THE KAIROS INITIATIVEGEM of TKI, APRIL 2014

A KairosFocus blog pamphlet

THE KF ECONOMICS BLOG POST SERIES:ON A SIMPLIFIED BUT USEFUL CARIBBEAN-ORIENTED LOOK AT:

THE AS-AD MACRO-ECONOMICS PICTURE, THE HAYEK ACROSS-TIME INVESTMENT TRIANGLE, THE PRODUCTION POSSIBILITIES FRONTIER AND TRADEOFFS BETWEEN CONSUMPTION AND SAVINGS/INVESTMENTS THENCE ECONOMIC GROWTH RATES ACROSS TIME, IN LIGHT OF: THE LEAKY TYRE ECONOMY MODEL, KONDRATIEV'S LONG WAVES AND THE ROLE OF TECHNICAL INNOVATION/CREATIVE DESTRUCTION; THUS ALSO, (INCIPIENT) STAGFLATION, AND SUSTAINABILITY OF DEVELOPMENT IN THE CARIBBEAN GIVEN THE THREE INEXTRICABLY

ENTANGLED ENVIRONMENTAL DOMAINS

1 BIO-PHYSICAL, 2 SOCIO-CULTURAL AND 3 ECONOMICS & POLICY

IN A NUTSHELL: Issues of economic growth, sustainability and development are too important to be left as a mystery, best placed in the hands of economists, politicians, senior technocrats and their public relations teams, especially in an era in which sustainability of development is an increasingly pressing concern. Accordingly, by using a simple AS-AD graphical model yes, rooted in Keynes' revolutionary insights from the 1930's . . . as Friedman is said to have noted, we are all Keynesians now . . . we can understand recession, booms, busts and (incipient) stagflation; with issues of generational impacts of major technological innovations hovering in the background as the ghosts of Kondratiev and Schumpeter try to warn us of the dangers of complacent business as usual forever. So also, we can see why sustainability concerns and associated issues of better and more fairly meeting our needs today, whilst making such wise use of resources and so husbanding our environment that our children can adequately meet their needs tomorrow become quite pertinent.

CONTENTS:

Post No. FOCUS PAGECF 78 The AS-AD model, stagflation and the sustainability challenge 2

CF 79 An Austrian view of Consumption, Investment, growth and development 19

CF 80 The Caribbean's Leaky Tyre Economy challenge 23

CF 81 Creative Destruction, generation dominating innovations and surfing the Kondratiev long wave 33

CF 82 Industrial Policy interventions and the challenge of corrupting crony capitalism 47

Manjack, MNI GEM of TKI, April 2014

KF (Macro) Economics blog seriesGEM of TKI April 2014

Series: 78, 79, 80, 81, 82, b/g

http://kairosfocus.blogspot.com/2014/04/capacity-focus-78the-as-ad-aggregate.html

Saturday, April 05, 2014Capacity Focus, 78: The "AS-AD" aggregate supply & aggregate demand macro view of the economy and the Caribbean sustainable development challenge

Series: 78, 79, 80, 81, 82, b/g

Yes, the topic is a corny pun on "a sad" -- as in, a sad picture.

We might as well have a chuckle first, before getting down to serious and sobering matters.

Time to roll.

In March, I began to put together a "game" or simple simulation model for strategic change in the Caribbean, which -- though still very much a prototype work in progress -- is now helping me to think about how to develop a general orientation for sustainable development based change strategies with reference to development dilemmas facing us in the Caribbean:

Boiled down, once a strategic change SD thinktank and transformation team has a critical mass of capacity, it should

(A) first get into the new media space [blogs, YouTube Channels, Podcasts, web based mass media, Social Networks] . . . relatively light resources demand . . . and

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use that to get in contact with networks of stakeholders, to gain resources. Then, a two-prong thrust:

(B) education and linked short and long term capacity building, and

(C) natural resources and hazards management bleeding over into the crucial tourism, industrial and agricultural sectors. Where,

(D) digital productivity will be particularly important.

Which brings up, we need a bit of an update to the classic 1987 Bruntland definition of sustainable development:

SD: better and more fairly meeting our needs today while making such wise use of resources and so carefully husbanding the environment -- our bio- physical, socio- cultural and economic surroundings, and trends (. . . as well as shocks) -- that our children can adequately meet their needs tomorrow.

All of this is in the context of thinking about the major environment and sustainable development domains and sectors that all have to be held in balance if we are to suceed in the long run . . .

I cannot forget that here in Montserrat we lost a generation of development now buried under volcanic ash because planners were ignorant of/negligent towards the hazards posed by a looming volcano:

Plymouth, Montserrat's former capital, a few years ago -- the burial is even more complete now . . . (HT: Ivan

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Browne)

A lesson, paid for in treasure and blood.

By official count, no less than nineteen people died during these eruptions, for which the Rhys-Burris Coronor's Inquiry of the late 90's found HMG and the local Montserrat Government to have contributory negligent responsibility for the deaths of fourteen.

So, we need to keep a balanced view of the following thirty or so sectors/issues to properly manage the development of an economy . . . especially in a heavily tourism dependent region:

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U/D Apr. 12: A conversation leads me to add the following needed corrective/balancing note on the common usage, "SD pillars," and the even more common use of "environment" to denote just the natural or biophysical domain (which unfortunately lends itself to the fallacy of imagining that one may split off "the environment" and treat it as an isolated matter . . . or worse, outright dismiss it):

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. . . returning to the post already in progress . . .

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This then led me to reflect a bit on an aggregate view of Montserrat's post-volcano economy in light of the AS-AD macroeconomic model, which can be summarised . . . here, from a snapshot of a whiteboard sketch:

This needs a bit of explanation, in light of the "simplified" but it seems rather useful AS-AD macro-economy model (and HT Wiki for the base image):

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The key concept, here, is that in individual markets (say for bread), as prices rise supply quantity rises, but demand quantity falls (people buy less), leading to equilibrium. That's the micro view.

But when we aggregate . . . "add up" . . . to form a whole economy, other factors begin to play.

Let me therefore lay out some rough and ready thoughts, which of course a full bore

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economist is welcome to refine or adjust and correct . . . but I think the following is near enough for first thoughts:

1 --> First, there is no overall economy price, so a price index based on a "typical" basket of goods has to be used, maybe the commonly seen consumer price index that tracks cost of living. Next,

2 --> quantity demanded becomes in effect output of the economy, often summarised as gross domestic product, GDP or national income, Y. Then,

3 --> aggregate demand acts as usual for a demand curve: the higher prices in the economy the lower is demand, other things being equal.

4 --> Aggregate supply, though, becomes more complex.

