Opinion of the Economic and Social Committee on 'Employment, Competitiveness and Economic Globalization` (97/C 158/06)

On 28 March 1996 the Economic and Social Committee, acting under the third paragraph of Rule 23 of its rules of procedure, decided to draw up an opinion on 'Employment, Competitiveness and Economic Globalization`.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 14 February 1997. The rapporteur was Mrs Konitzer.

At its 344th plenary session (meeting of 19 March 1997) the Economic and Social Committee adopted the following opinion by 104 votes to 27 with 11 abstentions.

Summary

Globalization means the in-depth, internationally organized interlinking of the production of goods and services, making use of technological innovations and progress in the field of transport and communications, supported by an international financial market in which financial transactions, the volume of which far exceeds real economic flows, can be carried out in seconds, complemented by the worldwide dismantling of trade barriers and by international organisations (WTO) and regional mergers.

This trend of course has a cultural significance, but its main effect is the international diversification of the production of goods and services. The permanent search for opportunities for short-term profit in the globalized currency and bond markets gives rise to a danger of turbulence, threatening national payment systems and the stability of the real economy.

Globalization has fundamentally changed competition between firms in the economy: it is not so much firms which have to compete with each other in a given location; rather, the focus of competition has shifted to the business locations themselves which have to compete for internationally mobile capital. The key to employment is thus to concentrate on making the region healthy, attracting investment and creating jobs by raising capacity.

But what does all this mean for Europe? Globalization is a challenge to be welcomed. But it creates a need for an international strategy to which all concerned contribute at European Union and Member State level. It is not impossible that the effects of globalization will be asymmetric. On the one hand there are the political institutions at local, regional and national level and they lack a worldwide communications structure. On the other hand there are the multinational corporations operating worldwide with ever lower transaction costs. Worse still, the supply-side operators remain within their isolated fields of activity (regional or local wage negotiations), whilst those providing the demand for labour make their decisions at world level. The danger to be avoided is thus that of competition between business locations going so far that lower wages and excessive cuts in public spending lead to loss of purchasing power, falling demand, stagnation, recession and thus to higher unemployment. In order to prevent a new wave of protectionism, a trans-nationally orientated competition policy is needed offering international versions of the cartels ban, consumer and environmental protection arrangements and social obligations in regard to assets. The Committee also calls for basic minimum global standards in respect of human, workers' and environmental rights, international organizations with legitimate economic-policy powers and internationally effective collective bargaining procedures and forms of social dialogue. As Europe has most to lose from a downward socio-economic spiral, it should take the initiative towards international cooperation. Some firms have already shown the way. The multilateral investment agreement currently being negotiated at the OECD can act as a spur to further initiatives by the European Commission.

The attempt is being made to quantify globalization. There is talk of globalization in relation to most sectors, but the phenomenon is more pronounced in some sectors than in others. Although over the last few years cross-border investment has risen faster than capital-formation overall, it is not true to say that there has been unhealthy exporting of jobs from industrialized to developing countries.

Globalization is thus not responsible for Europe's present problems. A more productive approach is to ask: Which comparative advantages can Europe use to sell which products and services in the world market? And here the Committee would cite the European social model as a comparative advantage. The system of social protection should for example not just be seen as a cost factor. The social model creates social consensus, a high degree of social cohesion, social peace and thus stability, which is a significant advantage for Europe as a business location. Growth strategies should take this into account.

The Committee's answer to competition from low-wage countries is clear. These countries buy more from us than we from them. Intra-European structural change must be brought about via an active employment and labour-market policy. Workers laid off as a result of shifting production processes in Europe must be trained and made available for jobs in areas where Europe has comparative advantages to offer.

The Committee therefore feels that assigning too much weight to wages policy, i.e. imposing lower wages in order to create jobs, is not effective. Nor should one expect anything positive from the dismantling of social services. Rather, one should fear the resulting tensions and recognize that in some Member States the systematic cutting back of workers' rights and the weakening of trade unions only leads to greater tensions. Thus short-term competitive advantages sometimes have a detrimental effect on productivity. The social model is thus one of the endogenous growth forces which Europe must exploit more, at the same time as improving conditions for SMEs and developing infrastructure (trans-European networks). To these can be added the dismantling of obsolete bureaucratic hindrances and the more active provision of risk capital. Also needed is better use of human capital, so that new goods and services can be encouraged and ultimately new markets opened up. A dynamic innovation strategy is thus advocated. Better management of firms and more worker participation in the innovation process are vital. Finally, the Committee emphasises that the completion of the internal market, the process of economic and monetary union already under way and the European social model are the basic conditions for Europe's entry to the next century.

