Why do countries perform differently?

It was generally believed that, with the globalisation of business and deepening interdependence of the OECD countries, their economic performance would align. But recent statistics of basic economic trends reveal sharp national differences. Attempts are now underway in the OECD to understand more precisely the impact of information technology, regulatory reform and corporate governance on economic performance.

At the beginning of the 1990s growth rates in Australia, Canada, the United Kingdom and the United States were substantially lower than those in France, Germany, Italy and Japan (Figure 1). In the last three years the position has been reversed.2 This pattern is true of employment patterns as well.2 No doubt, tight fiscal and monetary policies in Europe imposed by the Maastricht criteria, exchange-rate misalignment and labour-market rigidities in continental Europe are all responsible to some degree. But there may be other causes.

The good performance of Australia, Canada, the United Kingdom and the United States seems to coincide with their active use of information technology (IT), particularly since 1992 (Figure 2), and the recent surge in investment in IT in these countries suggests that their workplaces are now harnessing more advanced IT equipment. The number of networked personal computers per population is indeed generally lower in France and Italy than in the United Kingdom and the United States, and startlingly so in Japan.3 The Japanese government argues that the United States is enjoying a virtuous cycle', where investment in IT produces increasing competitiveness and growth; in Japan, by contrast, inadequate use of IT causes weak growth, which in turn discourages investment in IT. They are therefore hoping that an increase in the use of IT use will bring the Japanese economy out of prolonged recession.4It may be the rigidity of the labour market in Japan that has prevented firms from benefiting from IT as much as their US competitors, which have improved productivity by 'downsizing'. These characteristics may also explain in part why the virtuous cycle of IT investment has not occurred in Japan.

But a number of empirical studies show that IT is not a panacea. For it to be used effectively, the organisation of firms has to change, not least through the decentralisation of responsibility and the embrace of a less hierarchical structure.5 IT enables the instantaneous sharing of information across different tiers of an organisation and eliminates or reduces the `middle-man' role of intermediate management. It can therefore dramatically speed up managerial decisions, compelling the firms to move away from the timeconsuming building of consensus towards speedy, top-down judgements on strategic questions, which is vital for businesses trying to survive in global markets.

Many operational decisions nonetheless have to be delegated to floor managers for timely adjustment to ever-changing technologies and market conditions. At the same time, continuous improvement in their skills is necessary to cope with increasing responsibilities. A study in Sweden shows that flexible firms - characterised by a commitment to developing human capital and by a decentralised management structure - are both 20-60% more productive and less prone to lose staff (their turnover of workers is around 20% lower than more rigidly organised companies).6 An OECD analysis of Japan shows, bv contrast, that the impact of IT on productivity is less clear, although it confirms that, in general, firms using IT are more readily capable of changing their business procedures, and have a higher proportion of skilled workers.'

The high correlation between IT and the expansion of the service sector (Figure 3) is yet more evidence of its importance as a major driving factor of growth. Innovations in services are becoming progressively more important as determinants of national competitiveness,s8 and they often revolve around IT, not least software development, information processing, new financial products and logistics management in the distribution industry.

Competitiveness through Reform

The ability of an economy to generate new businesses, particularly in services, depends heavily on its regulatory environment. The reform of regulation which shielded service sectors from global competition was a vital step in building a competitive industrial foundation in the first group of countries and creating attractive locations for companies. During the 1980s, both the United Kingdom and United States carried out sweeping programmes of deregulation and privatisation in such sectors as finance, airlines, railways and road freight, telecommunications, energy and distribution. Australia, Canada and New Zealand also took bold steps to streamline government.' The second group, by contrast, has been slow in reacting to the problems facing regulated service sectors. Airlines and telecommunications are still state monopolies (or were privatised only recently) in France and Germany. Entry to the retail market is still heavily regulated, or opening hours restricted, in France, Germany, Italy and Japan.

