The importance of economic integration (and some investment advice)

In the comments to one of the posts below, I raised the point that America’s prosperity owes a great deal more to its economic integration rather than to any particular shared value system, and that this was part of logic behind the founding of the EU. I want to demonstrate exactly how important a point that can be by using my own line of work as an example.

I work for a medium-sized Belgian translation firm. We have a handful of full-time staff and some 200 freelance translators who take work from us. Our freelancers can and do take work from other sources, what we do is mostly dealing with clients. Like all good middlemen, we make it possible for businesses to negotiate a single price for their translation work and we act as an insurance policy. Avoiding the middleman may sometimes cost less, but if your freelance translator is sick or busy and you have a deadline to deal with, you have to scramble to find a substitute. If you deal with us, we have many translators on tap and someone will always take your work. Few firms – only a few very large ones – still keep in-house translators. Translators generally agree to charge us less than they would charge clients directly because we can bring them a great deal of work, and we take away the cost of billing and accounting. We charge customers a bit more because we simplify billing and guarantee schedules. This is pretty much how modern translation firms operate.

The thing is, working this way raises certain problems. The first is that the bigger you are, the more you can offer your translators plenty of work and the less money they’ll demand as a result. Size matters. Second, you have to offer certain additional services, because when different translators handle your work, the results can be inconsistent. The best translators are generally not very specialised in a single field, so two different translators may not all use the same terminology for the same translation job. It’s usually better to make sure that the same translator does all of your work if possible, but the essence of this business model is that we can’t promise you that will happen. There are ways of addressing this latter problem, but unless you’re really interested in translation theory and computer-human interaction, they’re not very interesting. Dealing with these issues is basically what I’m paid to do.

The ability to charge less for translation, and to invest in technologies that enhance translation productivity and quality, depends quite closely on the size of your firm. As recently as the early 90’s, it was still rare to find pan-European translation firms. The translation market in the EU wasn’t very integrated, and as a result, firms tended to be fairly small. The large, integrated markets – the US and Japan – are monolingual; they don’t do very much translation.

Now, things are different. Translation in Europe gets contracted more and more on a continent-wide basis. The possibility of large, integrated translation firms is much more real. If we relied exclusively on the Belgian market, we could not justify the capital spent on us or the money we’ve poured into technology development. We’re beginning to make real progress in raising productivity in this industry. This has only become possible because of European integration.

So, let me offer you a bit of investment advice: We’re going to need that increase in productivity very badly, because the demand for translation services is growing. Precise figures on this industry are hard to come by, but estimates of its size range from EUR10 billion to EUR30 billion in annual revenue. The common consensus is that this industry is seeing rapid growth despite the current global economic downturn. And, in the next decade, it’s going to grow at an incredible pace.

Let me explain why:

  1. The expansion of the European Union is acting as a stimulus to growth in this industry. The ten new members have eight new official languages, not counting Maltese, on top of the existing eleven, not counting Irish, Letzeburgish and Catalan. This does not just mean that EU official documents have to be translated, it means that manufacturers who are going to start exporting to those countries also have to translate mountains of information, from instruction manuals to maintenance guides to regulatory declarations.
  2. The decline in the value of the US dollar means that American firms that have not exported very much in the past will begin to do so. American companies don’t do translation. Many of them – the kinds of small and medium sized firms for whom the falling dollar is a big opportunity – many of them have never exported. They don’t know about language and don’t want to know, and they are going to want some single firm to come along and take care of all their language problems for one price.
  3. Rapid growth in key developing markets – India, China, southeast Asia and Russia in particular – is also a factor in the rising fortunes of the translation industry. Each one has its own language laws and regulatory requirements, and even less ability to use documents in English than most European states.
  4. The regulatory environment in the EU is the biggest reason to be bullish on the translation industry. With tighter integration, the European Commission and the EU member states themselves are increasingly explicit about language requirements in labelling, documentation and government submissions. These requirements tend to increase rather than reduce translation requirements, and this trend shows no evidence of abating.

One particularly good example of this last point is the EU directive 98/79/EC, covering a variety of medical devices. When it goes into full effect on December 7, 2003, it will require virtually all medical technology vendors to receive the “CE” label before being able to distribute their products anywhere in the EU. Obtaining this label means, among other things, complying with the language and labelling regulations of every single EU member state. Of the current 15 members, nine require all mandatory documentation in their national language and all of them require it for at least some of the documentation. The new members will doubtless make similar impositions.

The new European Patent Office is also an excellent example of how regulatory requirements are driving companies to spend more on translation. The new system streamlines the process of obtaining a Europe-wide patent and lowers the price dramatically. However, it has not eliminated the need to translate patents into whatever languages the member states individually mandate. The initial patent application can be in English, French or German, but once the patent is issued, a translation has to be prepared and deposited with each of the national patent offices, in whatever form and language they require. Twenty-two of the twenty-seven contracting states mandate that the whole of the patent be translated, one state requires only that one section be translated, and the remaining four states have not yet published regulations regarding European patents.