5 --> Deep in recession (think the notorious 1930's depression era . . . ) with a lot of land, labour, capital equipment and facilities as well as money and entrepreneurial talent idled and lot of unsaleable goods sitting on shelves, a rise in AD will have little effect on price level. Thus, if we break this up a bit, we can see how pushing government spending G can push up the economy, per the expression for National Income Y as sum of consumption C, Investment I and Government expenditure, with net exports added:

Y = C + I + G + (X - Im) Where also

Y1 = Y0 + g, the economy grows incrementally year to year by a growth factor g

(or if g is negative, shrinks; if g = 3%, the economy doubles roughly every 23 years, at g = 7%, it doubles in 10 years, the question is what goes into g and how g can be sustained . . . and as well we see that if a population is growing fast, it may outpace g, so improvements that lead to lessened mortality and disease can lead to more poor people (who would otherwise have died in childhood), yet another paradox of development. The answer to which is improved education, especially of girls; which triggers the so called demographic transition. )

We may picture this (in a somewhat simplified way, based on the circular flow of income captured in the Y = C + I + G + (X - Im) expression:

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Where, a slightly more complex view of the flows would be:

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6 --> But, if we boost government expenditure, G it will boost GDP in the short run [NB: cf. on multiplier effects here . . . and also ponder the "Austrian" viewpoint here], and will maybe unleash a better circulation of funds as optimism returns, leading to growth. That's where Y* kicks in . . .

7 --> Y* is the "natural capacity" of the economy, which may imply a significant natural unemployment rate for especially labour. (As in, unemployed workers, perhaps unemployable workers and their families and friends, can easily vote out governments if they think there is a "better" option. [Hence, the principle that people vote for their wallets.])

8 --> Y* may also reflect a significant level of idled capital equipment and facilities, as there is always a gale of Schumpeter's creative destruction blowing through an economy: new industries (or firms or technologies) are the source of long term growth, but older ones die as a result.

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9 --> In other words, an antiquated economy may LOOK depressed when actually it is stagnated and based on dying industries past their prime. So, we may misdiagnose the remedies required, as what one should do depends very much on where one is on the AS curve.

10 --> Now, if we are closing in on Y* from below, injections to boost AD . . . by Government or Donor spending or by playing with money supply or interest rates or a combination . . . may run into rising inflation.

11 --> If we push hard enough, we end up with growth becoming resistant and inflation trying to shoot up through the roof. In particular, as we are on the rising bend with resources tightening up, the famous Keynesian multipliers may fall so that injections don't have the impact they would on the shallower part of the curve. This tightening up or over-driving of the economy can be termed stagflation, or overheating the economy. (Stagflation, classically, is also caused by supply shocks that cause AS to jump leftwards; e.g. oil price jumps such as in the 1970's and arguably again in the late 2000's.)

12 --> Worse, people now become more expectant of rising prices and adjust wage demands accordingly, potentially setting off a wage-price inflationary spiral. (Under these conditions, too, inflation seemingly takes on a life of its own, typically with strong pressure coming to bear on the monetary authorities to keep in place the growing money supply that supports higher wages and salaries . . . especially among those on the Government's payrolls, but which growth also is a key required cause for an inflation, as: sharply braking money supply growth tends to trigger recessions. [To understand this, let us not forget the root definition of inflation, one championed by Keynes himself -- too much money chasing too few goods.])

13 --> If your economy is heavily import dependent (as in the Caribbean), that puts pressure on balance of payments, thence foreign exchange reserves and the devaluation dilemma sets in.

14 --> In the case of Jamaica, the Ja$ is now closing on 110: 1 US$, having started at US$1.20 : J$ 1 at the end of the sixties then slipping below the US$ in 1975-6, then being about 2:1 at the turn of the 80's then 5 - 7:1 across the mid 80's then by early 90's hitting 20:1, then by turn of 2000 35 - 40:1 then for some years 60:1 then 90:1 and now slipping again. Guyana's story is worse, and Trinidad is in the early stages, being shielded by having oil and natural gas.

15 --> Other territories have taken a strong stance against devaluation, but let's just say that when a Government in Barbados in the 90's cut Civil Servant salaries by was it 8%, it ran serious perils at the polls, and IIRC, lost.

16 --> So, it looks like, here and elsewhere, we face short term trouble and somehow have to invest in building up productive capacity, pushing the AS and Y* curves rightwards. That's hard, and there are no short cut answers.

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17 --> Thankfully, digital productivity is not extremely capital intensive, but it requires educational transformation. Which is inherently, however, a long-run investment in the future.

All of this sounds an awful lot like recent remarks by Eastern Caribbean Central Bank Governor Sir Dwight Venner: that in the OECS - EC$ subregion, for twenty years growth has slowed, and to restore sustainable prosperity and development the region has to shift to a GDP growth regime of 5 - 7% per year. Which of course requires development of clusters of new industries and revitalisation of existing ones, especially Tourism (and maybe agriculture?).

As a local economist put it, investing in new rum shops, fast food joints and grocery shops etc won't do it.

We may safely add: nor will ganja growing and cocaine smuggling.

I think the following introductory macroeconomics vids will help, vid 1:

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Object 1

vid 2:

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Object 2

(Yes, I know, I know, it's an hour to watch, and the hand writing is not the greatest. No flashy graphics and animations, save for audio and whiteboard markup in live progres. It is also very well put. About the best one hour you can spend on getting a key skeletal insight on macroeconomics that will take out a lot of the puzzles and pop a lot of myth-balloons. A great first step for going further, too. Well worth the investment to be more informed and insightful. better than an hour wasted on bold and brazen style soap operas or flittering around Facebook or running up a cell phone bill. Here is his handout page. Go, explore his site, here, too. Begin to enjoy learning!)

Back on focus, where do we go from here as a region?

First, we have to face some sad facts.

Our economies across the Caribbean are to a large extent outdated, stagnant and uncompetitive, ripe to be hard hit by creative destruction

They are being overheated by Governments under pressure of expectations

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to feed an unsustainable consumption pattern, multiplied by

communities full of a restless army of the unemployed, under-employed and working poor finding it hard to make a paycheck stretch to the next payday, much less put aside something as savings

We therefore face stagflation with a LOT of idle resources and opportunities gone or going to waste

Our education systems are even more out of date than our economies and economic policies

There is a youth and general culture that is hostile to education, learning and even to books

This wastes a lot of brain power, further feeds street unrest, crime, high illegitimacy rates and family/personal instability

We are in the digital era mostly as consumers, not producers . . . and mobile, wireless digital technologies are proved to be able to accelerate street uprisings and revolutions

They are also, unfortunately, powerful conduits for spreading rumours, slanders and myths, making basic critical thinking and civics education (cf. here for a starter in Ac 27) a vital but too often neglected topic

Our consumption patterns are heavily import dependent, in an era where the energy market is volatile and getting more so as the Middle East and Russia get ever more unstable

We don't feed ourselves, and our food tastes/preferences are heavily import dependent

Agriculture is in large part a remnant sector

Mining, quarrying and extraction industries by and large do not feed competitive value added industries

There is high corruption multiplied by high inefficiency . . . e.g. in Jamaica a cement company sitting on a mountain of raw materials and with its own dock in one of the ten largest natural harbours in the world went bankrupt (and was at one point importing cement from Thailand and rebagging it as its own)

And more, soberingly more

That sort of nest of mutually supportive problems is not going to vanish overnight. It's a generational challenge and the longer we take to start, the yet worse it will be, if we are lucky not to have a wave of social explosions first.

