Technology, structural change and growth Summer 2014

Objectives of the paper To present basic insights on structural change and growth in a simple framework To show some empirical evidence and stylized facts that are consistent with the “structural change” story

Variables and interrelations Technology gap (T N /T S )= G  Asymmetries in productivity [ (  S /  N ) =  ] which combined with relative wages (W = W S /W N )  specialization pattern (N) + patterns of domestic and world demand  Income elasticity ratio (  =  S /  N )  relative growth (y = y N /y S=  N ))  Feed back to the technology gap and wages

The starting point: the international diffusion of technology is slow and asymmetric (North- South technology gap) Technology diffuses only partially to the South and is highly localized in few activities A Schumpeterian flavor: technical change and innovation as the driving force of development. Starting point

Impacts on: a) Heterogeneity (implications for employment and income distribution / duality / informality) b) Specialization (implications for growth, technical change and macro stability)

A graphic representation: heterogeneity

a) Heterogeneity Large differences in labor productivity emerge within and between sectors Graphic: two structures that differ in terms of number of sectors, technological intensity (complexity) and asymmetries in labor productivity

How specialization emerges: N is an index of technological complexity

b) Specialization Ranking sectors according with South-North relative productivity  Unitary costs depends on the productivity gap and relative wage The productivity gap is higher in sectors which are more technologically-intensive (comparative advantage of the South is lower in high-tech sectors) Given the wage ratio, the South specializes in sectors with lower technological intensity

Dynamics of relative productivity Relative South-North productivity:  =  S /  N it increases with relative growth and falls with the technological intensity of the goods: a, b and  are technological parameters

Relative wages In our examples relative wages will be considered constant, but they can easily be made a function of the diversification of the productive structure or of the relative rate of growth in South and North

c) Growth (Keynesian side) -> The pattern of specialization implies lower dynamism of world and domestic demand for Southern goods -> a less articulated productive structure gives rise to losses of effective demand and a strong propensity to import that reduces the momentum of growth and leads to BOP and exchange rate crisis

Falling behind Growth will be constrained by external disequilibrium BOP constraint: y S /y N =  =  X /  M Elasticity ratio depends on N:  = hN Falling behind: Low income elasticity of the demand for exports and high income elasticity of the demand for imports, y S < y N

From specialization to growth A  N N 1

Macrodynamics The technology gap shapes relative productivities (box A) This in combination with relative wages define the pattern of specialization (boxes A and D) Specialization defines the BOP-constrained rate of relative growth (B) Growth defines labor demand and the absorption of informality and subsistence workers (E)

The complete system

Equations of the model (Cimoli and Porcile, 2013, CJE)

Equilibrium

Dynamics

Shocks and policies Industrial and technological policy Vent for surplus versus Dutch disease Unilateral trade liberalization

Case 1: Technological policy

Technological policy An active technological policy reduces the technology gap enhancing diversification towards sectors with higher technological- intensity and higher demand growth

2 tales in the 2x2 model

Shifting equilibrium in Asia and Latin America

Structural change and specialization AMÉRICA LATINA Y ASIA: PATRÓN DE CAMBIO ESTRUCTURAL Y PARTICIPACIÓN EN LAS EXPORTACIONES, Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de United Nations Commodity Trade Statistics Database (COMTRADE).

Elasticities: South America

Elasticities: Korea

Co-evolution between KE and SE

Production structure: an international comparison

A sample of countries

Relative wages

IRP (engineering)

Productivity growth in LA and SE Asia Latin America (12 countries) and Asia (7 countries): labor productivity (1980 = 100) Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de cifras oficiales de los países de la región, de la base de datos Laborsta de la Organización Internacional del Trabajo (OIT), y de World Development Indicators (WDI) del Banco Mundial.

An economy that fails to diversify will not be able to raise employment and productivity at the same time Latin America (12 countries): labor productivity and value added, a (thousands and millions of 2000 US dollars)

Productivity and employment in Korea

Gini in productivity and income

Inequality and the production structure

Production structure and education

The evolution of N and G

Case 2: Dutch disease

A positive shock in commodity prices leads initially to higher growth, more learning and investment (vet for surplus) If the real exchange rate rises, then there will be less diversification and slower growth at the end of the adjustment (regressive structural change) A key point is the policy reaction to the shock and how to neutralize appreciation

Case 3: unilateral trade liberalization

Reduces diversification Increases heterogeneity Rising productivity levels in commodities, falling in industry Of course trade liberalization plus industrial policy may significantly change the outcomes

Brief notes on evolutionary microdynamics Why technical change does not diffuse uniformly across countries and within sectors? Which policies close the technology gap and which policies lead to divergence? Conventional micro usually avoids these questions; on the other hand, they are at the core of evolutionary micro

Evolutionary perspective on technical change 1 It has a critical tacit component that could not be obtained from importing capital goods nor from reading manual and other forms of codified information; Cumulativeness: firms that are closer to the technological frontier have an advantage in innovation and will tend to increase their distance with respect to the laggards (cumulative processes leading to virtuous or vicious cycles)

Evolutionary perspective on technical change 2 It is subject to path-dependency, i.e. the evolution of capabilities depends on previous experience and directions of past learning There exists complementary between sectors and capabilities, in such a way that externalities and increasing returns are crucial at both the industrial and economy levels There is irreversibility in the building of certain (physical and technological) assets, which cannot be just abandoned or replaced

Convergence and divergence There is no reason for naïve optimism about convergence. Path-dependency and cumulativeness lead to strong inertia in the patterns of learning and specialization. On the other hand, catching up may be possible under specific circumstances, when industrial policies and institution-building create a favorable environment for learning from imported technology.

Industrial and technological policy Market forces tend to endogenously reinforce asymmetries; active policies are required to enhance diffusion Focus on institutions, complementarities and increasing returns rather than on flexibility in the goods, financial and labor markets.

The other supply side For having this virtuous cycle there must be in place an articulated institutional framework in which firms and non-profit organisations (particularly those directly related to education and R&D) are nested in a network of technological and productive flows which enhances the problem-solving capabilities of producers and stimulates the various forms of interactive learning – what has been called the National System of Innovation, NSI (Nelson, Freeman, Lundvall, Metcalf).