In my book on The Long Wave in the World Economy, published in 1992, I argued
in rather Schumpeterian style (and following Freeman and Perez 1988) that a new
techno-economic paradigm had crystallised, based mainly on information and
communication technology (ICT) but with biotechnology also ready to play a
significant role. This new TEP had however not yet made a significant
contribution to the world economy, either on the supply side or the demand
side, and its potential would not be released as long as the existing
socio-institutional framework was mis-matched to it. The mis-match went deep
and wide, and would persist until far-reaching reforms had taken place;
unfortunately, only a deep crisis of the world economy (and perhaps polity)
could shift the obstacles to such reforms. Such a crisis would take place
precisely because of the obstruction of the new TEP.
Such pessimism seemed to have been refuted by the developments of the mid to
late 1990s, as a New Economy built on ICT had (it was generally agreed) arrived
– or at all events, was rapidly arriving. Those who promised to exploit ICT’s
potential in telecoms and dot-coms found it very easy to raise money, and
investment in those fields roared ahead. When the New Economy boom became a
bubble, and then burst, optimism was shaken for a time. However after the brief
recession of 2001 high demand returned. Moreover there was by now evidence of
some quickening in the growth of productivity (labour and total factor), which
confirmed what one saw – pervasive diffusion of ICT in a way which was bound to
increase efficiency.
The world economy is now manifestly in deep crisis. How far is it the deep
crisis foreseen in The Long Wave in the World Economy? In this paper I argue
that, so far as the developed economies are concerned, the crisis is much as
predicted: relative to their vast potential, ICT and biotechnology remain
largely obstructed by mismatched institutions. (See below.) The blockage
affects not only the supply side (productivity growth may have quickened, but
set against the technological possibilities the rate of advance is slow) but
also, crucially, the demand side: the low rate of investment in innovation and
diffusion tends to reduce aggregate demand. This created a situation, from
2001 on, in which the US monetary authorities, felt obliged to stimulate demand
by holding interest rates low for years. This played a crucial role in the
2004-7 bubble. With the bubble’s collapse, the deficiency of aggregate demand
has been compensated by massive fiscal stimuli. This is normal enough as a
short-term measure while business confidence in the private sector is restored;
but it is now becoming clear that even when the financial system has been
repaired, the trend level of business investment will be insufficient to
restore balance.
So much for the developed economies. There is now a largely-globalised world
economy in which the developing economies are playing a more and more important
role. The Long Wave pointed to the relationship of the two groups as a
contributor to crisis, but the analysis was limited. Here we identify the key
deficiencies in this relationship. The ‘natural’ financial relationship
between them is one in which capital flows ‘downhill’ from developed to
developing economies – where ‘catch-up’ opportunities are plentiful and
profitable. Thus from 1870-1914, British capital flowed to Argentina and the
US, and French capital to Russia. Under such arrangements, there could be very
rapid growth in developing countries, and thus fast growth in the world economy
as a whole, even if in developed countries, growth had slowed to a crawl. And
aggregate demand would be kept up, in the latter, by high exports even though
investment had fallen to a low level. (Just that happened in the UK in the 20
years to 1914.)
However, in the 2000s the general direction of flow was strongly and
increasingly ‘uphill’, most notably out of China and into the United States.
(There was also a less surprising flow out of developing countries with large
petroleum exports.) In cases such as China’s there was clearly a definite set
of economic policy objectives at work (see below), but looking at developing
countries overall there is a consistent pattern which represents a change from
1870-1914. In that first period of globalisation there was heavy
infrastructural investment in developing countries, financed largely from
developed Europe; on this base, primary and manufacturing sectors were built
up, also partly with foreign capital. The institutions of government, whether
colonial, neo-colonial or other, were adequate to protect investors in general
and foreign investors in particular – at least up to 1914. In the recent
period, on the other hand, investment in infrastructure (‘hard’ and ‘soft’) in
developing countries has been grossly neglected. This is due to fundamental
inequalities in the social, political and economic structures of developing
countries, which in turn stem from the unequal relationship with developed
countries.
