Creative destruction and an out-of-crisis roadmap

Creative destructionand an out-of-crisis roadmap Mario Cimoli

Out-of-the-crisis roadmap at the light of post-crisis scenarios: 8 points • The self-enforcing role of the productive structure • Technological learning, stickiness and re-adaptation • Crisis and catching-up: capability building and the dazzle of commodities • Latin America facing the crisis: stylized facts • New productive configuration • New technological paradigms • The role of the State • Towards a path of sustainable growth

1. The self-enforcing role of the productive structure The crisis entails more than a systemic impact on aggregate macro variables • The impact of the crisis on the real economy is not neutral with respect to the characteristics of the microeconomic structure and the behaviour of the firms • The way world economy may affect economic growth in a specific country could be considered as “filtered” by the degree of structural change occurred into the domestic economy

1. The self-enforcing role of the productive structure • The production structure defines how the economy reacts to the crisis: economies that are more specialized in high tech sectors will have higher income elasticity with respect to global growth • This higher elasticity implies that these economies will: - respond more dynamically to global growth in normal times - suffer more during episodes of global economic contraction - recover more easily in the post-crisis stabilization phase • The crisis leads to a re-composition of this same microeconomic structure, which in turn shapes the response of the economy

Growth Elasticity with respect to the World Growth Source: Division of Production, Productivity and Management, ECLAC

2. Technological learning, stickiness and re-adaptation In crisis scenarios firms and sectors readapt their capabilities, learning processes and production and investment strategies. The production structure undergoes processes of restructuring, which may imply the destruction of certain productive, technological and human capabilities

2. Technological learning, stickiness and re-adaptation • Most of the difficulties firms have to face in restructuring arise from the features of the technological capabilities, which are affected by the intrinsic nature of technological learning Technological Learning • Require real time • Accumulation Stickiness • Path-dependency • Complementary • Irreversibility • Stickiness in technological capabilities implies that all these processes of re-adaptation and change are costly and require resources and time

2. Technological learning, stickiness and re-adaptation • However: going through a process of re-adaptation of the microeconomic structure is a mandatory path for firms in order to face the new conditions and survive in the post-crisis scenario. This is possible if the firms are endowed with an adequate amount of technological capabilities Consequently: • firms close to the technological frontier are endowed with better technological capabilities and are more able to design a sound response and reaction to the crisis • firms in catching up economies are more vulnerable to the potential disruptive effects of a financial crisis, because the destructions of capabilities would have a higher systemic impact at an early stage of development

3. Crisis and catching-up: capability building and the dazzle of commodities Stickiness in production and technological capabilities implies that these effects are less easily reversible in the real economy than in financial markets, in particular for catching up economies a) Fragility of the capability building process • Catching-up economies are in the process of creating endogenous technological and production capabilities • With the occurrence of the crisis, this process slowed down and got eventually interrupted, resulting in a weakening or breakdown of real capabilities • This affects deeply the microeconomic structure and its consequences on productivity and growth may be persistent and more costly in the long run • Falling behind in terms of technological capabilities makes the process of catching-up increasingly difficult, as market shares are reduced and investment compromised

3. Crisis and catching-up: capability building and the dazzle of commodities b) The dazzle of commodities: holding back structural change • Let’s consider a shock such as a temporary rise commodity prices • A shock of this type favours sectors which are less technology-intensive and whose stimulus to human capital formation is weak, with a consequent loss of technological capabilities and inhibits the creation of new ones • The economic structure resulting from the adaptation process will have in the aggregate less capabilities and fewer sectors • A loss of sectors and capabilities will reduce systemic learning and increasing returns and economic levels, compromising international competitiveness. Both effects combine and reinforce each other, giving rise to vicious circles which hamper economic growth in the long run

3. Crisis and catching-up: capability building and the dazzle of commodities c) The dazzle of commodities: volatility and uncertainty • Crucial to understand the microeconomic consequences of volatility and instability in prices and how they interact with long run growth in production and productivity • If shocks are recurrent, the firm might need either to constantly readapt its processes and product mix or to adjust at a slower pace, waiting for the emerging structure of relative process to become more transparent • The evolution of firm’s productivity with successive price or uncertainty shocks will appear as if productivity was stagnant, while it indeed had been fluctuating • A general slowdown in aggregate productivity is the most likely outcome of the productivity slowdown induced by price volatility in the medium-long run

