UNIVERSITÀ DEGLI STUDI DI BERGAMO
Dipartimento di Scienze Aziendali, Economiche e Metodi Quantitativi
Corso di Laurea Magistrale in Economics and Global Markets
Classe n.LM-56 – Classe delle lauree magistrali in Scienze de l’economia
Chiar.ma Prof.ssa Anna Maria Grazia Variato
Tesi di Laurea Magistrale Ivan INVERNIZZI
ANNO ACCADEMICO 2018 / 2019
Table of Contents
Chapter 1 – WHAT THE SOCIO-ECONOMIC SYSTEM IS
1.2. State, Market and division of labour
1.3. The World system
1.4. Defining what Market is
1.5. The determination of the Market design
Chapter 2 – STATE, ECONOMIC STRUCTURE, DEPENDENCY AND DEVELOPMENT
2.1 National Economic Structure
2.2 Product Space and Product Ecosystem
2.3 Dependency, its component, versions and implication
2.4 More on financial dependency/autonomy and their implications
2.4.1 Financial Dependency
2.4.2 Financial Autonomy
Chapter 3 – THE PROTOCOL
3.2. Sector development
3.3. Sector selection for Italy
An attempt to understand what drives the evolution of the human society is an attempt to understand the direction of human life in history, or at least all about the component of that direction originated by human choice. This text is all about a dimension of human freedom and its possible outcomes.
The aim is therefore to go beyond a simple description of reality, which in itself is meaningless, and attempt to develop tools to be able to have an impact on what could be called “the man kind project”.
In order to do so we will build and exploit epistemic, linguistic and theoretical links between several contributions using a materialistic version of critical realism as philosophical ontology and complexity theory as scientific ontology and epistemology. The scientific ingredients used here will be MMT ( monetary economics ) world system analysis (historical sociology), political and legal anthropology. Those above will be used as foundation over which there will be linked contributions made by several authors from several different discipline and approaches like dependency theory (comparative economic history), complexity development (international development) and other research programs. The reason for that is that society is a unitary organism in which the various “apparatus” don’t exist in autonomy, they share internal organs and they have in parts of the rest of the organism the necessary premises of their own internal reality.
The following text is not a simple sum of contributions embellished with some personal reflections.
The author is not looking forward to do some DIY in order create an overall Frankenstein like framework with a nice hat branded in its name.
Rigor in the elaboration is brought by the following hierarchy of knowledge levels: the ontological level constrain without determining the epistemic one; the epistemic constrain without determining the scientific one; the scientific guide without determining the technical application.
Combination of several theoretical contributions that will be exploited in conjunction will likely need to have some clear and solid link in the emerging theoretical structure in order to solve eventual incompatibility in their autonomous original hardcore structure. It is therefore neither necessary to preserve all their extension-ramification, nor their conclusion. A new theoretical structures will appear and a deeper and more systemic understanding is expected to be achieved.
The structure of the dissertation will follow the hierarchy of knowledge. Chapter 1 will clarify the ontology and the methodology, Chapter 2 the theoretical framework and Chapter 3, at the light of the previous parts of the dissertation, will suggest some theoretical tools in order to read the historical scenario, to recognize a set of options in terms of historical pattern to target and, finally, to provide guidance in policy design and implementation.
The following is therefore both a handbook for policymaker and a starting point for social scientist looking forward to connect their contribution with a grand social theory. This dissertation aims to be a post disciplinary work able to provide technical application.
Chapter 1 – WHAT THE SOCIO-ECONOMIC SYSTEM
The first epistemological position taken here is the understanding of social reality, i.e. human life, as an extension of natural reality in a stratified fashion, meaning that natural world constrains though does not determines the social world.
Such a position implies social science moves within the space accorded by natural science; hence the surface of connection between the natural and the social world is biology.1
That is why the social dimension can’t expand in complexity if the biological needs are not met, and that’s why social restriction can significantly expand just after advancement in the human ability of satisfying material needs: therefore social structures always have a material base.
The second epistemological assumption of this work is the rejection of standard reductionism2 in favour of complexity theory. That is why the social world is in presented in this dissertation as a system: “a set of interrelated elements” (Byrne and Callaghan 2014, p.4) that are influenced by each other and by the whole. Moreover, given the peculiar scope of the present work, the world system (which is the overall economic system) is understood as being composed by sub-systems characterized by logically necessary relations making the sub-systems what they are.3
The specific way how the parts of the system, or of any sub-system, are arranged, meaning the way they interact between each other, defines what is called the “structure” of such a system.
The epistemological starting point just presented is the reason why the understanding of Economics (as a specific social dimension) and of the policies connected to it, will be derived by an explicit comprehensive understanding of socio-economic system. This chapter will therefore provide such theoretical foundation for the development of the dissertation.
1.2. State, Market and division of labour
The most relevant organization of the last 9000 year of human development it is not the result of a bottom up progressive, spontaneous and natural process as it will be shortly illustrated.