Preliminary remarks

Scarcely a day goes by without some discussion of globalization and very few topics seem more suited to media debate. Thus whilst some people scapegoat economic globalization as the source of all our current problems, from the employment crisis and the dismantling of social services to environmental and distribution problems and even the public debt, others would prefer to delete the term from the political vocabulary altogether, perceiving it as a facade for politically-motivated scare-mongering.

This own-initiative opinion by the Economic and Social Committee steers a middle course. By addressing globalization as a serious phenomenon, the ESC identifies both its benefits and risks and points to the need for greater international cooperation. Thereafter, it puts globalization into perspective. Whilst the data do point to a process of globalization, we do not yet live in a fully globalized economy. In the light of this finding, the Committee advocates an appropriate competition policy for the European economy.

The Committee believes that the passion generated by the current political discussion of globalization is explained above all by the continuing failure to solve the EU's employment problems. It is, therefore, a major concern of this own-initiative opinion to pinpoint the relationship between globalization, competitiveness and employment.

1. Economic principles

1.1. The globalization process

1.1.1. The world is currently facing new technical, economic and social challenges.

1.1.2. Technological innovation is creating undreamt of opportunities for mankind. The remotest parts of the world can be reached in ever shorter time; thus, supersonic flights link London or Paris to New York in less than 3 hours. Worldwide goods and passenger transport is becoming increasingly cheaper. The computer, the micro-chip and the satellite have revolutionized communications. Information can be transmitted from any part of the earth to any other in a few seconds, with communication between the remotest areas becoming ever cheaper. As a result, it is becoming increasingly technically feasible and inexpensive for firms to operate across national frontiers.

1.1.3. This technological development is complemented by changes on the international political scene. The logical transformation of GATT into the WTO, the associated world-wide abolition of trade barriers and the association of nation states in economically integrated regions (EU, NAFTA and ASEAN) are also making it easier for firms to operate across national frontiers.

1.1.4. Technological development and international trade liberalization produce a common effect: the costs of international trade are reduced. As international transaction costs fall, distance is reduced and national frontiers become economically insignificant. The European internal market is an example of this trend.

1.1.5. The first consequence of this trend seems likely to be a general improvement in living standards. The reduction of transaction costs will make it possible to improve the international division of labour. Value-added networks can now be increasingly spread throughout the world in order to ensure the best possible conditions for the manufacturing processes concerned.

1.1.6. At present, this process can still produce very different sectoral consequences. Put simply, regions blessed with a sound infrastructure, a highly-skilled workforce and a high degree of social cohesion tend to specialize, for example, in high-tech products, information and communications services, research-intensive production processes and communications-orientated manufacturing. Areas without these resources are more likely to be attractive to simple manufacturing processes or basic materials production. Whilst these always provided the basis for international trade, the global division of labour is acquiring a new character. It is becoming increasingly possible to distribute the individual stages of production or service provision throughout the world.

1.1.7. This type of international division of labour is most effectively operated by international undertakings in which production and sales units can be located in different countries from the head office. These enterprises, created as a result of the reduction in transaction costs, are in a position to locate production, trade and service processes wherever optimum conditions exist. Economic globalization is thus hallmarked by a transition from horizontal trade-based international relations between individual economies to vertical production-based international links established by transnational undertakings () Concepts such as global sourcing, the global village and the global factory were developed to describe this worldwide integration of production and service processes.

1.1.8. This trend is supported by a globalized financial market. With the help of new communication technologies a short-term investment opportunity arising anywhere in the world can be exploited in seconds, and transaction volumes are many times greater than financial flows in the real economy. The trade is increasingly dominated by funds operating alongside the traditional banking system. This trend, in conjunction with the introduction of multifarious and complex innovative financial derivatives, is giving financial flows a dangerous life of their own, unconnected with real economic processes. The permanent search for opportunities for short-term profit in the globalized currency and bond markets gives rise to a danger of turbulence, threatening national payment systems and the stability of real economic processes.

1.1.9. There are, of course, other aspects to the globalization process, such as the shift in internal company procedures from hierarchical structures to more horizontal decision-making processes or the closer integration of different cultural currents in the social field. Nevertheless, the international diversification of production of goods and services remains the economic hallmark of this development.

1.1.10. Overall it can be said that globalization driven by transnational undertakings entails a reduction in world-wide costs in the broadest sense required to produce the range of goods that will satisfy international demand. This is a favourable development for mankind. Consequently, the globalization process cannot and should not be reversed. In its policy recommendations, however, the Economic and Social Committee will consider how all concerned can be enabled to reap the benefits of this trend.

