relaxing the constraints on growth. It was also fortuitous that the inheritance was favorable, since these kinds of deeply embedded social institutions are slow to change.

Catch-up was similarly the forte of planned economies organized along Soviet lines. Bureaucrats decided how many factories to build, instructed state banks to mobilize the necessary resources, and limited consumption to what was left. They decided what foreign technologies to acquire, whether through licensing or industrial espionage. Because success measured in tons of steel production depended more on brute-force capital formation and the assimilation of standard technologies than on entrepreneurship and innovation, the centrally planned economies of Eastern Europe were able, initially at least, to perform tolerably well. The institutions of the command economy had severe limitations, as we will see, but they were best suited to the circumstances of catch-up growth.

Just as this inheritance of economic and social institutions contributed to the extraordinarily successful performance of the European economy in the third quarter of the twentieth century, it was equally part of the explanation for Europe's less satisfactory performance in the subsequent twenty-five years. As the early opportunities for catch-up and convergence were exhausted, the continent had to find other ways of sustaining its growth. It had to switch from growth based on brute-force capital accumulation and the acquisition of known technologies to growth based on increases in efficiency and internally generated innovation. This transition is sometimes described as the shift from extensive to intensive growth. By extensive growth I mean growth based on capital formation and the existing stock of technological knowledge. It is the process of raising output by putting more people to work at familiar tasks and raising labor productivity by building more factories along the lines of existing factories. Intensive growth, in contrast, means growth through innovation. A larger share of the increase in output is accounted for by technical change, and less by the growth of factor inputs.

Thus Europe, which had relied on extensive growth in the 1950s and 1960s, had no choice but to switch to intensive growth from the 1970s on. The problem was that institutions tailored to the needs of extensive growth were less suited to the challenges of intensive growth. Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty. Now the role of finance was to take bets on competing technologies, something for which financial markets were better adapted. The generous employment protections and heavy welfare-state charges that had given labor the security to accept the installation of mass-production technologies now became an obstacle to growth as new firms seeking to explore the viability of unfamiliar technologies became the agents of job creation and productivity improvement. Systems of worker co-determination, in which union representatives occupied seats on big firms' supervisory boards, had been ideal for helping labor to verify that owners were investing the profits resulting from its wage restraint but now discouraged bosses from taking the tough measures needed to restructure in preparation for the adoption of radical new technologies. State holding companies that had been engines of investment and technical progress were no longer efficient mechanisms for allocating resources in this new era of heightened technological uncertainty. They were increasingly captured by special interests and used to bail out loss-making firms and prop up declining industries.

Increasingly, then, the same institutions of coordinated capitalism that had worked to Europe's advantage in the age of extensive growth now posed obstacles to successful economic performance. In this sense, the continent's very success at exploiting the opportunities for catch-up and convergence after World War II doomed it to difficulties thereafter. And the durability and persistence of institutions, which had worked to Europe's advantage after World War II, were now less positive attributes than impediments to growth.

Eastern Europe manifested this problem in its most extreme form. The centrally planned economies were particularly inept at innovation, since new knowledge generally bubbles up from below rather than raining down from above. More than nearly any other activity, innovation responds to incentives, which were in chronic short supply in the command economies. This weakness of central planning came back to haunt the Eastern bloc once the party was over, the technological pantry was bare, and a premium was placed on innovation.

This, in bare-bones form, is the story told in this book. It is a way of understanding the golden age of growth that prevailed for twenty-five years after World War II and the subsequent slowdown. It explains how the average annual rate of growth of gross domestic product (GDP) per capita in Western Europe could have fallen by more than half between the 1950-1973 period and the 1973-2000 period. It similarly explains why the deceleration between these periods was even more dramatic in Eastern Europe and why the planned economies collapsed at the end of the 1980s. To be sure, no single explanation for these complex phenomena can possibly be complete. For example, Europe's growth deceleration was surely also affected by global factors beyond its control. It is revealing, though, that the rate of growth of output per hour declined more sharply in Europe than in the United States, which was affected by the same global forces. The exhaustion of the technological backlog and the difficulty of adapting inherited institutions to changed circumstances go a long way toward explaining this fact.

As these last sentences remind us, the story of Europe's postwar growth-indeed, the story of its growth over the entire second half of the twentieth century-cannot be told in isolation from developments in the rest of the world. This directs our attention to another aspect of the inheritance shaping growth in the third quarter of the twentieth century: the Great Power conflict. Countries falling within the ambit of the United States or the Soviet Union came under pressure to adopt the same form of economic and social organization as the power under whose security umbrella they sheltered. After a brief period of uncertainty, Western Europe was decisively propelled toward market capitalism and Eastern Europe toward state socialism. This choice became the single most important determinant of growth performance in the two halves of the European continent.

The nature of the conflict permitted Western Europe to free ride on the security system provided by the United States. Less defense spending allowed Western European countries to devote more government revenues and investment to private ends. In effect, the subsidiary role that Europe played in the Great Power conflict yielded a peace dividend that freed up resources for productive capital formation. Eastern Europe was the recipient of an analogous dividend; it imported energy and raw materials at submarket prices from the Soviet Union in return for the stationing of Soviet troops in the region.

In addition, the Cold War provided an impetus for regional integration. The United States would not have acquiesced to the creation of a customs union of European nation-states capable of discriminating against American exports except for the priority it attached to building a bulwark against communism. And the Soviets would not have insisted so strongly on the integration of the Eastern bloc but for the example of Western Europe and the incompatibility of their own economy with those of Western European countries. . . .

Excerpted from The European Economy since 1945 by Barry Eichengreen Copyright © 2006 by Princeton University Press. Excerpted by permission.
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