The relaxation of natural constrain over human kind has been built, and has always relied upon a social coercion imposed by means of a monopoly on violence by the organization that will be here called the “State”. The appearance of the State is probably the main turning point in the development of human life.
In the present work States are defined as institutions having officials specialized in the assessment and collection of taxes – whether commodity, labour (Scott 2017, p.118) but also in financial term – thanks to their control over the monopoly on violence on a specific territory, who are responsible to a ruler or rulers.
In other words States are social structures organizing a systematic extraction of economic surplus from population, over which they have some degree of control, primarily to the benefit of a more or less defined social group. States emergence therefore chronologically coincides with, and logically causes, social class emergence.
Such definition of State is consistent with the definition provided by Max Weber and with the meaning attached to it in anthropology (Keeley 1996):
“A compulsory political organization with continuous operations (politischer Anstaltshetrieb) will be called a « State » insofar as its administrative staff successfully upholds the claim to the monopoly of the legitimate use of physical force in the enforcement of its order.”
Control over large active population has huge implication first and foremost in terms of division of labour and to the processes of technological development and economic growth that lead to it.
Initially the geographical power of States was spatially very limited, that is why the emergence of States coincided with the emergence of cities (Smith 2009) and with what was called “urban revolution”. With the development of space-demolishing technology the control of the States extended until the point of virtually covering all the dry land.4
Since its beginning State has implied hierarchy, social stratification and territorial polarization between centre/centres and peripheries; city and rural area.
As said the States’ geographic power grew with technological development to the point where multiple States got in permanent relation and, in most of cases, shared lands border with each other. In such scenario the systematic surplus extraction started to be organized at the interState level.
The 2 principles upon which it’s built, are, on one side, the tendency for State to establish in various forms some degree of hegemony (militarily, economically, technologically, …) in variable combination over the weaker States; and on the other side, the tendency of undergoing the hegemony of the strongest ones (Wallerstein 2006, Chase-Dunn, Kawano, Brewer 2000).
From the military side hegemony is measurable in terms of defensive and offensive power (Chase-Dunn, Kawano, Brewer 2000); from the economic side hegemony is the position of who is benefiting of the surplus extraction. But hegemony has also a cultural side (Wallerstein 2006), including the linguistic dimension. All the sides of hegemony are different sides of the same thing, although they can present very different ratio in their magnitude from case to case.
Social Stratification – in some degree – overlaps with territorial peripheralization resulting in having the majority of the most powerful and the wealthiest people in the world living in the core country, and the most of the labour force living in the peripheral and semi-peripheral countries.
We will call those interState structures “world systems” defining them as the structure composed by network of socio-economic unit interacting with each other systematically exchanging information and/or matter and/or energy in various forms including people, commodity, finance and culture. There has been several autonomous world systems in the past at the same time, for instance pre-Colombian American world system was autonomous from the Eurasian world system of the Middle Age.
Let’s now support the extensive theory illustrated above through history, archaeology, anthropology, urban studies, agrarian studies, sociology and economics.
To begin with there is a four thousand year gap between the domestication of crop and sedentism (Smith 2009, Scott 2017). This fact damages at its foundation the line of reasoning of who would present the State as a spontaneous and natural outcome of human technological development. This gap is indeed the evidence that the technical ability to produce economic surplus has not been sufficient for the increase in labour specialization connected with what has been called the “Urban revolution” and the rise of civilization (Smith 2009, Scott 2017). On top of that it should be remarked that the emergence of cities with their dramatic increase in the division of labour is not just always linked with State formation (Compagno 2018, Smith 2009, Scott 2017), but with a very brutal form of “totalitarian regimes” (Smith 2009, p.17), were the “majority of the population was unfree” ( Scott 2009, p.7).
Moreover, States’ first priority has not been maximizing economic surplus but to “maximise legible, taxable, and confiscated production” (Scott 2009, p.11), in other terms, imposing stackable crop with a harvest period (Scott 2018).
It is very likely that in such a scenario the concentration of labour force in the city was functional to its control (Compagno 2018), and in large scale opened the door for the elite to the possibility of demanding coercively new goods and to support craft workers out of the activity of food supply (Smith 2009, Compagno 2018).
It becomes self-evident that production specialization, i.e. the increase in division of labour from the elementary tribal one, has its necessary condition in the presence of the State, since there is a perfect temporal correlation between both: State emergence and increase in division of labour; as opposed to State collapses and decrease of division of labour (Scott 2017).
1.3. The World system
To begin with, starting from the largest picture, there is a world-system defined as the social unit of analysis whose historical pattern is determined largely by its own internal dynamics (Wallerstein 1991).
Countries are the constituent components of the world system possessing what is called organic unity, a whole in which the component part are not self-subsystem, on the contrary, are constituted by the very relation they have with other parts (DeLanda 2006:9): more specifically social classes, State and all the sub and overlapping systems within them.