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So, it is time to put fast talking politicians with dubious quick fix magic solutions out to pasture.

Likewise, antiquated policies for the economy, for environment and development, for natural resources and hazards management, and education, welfare and development.

In a tourism-dependent region, it is utter, unspeakable folly to imagine we can sacrifice cultural and key natural heritage in the name of ill-considered economic projects, also.

Yes, tourism is probably one of the sectors that will respond fastest, but only as a first step.

We need to feed resources into building up our productive capacity, especially digital productivity and then focussed agriculture and industry, as well as high value services.

(Which of course brings me back to my long term initiative to create some web based education.)

We need capacity to build capacity first of all, and so we should be acting on that front now.

In such a dangerous situation as we face, delay may be fatal.

And, of course, back on this post, some basic understanding of macroeconomics may well go a long way towards helping build the consensus we need to begin to seriously progress beyond the failed stagflationary policies of the past and present.

It is time for change, let it begin now, here, with us. END

PS: This slide show (from Singapore) may be helpful:

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Object 3 3.3 Macro Economic Models from Andrew McCarthy

Posted by GEM of The Kairos Initiative at 8:56 am

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http://kairosfocus.blogspot.com/2014/04/capacity-focus-79-using-modified.html

Tuesday, April 08, 2014

Capacity focus, 79: Using a modified "Austrian" production possibilites frontier and propensity to save approach in macroeconomics-based policy thinking (from Roger Garrison of Auburn University) Last time, as a sort of "one-shot heart of Macroeconomics 101 in a nutshell," we looked at the AS-AD approach and how it allows us to see into the core of several macroeconomics issues and policy challenges/ choices connected to economic growth and sustainability of development.

But, there is a bit of a heretical school of thought, the famous Austrian School of von Mises, Hayek and co, which also has some very useful pointers. Especially, on the structure of investment in the productive chain and on the implications of the production possibilities frontier -- as in, sometimes we really have to choose between alternatives -- that is more usually presented as "guns vs butter," rather than as a broad, macro-scope insight into how an enhanced propensity to save can help accelerate economic growth and development . . . whatever the neat algebra of the paradox of thrift may say. (Cf. critiques here and Hayek's classic from 1929 here.)

That is, sometimes, the heretics have something worth listening to.

Here, let me excerpt from a slideshow by Roger Garrison of Auburn University, on . . .

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(It would be very helpful to watch Garrison's 2006 animated slideshows here. [Libre or Open Office will enable you to view the shows, if there is any problem with accessing PowerPoint.])

A video lecture by Garrison:

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Object 4

Some steps of thought:

1 --> Once we see that savings and investment on one hand and consumption on the other may form a production frontier at the limit of an economy, we then have to consider trade-offs and consequences, which may be all the more harsh in a poor country where as my father (now retired, once one of the best macro economics practitioners in the Caribbean region) once warned me, the choice may be between 400 people starving this year and 800 the year after next. (Or, in less stark terms, being so debilitated that diseases they should have been able to resist carry them off.)

2 --> Indeed, there is a horror story in economic history, on how in order to save up to invest in heavy industries, Stalin simply starved the peasants by the millions, especially those in the Ukraine -- the Holodomor. (And, too many progressive journalists, starry eyed with the thoughts of a glorious workers paradise, failed to tell the world the truth.)

3 --> In that context, the issue of an induced consumption drop in order to finance a development programme is sobering. There has to be a better way, when that is at stake.

4 --> And, Development agency and government interventions, in partnership with targetted foreign investment plainly have too good a track record to be dismissed out of hand because of the problems that often crop up. (And, like it or lump it, that extends to agencies that are so often made into targets for ire, such as the

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GEMofTKITypewriter(gap corrected May 3)

International Monetary Fund.)

5 --> But at the same time, a self indulgent ostentatiously opulent and self-centred consumer lifestyle (especially when linked to corruption and exploitation of workers and their families) is patently not justifiable in a region that is facing serious development challenges.

6 --> Indeed, such behaviour may become socially destabilising, an invitation to uprisings and crime triggered by the sense that disaffected youth have no stake in the upliftment of the community as a whole, so why not join a predatory wolf pack.

7 --> That points first to a priority on education, linked welfare and public health backed up by reasonable health care services. Which are the first steps in productive development.

8 --> Likewise, there is need for social support of research and development, including enterprise incubation and micro or small venture capital financing.

9 --> Where in our region, obvious priority targets would be tourism, renewal of some agricultural sectors, small scale manufacturing, arts and artistic crafts, and digital productivity that includes application or app development, support for computerised control of industrial and agricultural production processes, point of sale and inventory management, manufacturing process and control systems, and of course multimedia and entertainment.

10 --> It also includes digitalisation of education and of curricula that are now frankly antiquated. (Think of a tablet based approach to schooling, textbooks/course reader-workbooks, reference resources, lab instrumentation etc.)

11 --> Then, that will help transform the production triangle wedge, as Garrison pictured. Indeed, I suspect that this would help release resources for further savings and investment.

12 --> Where innovation and agility are now keys to getting Schumpeter's gale of creative destruction to work in our favour.

Let's ask: why not now, why not here, why not us? END

PS: To dig a bit more deeply into Austrian macro-oriented thought, kindly cf. here, here and here. (The introduction to economics from an Austrian point of view here may be helpful. The famous essay, here, on economic calculation in a socialist commonwealth by von Mises, written c. 1920 proved decisive in the end, 60 years later. )Posted by GEM of The Kairos Initiative at 9:53 am

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http://kairosfocus.blogspot.com/2014/04/capacity-focus-80-addressing-caribbeans.html

Wednesday, April 09, 2014

Capacity focus, 80: Addressing the Caribbean's "leaky tyre" economy challenge by applying Hayek's investment triangle set in the context of long term community investments in sustainability

A leaky tyre -- time to use soap spray to spot the leak . . .

and what if you've got a bent rim? (HT: LifeHacker )I know, I know, my titles tend to approach unfashionably Victorian era length . . . but they lay out the topical/thematic focus and help us begin to think through the matter.