1.2. Competitiveness and employment

1.2.1. This globalization goes hand in hand with a change in the concept of competitiveness. In days gone by, a country, region or location was internationally competitive, if its indigenous enterprises could produce goods at competitive prices in certain world market sectors, whilst exploiting its economic resources, especially manpower, to the full. This meant that regions where these enterprises were located prospered.

1.2.2. As globalization proceeds, however, an economy's links with its 'indigenous` undertakings are loosened. The prosperity of an individual region becomes increasingly less dependent on the competitiveness of its enterprises which are now spread throughout the world. Individual locations now face global competition. Transnational undertakings are increasingly losing contact with their 'indigenous` locations since they can invest world-wide. Regions must compete for this internationally mobile capital.

1.2.3. On this basis, locations become internationally competitive if they succeed in creating conditions which make it possible to attract industry to their region. Entire economic, social and environmental systems are thus competing to attract internationally mobile capital. At a time of high and rising regional unemployment, the goal must be to attract investment so that jobs can be created through the resultant increase in capacity.

1.2.4. What determines the investment decision? Against the background of the goal of 'employment in our region`, two contradictory strands in company decision-making must be distinguished. On the one hand, business economics may require a transnational undertaking to operate close to its markets; substantial direct investment is then made in order to establish a local presence in a given region. Where, however, such a presence is not essential for commercial success, another motive comes into play with regard to location choice, namely the efficiency and profitability of production, transport and trade in the broadest sense. Ultimately, a location is chosen for the manufacture of a product or the implementation of a production stage where the desired objective, whether involving a material product or a service, can be achieved most profitably: capital seeks out the best host, so to speak.

1.2.5. Whilst the first motive will always lead transnational undertakings, seeking market proximity, to establish an investment base in their own region, the second is closely linked to regional competitiveness. As globalization proceeds, local production conditions must be adjusted so as to enable transnational undertakings to operate at least as profitably in their own region as in other locations where the globalization process makes investment equally profitable. The conditions in question will be discussed in detail in this Opinion. At this point, reference will merely be made to a whole list of influencing factors. The interplay between these factors is also important, however, because they are highly interdependent.

2. A global European policy

2.1. General opportunities and risks

2.1.1. Globalization is a historical development, which can be an opportunity for all concerned, if the right policies are pursued. What is needed is a conscious strategy for dealing with globalization to which all players at EU and national level contribute. This strategy includes a globally orientated European policy in the sense of greater international cooperation. The Economic and Social Committee also proposes a competitiveness policy in harmony with Europe's historic roots and the common cultural heritage.

In this section it will be shown that the Economic and Social Committee considers a transnational political initiative essential. The discussion of ways in which Europe as a region can meet the challenge of globalization with a long-term competitiveness strategy for the European economy is set out in chapter 4.

2.1.2. The danger that globalization will proceed asymmetrically provides the starting-point for the ESC's global policy recommendations. As stated above, with increasing globalization, company policies are integrated on a world scale and this gives rise to the present form of competition between locations. On the other hand, economic policy is, by and large, still nationally orientated. Existing supranational structures have mainly helped to reduce the transaction costs of international company diversification. There is, however, no concomitant international coordination aimed at economic regulation of this process (e.g. from the standpoint of competition). Most existing economic policy institutions continue to operate within a regional or national radius. When establishing supply conditions, i.e. organizing individual taxation, environmental-protection and social systems and regulating industrial relations, transnational undertakings are faced with economic policy institutions without a similar global, organizational and communications structure. The same is true of the workforce. The fact that wage negotiations are conducted at regional or local level is not a problem. Asymmetry develops because job-seekers have to operate at a regional or local level, whereas employers can base their decisions on global calculations.

2.1.3. This inherent asymmetry of globalization is fraught with great danger. Instead of keener competition between firms to satisfy consumers, which global markets might be expected to promote for the benefit of all, it becomes clear that the 'global players` are in a position to increase and extend their market power. As a result, the competitive machinery underpinning all market organization is limited. This is the origin of the frequently voiced fear of a 'race to the abyss`.

The following scenario could be imagined: in their efforts to attract production processes, individual regions undercut each other in order to offer transnational enterprises optimum (short-term) supply conditions. Industry, the State, the Länder and the regions attempt to increase site competitiveness via pressure on wages and social and environmental costs. Lower wages and dramatic cuts in public spending, however, also mean loss of income, a fall in purchasing power and declining demand. This leads to stagnation, recession and unemployment. In the long term, the social and material infrastructure deteriorates with a further adverse impact on competitiveness. And this provides justification for further cuts. Politically there are renewed calls for trade barriers and protection of domestic industry. Thus, the asymmetric pattern of globalization means that the benefits of free trade will not be shared equally. It is not globalization itself but its asymmetric development which will ensure downward harmonization of labour, social and environmental conditions. On the basis of existing experience, this scenario is still theoretical. But the Economic and Social Committee is concerned that regions might start to undercut each other in this respect.

