Friday, September 3, 2010

Global Policy Forum, Yaroslavl 8-10 September

Global economic integration, as measured by the ratio between world exports and world GDP, regressed slightly in 2009 only to resume its course immediately at an even faster rate. Globalisation, however, has not been matched at all - for better or worse - by the progress of global governance institutions. This is why the feeble and fragmented powers of international economic institutions - over 2,000 of them - are accompanied only by ad hoc arrangements from G-n groupings (from the G-1, i.e. the USA, to the G-24 of most advanced countries or the recently emerging G-20 including large less developed actors) to various Global Forums with the participation of some world politicians, businessmen and intellectuals. The Davos World Economic Forum was first and remains the foremost, but others have arisen in equally desirable locations. The millenary town of Yaroslavl - an ancient, former temporary capital of Russia - is hosting its second Global Policy Forum on 8-10 September, with prospective participants including the Russian President Dmitry Medvedev, the Spanish Premier José Luis Rodriguez Zapatero and the French Premier Francois Fillon. it is devoted to the general theme “The Modern State: Standards of Democracy and Criteria of Efficiency”.

Having accepted an invitation to join the Yaroslavl Forum, I was asked by the editor of the Conference website http://en.gpf-yaroslavl.ru/, Dr Dmitry Uzlaner, a number of interesting questions, listed below with my answers.

You are going to take part in the section 'The State as an Instrument of Technological Modernization'. What are your expectations about it? What problems seem to you most topical in this context?

Technological modernisation should not be understood as the introduction, at the fastest rate and on the largest possible scale, of the latest technique available, or the most productive in a physical sense. Modernisation is desirable only if

1) it introduces the best-practice technique, i.e. that which minimises total production costs calculated at the competitive market prices of all inputs, and

2) on the scale determined by total costs not exceeding the operating costs of production on already existing plant, whose historical capital cost is sunk and therefore irrelevant.

When input prices change, or some costs formerly neglected are included in production accounting, the best-practice technique also may change. The technique that is best for oil at $10 a barrel is not the same for oil at $150. The technique that is best when producers do not pay for the pollution generated in the production or consumption of their products is not that which is best when they do pay for it. A significant rise in the price of oil, or taking into account pollution costs previously unaccounted for, can require not only a technological change but possibly a “regression” to older and/or less productive techniques. This problem is well understood by economists and businessmen, but is all too often neglected by politicians and the general public.

The role of the State is paramount in: funding fundamental research and general technical education; enforcing market competition (for imperfect competition will distort the incentives to modernize and adversely affect the scale though not necessarily the occurrence of modernization; generally creating an economic environment favourable to modernization, for instance striking a balance between the production of new technology via patents protection, and the diffusion of technology. But there is no case for the State to have a direct hand in the choice of particular techniques in particular sectors let alone enterprises.

Which economic systems are doing better in the modern world? What factors determine success and failure of the system?

The collapse of the Soviet-type system in 1990-91 has led to a widespread conviction of the superiority of the capitalist system: the combination of market efficiency and the private appropriation of efficiency gains is a major stimulus to technical progress and innovation. For instance, Janos Kornai (Innovation and Dynamism, WIDER Working Paper No. 2010/33) argues that capitalism provides a strong incentive to dynamism, enterprise and the innovation process, and that every revolutionary new product for civilian use - such as information technology, the computer, the mobile phone and internet - has been brought about by the capitalist system. However, we should take into account the role of state-initiated and state-funded research, in this case space research, and its impact on such technical developments. It is true that Silicon Valley could not have developed in a centrally planned economy, but what seems indispensable is not necessarily a capitalist system, but a competitive market environment. Managers of private enterprises are already more motivated by profits than their shareholders, and equivalent incentives can be replicated in state-owned enterprises. China today, for instance, displays more dynamism, enterprise and innovation - and more resilience to economic crisis - than the traditional capitalist system, though this has far reaching implications for democracy.

Today Russia strives for the creation of modern high-tech infrastructure and technological renovation of the entire production sector. What to your mind are the best development strategies for countries like Russia? Which post-communist states were most successful in economic and political modernization? What factors determined their success?

In its current situation Russia, having suffered from decades of central planning inefficiencies, cannot go wrong by upgrading infrastructure and production; the question really is at which point such policy should be subjected to a strict analysis of economic efficiency. Russia has been blessed by an abundance of natural resources, notably oil and gas, which is an opportunity to be exploited. But the development of a diversified industrial basis is essential in the medium-to-long run.

Among post-communist states, economic success has not always gone hand in hand with democratic progress (from Poland to Belarus and to some extent Russia itself), but democracy must be regarded as a necessary pre-condition of long-term sustainable economic development.

What trends in modern economic theory you find most interesting and percective?

The global financial crisis of 2007-2010 has led to a considerable re-assessment and down-grading of the hyper-liberal economic theories of the 1990s and most of the 2000s. Markets are often non-competitive; in any case they are incomplete, given the lack of inter-temporal and contingent markets, leading agents to act on the basis not only of current prices and quantities of today’s goods, but also of their expectations of future prices and quantities. This is why higher savings might lead to a depression, and a global lowering of wages might increase unemployment. We live in a Keynesian world. Not only are markets somewhat inefficient and unstable, they are also patently unfair as demonstrated by rising national and global inequality.

