From Catch-Up to Frontier- Innovation Growth Philippe Aghion.
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Transcript of From Catch-Up to Frontier- Innovation Growth Philippe Aghion.
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?
Rethinking the role and size of the state?
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 rentsPolicy of growth
Creative destruction: new innovations make old technologies become obsoletePolitical economy of growth
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
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
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 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
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
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
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
Quality, not just quantity, of investment matters
Two illustrationsPISA and growthInvesting more in more autonomous
universities, is more growth-enhancing
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
20
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!
EPL
Variable eq1 eq2 eq3 eq4 eq5
Leader MFP growth 0.02949 0.02996 0.02830 0.02813
Gap to Leader -0.00858*** -0.00836***
EPL -0.00000
EPL, for highest tercile 0.00002 -0.00009** -0.00011** -0.00015***
EPL, for middle tercile 0.00004* 0.00002 0.00001 0.00001
EPL, for lowest tercile 0.00004 -0.00005 0.00002 0.00003
MFP Gap, for highest tercile -0.01261*** -0.00816 -0.00547
Gap, for middle tercile -0.00276 -0.00174 -0.00210
Gap, for lowest tercile -0.00901*** -0.01095*** -0.01173***
EPL*Gap, for highest tercile -0.00017 -0.00029*
EPL*Gap, for middle tercile -0.00004 -0.00003
EPL*Gap, for lowest tercile 0.00012* 0.00014**
Leader growth, for highest tercile 0.13600***
Leader growth, for middle tercile 0.00817
Leader growth, for lowest tercile -0.02597
legend: * p<.1; ** p<.05; *** p<.01
Flexsecurity
Flexsecurity
Flexsecurity
Flexsecurity
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).
OLS IV OLS IVStock Market * Financial Dependence 0.065 0.035 -0.008 -0.139
[.026]** [.023] [.058] [.069]**Stock Market * Fin Dep * Dist to Frontier 0.289 1.072
[.327] [.448]**Private Lending * Fin Dep 0.059 0.029 0.059 0.036
[.036]* [.028] [.034] [.027]Private Lending * Fin Dep * Dist to Frontier -0.528 -0.919
[.164] [.243]***Observations 972 661 887 638R-squared 0.3 0.3 0.38 0.36Country & Sector Dummies included.* significant at 10%; ** significant at 5%; *** significant at 1%
Finance, Growth and Distance to FrontierValue Added Growth, 1980-1990
Preliminary results
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
Free press reduces corruption
Sixth pillar: countercyclical macroeconomic 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
There is a third way between keynesian and conservative approachesnamely, 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
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
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:
Moving towards frontier-innovation growth requires:Competition Investing efficiently in education and
universitiesLabor market flexibility and trainingStock market financeChecks and balances to limit corruption
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
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?
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)