NEUTRON BOMBS WOULD HAVE BEEN QUICKER:

Europe’s Eroding Wealth of Knowledge (JEAN PISANI-FERRY, 23 August 2006, Financial Times)

Europe is much better endowed with buildings and machines than brains.

There is a clear gap between the US and the EU as regards human capital. The US economy is ahead of the pack for both human and physical capital, the EU for physical capital only. This shows up in trade structures. The US mostly exports skills-intensive goods, such as high-technology products, while the EU specialises in goods of high capital intensity and medium-skill intensity, such as cars and chemicals.

This puts the US and the EU in different positions vis-à-vis globalisation. Harvard University’s Richard Freeman notes that globalisation means an almost sudden “doubling of the global labour force”: that is, the entry into the world economy of new workers initially deprived of access to capital. In this context, there is an advantage in specialising in capital-intensive goods for which there are few competitors. In the short run, globalisation increases the world demand for those goods – and the countries that specialise in them benefit from a form of rent. Its trade specialisation puts Europe on the side of globalisation’s winners, as its advantage is actually strengthened by the entry of new players. This explains why European exports have thrived in recent years – and suggests that many complaints about the effects of globalisation ignore its benefits to Europe.

The good news, however, may stop here. Europe’s high savings helped in accumulating capital in the low capital mobility context of the past, but those times have gone and capital is gradually moving to the countries with good economic institutions, infrastructures and human capital. With migrations, human capital to some extent agglomerates at the same places. Here the EU risks being at a disadvantage because of its slowness in Developing and upgrading its education systems, especially universities and other tertiary institutions. Also, few countries have devised a skilled migration policy that makes them an attractive place to study and work.

The US has about equal infrastructure, more investment in human capital, better economic institutions and a more active skilled migration policy. Capital is thus more inclined to move there as well as to the best-performing emerging countries. This should erode Europe’s comparative advantage.

Why should the secular care what happens when they're gone?

Posted by Orrin Judd at August 24, 2006 7:14 AM