Regulatory reform, painful at first, is now paying off. The deregulation of telecommunications, for example, has had the immediate effect of opening-up opportunities for new entrants, with competition inducing cuts in prices and innovation creating new demand and jobs. As a result, there is now a substantial disparity in prices between the countries which have instigated reform and those which have not. The cost of, say, a long-distance telephone call is higher in Paris, in Dusseldorf and in Tokyo than in New York, by 23%, 31% and 69% respectively. By the same corollary, electricity and petrol are some 20 lOa/o more expensive in Germany and Japan than in the United Kingdom and the United States, where more competitive market conditions prevail.10

Expensive intermediary services also push up costs and diminish the price-competitiveness of products, driving companies to invest abroad where business can be done at less cost. About 30% of the investment made by Japanese manufacturing companies in 1995 was outside Japan,"l adding to Japanese worries about the `hollowing-out' of the economy. The number of foreign companies whose stocks were traded on the Tokyo Stock Exchange went down from 126 to 69 (compared to 261 in New York and 518 in London) over the last four years, as they attempted to avoid its restrictive listing regulations and taxes imposed on stock trading. The German government is similarly concerned about the erosion of the country's mighty industrial base in manufacturing, as German multinationals decide to invest in other parts of Europe, North America and Asia.

Regulatory reform to allow the creation of a capital market more responsive to the requirements of small start-up companies, such as NASDAQ" in the United States, is only beginning in France, Germany and Japan, where the government has yet to remove or relax a number of regulations and standards. Yet access to this kind of capital is vital for high-tech innovation by fledgling companies with limited financial resources. Indeed, venture capital tends to play a much less active role in continental Europe,13 where the European Union is now trying to create a European equivalent to NASDAQ. Japan is in the process of reviewing its regulations which have prevented retirement funds and insurance companies from making investments in venture capital.

The Importance of Corporate Governance

The ability of firms to exploit both IT and the new opportunities created by regulatory reform depends very much on the institutional framework in which their activities take place. The role and power of the stockholders and managers are at the heart of corporate-governance systems, although, of course, employees, customers, suppliers, banks and local communities do have differing degrees of influence on corporate decisions. Although no two countries have the same system, it is generally agreed that there are two distinct models, the British/North American and Continental European ones, with Japan having more in common with the second. The sharp difference in economic performance between the two groups seems to suggest that the corporate governance system strongly bears on economic performance.

After the turn of the decade, the characteristics of the Japanese system - long-term thinking, consensus-based decisions life-long commitments to employees, cohesive relations with banks and clients - began to backfire against Japanese companies. They now fear that their long-term commitments prevent them taking urgently required actions to streamline and rationalise their operations. Consensus makes quick decisions impossible, and the absence of scrutiny by stockholders creates a complacent atmosphere and slows down necessary adjustment. Japanese firms are thus beginning to search for new ways to govern themselves. Many have recently announced that they would adopt return on equity as a yardstick to measure performance, rather than market share, as they now do. In Germany, the three powerful universal, banks are losing their tight control over industry, allowing the stockholders to play a more active role in company supervision.

On the other hand, the British/North American model is focused on providing value for stockholders in the short term. Corporate managers are under close scrutiny by stockholders, pension funds in particular, to ensure the most efficient use of their resources. The threat of takeover helps maintain the pressure to show good bottom-line results and keep stock prices high. Although this approach is often criticised for being short-sighted, the regained competitiveness of the US and UK economies seems to demonstrate that this system functions as least as well as any other.14

`Downsizing' is a prominent feature of the current US economic landscape. IT enables firms to concentrate on their core activities by eliminating and 'outsourcing' indirect and noncore business, and to benefit from synergy with the activities contracted out to external suppliers. Legal and accounting services, for example, are now available on-line. Interaction with suppliers can also be strengthened by the ample flow of information on the networks without the risk of becoming locked in a fixed relationship with particular suppliers. Indeed, the British 'North American system of corporate governance permits companies there to tackle downsizing more successfully than their competitors in Japan and continental Europe, which are bound by their entangled business relations with a wide range of stakeholders.

The factor that seems to make the British,' North American approach, which a decade ago was considered to be full of drawbacks (`shorttermism,, higher transaction costs, and so on) now appear so effective, is the shift of leading sectors in OECD economies from `smoke-stack, industries toward information- and knowledgebased ones.15 The success of Japan and Germany during the 19?Os and '80s was attributed to strong manufacturing sectors. Investment in such sectors takes long periods to mature: 20 years (more or less) in steel, 15 years in petro-chemicals, ten in automobile manufacturing and five in electronics. To reduce the risks associated with such huge and long-term investment, companies in these sectors required assurance from their customers that their products would continue to be bought over a number of years, and from banks to offer a helping hand in the event of a major failure - characteristics which made the Japanese and German governance systems more suitable.

Now that the information and service sectors are forming an increasingly large part of the OECD economies, shorter product life-cycles and more rapid technology obsolescence in these sectors call for quicker profits and a swifter response to the market. Every 18 months, a new memory-chip doubles its capacity. Netscape's Internet browser took only a year to reach a market of ten million users. IT is suddenly throwing firms into a world of massive opportunity and threatens to drive them out of it just as quickly.