Now, this time, having looked at AS-AD and how an economy can saturate while having significant unemployment and idle resources, then at how savings and long-term investments can help us move to a growth path, we need to highlight what others and I have come to call the leaky tyre economy effect.

Back in February 2011, speaking of the Montserrat case, the observation was made that the local economy was acting like a car that hit a bad pothole and dented the rim.

Even after an obvious leak or three were patched, pfft, still leaky.

More is needed than simple patches, something structural is wrong.

Let's picture the economy's growth trend with injections, to see what is happening:

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So, if an economy is artificially pumped up by making a raw injection of money and throwing it at pumping aggregate demand up, the effect will be temporary (except that the population may become addicted to such money rushes). And likewise, ill-considered grandiose development projects are more of the same. Also, in both cases, inflation is liable to ratchet up and a wage-price spiral may be set off.

In the Caribbean, pressure on foreign exchange reserves is sure to follow.

Enter, stage left, the infamous devaluation debate.

With the latest International Monetary Fund structural adjustment recommendations hovering in the wings.

BOO!

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EEK!

Scramble for the exits . . .

Not so fast.

Dr Hayek to the rescue with his investment triangle model, here set in context of the wider community basis for sustainable growth and development:

In steps of thought:

1 --> Hayek [more or less Haah-yek] and other "Austrians" have emphasised that the macro view of an economy is inevitably, inextricably tied to its micro, case by case foundations.

2 --> For instance, when we see a given product on a market (such as a new model of car or a PC), there has been a long period of research and development invested in by the firms behind the product, leading up to the inventory on store shelves and in warehouses.

3 --> This is a risky process, with heavy casualties all the way along the chain, and even after hitting the market, a lot of products fail or only have so-so sales. Problem children and dogs, to use some colourful terms.

4 --> These have to be paid for by a steady flow of rising stars that become the cash cows milked to keep the firms and their share-holders happy. (And cash cows, just like the real ones, need to be properly fed and cared for to keep the milk flowing. [Also, yes, I am using the Boston Consultants Group Growth-Share matrix investment portfolio model, with a few mods.] )

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5 --> As is now usual, aggregate across an economy: bingo, we see an overall time- and- phase- of- product- development linked structure to capital investments that keep an economy going. Hayek's triangle.

6 --> An investment triangle in which, due to the inherent riskiness of investment, the stars and cash cows have to support an inevitable proportion of failures and mediocrities.

(And the temptation to then pounce on what has succeeded against the odds, recklessly accuse it of being "exploitation"without good reason, and drain its profitability though excessive taxation, regulation etc, will need to be resisted. Or the chain of investments will dry up; slowly draining the economy of innovation, competitive advantage and productive capacity. Leaving it ripe for a gust or two from Schumpeter's gale of creative destruction. . . . and BTW, as the name suggests, Joseph Schumpeter was one of the Austrians, though a bit of a fringe member. [Of course, this is not an excuse for running sweatshops or other clearly abusive behaviour by firms. Nor, for granting certain favoured firms undue protection from competition. Nor, for special favours based on under the table deals with regulators and politicians, or other similarly corrupt practices, etc.])

7 --> But, as our diagram illustrates, Hayek's investment triangle does not pop out of nothing, for no reason, with no adequate cause.

8 --> Instead, like a plant growing from a seed in properly rich soil,

it is seeded from valuable ideas coming from innovators, it then requires capable developers, engineers/scientists and technical staff, managers

and implementers, as well as financial backing attuned to the degree of risk at each phase, leading to a pattern that lays out a critical mass for strategic change:

1: idea innovators and champions2: sponsors, who provide resources, mentoring and support3: incubators to provide space and resources to prove itself at least to proof of concept demonstrations4: godfathers/ godmothers to protect at decision-maker levels, especially given5: the inevitable reality of idea hit-men who seek to shoot down even good or potential breakthrough innovations

9 --> Once that cluster has been laid out, it is easy to see why even good and sound ideas have such a hard run of it to succeed.

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10 --> Indeed, for many years, there were venture capitalists in Silicon Valley, California who were making 20 - 30+% return on investment by simply hanging around in watering holes and looking for circles of sound and innovative engineers and programmers crying into their beer.

11 --> Accordingly, we also see that at each phase of the development, there are different risks, a need for different types of work force, and different levels of funding. This naturally implies different markets for different kinds of labour [with top talent being very valuable indeed . . . ], and for different interest rates that reflect the degree of risk and time of exposure to risk.

12 --> But also, we see something else, there is a community that provides the context and foundation for the triangle. (Some "Austrian" thinkers and too many Libertarians with anarchist tendencies forget this, and misunderstand that it is appropriate and even necessary and valuable for a community to set up a department to see to the required common affairs, i.e. a properly tasked and limited, ethically responsible, accountable government. [Where, on history of the past 500 years, a properly set up small-d democratic Constitutional order is a good framework for such good government.])

13 --> Thus we see a place for steady funding of such good government through taxes, and for the role of saving and investment in funding the investment triangle process and the businesses that provide the goods and services we all consume.

14 --> This then brings back up the concept of the circular flow of income and the way that across time this framework should support and sustain efforts to keep the AS-AD framework in the "safe" intermediate growth band, despite inevitable wobblings and shocks:

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15 --> AS-AD, again:

16 --> In that context, as noted yesterday, we face the challenge of the production possibilities

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frontier and the implications of a shift to a higher propensity to save, to trigger initial slowdown and then faster growth as the triangle acts:

17 --> Of course, as was noted, the dip involved in higher savings may have harsh impact, so the issue of judicious intervention by Government and/or Development agencies, is relevant. Structural adjustment that -- in light of the Hayek triangle -- will take years, is hard.

18 --> But also, the "Austrians" are right to point out that ill judged Government interventions can be damaging, given the leaky tyre effect. Here, Garrison points out an "Austrian" perspective on some roots of the 2008 on global recession that yet has lingering effects here in the Caribbean:

Of all the losses suffered during the current recession, one of the most notable (and well deserved) is the loss in reputation suffered by todays macroeconomics textbooks. J. Bradford DeLong admits as mucheven of his own textbookin a

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recent lecture on our current financial crisis. While the events that have unfolded over the past year have required some outside-the-box theorizing by mainstream macroeconomists, the economists of the Austrian school can offer a straightforward, fill-in-the-blanks explanation by drawing on the theory first articulated by Ludwig von Mises and then developed by Friedrich A. Hayek . . . .