Re-adaptation of technological capabilities and productivity slowdown CRISIS: loss in capabilities Productivity slowdown and loss of technology-intensive sectors LONG RUN:LOWER ECONOMIC GROWTH Source: Cimoli and Porcile, 2008

Crisis and catching-up economies: the threat of the “Red Queen Effect” If immediate actions are not considered, once this “economic storm” would have passed the country will be running at a slower pace than the rest of the world, being unable to “keep in the same place”

4. Latin America facing the crisis: stylized facts • a) The “bonanza” quinquennium: 2003-08 • The expansion of the external sector • The increased weight of manufacturing sectors • b) A “cold shower”: 2008-09 - the “bonanza” is over • The flip side of rising commodity prices • Chronically underdeveloped technological capabilities • Trade unbalances • Industrial production within the Global Value Chain • Structural change and productivity

4. Latin America facing the crisis: stylized facts • What kind of structural change have Latin American countries experienced in the last decades (1990-2007)? • In the US, the high-tech sectors represented almost 60% of total manufacturing value added in 2007. These sectors are capable to produce abundant knowledge spillovers, which contribute to foster productivity in the whole industrial sector, dragging upwards the industrial productivity growth • In LA, the industrial structure was – and still is - biased towards natural resources and traditional industrial sectors. The evident lack of structural change is at the root of the immobility and slowdown of productivity • The productivity gap between Latin America and US has been constantly increasing for more than two decades, even during the time span of recent economic growth • Between 1990 and 2007: LA fell behind the technological frontier both in terms of technological specialization and productivity growth

Structural change and productivity: Argentina % value added of different sectors over total manufacturing value added Labour productivity (constant USD 1995) Nota: red square = labor-intensive sectors green circle = natural resources blue triangle = high-tech

Structural change and productivity: Brazil % value added of different sectors over total manufacturing value added Labour productivity (constant USD 1995) Nota: red square = labor-intensive sectors green circle = natural resources blue triangle = high-tech

Structural change and productivity: Chile % value added of different sectors over total manufacturing value added Labour productivity (constant USD 1995) Nota: red square = labor-intensive sectors green circle = natural resources blue triangle = high-tech

Structural change and productivity: Colombia % value added of different sectors over total manufacturing value added Labour productivity (constant USD 1995) Nota: red square = labor-intensive sectors green circle = natural resources blue triangle = high-tech

Structural change and productivity: Mexico % value added of different sectors over total manufacturing value added Labour productivity (constant USD 1995) Nota: red square = labor-intensive sectors green circle = natural resources blue triangle = high-tech

Persistency and increase of the technology gap CRISIS Productivity USA Productivity LA CRISIS Source: Cimoli and Porcile (2008), Cimoli, Hernadez and Stumpo (2008)

5. New productive configuration A challenging after-crisis competitive context for Latin American firms: • contraction of international demand, collapse of export levels, increased world competition • rising difficulties in managing trade-of-balance deficits • weak domestic markets (unable to act as “spare wheel”) • production overcapacity and difficult relocation of human capital (rising unemployment)

5. New productive configuration Firms and the credit crunch: • Financial restrictions will blow on the fire of the crisis and it will exacerbate the issue of scarce development of capabilities • Foreign investors are likely to cut and divert investments in new plans • National investors who are indebted will struggle to re-pay the debts or to find new credit

5. New productive configuration Firms and investment decisions: • Firms have to reorganize production and reorient their capabilities to respond to changing conditions of demand and international competition. This means: - review investment plans - cut unnecessary expenditure - increase efficiency - close production lines and plants, reduce employment • Sectors in which technology mastery and specific technical knowledge are the core competences: firms foresee the way-out of crisis through technological leadership and thus they are likely to realize/increase their planned investments in R&D • In primary commodity specialized economies: more difficult for firms where technological capabilities and other strategic assets are weaker - lock-in scenario, new projects may be cancelled and industries might migrate

5. New productive configuration Foreign Direct Investments: • FDI pattern reflect the comparative advantage of the region in primary commodity sectors • In 2008 Latin America received the largest amount of FDI (128.000 million USD) ever received, mainly concentrated in natural resources (up to 30% of FDI inflow in 2008) and services. • However, at the end of 2008 Mexico and some countries of Central America were already hit by a significant reduction of FDI inflows (-20% with respect to 2007) • FDI towards LA are expected to decline staidly at least in 2009

6. New technological paradigms The “creative destruction”: capitalistic development entails a continuous transformation of production structures and organizational routines, a process that is characterized by given regularities and by unforeseen and random events such as the appearance of new technological paradigms which recompose the way in which production and trade are organized

