FUNDACION RAMON ARECES The new agenda for innovation studies

Madrid, March 2014.

Jorge Katz
FEN, University of Chile

A brief visit to received theory.

The theory of Economic Growth exhibits two quite different research agendas that do not speak to each other.

The first one, the neoclassical equilibrium growth agenda, was started by R.Solow in the 1950s and further developed by R.Barro and Salas I Martin, P.Aghion and many others.
The second one, based on Schumpeter and evolutionary economics, has been developed by R.Nelson, G.Dosi, C.Freeman and others. Large conceptual differences prevail mong them concerning what economic growth is all about. The first agenda comes from Newtonian physics, the second one from Darwinian natural selection. Both have little to say when looking at natural resource based growth, a central topic in Latin America today. Environmental sustainability and social inclusiveness demand a conceptual framework and public policies which both agendas have not so far illuminated.

MAJOR TOPICS IN WHICH, FROM A LATIN AMERICAN PERSPECTIVE, REVEIVED THEORY HAS NOT SO FAR ADEQUATELY EXPLORED.
1. Impact of macro management upon the structure and growth of the economy. -Mundell-Fleming (coming from Hicksian IS/LM) describes an equilibrium aggregate in which the structure of the economy is absent. It is the conceptual basis of inflation targeting policy regimes in most of LA. When sectors are at different distance of the technological frontier it is not much of a help to discuss the economics of catch up. -Dutch disease and recent commoditization of the LA production structure. 2. Impact of natural resource based growth upon environmental sustainability -Tragedy of the commons and institutions in CPRs. -Impact upon lost of biodiversity, desertification, climate change and else. -KIBS and high tech activities in the value chain of natural resource based industries. 3. Expansion of the natural resource based exploitation frontier and lack of public goods. 4. The price of environmental services and Ricardian rents. 5. Social exclusion and democratic governance. -The emergence of a new middle class, demanding education nd health services, energy and transport facilities, residencial housing and else. The 1/3 2/3 societies and democratic governance.

From Hicksian IS-LM to Mundell-Fleming

(Short term equilibrium in a closed/open macro model).

1.IS-LM describes the equilibrium relation between i (the interest rate) and Q (output) in a closed economy, with rational agents, no market failures, no uncertainty and no institutions (besides the market itself). 2. Mundell-Fleming expands the above into an open economy model and explores short term equilibrium between the nominal exchange rate and output. MF assumes free capital mobility and shows that the authority can not maintain a fixed exchange rate and an autonomous monetary policy. This is called the impossible trinity. Floating the exchange rate in equilibrium the local i has to converge to the international interest rate. 3.Following MF most countries in LA opted for an inflation targeting macro policy regime, floating the exchange rate, allowing for free capital mobility and using the interest rate to regulate aggregate demand. 4.This isnt easy when the external cycle affects the interest rate and induces short term capital movements. These movements appreciate (depreciate) the local currency, affecting competitiveness, the structure of GDP, the local relative price of tradable and non tradable sectors and the rate of inflation.

Hicksian IS-LM to Mundell-Fleming (2)

In the logic of MF an increase in monetary supply shifts LM downwards, reducing local i vis vis the international I rate; this induces local capital to move out, the exchange rate depreciates and domestic goods become cheaper abroad. This expands exports. The expansion of Xs moves the IS curve outwards and i falls until it reaches the external interest rate. A similar analysis can be done if we consider a change in public expenditure (which moves the IS curve), a change in wages, in the external interest rate, and else. Why does this discussion matter to us? It does because the evidence says that changes in RER undervaluation (overvaluation) - induce changes in the growth rate. (Rodrick,2008). Inflation targeting is used as a short term policy regime, but it affects rate and structure of GDP (R.Frenkel) What is the alternative?. Consider the case of a fixed exchange rate policy. (Argentina after the 2002 devaluation). SCRER alone is not enough a. The lesson seems to be : A SCRER is a necessary but not sufficient condition. A mix of monetary, exchange rate and fiscal policies is needed, but also sector specific industrial policies in the way Korea orTaiwan used in the 80s. (Amdem). So much for the macro. How about structure? b. MF does not consider the structural heterogeneity of the economy . If we bring it in, jointly with a pro-growth macro policy regime we need sector/region specific policy interventions.

