Covid-19 and creative destruction – Marx, Schumpeter and the role of the state

The impact of the uncertainty generated by Covid-19 and the subsequent lockdown in countries across the world has been devastating for economies and societies. There is more to come. The world economy was already struggling somewhat in 2019, with slowdowns in the US and China, the two largest economies. In fact, what was at best sluggish growth in output and productivity in many countries had been a feature of the decade or so which followed the financial crisis of 2008. The onset of the pandemic has hit already weak or fragile economies hard.

Keynes famously argued that the ‘animal spirits’, or waves of optimism and pessimism among businessmen potentially looking to invest, were a major factor in the determinant of growth and employment, and hence economic prosperity. Uncertainty about the future could lead to spending on new industrial capacity and jobs being postponed, driving the economy into stagnation or recession. It was the job of government, he said, to ‘socialise’ investment. In other words, through judicious policy choices, it should try to maintain optimistic expectations among businessmen and make sure that there were sufficient investment opportunities to keep spending, and therefore employment, at a socially optimum level. Continue reading

Can Vietnam escape the middle income trap?

samsungvietnamelectronics1A recent article by Trinh Nguyen of the Carnegie Endowment for International Peace (which can be accessed for free here) describes Vietnam’s recent development success story, its lessons for other late-developers and its prospects for the near future. According to the author, this success has been based on a rapid growth in manufacturing exports, much of it from foreign invested firms. This is in turn down to a liberal approach to international trade and investment, incentives for foreign firms to invest, including the provision of “industrial parks, infrastructure building, and tax breaks”, and more widespread “improvements in its electric system, national highways, and air and sea ports”. Continue reading

The Chinese economy: development, finance and reform

800px-Chinese_draakEven before the Covid-19 outbreak, the Chinese economy was slowing, after more than three decades of rapid economic expansion. Thirty years of recorded growth at around ten per cent per annum is unprecedented in human history. This has enabled hundreds of millions of people to be lifted out of poverty, and the material transformation of a poor country to one that is classified by the World Bank as upper-middle-income.

Despite all this, there is a broad consensus, including among Chinese government officials, that the country’s development model needs to change if it is to continue its transformation and become a rich country. Many economists argue that this will involve a rebalancing of the economy, in order to continue to grow and develop in a way that is more sustainable both for China itself, and for the rest of the world, given that as the world’s second largest economy behind the US, internal changes now have a major impact globally. Continue reading

Ha-Joon Chang: why free trade may not be best

ha-joon-chang“When they hear someone criticizing free trade, free-trade economists tend to accuse the critic of being ‘anti-trade’. But criticizing free trade is not to oppose trade.

Apart from the benefits of specialization that the theory of comparative advantage extols, international trade can bring many benefits. By providing a bigger market, it allows producers to produce more cheaply, as producing a larger quantity usually lowers your costs (this is known as economies of scale). This aspect is especially important for smaller economies, as they will have to produce everything expensively, if they cannot trade and have a bigger market. By increasing competition, international trade can force producers to become more efficient – insofar as they are not developing country firms that would get wiped out by vastly superior foreign firms. It might also produce innovation by exposing producers to new ideas (eg., new technologies, new designs, new managerial practices).

International trade is particularly important for developing countries. In order to increase their productive capabilities and thus develop their economies, they need to acquire better technologies. They can in theory invent such technologies themselves, but how many new technologies can relatively backward economies really invent on their own?…For these countries, therefore, it would be madness not to take advantage of all those technologies out there that they can import, whether in the form of machines or technology licensing (buying up the permit to use someone else’s patented technology) or technical consultancy. But if a developing country wants to import technologies, it needs to export and earn ‘hard currencies’ (universally accepted currencies, such as the US dollar or the Euro), as no one will accept its money for payments. International trade is therefore essential for economic development.

The case for international trade is indisputable. However, this does not mean that free trade is the best form of trade, especially (but not exclusively) for developing countries. When they engage in free trade, developing countries have their chances of developing productive capabilities hampered…The argument that international trade is essential should never be conflated with the argument that free trade is the best way to trade internationally.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Pelican Books, p.412-4.

The political economy of the future: AI, Big Tech and humanity

Human-Intelligence-Can-Fix-AI-Shortcomings-1Peering into our technological future may seem a little inappropriate amidst the current global pandemic, but before Covid-19 had emerged, one of the major themes tackled by many scientists, economists and social theorists of both left and right had been the advance of technology, Artificial Intelligence (AI) in particular, and its potential impact on the worlds of business, the economy, politics and society.

The prospects of humankind given the inexorable march of technology typically range between a variety of utopias and dystopias. What will AI mean for productivity and living standards? Will it lead to a society of abundance with more leisure time than ever before for the majority? How about the distribution of income and wealth, the implications for democracy, and so on?

Four compelling books from 2019, written by, respectively, a computer scientist, two journalists and a maverick scientist and futurist, address some of these issues, from different perspectives, but with some overlap, particularly in terms of the necessary human response to the advance of AI. Continue reading

Lazy or overworked? The myths and realities of working hours and productivity

Myths abound when it comes to cultural stereotypes regarding working hours and productivity. But it is important to distinguish between the two. People can work all day long in a poor country with inadequate technology, infrastructure and institutions, and produce a fraction of the conventionally measured economic value of someone in a rich country in which these factors are much more advanced.

