How will Austrian school resolve the woes of Austrian economy?

This is a very interesting article by Prof Dalia Marin of University of Munich.

Austrian economy seems to be reeling for very different reasons. Usually, we see poor macro policy for poor economic performance. But this one is hardly a case of poor macro:

Austria was once lauded as Germany’s more successful neighbor, one of Europe’s fastest-growing countries. But its economy has been sputtering since 2012, with GDP up last year by a meager 0.7%; only Greece and Finland performed more poorly. And Austria’s unemployment rate has soared, from 5% in 2010 to 10% today.

These developments have their origins in how Austria engaged with Central and Eastern Europe after the fall of communism. At first, Austria benefited from the European Union’s eastern enlargement. International trade soared, Austrian firms invested heavily in the region, and Austrian banks opened subsidiaries there, financing these countries’ modernization. All of this was good for business, and the Austrian economy grew rapidly.

But a hidden dynamic ultimately turned the tables on this success. Central and Eastern European countries had low per capita income, but were rich in skills. Austria, far wealthier, was not. In 1998, 16% of Central and Eastern Europeans (including Russia and Ukraine) had academic degrees, compared to just 7% of Austrians. So, when Austrian firms invested in Eastern Europe, they did not just relocate low-skilled manufacturing jobs; they also offshored the parts of the value chain that required specialized skills and produced valuable research.

According to my research, from 1990 to 2001, Austrian subsidiaries in Eastern Europe employed five times as many people with academic degrees, as a percentage of staff, as their parent firms did. They also engaged 25% more research personnel in their labs.

This relocation of research activity lowered growth in Austria and boosted growth in Eastern Europe. Research spills over to the rest of the economy, as new knowledge diffuses into commercial activities. Tapping the knowledge produced by Austrian subsidiaries was one of the ways Eastern European economies were able to grow so quickly.

Today, Bratislava, Prague, and Warsaw – the location of most Austrian subsidiaries – have higher per capita incomes than Vienna. Indeed, according to the Hungarian economist Zsolt Darvas, in terms of purchasing power parity, all three cities surpassed Vienna in 2008. This is a remarkable development, given that Vienna has served as a reference point for these capitals for centuries.

🙂

Usually, we will say such investment in other countries will bring better returns etc for home companies which will translate into higher overall growth. But it s just the opposite case here.

What are the solutions? Educate and train your people:

If Austria is to return to its previous growth path, it will have to become more attractive as a location for innovation. And to do this, Austrian firms must employ highly qualified people in their research labs.

Educating a highly skilled workforce takes time, of course. But fortunately, Austria has another option: immigrants. Austrian policymakers could choose to follow Canada’s example and introduce a selective immigration policy that welcomes highly skilled migrants and refugees.

Austrians nearly closed the door on that option. Now they must recognize that what populists call a weakness could be Austria’s best hope for reviving growth.

Austrian school most likely would give thumbs up to the companies chasing higher returns abroad. But could be amazed to see how this could actually hurt the Austrian economy. What would be their suggestions?

Though, this may not be the only reason for Austrian decline. There could be some more as well and the above suggestions may be just a drop in the ocean. Economics is such a non-linear subject. The moment something becomes the broad norm, some other thing will challenge the norm..

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