These translations aren’t examined – the EPO examines the original application and unless someone challenges them, the rest are taken as accepted. You need only pay a filing fee of €50 to €100 in each member country. This is negligible compared to the price of filing a patent for examination (~€50,000), so the total cost of a European patent is now far, far smaller than it used to be. Many more firms will take out European patents than before. But, the translation load is even larger under the EPO scheme than back when you would only file patents in a few countries.

There is also more and more reason to see product liability as a motive for document and translation quality control. A rather infamous train accident at Paris’ Gare de Lyon in 1988 focused attention on layout and structure as a factor in text comprehensibility. French investigators ruled that the accident had been caused primarily by the failure to use clear layout in maintenance documentation, leading to incorrect servicing and ultimately to the deaths of 56 people. I don’t know of any comparable case involving a poor written translation, but it is only a matter of time before this issue is gruesomely highlighted.

EU regulations already make poor translations subject to product liability law. Although in principle the translator can be held liable for poor quality work, in practice this virtually never occurs. However, clients who commission and distribute bad translations are at present strictly liable. Manufacturing and service regulations focus more and more on issues of quality rather than specifications, and semi-voluntary standards like ISO-9000 focus heavily on quality issues. This means that not only will having translations matter, it will matter more and more that they be good translations. Good translations cost more than cheap ones.

This is why economic integration is going to make the translation industry much more productive and much larger in a decade than it is today. It is why integration – and not just free trade in the form of eliminating duties on imports – is worth pursuing.

5 thoughts on “The importance of economic integration (and some investment advice)

  1. Scott,

    “I raised the point that America’s prosperity owes a great deal more to its economic integration rather than to any particular shared value system, and that this was part of logic behind the founding of the EU.”

    That’s a challenging issue, I agree. From the perspective of the social sciences, I would ask: How can we tell?

    Economists certainly argue that reducing trade barriers will improve economic welfare or, at least, potentially so depending on whether losers can be and are, in fact, compensated by those who gain.

    The really interesting questions IMO are whether America’s value system is sufficiently diffused in America and distinctively different from Europe’s and, if so, whether that counts in the end?

    I’m eclectic on this but for the sake of discussion I would argue that America is fundamentally different in respective of its significantly lower tax burden compared with virtually all EU countries – Luxembourg, Monaco and a few other places with small populations are mysterious. On all the data I’ve ever seen, America’s income distribution, both before and after tax, is more unequal than that of virtually all European countries – save perhaps for a few, small mysterious exceptions again.

    America’s institutions are also significantly different from most European countries, notably so in respective of a legal system derived from a Common Law tradition, and in respect of the corporate disciplines imposed by a finance based capital market instead of the bank based and fragmented capital markets of most European countries. Europeans tend to have far more statutory employment rights than Americans. By the data, on average Europeans, or at least the western variety, take more holidays, work fewer hours a week, and tend to retire earlier than Americans who, incidentally, have more traffic accident fatalities per head of population than the citizens of west European countries. Very likely, the international readership here may think of more distinctive differences.

    Economic and even political integration may not be sufficient to generally raise productivity and affluence in Europe to American standards – but then Europeans may not want to make the adjustments necessary to get there: there are those who live to work and those who work to live. For generations to come, European markets will continue to be fragmented by differences in languages, cultures and social security systems. So far, the launch of the Euro seems to have had little impact on cross-border price differentials in the Eurozone.

  2. Bob, I would agree that there is no adequate sample size or sufficiently simple natural experiment to make an iron-clad case that some particular reason X explains why one country succeeds and another fails. Indeed, 99% of the time, I would argue that there probably is no single reason at all. However, there are quite a few individual cases which support the idea that integration has been a very big factor in Amercan economic growth and that lack of integration has been a problem for Europe.

    One big one has been access to adequate capital. A big firm with a great deal of capital can undertake much riskier research projects than a small firm with less capital, even when both firms are equally productive. This has certainly been an important factor in deploying automation, which is a high cost, fairly risky investment. The robots they use to make cars, for example, are almost custom made and represent a huge investment in capital. It is unlikely that a small firm limited to a market the size of, for example, the UK’s could afford to commit enough capital to robot research and deployment to ever make the transition. A big Japanese or American firm can.

    Even when these kinds of investments in productivity are finaced by banks and investors rather than out of profits, it is difficult to justify absorbing the enormous capital for new high-cost, high-risk research unless the potential gains are enough to justify it. Having access to larger markets makes it easier to claim that there are large potential profits in productivity enhancement.

    This goes beyond just lowering or eliminating tariff barriers. It means that because GM is an American or global firm with access to large markets and large sources of capital, rather than just a Michigan firm that exports to other states, GM can invest in productivity far more than a smaller firm could. For Europe, that means continent-wide firms with continent-wide markets and access to capital sources commensurate with the size of their markets.