A true-to-Hayek nutshell version of the Austrian theory is not difficult to produce: The central bank is central to our understanding of the current crisis.

The Federal Reserve under the leadership of Alan Greenspan kept interest rates too low during 2003 and 2004 and then ratcheted the rates steeply upward. Time-consuming investments that were initiated while cheap credit made them artificially attractive were then made prohibitively costly to carry through.

Macroeconomically, that sequence translates into an Austrian-style boom and bust. The background against which the story unfolded was a long-running, politically motivated sequence of housing policies whose dubious goal was to increase home ownership beyond what mortgage markets themselves would allow. The actual effect of the various policies was to desensitize both lenders and borrowers to the risk of default, causing mortgage markets and hence housing markets to play leading roles in this particular boom-bust episode.

The Austrian theory couldnt be more tailor-made for understanding our current situation. Dealing with the unfortunate consequences of artificially cheap credit, a memorable passage in Misess Human Action (3 ed., 1966, p. 560) alludes to an overbuilt housing market:

The whole entrepreneurial class is, as it were, in the position of a master-builder whose task it is to erect a building out of a limited supply of building materials. If this man overestimates the quantity of the available supply, he drafts a plan ...[that cannot be fully executed because] the means at his disposal are not sufficient. He oversizes the groundwork and the foundation and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure.

The foiled plans in Misess parable represent the upper turning point of the business cycle. The subsequent compounding of the downturn in the form of a downward spiral into deep recession should not distract attention from the underlying problem of the credit-induced misallocation of resources. The solution must entail, in the first instance, a reallocation of those misallocated resources.

19 --> I would, however, modify this by mixing in not only (a) the prior folly of forcing banks to create a sub-prime lending market for housing under the false notion that effectively people and regions were being red lined more or less out of veiled racial prejudice, but also

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(b) a global factor: the surge in oil prices from US$ 30 - 40 in 2004 that peaked at nearly US$150/barrel in 2008, and which has now led to oil prices hovering for several years at or near US$ 100 - 120/barrel:

20 --> So, also, the leaky tyre effect has broad applicability, as could be inferred from its root: the downside of the Keynesian multiplier effect. No surprise, Garrison goes on to say (his emphasis):

Policies based on mainstream thinkingcheap credit and stimulus packagesare politically attractive, a circumstance that makes any theory, particularly as it might apply to the long run, wholly irrelevant. Attempts to rekindle the boom also satisfy the dont-just-stand-there criteria for political viability. In the long run, a boom will get you a bust; but in the short run, a boom will get you votes. No doubt, many elected officials are oblivious to the first part of this long-run/short-run distinction. And virtually all those not so oblivious see the second part as trumps.

21 --> Further on he notes:

For the Austrians, the liquidation that is essential to the economys recovery is the liquidation of the malinvestments. Resources need to be reallocated. Hence, any government spending program that serves to rekindle the housing boom or even to keep resources from leaving the housing industry is counterproductive. It locks in the misallocated resources. Similarly, restoring macroeconomic health requires the liquidation of many other long-term or early-stage

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investments whose expected profitability depended upon artificially low borrowing costs.

This needed liquidation does not imply that a panic would be not altogether a bad thing, a judgment that DeLong also attributesvia Hooverto Mellon. What Mellon (or Hoover) called a panic, Hayek called a secondary contraction, meaning a self- reinforcing spiraling downward of economic activity that causes the recession to be deeper and/or longer-lasting than is implied by the needed liquidation of the malinvestment. Hayek argued, in effect, that the ideal policy would be one that allows the needed liquidation to proceed at market speed while the monetary authority curbs the secondary contraction (i.e., the panic) by maintaining a constant flow of spending. In terms of the equation of exchange (MV = PQ [--> best understood as saying that money stock, M, circulates V times per year to support Q number of transactions at price level P, cf. here]), Hayek argued that the ideal policy was to keep MVand hence PQconstant by increasing the money supply (M) just enough to offset declines in moneys velocity of circulation (V). Hayek used the word ideal in recognition that the monetary authority may lack both the technical ability and the political will actually to implement that policy.

22 --> So, the job is hard, and given the likelihood of downturns, likely to be thankless.

23 --> But that does not absolve us, the onlooking educated public, from a duty to seek a sound understanding and to support -- not: those who tickle our itching ears with what we want to hear -- but instead to support the sound; bitter and painful though it will often be.______________________________________

Thus, back to the kairos challenge and the Mordecai trumpet call to hard and perhaps dangerous duty: If not here, then where? If not now, then when -- and why? If not us, then who? END

PS: Next, DV, the Kondratieff long wave perspective. (I think this even more unusual perspective -- one favoured by Schumpeter -- provides a partial guide to making sound long-term decisions on development.) Posted by GEM of The Kairos Initiative at 9:08 am

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http://kairosfocus.blogspot.com/2014/04/capacity-focus-81-technological.html

Thursday, April 10, 2014

Capacity focus, 81: Technological innovation, diffusion, shocks, creative destruction, the Kondratiev - Schumpeter long wave and understanding the economic signs of our times Shakespeare, putting the following words in the mouth of Brutus as he discusses an about to be missed pivotal opportunity in the civil war with Mark Anthony and Octavian [later, Augustus Caesar], put it well:

There is a tide in the affairs of men.Which, taken at the flood, leads on to fortune;

Omitted, all the voyage of their lifeIs bound in shallows and in miseries.On such a full sea are we now afloat,

And we must take the current when it serves,Or lose our ventures.

[Julius Caesar Act 4, scene 3, 218224]

Just so, the pivotal question before us today is how to understand economic signs of our times, and thus how to surf the waves of innovation rather than be swamped by them and swept away by the forces of creative destruction. Where, too, as the ANC's motto counsels, we must understand the past, act in the present, build the future.