2.1.4. A long-term EU policy for international competitiveness will attempt to reverse this downwards spiral by adopting a transnational orientation. The ultimate aim should be to create international versions of the cartels ban, consumer and environmental protection arrangements and social obligations in regard to assets. Basic minimum global standards must be established in respect of human, workers' and environmental rights. International organizations would be endowed with legitimate economic-policy responsibilities. Internationally effective collective bargaining procedures and forms of social dialogue would be created to re-establish the negotiating balance on the labour market.

2.1.5. Such a transnational economic initiative should proceed from Europe, a region with a high level of social protection. As a result, there is much to be lost from a downward spiral. Europe also has more than 40 years' experience of organization of the internal market and its social and environmental framework legislation. Not least for the sake of its own survival, therefore, Europe should quickly contact other international blocs and press for a globally coordinated economic and social policy which respects the principle of subsidiarity.

2.1.6. In addition, there is a general awareness in Europe that the prospects for long-term economic development are directly linked to environmental conservation and that sustainable development for every country must be recognized as a major national and international objective (). To avoid environmental dumping, Europe should take the lead in efforts to create an international framework for the establishment of environmental standards and, to this end, should assist countries in which such standardization is still relatively poorly developed. In this context the Economic and Social Committee advocates consistent implementation of Agenda 21, adopted at the United Nations' Conference on Environment and Development held in Rio de Janeiro in June 1992 and signed by 170 states. Agenda 21 sets out concrete programmes of action for the 21st century both for industrialized and developing countries and important commitments on the combating of poverty, trade and the environment, policy on waste, chemicals, climate and energy, and on financial and technological cooperation between industrialized and developing countries.

2.1.7. The Economic and Social Committee is convinced that an international initiative of this kind would provide a new impetus to all concerned. The current mood of powerlessness in the face of the problems needing to be solved, e.g. unemployment, results in part from the fact that at present the worldwide process of globalization is being met by isolated national or regional strategies. The Economic and Social Committee feels however that greater international cooperation is a suitable way of preventing the worst excesses of globalization.

2.1.8. In this sense the Economic and Social Committee is pleased to note that a number of far-sighted companies, the National Westminster Bank of London, and the Volkswagen AG of Wolfsburg, Germany, for example, have already begun to construct worldwide information and communications structures for workers' representatives. In this connection the Economic and Social Committee stresses the special role of the trade unions in building international workers' solidarity and refers to the European Parliament's Resolution ().

2.1.9. The world economy is faced with major problems and challenges. There is increasing awareness that the Bretton Woods' institutions and the existing UN system are not adequate to respond to the challenges of globalization. Lack of coordination is a particular shortcoming. One practical proposal for reform has been put forward by the Commission on Global Governance (), which calls for an 'economic security council` to be set up within the UN framework as well as an overhaul of the Bretton Woods' institutions, e.g. to bring voting rules more into line with current economic realities.

The responsibilities of this economic security council would encompass economic and social as well as environmental matters. It would be set up as a parallel body to the Security Council, but its composition would be different. It would be more representative than the G7 and Bretton Woods' institutions and have an advisory role. One main task should be to ensure that the IMF, World Bank and WTO pursue more consistent political lines.

The ESC supports these ideas and wishes to develop them further.

2.2. The OECD multilateral investment agreement: a case study

2.2.1. The Committee's demands for internationally agreed economic policy rules should be met for example in the context of ongoing multilateral negotiations organized by the OECD and the WTO.

2.2.2. A current example is provided by the OECD Multilateral Investment Agreement (MIA). Recognizing that cross-border investment is the driving-force behind globalization, the OECD ministers called in May last year for negotiations to commence. The essential aim of the agreement is to facilitate cross-border investment by means of safeguard clauses and procedural rules with a view to promoting globalization ().

2.2.3. In the light of the comments made in the preceding section, the Economic and Social Committee believes that this agreement must incorporate basic employment, social and environmental provisions if asymmetric global development is to be stopped. By itself, the liberalization of cross-border investment flows merely makes it easier for enterprises to ignore national frontiers and to diversify internationally. There is no guarantee that it will generate the anticipated increase in wealth. On the other hand, the MIA could provide a model for effective economic globalization through a socially-orientated definition of investment rules ().

3. The extent of globalization

3.1. The above call for greater international cooperation constitutes the requisite response to the globalization trend outlined in theory in the first section, where cross-border production and service processes were identified as the hallmark of globalization. This section will seek to quantify the extent of this international integration in order to assess the true seriousness of this debate.