Macroeconomic volatility as a determinant of microeconomic defensiveness. 1990-2004.

Figure I.2 Latin America (19): GDP and aggregate demand, 1990-2004 (annual growth rates, %)
8

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

-2

-4

GDP growth Aggregate demand growth

2004

The exchange rate, the orthodox view.

Argentine exchange rate after the currency board regime.

Real exchange rate and industrial wage. (Argentina after the CBR,Lucangelli, 2013)

Real exchange rate, Argentina, Brasil and Chile 2003-2010

120 108,9 104,2 100,0 100 94,8 94,4 90,0 88,1 89,7 89,3 106,1 102,7 101,9 97,0 92,7 87,9 110,2

Argentina

Brazil

Chile

80

76,7 67,8 63,0 60,9 62,0 53,8

60

40 2003 2004 2005 2006 2007 2008 2009 2010e

Export growth, Argentina, Brasil and Chile 2003-2010.

170

160

Argentina

Brazil

Chile

159,4

150 141,6 138,2 134,9 129,6 120,8 121,0 128,7 124,2 120 119,0 116,3 131,8 133,1 138,4 138,1 132,2 125,4 123,2 134,6 125,4

140

130

110 100,0 100

105,0

90 2003 2004 2005 2006 2007 2008 2009 2010e

Rate of Inflatin, Argentina, Brasil and Chile 2003-2010

25% 22,0% 20%

23,1%

Argentina

Brazil

Chile

15% 12,3% 10% 9,3% 7,6% 6,1% 5% 3,7% 2,4% 1,1% 0% 9,8%

13,0%

13,8%

7,8% 5,7% 3,7% 4,5% 3,1% 2,6%

7,1% 5,9% 4,3%

5,6% 2,5%

-1,4% -5% 2003 2004 2005 2006 2007 2008 2009 2010e

Growth in the neoclassical agenda.

(A Latin American perspective)

Yt

at yt k t 1 lt

1 At K t Lt

The model incorportes factor accumulation and a residualnot expalined by capital and labour growth. There are no institutions in the model, uncertainty or market failure. What we describe is a Long term steady state growth process.

TPF in Latin america

5 4 3 2 1 0 -1 -2 -3 1950 1953 1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004
PTF sin ajustar PTF ajustada

(Aravena et.al. ECLAC 2006)

15 1971

17

19

21

23

25

27

1972
1973

23,5

1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986

Fuente: Basado en datos de CEPAL.

17,6

1987 1988 1989 1990 1991

1992
1993 1994

18,5

1995
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Gross capital formacion 1970-2011

17,6 21,3

15

2010 2011

Inter-country differences in PTF. (Aravena et.al. ECLAC, 2006)

6

Argentina

Bolivia

Brasil

Chile

Colombia

Costa Rica

Ecuador

Mexico

Peru

Venezuela

1950 - 2005
Capital Trabajo PTF

Ch ile : PIB e fe c t ivo y po t e n c ial, 1 9 7 4 -2 0 0 3 (e s c ala lo gart m ic a, 1 9 9 6 =1 0 0 )

103.0 102.0

11%
101.0 100.0 99.0 98.0 97.0 96.0

Crecimiento del PIB y tasa de subutilizacin. 1974-2002 (%, promedios anuales) 1974-89 1990-98 1999-2002 PIB efectivo 2,9 7,1 2,1 PIB potencial 2,9 7,2 4,0 PIB subutilizado 10,3 0,0 8,9

20%
95.0 94.0 93.0
1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

21%

PIB potencial

PIB efectivo

Fuente: Basado en Ffrench-Davis, Ricardo (2003), Entre el neoliberalismo y el crecimiento con equidad: tres dcadas de poltica econmica en Chile, J.C. Editor, Tercera Edicin, Santiago.

The Chilean case.

Structural change and doubts about the TPF(Astorga,20012).

A non-orthodox interpretation of the Chilean TPF.

New Industries, diversity and competitiveness.

