From catch up to frontier innovation growth
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From Catch-Up to Frontier-Innovation Growth. Philippe Aghion. Questions. How can China avoid the middle income trap and succeed in transition from “catch-up economy” to “frontier innovator”? Does this also require institutional change, not just policy change?

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From Catch-Up to Frontier-Innovation Growth

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From catch up to frontier innovation growth

From Catch-Up to Frontier-Innovation Growth

Philippe Aghion


Questions

Questions

  • How can China avoid the middle income trap and succeed in transition from “catch-up economy” to “frontier innovator”?

  • Does this also require institutional change, not just policy change?

  • Rethinking the role and size of the state?


Schumpeterian paradigm

Schumpeterian Paradigm

  • Long-run growth is driven by (frontier) innovations

  • Innovations result from entrepreneurial investments (R&D…) which are themselves motivated by the prospect of innovation rents

    • Policy of growth

  • Creative destruction: new innovations make old technologies become obsolete

    • Political economy of growth


Schumpeterian paradigm1

Schumpeterian Paradigm

  • A first prediction of the paradigm is that (frontier) innovation requires turnover, i.e reallocation and exit!

  • A second prediction is that competition enhances frontier innovation and thereby growth

  • A third prediction is that growth-enhancing policies depend upon stage of development


Frontier innovation vs catch up growth

Frontier innovation vs catch up growth


Catch up growth in china

Catch up growth in China

  • Partial market reforms and yardstick competition between provincial leaders

  • Reallocation from agriculture to industry and from SOEs to (credit-constrained) new TVEs and private enterprises (Song-Storesletten-Zilibotti)

  • Technological catch-up taking advantage of FDI


From catch up growth to innovation based growth in china

From catch-up growth to innovation-based growth in China

  • More reallocation-based growth can be achieved from liberalizing labor flows from rural to urban areas and from developing financial sector


From catch up growth to innovation based growth in china1

From catch-up growth to innovation-based growth in China

  • Yet, several reasons for expecting a slowdown:

    • Gains from reallocating resources from agriculture to industry and from absorption of imported technologies have exhausting effects

    • Wage increases will reduce comparative advantage of China in what it currently exports


Pillars of an innovation based economy

Pillars of an innovation-based economy


First pillar competition

First pillar: Competition

  • Competition/entry is more growth-enhancing for countries or sectors that are closer to technological frontier

  • Competition/entry is more growth enhancing in countries or states with less regulated labor markets


Three fallacies about competition policy

Three fallacies about competition policy

  • Competition policy would counteract effects of patent policy: in fact the two policies are complementary

  • Competition policy goes against any form of industrial policy: in fact the two are complementary

  • Competition policy works independently of institutions: in fact corruption limits competition


Second pillar education

Second pillar: education

  • Need good primary/secondary education...importance of good PISA performance

  • To have good graduate education is more growth-enhancing closer to technological frontier....importance of good Shanghai rankings


Primary secondary education

Primary/secondary education

  • Quality, not just quantity, of investment matters

  • Two illustrations

    • PISA and growth

    • Investing more in more autonomous universities, is more growth-enhancing


Autonomy of universities

Autonomy of universities

Autonomie

Source : The Governance and Performance of ResearchUniversities: Evidence from Europe and the U.S. – P. Aghion et alii – NBER avril 2009


Third pillar labor market flexibility flexsecurity

Third pillar: Labor market flexibility: “flexsecurity”

  • Labor market flexibility is more growth enhancing the closer a country is to the technological frontier

  • Need to combine labor market flexibility with reasonable unemployment benefits conditional upon training for new jobs: flexsecurity!


Flexsecurity

Flexsecurity


Flexsecurity1

Flexsecurity


Flexsecurity2

Flexsecurity


Flexsecurity3

Flexsecurity


Fourth pillar finance

Fourth pillar: Finance

  • As country moves closer to frontier, needs to rely more on equity finance and stock markets

  • Reason is that innovative investments are more risky and therefore investors require both, to get a share of upside returns and to get control rights (Aghion-Bolton, 1992; Kaplan-Stromberg 2002).


Preliminary results

Preliminary results


Fifth pillar democracy

Fifth pillar: Democracy

  • Democracy is more growth-enhancing for industries that are closer to the technological frontier

  • This is not surprising for at least two reasons:

    • Frontier innovation requires free thinking

    • Frontier innovation requires creative destruction, but lack of democracy favors corruption and in particular collusion between incumbents and (local) leaders.


Reducing corruption or increasing trust enhances growth

Reducing corruption or increasing trust enhances growth


Free press reduces corruption

Free press reduces corruption


Sixth pillar countercyclical macroeconomic policy

Sixth pillar: countercyclical macroeconomic policy


Two contrasted views of how to conduct macrooeconomic policy

Two Contrasted Views of How to Conduct Macrooeconomic Policy

  • Keynesian view (non-discriminatory increase in public spending)

  • Conservative view (tax and spending cuts)


A third way

A Third Way

  • There is a third way between keynesian and conservative approaches

    • namely, countercyclical fiscal and monetary policy to partly circumvent credit market imperfections and thereby help firms maintain their growth-enhancing investments over the cycle.


Fiscal policy over the cycle

Fiscal Policy Over the Cycle

  • 17 OECD countries, 45 manufacturing industries

  • Period 1980-2005

  • Finding: Countercyclical fiscal policy enhances growth more in sectors that are more dependent on external finance or in sectors with lower asset tangibility


Fiscal countercyclicality across oecd countries

Fiscal countercyclicality across OECD countries


From fiscal to monetary policy

From fiscal to monetary policy

  • More countercyclical monetary policy, i.e with lower short-run real interest rates in recessions and higher rates in booms...

  • ....is more growth-enhancing in more credit constrained or more liquidity-constrained sectors


Conclusion 1

Conclusion 1:

  • Moving towards frontier-innovation growth requires:

    • Competition

    • Investing efficiently in education and universities

    • Labor market flexibility and training

    • Stock market finance

    • Checks and balances to limit corruption


Conclusion 2

Conclusion 2:

  • Competitive and independent media supported by rule of law, will spur innovation-based growth for at least two reasons:

    • It will put checks and balances on (local) leaders, thereby reducing corruption which in turn will foster creative destruction

    • It will increase China’s attractiveness to foreign researchers, more generally it will enhance China’s “soft power” (J. Nye).


Conclusion 3 seek higher quality growth

Conclusion 3: Seek higher quality growth

  • Environment:

    • State intervention to foster green innovation and production

  • Income distribution:

    • Excessive inequality encourages capture and undermines competition and trust

    • The top end stops contributing to public good provision


Smart state shouldn t we all become scandinavians

Smart State: shouldn’t we all become Scandinavians?

  • Targeted and well-governed growth investments and wise countercyclical macroeconomic policy

  • Social dialogue (high unionization rates) favor external and internal labor market flexibility, and enhance trust between firms and employees

  • Fiscal system which helps deliver on budget balance, growth, inclusiveness, and the environment

  • Politicians under strict checks and balances (“Toblerone” story in Sweden)


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