A debate, especially in Flanders, has arisen in recent days between economists Paul De Grauwe, who believes that the Belgian economy has more than compensated for the loss of its automobile sector, and Geert Noels, who is worried about the deindustrialization of the country .
For years and years, we have been worried about the deindustrialization of the European Union, and more especially of Belgium. In our country, the disappearance in two decades of the automobile sector, whose last flagship, Audi in Brussels, has just closed its doors, is the latest symptom of a phenomenon considered worrying by many.
This old debate resurfaced, at least in Flanders, during a skirmish between Paul De Grauwe, professor at the London School of Economics, and Geert Noels, CEO and co-founder of Econopolis. Two economists with very divergent views.
“We have more than compensated for the disappearance of the automobile sector”, estimated Paul De Grauwe a few days ago, during the program The Appointment (on Canvas). Industrial production has, since 2000, increased by around 75%, with even a spectacular jump at the time of covid, when the country’s pharmaceutical sector was working at full capacity. “This is unfortunately false,” retorted Geert Noels on Twitter/X.
“Industrial production is not a good measure of the economic importance of industry. Economists are interested in the added value generated by industry. And in the Belgian industrial sector, this has only increased by 15% since 2000, while the added value of the entire Belgian economy increased by almost 50% during this period, or three times more. The industry therefore stagnated, unable to keep up with the growth of the economy. The same is true in the euro zone, but to a lesser extent,” says Geert Noels, who adds: “We have never recovered from the loss of the automobile. Belgium’s industrial added value is far behind that of the euro zone and Belgium risks once again losing more than the European Union.”
Cell phone versus hairdresser
“Production and added value, you have to look at both indicators,” explains Paul De Grauwe. The first tells us that we have increased output in real terms dramatically. The second tells us that the added value has also increased by approximately 15% since 2000. Despite the fact that, during this period, a large part of automobile production disappeared in Belgium, we have therefore continued to increase the value. added in Belgian industry. Which means that we have more than compensated for the loss of added value in the automotive sector. Whether we look at production or value added, the conclusion remains the same. The loss of the automotive sector is more than compensated in the industrial sector in Belgium.”
We can still ask ourselves: why, in industry, does the creation of wealth not follow the evolution of production? “The reason for this discrepancy, answers Paul De Grauwe, is that the prices of production of industrial products tend to decrease compared to the prices of the service sector. So I often use my laptop as an example. Today, you can buy them for 200 or 300 euros. When I was younger, I bought my first PC in 1982 or 1983, with which you could do very little, and I paid more than 2,000 euros for it. Prices have fallen sensationally, and this is the case for many industrial products. On the other hand, in the service sector, the opposite trend is often observed. Prices tend to increase. My hairdresser is more expensive every year. The weight of the added value of industrial products therefore tends to decrease, and the weight of services to increase. Does this mean we have more hairdressers, and more haircuts? No. On the other hand, we produce many more PCs today than 20 years ago.”
The price effect
And then there is another element. Where to draw the line between industry and service? Many industrial services are not listed in the industrial sector. And conversely, industrial products include a lot of services. Laptops or smartphones are not only made up of hardware, but also of services. “I haven’t done detailed studies, but the value of a laptop is 80% made up of software services,” emphasizes Paul De Grauwe. What we sell as an industrial product actually has a lot of attached services. The same with cell phones.”
This “price effect” explains many things, continues the professor at the London School of Economics. “When I started my economics studies in the 1970s, the industrial sector still represented 40% of GDP. Now it weighs less than 20% (in 2023, industry represented 13.6% of GDP, editor’s note). The prices of industrial products tend to decrease. Consequently, the weight given in GDP to all these industrial products tends to decrease each year, while the weight given to services tends to increase.”
Production on the rise
We don’t realize the reality behind the numbers. “People look at the statistics and say the industry is disappearing. But it does not disappear, continues Paul De Grauwe. It’s important to look at the data that tells us that, in fact, we are producing more than in the past. It is also the same phenomenon in agriculture, a sector which represents barely 1% of GDP. However, we have never produced as many agricultural products as today. But in this sector too, we can produce more, cheaper, with fewer and fewer people. This does not mean that the sector is disappearing.”
There is a phenomenon of “creative destruction” which is always at work, he adds. “The industrial sectors which are under pressure react by saying: we must support us because if we disappear, the whole industry will disappear. That’s not what’s happening. The steel sector has practically disappeared in Belgium, but the industry has not disappeared. Remember: in the 1970s, people said that we should not abandon the steel industry because the sector was strategic.”
Loss of know-how
Geert Noels is far from convinced by Paul De Grauwe’s explanations. In his opinion, the example of laptops is not significant, he tells us. “We don’t create computers in Belgium! This has nothing to do with our industrial production, neither in our country nor in Germany. Maybe in the United States. But even there, the production figures do not show the revival of the industry.”
He continues: “This is not the first time that I have been in debate with Paul De Grauwe. Already in 2009, when I said that we had a problem with industry, Paul De Grauwe replied that the future was in services and said to look at the United States. However, the United States has changed – since Obama, Trump, Biden – the direction of its policy because it has seen that without industrial production, a country loses a lot of know-how and a lot of additional related services. In reality, we are losing a lot of jobs in the industry that are not being replaced by other, equally valuable jobs. People are not going to do anything else except work for the government. Is this the future?”
What to put instead?
Replace energy-intensive industries that have become uncompetitive with other industrial activities? Geert Noels doesn’t believe it. “We had sufficiently attractive energy prices. Then we changed our energy policy under Tinne Van der Straeten. We said: we don’t need it! But abandoning nuclear power was an ideological decision. There were enough reasons not to do it, especially after the outbreak of the war in Ukraine.”
“I would like to know what we are going to put instead,” adds Geert Noels. Each time, we change a parameter. For example, salary costs. We say: it’s not important because we have higher value-added activities that need energy. And then, energy is becoming too expensive in Belgium. We’re going to do something else. We accumulate costs and pretend that we are entitled to activities that bring in the most money possible, but which, nonetheless, are in international competition. So I don’t know what activity we’re thinking of. To semiconductors? In Belgium, we only have Imec (the nanotechnologies and digital technologies research center based in Louvain, editor’s note), and it employs relatively few staff. There are very few high-tech jobs.”
Change mentalities?
“We imagine that we can afford to accumulate all the cost and competition handicaps. And then, with the wave of a magic wand, we will always attract activities, continues Geert Noels. But we can already see in the figures that this is not the case. Belgium no longer has the capacity to create jobs in the private sector, even though there are a huge number of jobs in the public sector. And the more public jobs we create, the more political parties depend on them to win elections, since the majority of the electorate is dependent on subsidies and jobs created by politicians.”
When we ask him what should be done, we feel Geert Noels fatalistic: “It is difficult to change mentalities,” he replies. If the mentality is good, we can still hope to do something. If the mentality is for degrowth, if we believe that we do not need industry, we will feel it heavily. There is a heavy responsibility that weighs on people like Paul De Grauwe, who encourage abandoning the industry and who are somewhat in a philosophy of degrowth, a philosophy which neglects the factors of competition and pushes Belgium into a situation of more and more catastrophic.”
