Technology, structural change and growth

ECLAC Summer SchoolAugust 2013

Objectives of the paper

• To present basic insights on structural change and growth into a simple framework

• To show some empirical evidence and stylized facts that are consistent with the “structural change” story

• The starting point: the international diffusion of technology is slow and asymmetric (North-South technology gap)

• Technology diffuses only partially to the South and is highly localized in few activities

• A Schumpeterian flavor: technical change and innovation as the driving force of development.

Starting point

Impacts on:

a) heterogeneity b) specialization c) growth

A graphic representation: heterogeneity

Figura 1. Productividad del trabajo y estructura productiva del centro y la periferia

Productividad del Trabajo y Estructura

Variables

= Productividad del trabajo E = Participación acumulada en el empleo , 0 E 1 N= Número de sectores de la economía ordenados de forma decreciente según la productividad, N= 1 máxima productividad, N = NC e N=NP mínima productividad en centro y periferia, respectivamente NC = Total de sectores en el centro NP = Total de sectores en la periferia, NP < NC (mayor diversificación de la estructura del centro). En el punto (NP, EP) del gráfico C hay una discontinuidad, cesa la acumulación de empleo en el sector moderno de la periferia. EP = Total del empleo en el sector moderno de la periferia (el empleo residual 1-Es se aloja en el sector de subsistencia con productividad igual a *) = Productividad del trabajo del sector de subsistencia de la periferia P = Productividad del trabajo del sector NP en la periferia _____________________________________________

NC

NP

E=0

B Empleo en el Centro

C Empleo en la periferia

E = 1

E=0 N=1 N=1

1-Ep

Ep

NC

Discontinuidad del sector moderno

NC

NP

A Productividad en el centro

D Productividad en la perfiferia

NC

N=1

N=1

P

C

a) Heterogeneity

• Large differences in labor productivity emerge within and between sectors

• Graphic: two structures that differ in terms of number of sectors, technological intensity (complexity) and variance of labor productivity

How specialization emerges: N is an index of technological complexity

N1 N

Porductividad relativa S/N

W/W*e

Porductividad relativa S/N Salarios relativos S/N

b) Specialization

• Ranking sectors according with South-North relative productivity

• Unitary costs depends on the productivity gap and relative wage

• The productivity gap is higher in sectors which are more technologically-intensive (comparative advantage of the South is lower in high-tech sectors)

• Given the wage ratio, the South specializes in sectors with lower technological intensity

Dynamics of relative productivity

• Relative South-North productivity:• = S /N

• it increases with relative growth and falls with the technological intensity of the goods: a, b and a are technological parameters

CP yybNa a

Relative wages

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

c) Growth (Keynesian side)

-> The pattern of specialization implies lower dynamism of world and domestic demand for Southern goods

-> a less articulated productive structure gives rise to losses of effective demand and a strong propensity to import that reduces the momentum of growth and leads to BOP and exchange rate crisis

Falling behind

• Growth will be constrained by external disequilibrium

• BOP constraint: yS/yN= e=eX/eM

• Elasticity ratio depends on N: e = hN• Falling behind: Low income elasticity of the

demand for exports and high income elasticity of the demand for imports, yS < yN

From specialization to growth

A e/

N N1

Brief notes on evolutionary microdynamics

• Why technical change does not diffuse uniformly across countries and within sectors?

• Which policies close the technology gap and which policies lead to divergence?

• Conventional micro usually avoids these questions; on the other hand, they are at the core of evolutionary micro

Evolutionary perspective on technical change 1

• It has a critical tacit component that could not be obtained from importing capital goods nor from reading manual and other forms of codified information;

• Cumulativeness: firms that are closer to the technological frontier have an advantage in innovation and will tend to increase their distance with respect to the laggards (cumulative processes leading to virtuous or vicious cycles)

Evolutionary perspective on technical change 2

• It is subject to path-dependency, i.e. the evolution of capabilities depends on previous experience and directions of past learning

• There exists complementary between sectors and capabilities, in such a way that externalities and increasing returns are crucial at both the industrial and economy levels

• There is irreversibility in the building of certain (physical and technological) assets, which cannot be just abandoned or replaced

Convergence and divergence

• There is no reason for naïve optimism about convergence. Path-dependency and cumulativeness lead to strong inertia in the patterns of learning and specialization.

• On the other hand, catching up may be possible under specific circumstances, when industrial policies and institution-building create a favorable environment for learning from imported technology.

Industrial and technological policy

• Market forces tend to endogenously reinforce asymmetries; active policies are required to enhance diffusion

• Focus on institutions, complementarities and increasing returns rather than on flexibility in the goods, financial and labor markets.

