FUNDACION RAMON ARECESThe new agenda for innovation studies

Madrid, March 2014.

Jorge KatzFEN, 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 1950’s 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 isn’t 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 80´s. (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.2Latin America (19): GDP and aggregate demand, 1990-2004

(annual growth rates, %)

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0

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8

1990

1991

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2004

GDP growthAggregate demand growth

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

104,2106,1

108,9 110,2

102,7 101,9

97,0

76,7

67,8

63,060,9 62,0

53,8

94,8

90,088,1 89,7 89,3

92,7

87,994,4

100,0

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010e

Argentina Brazil Chile

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

138,4

132,2

159,4

119,0

134,6

125,4 125,4

138,2

128,7

120,8

105,0

123,2

100,0

138,1

141,6

134,9

129,6

131,8

133,1

116,3

124,2121,0

90

100

110

120

130

140

150

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170

2003 2004 2005 2006 2007 2008 2009 2010e

Argentina Brazil Chile

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

6,1%

12,3%

9,8%

13,0%

22,0%

13,8%

23,1%

5,7%

3,1%4,5% 4,3%

5,6%

2,4%3,7%

2,6%

7,8%7,1%

-1,4%

2,5%3,7%

5,9%

7,6%

9,3%

1,1%

-5%

0%

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010e

Argentina Brazil Chile

Growth in the neoclassical agenda. (A Latin American perspective)

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1

The model incorportes factor accumulation and a ´residual´not expalined by capital and labour growth. There are no institutions inthe model, uncertainty or market failure. What we describe is a Long term steady state growth process.

TPF in Latin america

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-2

-1

0

1

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4

5

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

Fuente: Basado en datos de CEPAL.

1971

1972

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2011

15

17

19

21

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25

27

23,5

17,6

18,5

17,6

21,3

Gross capital formacion 1970-2011

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

0

1

2

3

4

5

6

Argentina Bolivia Brasil Chile Colombia Costa Rica Ecuador Mexico Peru Venezuela

1950 - 2005

Capital Trabajo PTF

Fuente: Basado en Ffrench-Davis, Ricardo (2003), Entre el neoliberalismo y el crecimiento con equidad: tres décadas de política económica en Chile, J.C. Editor, Tercera Edición, Santiago.

Chile: PIB efectivo y potencial, 1974-2003(escala logarítmica, 1996=100)

93.0

94.0

95.0

96.0

97.0

98.0

99.0

100.0

101.0

102.0

103.019

74

1975

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PIB potencial PIB efectivo

20%

11%

21%

Crecimiento del PIB y tasa de subutilización. 1974-2002(%, promedios anuales)

1974-89 1990-98 1999-2002PIB efectivo 2,9 7,1 2,1PIB potencial 2,9 7,2 4,0PIB subutilizado 10,3 0,0 8,9

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) Sector 1 Mining Sector 2 Salmon farming Sector 3 Retail

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

GDP

Tiempo

The structuralist approach: Co-evolution between Organizations and Institutions

Example: salmon farming in Chile.

• Firms, regulatory agencies, Banks, R&D institutes, Municipalities, TradeUnions, and else belong in a sectoral cluster.

Firms Differences in Structure, Strategiy and capabilities.

Public Regulatory Agencies

Universities R&D centers.

1.Banks.2.Venture Capital funds.

External Knowledge Suppliers. Intermediate

Input providers

Trade Unions

Municipal auth.

Technological complexity,local capabilities and thetechnology gap.

• . • Productos y procesos nuevos a• escala mundial.

• Mejoras ´mayores´ de productos• y procesos.

•• y procesos.

•

• de planta.

Capacidad tecnologica Latino- americana

Estado del arte

BrechaTecnologica

I&D basica ´de frontera´

Mejoras ´menores´ de productos

Ingenieria adaptativa.

Operación rutinaria

A view as from evolutionary economics.

• Rutinas• Incertidumbre• Racionalidad limitada• Aspectos tácitos del conocimiento• Irreversibilidad del cambio técnico 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 ONNATURAL 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 ? THE CASE OF CHILE

0.000.010.020.030.040.050.060.070.080.090.100.110.120.130.140.150.160.17

1.3 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5

Horticultura primaria

Metalurgia

ConsultoríaFarmacéutica

Medicina especializada

Bovinoy ovino

Industrias creativas

Serv.medioambiente

Acuicultura

Silvicultura

Comercio minorista

Outsourcing

Turismo1

Porcicultura y avicultura

Celulosay papel

Productos de madera

Educación superior

Comunicaciones

Vitivinicultura

Logística y transporte

PlásticoFruticultura

primaria

Minería del cobre y subproductos

Construcción

Lácteo

Alto

Bajo

Medio

Pote

ncia

l de

crec

imie

nto

(%)

Servicios financieros

Plataforma de negocios para LA

Industria química

Minería no metálica

Alimentos procesados de

consumo humanoSectores que se destacan

1 billón de pesos

Crecimiento PIB en 10 años

Esfuerzo para lograr la competitividad necesaria

Medio BajoAlto

Alimentos proc. para consumo animal

Figura 5

(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 ´cluster´evolution 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 capìtal, 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.