The key inequality is technological: advanced countries have mastered advanced
technology, which they are capable of developing further to suit themselves.
Developing countries have not; even the more successful ones which have a small
core of advanced technology, have a long tail of most of their labour force
which has no access to it. The technological frontier has steadily advanced
for two hundred and fifty years; the consequence is that the majority of the
labour force in (e.g.) China and India were much further behind the frontier in
1980 than they were in (say) 1920 or 1850. Elites (however) in developing
countries have access to the advanced technology of the time, bought or rented
from advanced countries. This means that the gulf between elites and (say) the
bottom 50% tends to grow, as does the conflict of interest between the elite
and the country as a whole. Governments, which essentially represent the
elites, will concentrate their spending on the capital and other major cities
rather than the countryside (or the slums), on higher education rather than
primary schools, on airports rather than country roads. (Thus the very high
Gini coefficients of income distribution in China and Brazil.)
What ought to be done is shown by the experience of the very small number of
ex-developing economies which have done it – notably Japan and Taiwan. In
‘Twin Innovation Systems’ (Tylecote 2006), I showed how, while engaging with
the technological forefront through their ‘upper level’ national systems of
innovation, Japan and Taiwan also nurtured ‘lower level’ innovation systems
which diffused and developed ‘intermediate technology’ (Ernst Schumacher’s
term) among the bulk of the labour force – who had neither the capital nor the
skills to be able to adopt advanced technology at that stage. This set a
virtuous circle in motion: intermediate technology, being more productive than
the traditional technology which was the only alternative, generated a surplus
which could be reinvested both in higher investment in advanced technology and
faster upgrading of intermediate.
What ought to be done is not being done. The irony is that the strategy of
concentrating resources on advancing the advanced, in an economy like mainland
China’s, does not even work very well for the advanced. Much of Japan’s
dynamism in advanced technology has come from firms which emerged from the
lower level of innovation – Toyota, initially a textile firm; Honda and
Matsushita, founded by half-educated entrepreneurs from nothing. Much of the
cheap capital lavished on state-owned Chinese firms has gone for nothing. The
Chinese government has been forced to resort to maintaining an undervalued
currency, thus developing an export surplus based on labour-intensive goods and
labour-intensive operations like assembly; which in turn allows it to pay for
the purchase of foreign firms and their high technology (Cai &Tylecote 2008).
So much for Schumacherian insights. I return finally to the ‘obstructed’
ICT/biotechnology techno-economic paradigm. There are now three key
institutional obstructions left:
1. The system(s) of finance and corporate governance (see Tylecote and
Visintin,
2008). With the exception of the best venture capital, the institutions of
finance and corporate governance are unfit to deal with technological change in
the new TEP.
2. The now-dominant ideology of relying heavily on market forces, when as
Tassey
(2007) has shown, private sector dynamism even in the allegedly market-friendly
US has depended on massive state spending on the technological – and other –
infrastructure. That spending has declined precisely when the new TEP demands
more, not less.
3. The failure to reflect externalities in energy pricing, particularly those
related to climate change. Without significant carbon taxation, growing world
demand has pushed up fossil fuel prices to producers, particularly for oil, and
thus increased the rents accruing to the elites of oil-rich developing
countries. This (as mentioned above) contributes to the ‘uphill’ flow of
capital, reducing aggregate demand. Heavy carbon taxes would force producer
prices lower, but consumers of fossil fuels (particularly coal and gas) would
pay much more. This would launch a huge wave of innovation and investment in
renewable energy and energy-saving, based on ICT and also biotechnology,
particularly in advanced countries (Tylecote 2000).
When these obstructions have been removed, the new TEP can leap forward, and
the deficiency of aggregate demand will be repaired.