This brings the Kondratiev-Schumpeter long wave to the focus of our attention (here pictured by plotting the Standard and Poor's 500 percent shifts):

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The pivotal idea here, is that for hundreds of years, a cycle of maybe 40 - 70 years (one to two generations) has decisively shaped economic and global history. In Schumpeter's words in his classic 1939 Business Cycles, as edited and abridged by Fels:

Historically, the first Kondratieff covered by our material means the industrial revolution, including the protracted process of its ab-sorption. We date it from the eighties of the eighteenth century to 1842. The second stretches over what has been called the age of steam and steel. It runs its course between 1842 and 1897. And the third, the Kondratieff of electricity, chemistry, and motors, we date from 1898 on. These datings do not lack historical justification. Yet they are not only tentative, but also by nature merely approximate. A considerable zone of doubt surrounds most of them, as will be seen more clearly later on [p.178] . . . . From the standpoint of the transactions which carry a fluctuation of short span, the sweep of the longer waves constitutes the long-time conditions of doing business, although full equilibrium could, even theoretically, exist only in the points in which all cycles pass their normals. This accords well with the attitude toward eco-nomic fluctuations of the business community. What the businessman sees, feels about, and takes account of are the relatively short waves. In our three-cycle schema they would be the Kitchins. Waves much longer than these he does not recognize as such, but only as good or bad times, new eras, and so on. He, therefore, acts as a rule on the conditions of a phase of longer cycles as if these conditions were per-manent. This is obviously so in the case of the Kondratieff [p. 181]

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Thus, while it may be hard to assign specific dates, we can identify wavelike phenomena linked to various driving forces, and so it is highly advisable for us to pay attention and draw lessons for our own response to the signs and tides of our times here in the Caribbean and beyond.

For first instance, the historian and geopolitical thinker George Modelski has tabulated a parallel series of Kondratiev waves and long cycles associated with key technologies and the dominance of a chain of great powers:

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In the longer haul:

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Fr: Robert W. Fogel, Catching Up with the Economy, March 1999, The American Economic Review

We may follow Korotayev and Tsiril (2010) and further highlight the recent waves:

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Kondratiev These waves were first seriously studied in our time by Russian Economist Nikolai Kondratiev, whose academic integrity led him to point out that Capitalist civilisation underwent multi-generational cyclical phases of:

P: prosperity [upswing above the trend-line],

R: recession [downswing from the peak],

D: depression [hitting rock bottom] and

E: improvement [turnaround towards new upswing]

. . . which meant that the time of troubles from the end of the 1920's on was not terminal. This implication of a recovery was not welcome to Stalin, and he sent Kondratiev to the Gulag in 1930. Then, on that brutal Communist dictator's orders, Kondratiev faced a firing squad on 17 September 1938 (aged 46) at the Kommunarka firing range, Moscow Oblast, USSR.

A martyr to academic integrity.

Schumpeter, from the 1930's, termed these long waves associated with technological innovations and diffusion, after the martyr.

However, it is a matter of controversy as to whether the waves and associated "business cycles" are "real" and "useful."

Statistical studies of various types of economic data say, yes. For instance, Korotayev and

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Tsiril (2010) have used modern techniques based on the Fourier Transform for pulling frequency domain data out of time series, and have presented several convincing spectra.

For example, we may snip:

The mere credible existence of these cycles is already significant, even before we address causes, for, if we can spot the signals, their amplitudes and phase relationships, we can at least roughly sketch in patterns and so may be able to judge tides.

But of course, in the real world, such forecasting efforts -- just like weather prediction and its extension into projecting climate trends -- must be taken with a grain of salt, and we must not underestimate the significance of unpredicted shocks or surprise breakthrough innovations. Where, a sobering facet of this is that these K-waves are plainly strongly associated with great power rise and fall, thus with associated geopolitical, ideological and military conflicts.

When elephants get to fighting, smart worms, ants and mice get well out of the way.

Now, also, the long cycles are associated with innovation and diffusion of technologies, so it is helpful to picture that with the help of Knell and Robertson, and get a rough idea of how long the phases might take:

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That S-curve is very familiar to strategic marketers, a product life cycle curve: birth, growth, maturity, decline.

And of course, this invites the expectation of the next wave as is also pictured, leading to a chain of cycles.

That opens up the question of analysis, and here we may introduce the Solow per capita production function as summarised by Thomas McGahagan of Pitt University:

The Solow per capita production function:

q = A k 0.5

indicates that an economy can increase output per worker or q by

1. increasing the amount of capital per worker or k. See the previous web page for a study of growth by capital accumulation.

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2. increasing multifactor productivity or A. An increase in A will come from innovation in methods of production, due to improved technology or improved organization -- including improved transportation and infrastructure under technology, and a decrease in social friction under organization.

Growth in output due to capital accumulation, as previously pointed out, will slow down and approach a steady state. [--> Thus, the S-curve tends to plateau as investment is attracted and pushes the technology towards a limit where growth tends to plateau . . . ] While this is a major source of growth -- it probably accounts for three-quarters of US growth, according to Dale Jorgenson ( Journal of Economic Perspectives , Spring 1988) -- it is not the entire story.

Increasing multifactor productivity due to innovation is necessary for continued rapid growth; that growth however will be less steady and less predictable than growth by capital accumulation. Indeed, changes in the rate of innovation may be one of the main causes of business cycles , as the economist Joseph Schumpeter (Austrian, taught at Harvard 1930-1950) maintained in his Theory of Economic Development (1912) and his Business Cycles (1939). This position has been developed in many ways by the so-called Real Business Cycle school (representative members: Finn Kydland, Carnegie-Mellon University; Edwin Prescott, University of Chicago) . . .

In short, we here have a reasonable model and mechanism, where obviously generation-dominating technologies make very good candidates for cycles of 40 - 60 or so years. And, where also, we see the pivotal role of steady, long term investment in not just capacity but innovation and underlying research, exploration and development.

Feed such impulses into the leaky tyre model from last time:

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. . . and we easily see a strong tendency of the economy to be oscillatory, at different scales.

Thus, the different, superposed cycles:

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Where does this catch us here in the Caribbean, in 2014?

For thought-provoking starters:

1 --> Here in Montserrat, we need a crucial infrastructure push to put in place effective access. That points to the current sea port project, to the development of the identified source of Geothermal Energy, and to the upgrading of our airport to at least capacity to take 40 - 50 seat regional carriers as before the volcano eruption. The restoration of fibre optic connexion would also help.

2 --> Across the region, similar investments can easily be identified.

3 --> But we still have not hit the focal spot, we need to lift our attention to innovations based on generation-dominating technologies.

4 --> For instance, we have largely participated in the digital technology revolution as consumers, not so much as producers. Starting with educational transformation to build computer programming and science into core primary and secondary education, that has to change.

5 --> We need to go high tech with agriculture and target profitable niches. That suggests drip irrigation and mulching, hydroponics, fish farming, and other innovations.

6 --> Since bio-technologies and nanotechnologies are evidently a coming wave, we need to strengthen our education base to catch that wave as it comes in. Now, not "too little, too late" as usual.

7 --> Water is a pivotal issue, and we need to look to water resources management.

8 --> We need to think and begin to act towards energy transformation. And in so doing we

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should at least bear in mind possibilities such as pebble bed modular reactors, molten salt thorium reactors, Bussard electrostatic potential well fusion, and broader fusion.

9 --> Where for transportation, hydrogen and fuel cells look to be serious candidates.