3.2. Foreign direct investment (FDI) provides an indicator of the scale of integration. An increasing FDI flow accelerates the international transfer of capital, technology and know-how and promises further integration. FDI stocks, on the other hand, indicate existing levels of capital investment abroad and, consequently, the extent to which production is already integrated. In this context, reference is generally made to outflows or outward FDI stock (). Table 1 illustrates these data in relation to other indicators of economic globalization.

3.3. The indicators reveal a dramatic rise in global internationalization, particularly between 1986 and 1990. Although incomes rose by less than 11 % per annum in this period, global exports increased by more than 14 %. The scale of FDI flows, however, was far greater, rising by almost 30 % per annum at this time. Outward FDI stock also grew by an impressive 20 % compared with a rise of only approximately 10 % in global capital. In the early 1990s, there was however a worldwide fall in all these figures, which can be attributed to the general recession. But even at this time, FDI growth rates were greater than those for overall income, trade or capital formation.

3.4. This impression is confirmed by the wide diversification of the major international undertakings. Table 2 provides a snapshot from 1993. This indicates that the leader, Royal Dutch Shell, held more than two-thirds of its total capital abroad recorded just under half its turn-over abroad and employed more than 70 % of its workforce abroad. Since these rankings are based on absolute values, even more impressive breakdowns along these lines can be found in the subsequent placings.

3.5. By contrasting FDI inflows and outflows, Table 3 shows that the highest degree of integration between developed countries occurs when values are generally rising. In 1994, for example, the developed countries accounted for 60 % of inflows and 85 % of outflows. Whilst this table also reveals that FDI inflows to developing countries are two to three times greater than outflows, they account for a relatively small proportion of the total volume (approximately one third of total inflow in 1994). These figures suggest that the widespread concern of the developed countries about jobs being exported to the developing countries is exaggerated.

3.6. Figure 1 provides a snapshot of FDI stock within the Triad. This reveals a far higher degree of European integration with the US than with Japan. At the same time, it shows that there is no imbalance in FDI stock, either with Japan or the US.

3.7. Figure 2 quantifies the importance of FDI flows for total domestic investment. It provides a sobering picture with regard to the alleged extent of globalization. Thus, even in peak periods (1989 and 1990), foreign contributions represented only a little more than 5 % of gross fixed capital formation in the developed economies. This means that almost 95 % of capital formation can be attributed to domestic investment by national undertakings ().

3.8. In the light of the above, globalization, in the form of the global integration of production, can be said to exhibit high growth rates. It is possible to identify an economic globalization trend on this basis. At the same time, sober analysis of the situation reveals that on balance there are no grounds for concern with regard to large-scale job transfers (). There is no general, unilateral shift of production sites to developing countries and other developed areas of the world are not uniformly attractive.

4. The competitiveness of European undertakings

4.1. Preliminary remarks

4.1.1. Quantitative analysis has shown that, whilst the globalization process has been under way for many years, its overall scale is still relatively small. Thus, the considerable room for manoeuvre still available in regional policies must be exploited. The elimination of international transaction costs is a slow process which does not have the same impact on all sectors. The spectrum in question ranges from fully integrated international markets (e.g. the currency markets) to sectors totally shielded from international competition (e.g. certain sections of the services sector).

4.1.2. Many of the problems facing Europe would exist in similar form even without globalization, or are merely of domestic origin. There is still a European economy (in contradistinction to transnational undertakings) and it is necessary to identify the products which European undertakings can successfully market internationally.

This raises the question of the comparative advantages which Europe enjoys. In attempting to answer this question, the Economic and Social Committee 's policy recommendations will call for the reinforcement of these advantages.

4.1.3. In general, Europe's comparative advantages are concentrated in the skills of its workforce, backed up by an extensive physical and social infrastructure. The development of these comparative advantages is closely linked to the European social model. The Economic and Social Committee is therefore convinced that the dynamic further development of the employment-promoting aspects of the European social model, whilst preserving social consensus, constitutes an absolute precondition for any competitive strategy for the European economy (). In this connection, economic policy must not treat the social organization and social institutions as mere components of the economic climate, or the social welfare system as no more than a cost factor in the context of international competitiveness. Rather, the social framework must be viewed as the basis for the development and activation of a wide variety of skills and capacities. This is all the more important since the developed economies are currently in transition from the industrial model to information, service and cultural societies. From the economic standpoint, therefore, the European social model - or the social cohesion and peace and resultant stability associated with it - represents a specifically European production factor and, consequently, a locational advantage which should be fully exploited. The further development of the social welfare system in the broader sense therefore represents an investment; it facilitates economic development, reform and modernization and promotes smooth economic structural change.