6. New technological paradigms • Opportunities in the post-crisis scenario will be strictly linked with capabilities in new paradigms in science, technology and production: capabilities will lead the resurgence from the current crisis, and will determine the repositioning in the global economy • US: despite being the source of the crisis started and where its impacts have been dramatic, are still the big technological leader in many new core technologies • LA: lagging behind in terms of development of technology intensive industries and patenting • Towards a consolidation of the markets of knowledge: with the new paradigms, the importance of intellectual property right defence and trade will increase

The knowledge curve: production structure specialization and patenting Source: Cimoli, Coriat and Primi (2008)

6. New technological paradigms a) New technological paradigms: ICT LA: rising importance of ICT, but still digital divide Penetration rate differences between LA and EU Source: Programa Sociedad de la Información with data from the “World Telecommunications Indicators Database”, 2008

6. New technological paradigms Crisis impacts on ICT diffusion in LA: threats and opportunities • effects on supply: not relevant Big regional leaders (Telefónica and América Móvil) have expressed the intention not to stop investments they have planned in the long run (they have liquidity). Hence, it is likely that ICT infrastructures will continue to expand in the region despite the crisis • effects on demand: mixed Some services (telephone land lines…) are perceived as essential, thus their demand tend to be rather inelastic with respect to income conditions, so a contraction is not expected. On the other hand, some more sophisticated services (wide band… ) are still perceived as “luxury goods”, so a reduction in demand is likely to happen, at least in the short run • opportunities: delocalization and offshoring for the countries which can be able to offer these services (advantaged: Mexico and Central America countries)

6. New technological paradigms b) New technological paradigms: Bio- and Nanotechnology • Still at initial phase: their potentialities under the scientific as well as economic point of view have not been fully disclosed yet • Do LA countries own the adequate capabilities to undertake this new technological pattern? • Diffusion and development of Bio-/Nanotechnology activities in the region still at “embryonic” level: - only few countries are involved in activities • Bio-: Argentina, Brazil, Chile, Colombia Cuba • Nano-: Brazil, Mexico, Argentina - lagging behind in terms of patenting and scientific publications with respect to EU, US, Japan and some emerging Asian countries (China and in particular India) - low amount of dedicated expenditure in R&D (private as well as public) - weak support form governments and public sector

Biotechnology outlook in Latin America

Nanotechnology outlook in Latin America Sources: from Gutman and Lavarello (2009): Anuario Estadístico CEPAL (2008), OECD FactBook 2009, Albornoz y Barrere (2008), Gutman y Lavarello, 2009, Garcés Toledano y otros(2007), Albornoz (2007), Hernandez Cuevas y Valenzuela (2004), Van Beuzekom y Arundel (2006),Van Beuzekom y Arundel (2009), Ernst % Young (2008), Niosi y Reid (2006) y InvestChile (2008).

7. The role of the State Time has come for a renewed role for the State: the need “more than ever” of active industrial and technological polices • LA: traditional lack of institutions and policies to boost structural change and productivity • Challenges: after two years of fiscal surplus (2006 and 2007), the crisis led to a reduction of fiscal revenues and consequently of the financial room for policy actions

7. The role of the State How should the new industrial policies be? A smart policy mix… • support “real economy”: avoid the destruction of existing capabilities, give incentive to develop new endogenous technological capabilities • support structural change: towards high-tech intense sectors • promote the adoption of new technological paradigms and related technologies • manage uncertainty • guarantee financial support during the post-crisis transition (but “smart spending”) • sectoral approach (different incentives to different sectors): adopt a variety of policies and instruments, because sectoral responses to a crisis are heterogeneous • “green tendency”: actions will be required to account for the increasing environmental sensitivity (eg.: during the recent crisis, many OECD countries have implemented green incentives in order to support the slowdown of automotive industry)

8. Towards a path of sustainable growth • The sustainability of the “before the crisis” mode of production have been questioned: energy requirements, environmental sustainability of current industrialization patterns will not allow production to take place following the same pattern for long time • How to move towards a patter of more sustainable growth? • Need of undertaking a process of technology foresight in order to grab a comprehensive overview of future productive paradigms, bringing together in partnership scientists, engineers, industrialists and government officials • Energy consumption vs productivity growth: a new balance is mandatory and urgent • Science as productive input and driver of growth • Strengthening public-private alliance • Environmental policies as out-of-crisis “emergency exit”: a stimulus to technological development and job creation

Creative destruction and an out-of-crisis roadmap