THE THEORY OF ECONOMIC DEVELOPMENT, CLUSTERS AND THE NEW LATIN AMERICAN PRODUCTION STRUCTURE'

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• THE THEORY OF ECONOMIC DEVELOPMENT, CLUSTERS
  AND THE NEW LATIN AMERICAN PRODUCTION STRUCTURE.
• JORGE KATZ
• Universidad de Chile, Mayo 2007

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CONTENTS OF THE PRESENTAION PART I
THEORETICAL FRAMEWORK PART II THE EMPIRICAL
EVIDENCE PART III AN APPRECIATIVE ACC0UNT
OF THE FACTS.
-CLUSTERS AND THE CREATION AND
DESTRUCTION OF PRODUCTION AND
TECHNOLOGICAL
CAPABILITIES. PART IV AFTER THE WASHINGTON
CONSENSUS, WHAT?
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The theory of economic development no longer
exists (Krugman, 1992)

• Once upon a time there was a field called
  development economics, a brach of economics
  concerned with explaining why some countries are
  so much poorer than others, and with prescribing
  ways for poor countries to become rich. The
  field no longer exists(pag.1).
• After 1960, by contrast, economists working on
  development had been trained in the formalism of
  constant returns general equilibrium and did not
  so much reject the posibilities that scale
  economies might matter, but simply failed to
  notice it (pag.8).

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Modern Growth Theory is based on an equilibrium
algorithm that is scarcely useful when we come
to explore the major issues posed by developing
countries.

• R.Solow, al recibir el Premio Nobel.
• The idea is to imagine that the economy is
  populated by a single inmortal consumer, (for
  whom) every firm is just a transparent
  instrumentality, a device to carry out
  inte-temporal optimization subject only to
  technological constraints and initial endowments.
  Any kind of market failure is ruled out from the
  begining. The end result is a construction in
  which the whole economy is assumed to be solving
  a Ramsey optimal growth problem through
  time.Inseparable from this is the presumption
  that observed paths are equilibrium paths (AER,
  Junio 1988)
• Y agrega
• we are asked to regard this construction
  as a model of the actual capitalist world.I find
  none of this convincing. The markets for goods
  and labor look to me like imperfect pieces of
  social machinery with important institutional
  peculiarities. They do not behave like
  transparent mechanisms for converting consumption
  and leisure desires of households into production
  and employment decisions (pag.311)

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Part I the conceptual framework Neoclassical
and evolutionary models of the development
process.

• In the neoclassical world growth is studied at an
  aggregate level, under conditions of competitive
  equilibrium. Firms have perfect information and
  free access to their production technology. In
  the original Solow-Swan (1956) version knowledge
  in exogenous. There are no market or
  coordination failures, uncertainty or
  institutions other that the market.
• In the evolutionary world institutions,
  uncertainty and differences in firm behaviour
  play a major role.Knowledge markets are not
• Pareto optimal and knowledge is a rival
  and non excludible good. (Romer, 1999 J.S.Mill,
  1854). We no longer have a representative firm
  and rents and appropriability are key
  determinantes of the innovative path of the
  economy. Competition acts as a selection
  mechanism in the market.
• Growth is described as a disequilibrium
  process with creation and destruction of
  production and technological capabilities.

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Public policies strongly differ in both models

• In Europe and Asia as in china now the State
  acts as a coordination agent in the economy,
  creating markets, institutions and capabilities.
  Countries integrate to the world economy in their
  own terms. (Rodrik, 1998).
• In Latin America, on the other hand, and
  following Washington Consensus ideas, countries
  have introduced structural reforms based on
  market principles. The idea is that ex ante
  equilibrium in macro fundamentals are needed
  and the right institutions need to be in place
  for entrepreneurs to be able to make the right
  investment and innovation decisions. The State
  should be neutral and a subsidiary agent in the
  economy.

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Formal and appreciative theorizing.

• Although current versions of Modern Growth Theory
  incorporate creationand destruction effects
  of a Schumpeterian nature there is no real
  understanding of the rol of institutions,
  uncertainty and differences among firms.
• We need different microfoundations to the
  neoclassical ones if we are to understand
  development processes. The idea of the
  representative firm has to be abandoned and also
  the notion of equlibrium growth. Instead we need
  to bring on board institutions, uncertainty and a
  theory of innovation in a volatile macro
  environment. Capitalism is highly variable
  across countries and a restless model of social
  organization.
• Formal models can scarcely accomodate such
  features.

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Institutions and Organizations as central
components of the development process.