10 --> And more, just add to the list (and place on a timeline compared to the S-curve chart) . . .

11 --> Which then brings up the Hayek investment triangle and the issue of what sort of future are we already investing in now, based on business as usual:

12 --> Thence, where is that likely to end up given trends, and what credible alternatives can we put in place to head to a better outcome? As in:

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__________

The thing is, we need to look at the innovation S-curve wave, with its credible timing, and then begin to play three to five moves ahead of events on the ground.

Which -- in a region prone to lurch, caught off guard, from reacting to one crisis to another -- is maybe the biggest challenge of all.

So, we are back to the Mordecai challenge: If not now, when? If not here, where, if not us, who? END Posted by GEM of The Kairos Initiative at 5:12 am

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http://kairosfocus.blogspot.com/2014/04/capacity-focus-82-how-industrial-policy.html

Thursday, April 10, 2014

Capacity focus, 82: How industrial policy -- yes, well judged and prudent state-led interventions -- can help to build effective competitiveness (despite the risks of fostering crony capitalism and/or the entrenching of corruption) . . .

Series: 78, 79, 80, 81, 82, b/g

One of the points made in support of the large sums being spent by the American Government to fund the 1960's space race to the Moon, was that the sci-tech "spin-offs" would help create such a wave of innovations that the programme would more than pay for itself.

And indeed, it patently has.

Ranging from Tang breakfast drink to the PC or Tablet or smart phone you are probably reading this on, ever so many "high" technologies trace back to the massive injection of funding, research and inventive effort that went into the space race.

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Where, of course, it is no accident that the United States is still in the lead in the high tech race, having decisively overtaken the Germans through the total mobilisation for war in the 1940's (the British having more or less bowed out of the race and having chosen instead to be a partner with the Americans . . . the new leading maritime power), and having beaten the Russians in the 1950's and 60's. Of course, a big boost came from the GI Bill that sent ever so many veterans of the Second World War to College.

All of this heavily focussed on oil, the automotive industry, electronics, computers, telecommunications, information technologies and the internet, the industries and innovations that have dominated the last two Kondratiev waves, to date.

All of which, of course was further enhanced by the fact that the industrial base and infrastructure of the United States suffered little or no direct attack during the world war. By contrast, the British, French, Germans, Russians and Japanese were severely damaged or outright devastated, the USSR losing some 25 million people as well.

For that matter, the early industrial development of the United States and other major economies was actively aided by the state, far above and beyond the basic community-based interventions suggested by the following context for the Hayek investment triangle:

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This brings us to the issue of how well-judged community and state actions -- and culture -- can demonstrably help transform the state of development of a country.

That is, industrial policy.

Wikipedia aptly summarises:

The Industrial Policy plan of a country, sometimes shortened IP, is its official strategic effort to encourage the development and growth of the manufacturing sector of the economy. The government takes measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation." A country's infrastructure (transportation, telecommunications and energy industry) is a major part of the manufacturing sector that usually has a key role in IP . . . . Historically, there is a growing consensus that most developed countries, including United Kingdom, United States, Germany and France, have intervened actively in their domestic economy through industrial policies. These early examples are followed by interventionist ISI strategies pursued in Latin American countries such as Brazil, Mexico or Argentina. More recently, the rapid growth of East Asian economies, or the newly industrialized countries (NICs), has also been associated with active industrial policies that selectively promoted

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manufacturing and facilitated technology transfer and industrial upgrading. The success of these state-directed industrialization strategies are often attributed to developmental states and strong bureaucracies such as the Japanese MITI. According to Princeton's Atul Kohli, the reason Japanese colonies such as South Korea developed so rapidly and successfully was down to Japan exporting to its colonies the same centralised state development that it had used to develop itself.

So, industrial policy can work, if well done.

If.

In light of the tempting challenge of crony capitalism, a difficult task.

Crony capitalism?

Wikipedia is again apt:

Crony capitalism is a term describing an economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism. Crony capitalism is believed to arise when business cronyism and related self-serving behavior by businesses or businesspeople spills over into politics and government, or when self-serving friendships and family ties between businessmen and the government influence the economy and society to the extent that it corrupts public-serving economic and political ideals . . . .

In its lightest form, crony capitalism consists of collusion among market players. While perhaps lightly competing against each other, they will present a unified front (sometimes called a trade association or industry trade group) to the government in requesting subsidies or aid or regulation. Newcomers to a market may find it difficult to find loans, acquire shelf space, or receive official sanction (like the Medallion System of the Taxicabs of New York City created during the Great Depression) to sell their product or services; in technological fields, they may be accused of infringing on patents that the established competitors never assert against each other. Distribution networks will refuse to aid the entrant. In spite of this, some competitors will succeed when the legal barriers are light, especially where the old guard has become inefficient and is failing to meet the needs of the market. Of course, some of these upstarts may then join with the established networks to help deter any other new competitors. Examples of this have been argued to include the keiretsu of post-war Japan, the print media in India, the chaebol of South Korea, and the powerful families who control much of the investment in Latin America.

However, crony capitalism is generally associated with more virulent government intervention. Intentionally ambiguous laws and regulations are common in such

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systems. Taken strictly, such laws would greatly impede practically all business; in practice, they are only erratically enforced. The specter of having such laws suddenly brought down upon a business provides incentive to stay in the good graces of political officials. Troublesome rivals who have overstepped their bounds can have the laws suddenly enforced against them, leading to fines or even jail time. Even in high-income democracies with well established legal systems and freedom of the press a larger state is associated with more political corruption (including crony capitalism).

States often said to exhibit crony capitalism include Hongkong , the People's Republic of China, India (especially up to the early 1990s when manufacturing was strictly controlled by the government, also known as "Licence Raj"), Indonesia, Argentina; Brazil, United Kingdom - especially in the 1600s and 1700s, United States, Malaysia, Israel; Russia; most ex-Eastern Bloc states, as well as the most well-known case of economic crisis due to cronyism, Greece. Wu Jinglian, one of China's leading economists and a longtime champion of its transition to free markets, says that it faces two starkly contrasting futures: a market economy under the rule of law or crony capitalism . . .

The article continues, soberingly -- we are playing with dangerous matches here and need to understand why strict safeguards are necessary:

In its worst form, crony capitalism can devolve into simple corruption, where any pretense of a free market is dispensed with. Bribes to government officials are considered de rigueur and tax evasion is common; this is seen in many parts of Africa, for instance. This is sometimes called plutocracy (rule by wealth) or kleptocracy (rule by theft).