1. The OECD Economic Outlook. No. 60 OECD Publications. Paris. 1996.), projects that the average GDP growth rate of the Australian, Canadian, British and American economics wil remain highernthan those of the French, German, Italian and Japanese until 1998.

2.From 1992 to 1995, the unemployment rate fell in Australia, Canada, the Uited Kingdom and the United States by 1.4%-2.2% in the other four countries if rose by 0.9%-3.6%

3. The number of PCs per 100 white-collar workers in 1994 was 104 in the United States. 74 in the United Kingdom. 76 in Germany. 62 in France. 57 in Italy and 24 in Japan (Information Technology Outlook 1997. OECD Publications, Paris 1997.) Sam Paltrige and Dimitri Ypsilanti. A Brught Outlook of Communnications: The OECD Observer. No. 205. April, May 1997: see also pp. 41-44.

4. Program for Regaining the Dynamism of Industries by Making Use of Electronic Information Technology. MITI. Tokyo. 1995.

5.Graham Vickery and Gregory Witzberg Flexible Firms Skills and Employment. The OECD Observer No. 202. October, November 1996. 6. Towards Flexible Organizations. NUTEK, Stockholr, 1996.

7. Kazuyuki Motohashi. Use of Information Networks Organizational Change and Productivity: Firm Level Evidence in Japan: in Information Technology Outlook 1997. op cit.

8. Anidrew Wyckoff The Growing Strength of Services' The OCED Observer. No. 200. June, July 1996.

9. Paul E. Atkinson. New Zeland's Radical Reforms The OECD Observer, No. 205. April May 1997.

10. In 1988-90 teh UK electricity market was split up into generation, transmission and distribution sections, and competition was intrduced in generation and distribution. The US market is in a similar situation, in contrast to virtually monopolistic market conditions in many other countries.

11. Tankan, Bank of Japan, Toyko, Atuust 1996 12. National Association of Securities Dealers Automated Quotation.

13. Venture Capital and Innovation, OECD, Paris, 1996, available free of charge from the Science. Technology and Communcations Divison of the Directorate for Science, Technology and Industry.

14. Jorgen Elmeskov. Germany: The Structure of Corporate Goverance: The OECD Observer. No. 196. Ocrober November 1995. Peter Jarret. The United States- Corparate Goverance: The Market Monitor: The OECD Observer, No 203 December 1996 January 1997 Randell S. Jines Kotaro Tsum Japan-- Corporate Goverance A System in Evolution. The OECD Observer, No. 204 Feburary March 1997.

OECD BIBLIOGRAPHY

Information Technology Outlook 1997, 1997

Communion Outlook 1997

Sam Paltrige and Dimitri Ypsilanti, 'A Bright Outook for Communucations', The OECD Observer, No. 205, April/May 1997

OECD Economic Surveys: New Zealand, 1996 Paul E Atkinson, `New Zealand's Raical Reforms, The OECD Observer, No. 205, April/May 1997 OECD Economic Surveys: Japan 1996 Randal S. Jones and Kotaro Tsuru, 'apan - Corporate Governance: A System in Evolution', The OECD Observer, No.204, February/March 1997 OECD Eco Surveys: The United States, 1996 Peter Jarrett, 'The United States - Corporate Governance: The Market as Monitor, The OECD Observer, No. 203, December 1996/January 1997 OECD Economic od; No. 60,1996 Regulatory Reform and Innovation, 1996 Science, Technology and Industry Outlook 1996 The OECD Jobs Strategy: Technology, Productivty and job Creation, 1996

Graham Vickery and Gregoy Wurhwrg, 'Fr Films, Skills and Employment', The OECD Observer, No. 202, October/November 1996

Candice Stevens, The Knowledge-driven Ec, The OECD Observer, No. 200, June/July 1996 Andrew Wyo, The Growing Strength of Service, The OECD Observer, No. 200, June/july 1996 OECD Economic Surveys: Germany, 1996 Jen Elmeskov, 'Gerrnany The Structure of Corporate Goverance', The OECD Observer, No. 196, October/November 1995.

Kazuyuki Motohashi works in the Economic Analysis and Statistics Division of the OECD Directorate for Science, Technology and Industry, of which Risaburo Nezu is Director.

E-mail: [email protected]

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