• Institutions are the rules of the game. They
  vary strongly across regions, countries and
  sectors of economic activity.
• Organizations are power structures with a set of
  rutines to follow, and a system of rewards and
  punishment as a result of performance.
• Both should be undertood in a dynamic setting as
  process and not as a final, stationary state
  of the model. Such dynamics varies between
  countries, sectors, historical settings or
  epochs.

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Innovation and Schumpeterian rents.The motor
of capitalism.
p
Introduction price.
Innovative rent.
Long term equilibrium price.
q
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Central features of an evolutionary account of
development processes.

• Technical progrss is endogenous.
• Firms differ in structure, strategy and
  technoloigical behaviour.
• Institutions matter and they have their own
  learning and evolutionary dynamics.
• Uncertaintly plays a very significant rol in
  determining the development path of the economy.
• On top of the above, in the Latin America
  scenario we have to take into account the
  following additional features.

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Specificities of the Latin American scenarios

• 1.Macroeconomic volatility and uncertainty.
• 2.Changes in economic structure as a result of
  creation and destruction of production and
  technologial capabilities.
• 3.Wear public sector organizations and very poor
  coordination capabilities in the economy.
• 4.Lack of public goods in the economy.
• 5.Structural heterogeneity and punctuated
  convergence.
• 6.Defensive behaviour and low animal spirits.

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Macro volatility. 19 countries 1990-2004
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Cicles of creation and destruction as a result
of macro volatility.
B
Q
A
Time
phase 1
phase 2
phase 3
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Macro-to-micro interdependencies.

• Phase 1 A highly unstable macro makes
  entrepreneurs reluctant to invest. But lower
  external protection forces firms to adapt to the
  new rules of the game. Some exit the market,
  others increase productivity firing labor.
• Phase 2. Unvertainty becomes smaller. Inflation
  and the fiscal deficit come down and the external
  sector improves. But now imports and FDI attain a
  major role in most markets. The is Dutch
  desease and local firms leave the market. MA.
  prevail.
• Phase 3. A small number of new firms opens up,
  more capital intensive and in sectors close to
  natural comparative advantages. These new firms
  bring a different model of production
  organization. ICTs and outsourcing.

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We can differenciate three different stages in
the adjustment process.
Ínward-directed growth. A command economy.
Macroeconomic dis-equilibrium. Many firms exit
the market. A new market regime sets in. Firms
and markets behaviour change.
ISI
A more open regime.
Creative destruction.
Macro turbulence
1975
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Trade liberalization and market exitsThe Chilean
case.
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Exit and entry of new firms during The
adjustment process.
M 1
M
M
M1
M Productivity before structural reforms. M1
Productivity after structural reformas.
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The aggregate picture in different stages of the
adjustment process.
Fuente CEPAL
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The large majority of the countries in the region
has not been able to substain their rate of
economic growth.
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Areas in which we should examine the impact of
market-oriented structural reforms.

• Productivity and convergence.
• Employment generation.
• MNCs y SMEs.
• External equilibrium.
• Income distribution and equity.
• The development of domestic tecnological
  capabilities.

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Manufacturing productivity vis a vis the US.
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The productivity gap vis a vis the US. Is it
getting any beter?.
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Convergence, acording to the World Bank.
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Sectoral productivity gap.Argentina vis a vis
the US.
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Exit and entry of firms in the Argentine
steel industry.
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Changes in the manufacturing production
structure.
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Genetically-modified soy bean in Argentina.

• Dramatic expansion in four years.
• New sectoral institutions. Cero tillage and
  contract agriculture.
• WTO,Trips, IPRs and genetic patentes. Monsanto
  and PWL of USTR.
• The international debate as to the use of
  transgenic products.

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An example, soy bean production in
Argentina.1973-74 and 1993-94

• Less firms, more capital intenve, much more
  efficient.

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Salmon farming in Chile

• Inception of the industry.Late 1970s-mid 1980s.
  
• Fundacion Chile and Corfo played crucial
  role showing that the technology for salmon
  farming could be succesfully adapted to local
  conditions.
• Rapid physical expansion. Mid-1980s to mid
  1990s.
• Early entrepreneurial awareness became key
  issue in the expansion process. The Public Sector
  continued to play an important role building up
  the regulatory and physical infrastructure
  supporting the industry.
• Transnationalization. Mid-1990s to the present.
• FDI and large international retailers
  gained an increasing participation in the
  globalization process of Chilean salmon farming
  activities. Knowledge generation and difussion
  continues to be performed by Fundacion Chile,
  universities, and public sector labs and
  agencies.