4.2. Competition with 'low-wage` countries

4.2.1. In some sectors the productive potential associated with a highly skilled workforce and an extensive social welfare system cannot be easily translated into corresponding productivity. These areas of production are increasingly moving to lower-wage countries in the framework of the international division of labour. In this respect however the belief that 'low-wage countries are stealing our jobs` is unfounded. As has already been pointed out, there is no imbalance of international investment flows to the developing countries. Moreover, Europe's balance of trade with these countries is in surplus. Their export revenue generates internal growth, with a resultant increase in domestic demand. Europe then responds competitively by exporting to meet this demand, i.e. converting it into European production.

4.2.2. A political recommendation on this subject must call for the necessary intra-European structural change to be based on active employment and labour market policy. The unproductive European manpower released by this transfer of production processes must be integrated through improved qualifications into other sectors in which Europe has a relative competitive advantage. The macroeconomic growth effects resulting from this structural change will at the same time enable new job opportunities to arise in the non-marketed goods and services sectors. Insofar as international trade promotes growth, this sector will help to ensure equilibrium on the labour market.

4.3. Price competition within the EU-NAFTA-ASEAN triad ()

4.3.1. In many economic sectors, firms in the developed countries are facing strong competition for a slice of the global market. As a result, analysis of the international competitiveness of the European economy focuses on price competitiveness. Put simply, the developed economies essentially enjoy similar equipment advantages and therefore seek to supply the same global markets. There is thus a need for a European economic strategy which will make it possible, on the one hand, to understand this market competition and, on the other, to react flexibly to new market opportunities in a highly dynamic environment.

4.3.2. The Commission had defined competitiveness in the following terms: A country is competitive if its productivity growth is at least as great as that of partner countries with a similar level of development and if it can maintain external economic equilibrium under open market conditions and with a high level of employment. The appendix shows that Europe fulfils all the above criteria, with the exception of a high level of employment (see table 5). With the balance of payments in equilibrium (see also table 5) Europe shows productivity growth similar to that of Japan and higher than that of the USA (table 6).

4.3.3. In order to achieve a high level of employment as well, a wider wage scale is often discussed with a view to making sectors with lower productivity viable. In the Committee's view this could theoretically produce a dramatic improvement in the unemployment figures, but would not bring about any corresponding improvement in the living standards of those affected. If this form of increased employment is not accompanied by supplementary transfer payments to the low-paid, the problem merely takes on a different form. Instead of the social challenge of 'poverty as a result of unemployment` the problem to be addressed is now 'poverty despite employment`. Table 7 also shows that since 1975 real unit wage costs have fallen steadily in the EU, whilst in the USA they remained at roughly the same level and in Japan they actually rose significantly. As has been argued elsewhere (), the Economic and Social Committee considers that excessive pressure on wages policy would be counter-productive.

4.3.4. Short-term cost-cutting based on further dramatic reductions in social welfare benefits in the broadest sense does not bring any lasting improvement in competitiveness. Instead, it raises the question of whether economic output will not also fall as a result of increasing social tensions. This trend has been strengthened by the systematic undermining of workers' rights and the weakening of the trade unions in some Member States, which has in particular reduced the scope for the controlled conduct of disputes. The Economic and Social Committee sees this as a threat to democratic systems. The Committee therefore concludes that policies which lead to the growth of poverty are no more conducive to Europe's competitiveness than unemployment itself. Short-term competitive advantages achieved by cutting costs through further dismantling of the social welfare system and pressure on wages impair economic output, owing to the overall social impact of such measures and therefore constitute competitive disadvantages.

4.3.5. The Economic and Social Committee recommends a diametrically opposite strategy. Europe should concentrate on endogenous growth forces in the framework of a long-term and environmentally acceptable strategy for competitiveness. The dynamic further development of the European social model coupled with the upgrading of human resources will create a stable framework in which the potential of the internal market can be exploited. The accelerated development of infrastructure, trans-European networks for example, will create a climate in which SMEs, in particular, can make their contribution to employment. The availability of risk capital will encourage entrepreneurs, technological progress and innovation. These endogenous growth factors will enable Europe to boost total output without raising costs, with resultant gains in competitiveness and positive effects on employment. The growth effects to be expected will also mean that labour-saving technological progress will not lead to higher unemployment.

4.3.6. The Economic and Social Committee also sees political scope for boosting market efficiency within the EU. Obsolete bureaucratic barriers and procedures, which unnecessarily curtail market flexibility should be eliminated. In spite of recent efforts, entrepreneurial financing opportunities remain inadequate. More incentives must be created for the provision of risk capital, subject to fiscal and monetary policy requirements.