The other supply side

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

Macrodynamics

• The technology gap shapes relative productivities (box A)

• This in combination with relative wages define the pattern of specialization (boxes A and D)

• Specialization defines the BOP-constrained rate of relative growth (B)

• Growth defines labor demand and the absorption of informality and subsistence workers (E)

The complete system

Figura 2. Especialización, salarios y crecimiento en el sistema Centro-Periferia

P/C

eP/ec

W*

A

B C

D

NZ N

eP/ec

yP/yC

yP/yC

45º

W = WP/eWC

Absorción

F Crecimiento del producto

Aumento de la productividad más aumento de la oferta de trabajadores

N

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

Box 1: The 5-equation LAS System

System 1, cNN * System 2, cNN *

(2) CP yybNa a

(3) eC

P

yy

(5) hNe (7) WW

(10) WN *

(2) CP yybNa a

(3) eC

P

yy

(5) hNe (8) )(NWW

(11) *)(* NWN

Equilibrium

System 1, cNN * System 2, cNN * (12) WW

(13) hb

WaNa

*

(14)

hb

Wahyy

C

P

a

*

(15) WN *

(16) )(NWW

(17) hbNWaN

a

*)(*

(18)

hbNWah

yy

C

P

a*)(

*

(19) ** NWN

Shocks and policies

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

Case 1: Technological policy

P/C

eP/ec

W

3A

3B 3C

3D

N1 N

eP/ec

yP/yC

yP/yC

45º

Z

X

X X

Z X

Z

X

N2

W

Technological policy

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

Impact of I&T PolicyGraph 1A. Country A before the adoption of an

active industrial and technological policy Graph 1B. Country A after the adoption of an

active industrial and technological policy

Structural change and specializationAMÉRICA LATINA Y ASIA: PATRÓN DE CAMBIO ESTRUCTURAL Y PARTICIPACIÓN EN LAS EXPORTACIONES, 1985-2011

Fuente: Comisión Económica para América Latina y el Caribe (CEPAL), sobre la base de United Nations Commodity Trade Statistics Database (COMTRADE).

Co-evolution, structural change and labor productivity1970-2008

0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.450

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1970

2008

1970

2008

ArgentinaKorea, Republic of

relative labor productivity

IRP

Co-evolution between KE and SE

Sector PB RRNN BT MT AT Otros Media

Argentina 0.70 1.05 0.95 1.72 1.48 0.90 1.13

Brasil 0.75 1.41 1.26 1.91 2.15 1.54 1.50

México 1.30 1.22 1.54 2.27 2.03 1.31 1.61

Media 0.92 1.23 1.25 1.97 1.89 1.25 1.41

Elasticities: South America

Elasticities: Korea

Production structure: an international comparison

Indicadores de cambio estructural y esfuerzo tecnológico, varios años

Productividad relativa

IA 1985 IA 2007 X_HMT/X EXPY IPR Pat. I+D

Argentina 25.7% 0.1 0.2 22.0% 10.4 0.4 1.0 0.5%

Brasil 11.7% 0.4 0.9 32.0% 11.4 0.7 0.5 1.0%

México 19.8% 0.3 1.1 60.5% 13.2 0.6 0.6 0.4%

Asia en desarrollo 33.8% 0.5 2.3 64.3% 14.6 0.9 17.2 1.3%

América del Sur 12.1% 0.3 0.6 18.5% 9.1 0.2 0.4 0.4%

América Central 11.0% 0.2 1.1 34.2% 11.2 0.2 0.3 0.2%

Economías maduras intensivas en recursos naturales (EM-RRNN)

71.3% 0.5 1.3 32.4% 14.1 0.8 55.2 2.0%

Economías maduras 76.3% 0.8 1.5 64.6% 15.0 1.1 126.1 2.4%

A sample of countries

Participación relativa de las ingenierías (IPR)

Productividad relativa EXPY

Argentina 0,40 0,26 10,4

Brasil 0,64 0,12 11,2

Chile 0,17 0,20 8,9

Colombia 0,24 s.d. 9,9

México 0,64 0,20 12,5

Uruguay 0,18 s.d. 10,4

Australia 0,67 0,59 12,3

Dinamarca 0,87 0,78 14,0

Finlandia 0,94 0,73 15,0

Noruega 0,76 1,01 10,8 República de Corea 1,07 0,38 14,8

Gini in productivity and income

Inequality and the production structure

Production structure and education

Two tales in the linear model: technological intensity of the production structure

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

RSE, Argentina

RSE Korea

IPR

EXPY19

6219

6319

6419

6519

6619

6719

6819

6919

7019

7119

7219

7319

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

08

5,000

7,000

9,000

11,000

13,000

15,000

17,000

Argentina Korea

year

EXPY

Case 2: Dutch disease

P/C

eP/ec

1W1

A

B C

D

N1 N

eP/ec

yP/yC

yP/yC

45º

W = WP/WC

X

Z1

N2

Z2

X X

2W

Z2 X

Y

Z1

Z2 X

Case 2: Dutch disease

• A positive shock in commodity prices leads initially to higher growth, more learning and investment (vet for surplus)

• If the real exchange rate rises, then there will be less diversification and slower growth at the end of the adjustment (regressive structural change)

• A key point is the policy reaction to the shock and how to neutralize appreciation

Case 3: unilateral trade liberalization

P/C

eP/ec

A

B C

D

N1 N

eP/ec

yP/yC

yP/yC

45º

W = WP/WC

Z

Z

N2

X X

X

Z X

N1 N2

F

X X

x

z

W

Case 3: unilateral trade liberalization

• Reduces diversification• Increases heterogeneity• Rising productivity levels in commodities,

falling in industry• Of course trade liberalization plus industrial

policy may significantly change the outcomes