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Each evolutionary stage is characterized by the
nature of the constraints that needed be solved
and by learning in firms and public sector
organizations.(1)
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Each stage can be characterized by . (2)
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New sectors developing in the Chilean economy
after structural reforms.

• The mining cycle. Escondida Codélco.
• The forestry cycle. Fiscal subsidies and local
  conglomerates.
• The salmon farming cycle. Chile and Norway.
  Clustering and the transition to a mature
  oligopoly inserted in world commodity chains
• The vineris cycle. FDI (Torres) and the role of
  brokers and world food chains.( Wall Mart
  others)

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A microeconomic interpretation of the Chilean
growth process. Cycles of new industry inception

• New sectors opening up in the economy.
  
• Sector
  1 Mining
• 
  Sector 2 Salmon
• 
  Sector 3 Retail
• 
  .New plants.
• 
  .Professional management.
• 
  .New competitive capabilities.
• 
  .New institutions.
• 
  .New competitive regimes

GDP
Time
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Structure and behavious of the National
Innovation system.

• Firms, universities, banks, regulatory bodies,
  municipalities, etc.
• Frail and uncoordinated structure.

Universities, Public sector labs.
Public Sector regulatory agencies
Banking System
Enterprises, Import, create and adapt technology

Foreign Regulatory bodies
Foreign Training education
Imports of technology
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ID expenditure as of GDP (2002)
Fuente RICYT, 2004
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Institutions of the NIS, and their recent changes.

• Rent creation mechanisms. Property rights on
  natural resources.
• Intellectual property rights. Trips and Trips
  plus. Byhe-Dohle and university ID. Niches of
  flexibility
• Venture capital. Private and public resources.
• Enterprise university relationship.
• Open competition and public resources. Neutral vs
  sector specific policies.
• Local scenarios. Regional clusters and local
  institutions.

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Domestic technological capabilities in the
inward-oriented growth stage.

• Nature of the firm in the inward-oriented
  growth model
• Domestic adaptive RD efforts. Nature and size
  of such efforts.
• Product design, process and production
  organization knowledge generation activities.
  Codifiedand tacitknowldege.
• The degree of vertical integration and the
  wideness of the product mix.
• Domestic RD efforts, exports and FDI of LDCs.
• Structure and behaviour of the National
  Innovation System in Latin American countries
  during the inward-oriented growth strategy.
  Agents, incentives and conduct.
• The limits of the inward-oriented growth
  strategy. Economic and political dimensions of
  the sustainability issue.

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Domestic technological capabilities after
structural reforms.

• Macroeconomic volatility and the nature of the
  firm after trade liberalization policies.
• The re-structuring of the production structure in
  the direction of static comparative advantages.
  Natural resources and the maquiladora model.
• IED, MA and the expnsion of the service
  industries. Telecoms, energy. The new role of
  Spanish capital in Latin America.
• The transition to a digital production
  organization environment. SCM and CRM among
  largefirms. The growingn gap with SMEs.
• The new institutional international architecture.
  Trips and Trips-Plus.

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Third Part An appreciative account of the
facts.

• The aggregate picture, ligths and shadows.
• Differences across countries.
• Differences across industries and new patterns
  of
• production specialization.
• Cross-firms differences in performance within
  a give
• industry.
• Catching Up O Lagging Behind

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An appreciative account of the facts 2.

• Entry and exit of firms and changes in
  industry regime.
• A younger capital stock structure.
• . Externalization of the sources of technical
  progress.
• De-verticalization of production organization
  processes,
• and new forms of coordination with foreign
  sources of
• technology.
• Trips, Trim. Gats, and the new institutional
  architecture.

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A global overview of the LA scenario

• Low average productiviy, far behind world
  standards. Strong structural heterogeneity
• Production structure back to static comparative
  advantages. Southern Cone and the Carribbean.
• Cycles of creation and destruction of
  capabilities.
• New sectorial competitive and technological
  regimes. Higher concentration and foreign control
  .
• New patterns of insertion in international
  markets. Commodities vs. Specialites.
• Very low coordination capabilities from the part
  of the public sector.

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The National Innovation System and the
development of domestic capabilities.

• New forms of University-Industry interactions.
  Industrial parks, incubators, support for SMEs.
• New forms of comparative advantages based on
  natural resources. Biotechnologies, Genetics,
• A new Public/private set of interactions. Venture
  capital and the introduction of new knowledge
  intensive firms and industries.
• The domestic market. Equity considerations and
  the neww for new technologies on the local
  scenarios. Education contents, Health services,
  enviroment protection, water quality, urban
  development.