    All of this is true quite apart from personal income tax rates or labour market inflexibilities. I do not have the impression that taxes on capital are particularly high in Europe. The capital gains tax here in Belgium is very small by comparison with the US, so income derived from investment is generally taxed a good deal less. I believe that this is generally true across Europe, although I don’t have specific figures for different countries. It would seem to me that that variable has far more effect on access to capital than income tax rates or the VAT, and that access to capital is the most important factor in financing investments designed to enhance productivity. Personally, I think Belgium could afford a higher capital gains tax and a more progressive income tax, but it undermines the idea that European tax policy is really a barrier to growth.

    This leads me to the conclusion that it is the lack of a genuinely integrated market that has been a bigger barrier to productivity growth in the EU than labour market flexibilty or tax policy. The Euro has already helped in this respect by eliminating currency risks in the establishment of pan-European firms and creating a pan-European investment market. In the five years since the introduction of the Euro (the fixing of the exchange rates, not the introduction of physical currency) has brought about a substantial increase in cross-border investment in the EU. It may well take some time before this begins to affect consumer prices directly, but it is already reducing business risks for companies like mine, which can now charge clients across Europe in Euros without taking on any risk from currency fluctuations or imposing them on our clients, and can seek out capital across Europe without our investors having to accept that risk.

    This is beginning to pay off in productivity growth in my industry and I expect it is for others too. One of our clients is a Dutch bank that has been buying banks in other EU countries, because they can now operate from centralised back offices without regard for local currencies, raising the efficiency of their operations quite sharply. I might also note that the prospect of a merger between Air France and KLM is also driven in part by the ability to set a single set of prices across the EU in just one currency, without having to factor in currency risks.

    I note that there is a good argument that being able to set your own interest and exchange rates also offers gains. However, I am arguing that this has to be set against gains derived from having large enough stable markets, both for things and for capital, to make investments that lead to real growth. I should think that for folks who believe that productivity growth is driven by investment in risky ventures – which was the orthodoxy I learned in college – support for the Euro would be fairly obvious. I do think the EU can grow to the level of affluence the US has. For the bottom 90% of the population of the countries immediately around me – France, Germany and the Low Countries – it already has. Although there may well be a case that labour market inflexibilities hamper productivity growth, I haven’t seen anything to suggest that this is a factor comparable to access to capital in explaining differences in productivity growth.

    As for the language issues, I think the costs associated with language barriers are overestimated when compared to more mundane issues like different regulatory schemes and jurisdictions. They are magnified in the minds of managers because of their own lack of experience working in multilingual markets. Besides, the EPO is a good example of how a trade off that raises language related costs but creates single regulatory schemes can pay off spectacularly. My job is entirely about lowering these language related costs anyway.

  3. I think that American econmic integration is made possible (and is reinforced by) individualistic religious/cultural doctrines of British origin — individual salvation and wealth as the visible sign of grace. This means that most Americans are easily recruited into a pure competitive-economic way of life.

    My own home state, Minnesota, along with neighboring states, has a very low Anglo-Saxon-descended population; it’s overwhelmingly Lutheran or Catholic German or Scandinavian. Minnesota and Wisconsin were not coincidentally the centers of socialist and even communist resistence to law-of-the-jungle capitalism.

    Midwestern populism had a rightwing streak too. In 1936 a Minnesota Farmer-Labor third-party Congressman was the only one to vote to support the Spanish Republic. In 1942 or so, a different Minnesota Farmer-Labor Congressman (Ledeen or Lundeen; don’t remember the first guy’s name) was implicated in America First lobbying by the Germans.

  4. Mats,

    “Benefits of scale. You can’t beat that.”

    Exactly so but then how come Canada and Australia do so well in terms of national per capita GDP with their own national currencies and national populations of, respectively, only 30 and 20 millions? It seems the size of national markets isn’t all that matters.

    Besides, just how many industries are there where national markets of the size of, say, Britain cannot sustain plants of minimum efficient technical scale? The Cecchini Report on the Single Market (1988), as I recall, looked into that. The obvious examples are the motor industry, civil airliners and military equipment.

    Where the extent of *market access* certainly effects returns to capital is with those products with huge front-loaded costs, like computer electronics and operating systems, movies, pharmaceuticals and telecommunications equipment. But then the likes of Taiwan and Singapore do nicely making computer products while European markets will continue to be fragmented by differences in languages and national cultures. So far, the launch of the Euro seems to have had little impact on cross-border price differentials in the Eurozone, the principal indicator of the extent to which monetary union intensifies market competition across borders.

    My personal theory is that some Europeans are more enthused by visions of a politically integrated Europe being more able to flex muscle on the international scene, which is why we are getting these proposals for a European defence capability independent of NATO and the recent kite flying exercise: “The domestic governance of foreign countries has now become a matter of our own security.” – from (courtesy of Airstrip One): http://politics.guardian.co.uk/eu/comment/0,9236,1068985,00.html

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