Having said that, we must recognize that markets - with strong qualifications for at least some financial markets like derivatives - are absolutely indispensable in any economic system, for they provide automatic mechanisms of economic adjustment: of enterprise production to prices, of prices to excess or deficit demand, of actual to desired capital through capital stock adjustment via investment, of inputs supplies to actual outputs. We cannot live without markets.

What, to your mind, are the main problems of interaction between the intellectual community and policy makers? What form of communication is urgently needed? Is it just financing of intellectual think-tanks by some governmental bodies, or a kind of intellectual intercourse like forums in Davos, St. Petersburg, or Yaroslavl, etc.?

The decisions taken by policy-makers reflect mostly their own interests and values and those of their clients, and are rarely purely technical decisions that might be influenced by arguments developed by the intellectual community which, moreover, itself might not be representative of the people. Therefore problems of communication and interaction arise only in the narrow range of decisions open to a technical/intellectual argument; such is the natural limited area of operation of both think-tanks and forums. The real problem is that of democratic formulation and implementation of the public interest, and in a global dimension - though think-tanks and forums such as that of Yaroslavl can indeed have positive effects.

6 comments:

Anonymous said...

Mario
While your answers are mostly on the dot let me strengthen one point further. As someone who has worked on various aspects of the IT industry and Silicon Valley, I can assure you that the "state" in its myriad forms had a significant role to play in the development of the internet and the IT industry.
Of course, now with the sudden burst of dynamic efficiency shown by the state-controlled sector in China, quite a few of the "traditional" economists are soon going to throw a hissy fit!
Ashok

Jacob Richter said...

"The global financial crisis of 2007-2010 has led to a considerable re-assessment and down-grading of the hyper-liberal economic theories of the 1990s and most of the 2000s."

Forgive me for being skeptical about this assertion. Everyone is in a state of shock, but there has been no real change in Economics departments. I have heard graduates regret taking up Economics because the neoclassical paradigm is repeated ad nauseum.

While supportive of the political economy of Marx, I'll allude to my other heterodox positions below.

"This is why higher savings might lead to a depression, and a global lowering of wages might increase unemployment. We live in a Keynesian world."

The post-Keynesian school has the best immediate solutions to the structural and cyclical unemployment problem. Overreliance on money multipliers is inefficient.

Speaking of savings, the Chartalist school of monetary thought says that deficit spending is absolutely necessary even in good times. Without deficit spending, the capitalist credit system as a whole simply cannot expand.

"Having said that, we must recognize that markets - with strong qualifications for at least some financial markets like derivatives - are absolutely indispensable in any economic system, for they provide automatic mechanisms of economic adjustment: of enterprise production to prices, of prices to excess or deficit demand, of actual to desired capital through capital stock adjustment via investment, of inputs supplies to actual outputs. We cannot live without markets."

Which markets? Human economic activity may have had markets for consumer goods and services (your first two adjustments and the last one), but for long was quite independent from labour and then capital markets, let alone very very liberalized labour and capital markets.

Good luck at the Yaroslavl Forum.

chilosi said...

Mario, I have noticed that the Yaroslav Forum has been organized in exactly the same days as the twenty-one years old International Economic Forum in Krynica. Do you think the choice of the dates was casual? And how does your experience of the Yaroslav and Krynica Fora compare?

Turning to your interview, it is true that presently it seems that we are in a Keynesian world (including the liquidity trap), but stagflation could be just around the corner. Unfortunately reality does not always live up according to our textbook paradigms. Or fortunately: if it would, it would be a much more boring world (for economists at least). And surprises are needed to make the world more interesting (if also more dangerous).

D. Mario Nuti said...

Ashok, I am not surprised that the state had an important role in IT industry development and the rise of Silicon Valley. I was convinced that it did but felt I could not document it properly: obviously you can and I should be grateful for some references.

Alberto, I did notice the overlapping of the Krynica and Yaroslavl Forums/Fora on 8-10 September, but I do not think this was deliberate. In 2009 the two events did not overlap. I received an invitation to Yaroslavl much earlier than one to Krynica, probably both dates were fixed much in advance without concern for co-ordination. And it was not in anybody interest to compete.

I had not been able to attend the Krynica Forum on earlier occasions, and cannot compare the two events. I will post an assessment of the Yaroslavl Forum very soon: the event was above all a massive propaganda exercise.

Anonymous said...

Hi Mario
Was traveling and just saw your comment. Pl check out:
http://www.stanford.edu/dept/HPS/TimLenoir/SiliconValley99/Harayama/SVResearch.pdf

Also, similar stuff on Berkeley (which, moreover is a public university; also Saxenian's book on "Regional development..." has bits and pieces related to it, as does the Bresnahan/Gambardella book. There are other papers on federal funding of applied research in the valley, participation in even some venture financing, not to mention the critical role in the development of the internet, the pillar of the valley in its present avatar. The real integrated story is yet to be told!
Ashok

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