4.3.7. In this connection, the Economic and Social Committee would urge firms to make greater efforts to mobilize dormant productivity reserves among their workforce. The overall competitiveness of the European economy can be improved if employees' skills are effectively exploited at company level by developing structures for participation and dialogue, by dismantling outmoded company hierarchies and by introducing new management concepts. This is a prerequisite for achieving the aforementioned productivity of the European social model ().

4.4. From price competition to competition between ideas

4.4.1. The foregoing considerations focus on how European price competitiveness can be ensured in existing economic sectors. Nevertheless, the efficiency of a developed economic system is also demonstrated, in particular, by its ability to open up new markets. Europe is therefore facing the challenge of how to use its human resources to develop new goods and problem-solving concepts and to produce and to export high-quality goods and services.

4.4.2. Insofar as the European economy succeeds in translating R& D results into product and process innovation, it will enjoy high returns before price competition begins as a result of increasing production opportunities. These returns create scope for a high standard of living and major investments which can, in turn, provide a basis for innovation. Nevertheless, research fundings and innovation cannot be forced. By contrast with the standardized production of goods or services where, for a given technology, likely output can be inferred from input level and structure, the innovatory capacity of an economy is largely determined by intangible unquantifiable factors and their interaction. This Opinion therefore focuses on a form of competitiveness in which the 'environment` is structured so as to produce a climate favourable to innovation.

4.4.3. The Commission Green Paper on innovation () revealed that something was clearly wrong with the European innovation climate. The statistics examined show that, whilst Europe can boast outstanding scientific achievements, a great deal still needs to be done to convert R& D results into industrial or commercial output. This 'lack of transposition` goes hand in hand with R& D expenditure levels which are already low in comparison with countries such as the US or Japan.

4.4.4. The Economic and Social Committee perceives a serious lack of competitiveness and an urgent need for political action in this area. It regards the Commission report as an exceptional document and fully endorses its political recommendation ():

'Europe needs to react resolutely. It has to rely on intelligence and invest in the intangible. Education and lifelong training, creativity, the exploitation of research results and the anticipation of technical and commercial trends need to be developed. There is also a need to improve the management of enterprises, their openness to external influences and the involvement of employees in the innovation process, so that all the essential skills can be mobilized. Lastly, a climate conducive to innovation needs to be generated with regard to financing (venture capital, stock markets), effective use of industrial property rights, regulations or standards` ().

4.4.5. The Economic and Social Committee would point out that the Commission's proposed policy for the attainment of competitiveness through innovation does not conflict with the price competitiveness policy outlined in the preceding section. Rather, the Commission's quoted proposals on innovation and the ESC's price competitiveness recommendations can be said to complement each other to produce a comprehensive and coherent strategy for the competitiveness of European undertakings.

5. Outlook

5.1. Europe should look ahead. Globalization is desirable and should offer opportunities for all. What is needed however is a new kind of international initiative in economic and social policy to limit the risks of globalization and ensure that its fruits are more fairly distributed. The tendency of firms to think globally creates a need for effective international institutions to provide a framework for political decisions. Accepting this requires courage from all concerned as it entails re-orientation. Old recipes will no longer be effective: already calls for protection are being heard. The Economic and Social Committee resolutely opposes these. A new form of international cooperation is no utopia. It is a vision and the Economic and Social Committee has pointed the way. All operators are called on to become actively involved in their fields of activity in promoting broadly based international cooperation.

5.2. Europe has a firm footing on the path which leads to the new century. Its advantages include completion of the internal market and well planned economic and monetary union on the one hand and its hard-won social safety net on the other. Neither of these projects must be allowed to fail. In addition to economic integration, social integration in a competitive economy must also be promoted. Marginalization and discrimination are signs of weak policy; social cohesion and involvement of all on the other hand promotes a strong economy and a healthy society. 'Revival requires society driven by citizens who are aware of their own responsibilities and imbued with a spirit of solidarity towards those with whom they form local and national communities - communities that are so rich in history and in their common feeling of belonging` ().

Brussels, 19 March 1997.

The President of the Economic and Social Committee

Tom JENKINS

() See UN World Investment Report 1993, from page 161, for an argument along these lines. Transnational undertakings are not necessarily the same as the major economic enterprises. The reduction in transaction costs is making it increasingly possible for SMEs to operate internationally.

() Commission Communication to the Council and European Parliament on Trade and the Environment (COM(96) 54 final).

() European Parliament, Resolution on human rights in the EU 1994, esp. points relating to freedom of association.

() 'Our Global Neighbourhood` (Commission on Global Governance), London, 1995.