Diversity Creation(Saviotti)
GDP

Sector 1 Mining Sector 2 Salmon farming Sector 3 Retail

.New plants
.Professional management .Increased competitiveness. .New sectoral institutions. .The transition to mature oligopolies

Tiempo

The structuralist approach: Co-evolution between Organizations and Institutions Example: salmon farming in Chile.
Firms, regulatory agencies, Banks, R&D institutes, Municipalities, Trade Unions, and else belong in a sectoral cluster. 1.Banks.
2.Venture Capital funds.

Public Regulatory Agencies

Universities R&D centers.

Firms
External Knowledge Suppliers.
Differences in Structure, Strategiy and capabilities.

Trade Unions Municipal auth.

Intermediate Input providers

Technological complexity,local capabilities and the technology gap.

Estado del arte

Brecha Tecnologica

. frontera I&D basica de

Productos y procesos nuevos a escala mundial. Mejoras mayores de productos y procesos. Mejoras menores de productos y procesos. Ingenieria adaptativa. Operacin rutinaria

Capacidad tecnologica Latinoamericana

A view as from evolutionary economics.

Rutinas Incertidumbre Racionalidad limitada Aspectos tcitos del conocimiento Irreversibilidad del cambio tcnico y path dependency Herencia schumpeteriana de la creacion destructiva. Very little of this analytical framework has been so far used in the exploration of natural resource based industries. The dialogue between economics and the ecology is still in its infancy and both a theoretical framework and adequate policy instruments are lacking to deal with market failure in relation to sustainability and inclusiveness. A ne set of supporting institutions is still demanding to be developed.

TOPICS FOR A FUTURE RESEARCH AGENDA ON NATURAL RESOURCE BASED GROWTH

The firm in natural resource processing industries. Subcontracting minin, aquaculture, agriculture. Sectoral institutions. Royalties and cannons on the use of environmental services. Public sector regulatory institutions Interdependencias entre lo macro, lo micro y la estructura. The expansion of the natiural resource exploitation frontier and public goods. The role of Corporate social responsibility in the expansion of the frontier. External demand, prices and resource overexploitation. Optimal loading capacity and the need for location-specific R&D. KIBs in the production chain and domestic capabilities. Local Universities.

HOW TO SELECT ACTIVITIES ?

Figura 5
0.17 0.16 0.15 0.14 Alto 0.13 0.12 0.11 0.10 0.09 0.08 Medio 0.07 0.06 0.05 0.04 0.03 Bajo 0.02 0.01 0.00
Horticultura primaria

THE CASE OF CHILE

Serv.medio ambiente Outsourcing

Crecimiento PIB en 10 aos 1 billn de pesos Sectores que se destacan

Alimentos procesados de consumo humano

Industrias creativas Acuicultura Servicios financieros Fruticultura primaria

Potencial de crecimiento (%)

Plstico Comunicaciones Plataforma de negocios para LA

Vitivinicultura

Educacin superior Medicina Logstica y Farmacutica especializada transporte Consultora Bovino Alimentos proc. para y ovino consumo animal Industria qumica Lcteo

Porcicultura y avicultura Minera no metlica Construccin Comercio minorista Minera del cobre y subproductos

Productos Turismo1 de madera Silvicultura Celulosa y papel Metalurgia

Alto 1.3 1.5

1.7

1.9

2.1

2.3

2.5

2.7

Medio 2.9 3.1

3.3

3.5

3.7

3.9

4.1

4.3

Bajo 4.5

Esfuerzo para lograr la competitividad necesaria

(1) Dentro del sector de Turismo fue considerado el subsector de Turismo de Intereses Especiales, que tiene un dinamismo mucho mayor que el sector de Turismo tradicional

Stages in clusterevolution and construction of domestic technological capabilities.

Inception period. Rol of the Public Sector solving market failure in knowledge generation and difussion. Period of rapid industry expansion. Local SMEs and market failure in long term financing.

The arrival of foreign captal, M&A and the growing participation of external firms. From a domestic competitive structure to a mature oligopoly incerted in the global production chain. KIBs in natural rsource based industries. The development of local capabilities in service industries. Subcontracting mining, aquaculture, agriculture. The role of local Universities.
The ecology and environmental sustainability. World prices and over explotation of domestic natural resources. Lack of collective action and of law enforcing capabilities from the part of public sector agencies. The expansion of the natural resource exploitation frontier, public goods and CSR.

. .