Yes, incentives for individuals to work are important, but without the right physical and social technologies, there are significant limits on how much can be produced. Parachute a rich entrepreneur from an advanced economy into a very poor one and, while she may have some good ideas about how to make a living, she will find it impossible to earn anything like as much as she does at home. Continue reading

Brazilian development: a case of regressive specialisation

Flag-Brazil

Many development economists in the heterodox or non-mainstream tradition argue that the particular kinds of goods and services produced by an economy and the way this structure of production evolves is a key determinant of developmental success. Leaving this evolution to the ‘free market’ is unlikely to lead to rapid and sustainable growth and transformation. It should therefore be a target of industrial policy, although the form this takes will necessarily vary between different country contexts.

The May issue of the Cambridge Journal of Economics carries an interesting article on the economic development of Brazil in recent decades (1990-2016) as a case of what the authors call ‘regressive specialisation’. That is, “both production and export structures are strongly oriented to goods of low technological sophistication and low income elasticity of demand”.

This has led to a “falling-behind trajectory” so that GDP growth is slow relative to the richest countries and the economy fails to catch-up over a sustained period in terms of GDP per capita. This carries negative implications for efforts to reduce poverty and inequality and raise living standards for the majority of the population. Continue reading

Ha-Joon Chang: why we need to pay more attention to production

Chang EconomicsUsersGuideMore from Ha-Joon Chang’s Economics: The User’s Guide, this time on production and its relative neglect by neoclassical economics. Despite the rise of the so-called knowledge economy, manufacturing and industry more generally remain vital to the development and evolution of our society, and a key driver of the economy.

Chang has written extensively on industrial policies, making the case for their role in promoting economic progress, both in the poorest and the richest countries. Here he is on p.273-275:

“Production has been seriously neglected in the mainstream of economics, which is dominated by the Neoclassical school. For most economists, economics ends at the factory gate (or increasingly the entrance of an office block), so to speak. The production process is treated as a predictable process, pre-determined by a ‘production function’, clearly specifying the amounts of capital and labour that need to be combined in order to produce a particular product.

Insofar as there is interest in production, it is at the most aggregate level – that of the growth of the size of the economy. The most famous refrain along this line, coming from the debate on US competitiveness in the 1980s, is that it does not matter whether a country produces potato chips or micro-chips. There is little recognition that different types of economic activity may bring different outcomes –  not just in terms of how much they produce but more importantly in how they effect the development of the country’s ability to produce, or productive capabilities. And in terms of the latter effect, the importance of the manufacturing sector cannot be over-emphasized, as it has been the main source of new technological and organizational capabilities over the last two centuries.

Unfortunately, with the rise of the discourse of post-industrial society in the realm of ideas and the increasing dominance of the financial sector in the real world, indifference to manufacturing has positively turned into contempt. Manufacturing, it is often argued, is, in the new ‘knowledge economy’, a low-grade activity that only low-wage developing countries do.

But factories are where the modern world has been made, so to speak, and will keep being remade. Moreover, even in our supposed post-industrial world, services, the supposed new economic engine, cannot thrive without a vibrant manufacturing sector. The fact that Switzerland and Singapore, which many people consider to be the ultimate examples of successful service-led prosperity, are actually two of the three most industrialized countries in the world (together with Japan) is a testimony to this.

Contrary to conventional wisdom, development of productive capabilities, especially in the manufacturing sector, is crucial if we are to deal with the greatest challenge of our time – climate change. In addition to changing their consumption patterns, the rich countries need to further develop their productive capabilities in the area of green technologies. Even just to cope with the adverse consequences of climate change, developing countries need to further develop technological and organizational capabilities, many of which can only be acquired through industrialization.”

How Nations Learn – industrial policy and political economy

HowNationsLearnLast week I finished some lockdown reading, following my perennial interest in industrial policy and how it impacts development. This time it was the edited 2019 volume How Nations Learn, subtitled Technological Learning, Industrial Policy and Catch-Up.

HNL explores industrial policy in the context of ‘learning’ by governments and firms in ways which can accelerate industrial growth and development. That is, learning by governments in the process of policy making for development and learning by firms in the form of using and adapting already existing technologies to drive productivity growth in the catch-up process.

It is fair to say that most of the chapter authors hold to the idea that industrialisation and the growth of the manufacturing sector in late (relative to today’s advanced countries) developers is a primary driver of learning and of development. In this vein development is seen as more than periods of growth, but as an economic transformation. It is this continuous transformation in economic structure which makes long term growth and broad increases in living standards possible. Continue reading

To imitate or innovate? Firm behaviour and economic performance

innovative-manufacturing-headerSuccessful developing countries that have made the transition to advanced country status are relatively few in number. Those that have ‘made it’ in the wake of already rich countries have tended to adopt polices which encourage firms and sectors to ‘catch up’ over a sustained period.

When economies are far from the technological frontier they can achieve more when firms learn to use and adapt already existing technology rather than innovating themselves. Historically this has taken place in countries from the US and Germany to South Korea and Taiwan. One would expect firms to imitate technology more at an earlier stage of development, assuming that there are economies, sectors and firms ahead of them and closer to or at the frontier, while as they approach the frontier, innovation should become more important.

A recent article in the journal Industrial and Corporate Change looks into this process at the firm level. Ching T. Liao explores the differences between those firms that imitate others and those that innovate, and the effect this has on productivity. Continue reading