() See the Committee Opinion on global harmonization of direct investment regulations for a thorough assessment of these negotiations. The Rapporteur was Mr Cal. OJ No C 153, 28. 5. 1996.

() Reference should be made to the ILO Convention in this connection. The Committee has already looked at this subject on a number of occasions. In relation to the social clauses, see the opinion on the global challenge of international trade: a market access strategy for the European Union. OJ No C 56, 24. 2. 1997; rapporteur: Mr van Dijk, in particular point 5 on the enshrinement of environmental rules at multilateral level; see the own-initiative opinion on international trade and the environment, OJ No C 56, 24. 2. 1997; rapporteur: Mr Koopman.

() According to balance-sheet theory, inward and outward FDI flows and stocks should balance out world-wide. Nevertheless, differences in data collection give rise to variations.

() Table 4 shows external trade as a percentage of GDP. Surprisingly it shows that over the last 30 years exports to and imports from non-European countries have remained constant at some 10 % of GDP.

() A recently published ILO study concludes that only 5-6 % of global employment is directly or indirectly dependent on transnational undertakings and concludes: 'No doubt this overall contribution of MNEs to employment hardly seems significant at present`. World Employment 1995: An ILO Report, Geneva 1995, p. 45. However, worldwide almost 50 % of workers are employed in agriculture. In relation to employment in industry and services the figure is doubled, therefore, to 10-12 %.

() Similarly, Article B of the EU Treaty refers to the need 'to promote economic and social progress which is balanced and sustainable through the strengthening of economic and social cohesion`.

() The term triad is used in this context by the United Nations Conference on Trade and Development (UNCTAD).

() See Opinion on the 1996 Annual Economic Report, rapporteur: Mrs Konitzer, points 3.3.1 to 3.3.3, OJ No C 204, 14. 7. 1996.

() See also ESC Opinion on the impact of the introduction of new technologies in employment, OJ No C 66, 3. 3. 1997, p. 78; rapporteur: Mr Cal.

() Bulletin of the European Union, Supplement 5/95 (based on COM(95) 688 final of 20. 12. 1995).

() See also ESC Opinion on the Green Paper on innovation; rapporteur: Mrs Sirkeinen; co-rapporteur: Mrs Konitzer, OJ No C 212, 22. 7. 1996.

() Bulletin of the European Union, Supplement 9/95, p. 6.

() From the preamble to the White Paper on Growth, Competitiveness and Employment, European Commission, 1993.

APPENDIX 1 to the opinion of the Economic and Social Committee

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Graph 1: FDI stock among Triad members and their clusters, 1993 (Billions of dollars)

Graph 2: The ratio of FDI flows to gross fixed capital formation, by regions, annual average, 1982-1987 and 1988-1993 (Percentage)

APPENDIX 2 to the opinion of the Economic and Social Committee

The following amendments, which received at least one quarter of the total votes cast, were defeated in the course of the debate:

Point 2.1.3

Amend to read:

'This inherent asymmetry of globalization is a cause for concern. As well as keener competition between firms to satisfy customers, which global markets can promote for the benefit of all, the "global players" are potentially in a position to increase their market share and influence on the different markets. As a result, the competitive processes can have unwelcome effects. The following scenario can be envisaged: individual regions, in their efforts to attract investment in additional production, try to create the most attractive location for transnational enterprises. Each region has a strong interest in offering the investor a combination of supply conditions which are more favourable than other regions. This means that the institutions in each region attempt to enhance the competitiveness of location in that region which, indirectly, puts pressure on wage competitiveness and keeping social and environmental costs down. It is not globalization itself which is the problem, but the asymmetric consequences which enhance the returns to investment by placing competitive pressure on the labour market and social and environmental conditions. Many regions within the EU have benefited from investment made by firms within their global strategies. However, there is a growing concern that, in some circumstances, the balance of advantage to the local region could disappear. The Economic and Social Committee is concerned that regions might be tempted to engage in competitive undercutting of one another.`

Reason

To base the argument on a more widely accepted analysis of the impact of recent trends in globalization and reduce the risk of criticism that the cumulative reaction envisaged in the present draft is overstated.

Result of the vote

For: 45, against: 63, abstentions: 15.

Point 2.1.4

Amend to read:

'A long-term EU policy for international competitiveness would attempt to alleviate these concerns. The difficulties in securing agreement are all too obvious. Global standards, whether in consumer protection, workers' rights or environmental rights, are more difficult to agree and enforce than at a national or EU level.`

Reason

To base the argument on a more widely accepted analysis of the impact of recent trends in globalization and reduce the risk of criticism that the cumulative reaction envisaged in the present draft is overstated.

Result of the vote

For: 41, against: 66, abstentions: 11.