Corrupt governments may favor one set of business owners who have close ties to the government over others. This may also be done with racial, religious, or ethnic favoritism; for instance, Alawites in Syria have a disproportionate share of power in the government and business there. (President Assad is an Alawite.) This can be explained by considering personal relationships as a social network. As government and business leaders try to accomplish various things, they naturally turn to other powerful people for support in their endeavors. These people form hubs in the network. In a developing country those hubs may be very few, thus concentrating economic and political power in a small interlocking group.

Normally, this will be untenable to maintain in business; new entrants will affect the market. However, if business and government are entwined, then the government can maintain the small-hub network.

Raymond Vernon, specialist in economics and international affairs, wrote that the Industrial Revolution began in Great Britain, because they were the first to successfully limit the power of veto groups (typically cronies of those with power in government) to block innovations. "Unlike most other national environments, the

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British environment of the early 19th century contained relatively few threats to those who improved and applied existing inventions, whether from business competitors, labor, or the government itself. In other European countries, by contrast, the merchant guilds ... were a pervasive source of veto for many centuries. This power was typically bestowed upon them by government". For example, a Russian inventor produced a steam engine in 1766 and disappeared without a trace. "[A] steam powered horseless carriage produced in France in 1769 was officially suppressed." James Watt began experimenting with steam in 1763, got a patent in 1769, and began commercial production in 1775.

Anthropologist David Graeber's book Debt: The First 5000 Years provides an even broader perspective: For as far back as we can see in the historical and archaeological record, argues Graeber, people with wealth and power, typically a monarch and cronies, have written the rules to benefit them at the expense of others. The situation would deteriorate for common folk until it was interrupted by a peasant revolt. Then the cycle would start over again . . .

So, there is a fine line to be sailed between legitimate and reasonable support for industry and development and shady or outright corrupt practice that in effect sets up a state-backed business oligarchy that in turn can dominate and utterly corrupt the state. Not to mention, outright block potential breakthroughs.

For instance, the steam engine was the chief "locomotive" -- and, in essence, this is simply a coal-fired steam engine turned into an "iron horse" -- that pulled the train of the first major industrial era Kondratiev waves of transformation and development. Showing us the potential in breakthrough energy and transportation or networking technologies.

(Indeed, across C19, between the continent-spanning rail network and the telegraph network, the emergence of the United States as a continent-spanning unified industrial power was enabled . . . transforming what would be possible in the 20th Century.)

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So, it is not insignificant to see how abuse of power seems to have blocked progress in Russia and France across the 1760's. (We should note, though that Watt had a predecessor in England, Newcomen . . . as early as c. 1710.)

Let's refresh our memories:

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That is already a major challenge, one perhaps best faced in a community where there is a strong, vigorous independent media, and a well informed, fearless public. (Which, characteristically will not be the case in a community dominated by cronyism -- and BTW, for those inclined to suggest a radical socialist solution . . . this boils down to creating a massive state owned monopoly on the commanding heights of the economy driven by political and bureaucratic impulses rather than economic effectiveness, a "cure" the C20 just past has shown beyond reasonable doubt is likely to be worse than the disease. Thankfully, in an era of widespread web access, social media and PCs, Tablets and smart phones, there are alternatives. But in turn, such can all too easily foster the spreading of destructive slanders, bigotry and popular but ill-founded notions. Another cluster of challenges.)

That already means that a viable industrial policy is a complex, delicate challenge.

However, that is only the first challenge. For, in an era where major anti-protectionist agreements abound, industrial policy is obviously a far more complex matter than hitherto. One that is multiplied by the current ferment in macroeconomic thinking.

Synthesist blog, which seems to be based in the Philippines, comments:

In his book, Professor Rodrik suggests ten design rules for modern industrial policy that I paraphrase below.

One must read the chapter on Industrial Policy for the 21st Century (2004), one of nine papers in his book, to get the full flavor from the detailed discussions on these design rules.

I have my own two reservations on these rules that I discuss below the list.

1. Incentives must be provided only to new activities not to existing ones.

2. Milestones are necessary there should be clear benchmarks/criteria for success and failure.

3. A clear timeline, as well there must be a built in sunset clause for performance. Maybe, a pre-defined exit strategy for failure can help as well.

4. Public activities must target activities not sectors this is a radical departure from current way of giving incentives.

5. Activities that must be subsidized must have a clear potential of providing spillover or demonstration effects. Cluster or network effects that enhance value-adding potential are a must

6. The authority for carrying out industrial policies must be vested in agencies with demonstrated competence.

7. The implementing agencies must be monitored closely by a principal with a clear stake in the outcomes and who has political

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authority at the highest level. 8. The agencies carrying out promotions must maintain channels of

communications with the private sector. 9. Optimally, mistakes that result in picking the losers will occur. 10.Promotion activities need to have the capacity to renew

themselves, so that the cycle of recovery becomes an ongoing one.

Professor Rodrik is very clear that his methodology in deriving the rules above is neoclassical economic.

As I expected, that constrains him from finding the two aspects that actually drive development through the process: the entrepreneur and technology innovation.

The neoclassical and free market approach treats both as externalities and assumes that both will arise quickly given the environment.

Big assumption, especially when there is a weak entrepreneurial culture and where there is a serious capacity challenge to be overcome to achieve the required waves of key technological innovations.

For much of that, a long term investment in a solid education system is a necessity.

At the upper end, that should feed into a research programme that can be co-ordinated on a regional basis. Much of that can become a partnership between the universities, the region's private sector and governments, probably with significant injections from Commonwealth universities.

But also, such a programme should feed into a carefully developed enterprise incubation programme, backed by mentoring and venture capital, at all scales, including micro.

Across time, this will help develop technological strength and an entrepreneurial culture.

Again: if not now, then when? If not here, then where? If not us, then who? END Posted by GEM of The Kairos Initiative at 6:56 pm

END

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Saturday, April 05, 2014Capacity Focus, 78: The "AS-AD" aggregate supply & aggregate demand macro view of the economy and the Caribbean sustainable development challenge

Tuesday, April 08, 2014Capacity focus, 79: Using a modified "Austrian" production possibilites frontier and propensity to save approach in macroeconomics-based policy thinking (from Roger Garrison of Auburn University)

Wednesday, April 09, 2014Capacity focus, 80: Addressing the Caribbean's "leaky tyre" economy challenge by applying Hayek's investment triangle set in the context of long term community investments in sustainability

Thursday, April 10, 2014Capacity focus, 81: Technological innovation, diffusion, shocks, creative destruction, the Kondratiev - Schumpeter long wave and understanding the economic signs of our times

Thursday, April 10, 2014Capacity focus, 82: How industrial policy -- yes, well judged and prudent state-led interventions -- can help to build effective competitiveness (despite the risks of fostering crony capitalism and/or the entrenching of corruption) . . .