Countries, and their components have then a more or less important relation of dependence, inter-dependence or hegemony with the rest of the World system. We will discuss more on that later.
The primary elements that constitute a country are the political authority, the “State”, and the “national socio-economic system”.
How the State designs the system for its provision and how it defines “property rights”, determines the kind of “national socio-economic system” of the country, for instance: socialism, capitalism, slavery or manorialism.
In particular, if under the imposition of a currency there is the possibility of the existence of private means of production and just of the trade of labour force, and not of human being, the system is defined as capitalist; we talk about slavery if the ownership of human being exists; when there is no private property of means of production, the system falls under the definition of socialism (Koronai 1992) and when there is no ownership over human-being , but instead there are constraints for the labour force to remain on a specific land under a specific lord, the system is defined as manorialism.
For what we are concerned we will analyse a capitalistic socio-economic system where the imposition of currency system is the way the State provides itself with real resources (Tcherneva 2016), and on the other hand where private property of means of production exists, but where workers cannot be of property and therefore it is possible to acquire just labour force or goods embodying labour force, and not slaves.
More specifically, for what concerns the imposition of currency by the State as provisioning system, the mechanism works as follows. The State imposes on the non-governamental sector of the national socio-economic system a payment to itself in a specific currency, which is called taxation, this creates the need in the national socio-economic system of that specific currency, which leads to the emergences of seller of goods and services in the State’s territory in such currency.
As a consequence, if the State provides itself with real resources just from a portion of the national socio-economic system, just that portion will obtain currency directly from the State. This means that remaining private agents of the national socio-economic system will need to provide themselves with currency from other private agents and to do so becoming seller of real goods and services to other private agents in exchange for currency. The final result is a generic system of exchange of currency, that collaterally appears as a generic system of exchange of goods, which we will call “market”.
When property rights are designed in a specific manner there will be the emergence of both labour market and capitalistic social classes. In such a case we will have a Capitalist national socio-economic system. Market is therefore an epiphenomena of the State and so Capitalism. Social classes, defined as people groups divided in function of the relation they have towards the means of production, do not exist prior to the action of the monopoly on violence by the State. As already explained, State is synonymous with extraction of economic surplus and therefore with people groups benefiting from it and people groups from which the surplus is extracted. There is therefore no such a thing as social classes logically and chronologically prior to the State, but on the opposite social classes are the necessary result of the State’s function. The State creates the social group from which the economic surplus is extracted and it has a supporter in the social group who receives it.
“… States and societies are mutually constitutive. Interest and classes are not logically prior to the State and its policies. States help define private interests and play a crucial role in the growth of classes and interest groups. Once classes and interest groups have coalesced, they constitute powerful constraints on subsequent State strategies.”
We will call the combination of social classes design and of the technological makeup of the country the “socio-economic structure” of such country. It goes without saying that a specific socio-economic structure expresses itself with a specific division of labour. Again, it is the object of this dissertation.
The general understanding of the socio-economic system that has just been provided is meant to recognize the primary foundation of both, constrain promoting the system stability, as well as its structural possibility for changes in the State’s power, in its institutional setup up, and in available technology.
As said, those organic unit called “country” composing the world system are related one another in a set of ways that goes above and beyond the economic dimension. Those relations define where the balance of power embedded in the world system ends up in the continuum between the two polarity constituted by, on the one side, “absolute hegemony” of the centre on the periphery and on the other side, a somehow balanced “symmetric interdependence” between countries.
Out of this last extreme, and purely theoretic setup, a degree of hegemony always emerges and consists of the power of a country – or of a limited number of countries – to turn the world system in its favour by leading the economic, political, military, diplomatic and cultural arenas (Wallerstein 1991). Note that such kind of relation between constitutive areas of the world system can be found in any world system, including non-capitalistic ones like empire or socialist inter-State system.
Hegemony and balance of power expresses themselves in various form and degree. The world system resembles a set of chain of hegemony-exploitation relation that tends to go from the upper class to the lower ones, from cities to rural areas and from the central countries to the peripheral ones with all the intermediary buffer position between those poles and all the possible overlapping between those layers of social reality. We will then have middle classes, provincial cities, and semi-peripheral countries at the same time under the external constrain and exercising constrains on lowers levels in the chain.
The premise of hegemony is therefore the monopoly on violence of the State that is the base to constitute all other fundamental social structure supporting social control and economic appropriation.
On money and market
One of the most detrimental idea in social science, and more specifically in economics, has been introduced by Aristotle and then developed, along different lines, by both Smith and Marx – just to name two between the most influential authors. Such idea has therefore affected a large part of the history of economic thought.
This idea consists of seeing barter as the original form of trade and money as a consequence of the development of barter.
“The original form of trade was barter, but with the extension of the latter there arose the necessity for money.”
Aristotle quoted by Marx Capital volume1 :253
Smith conception goes further in describing the origin of trade by arguing that the natural human propensity of exchange is a necessary consequence of human faculty of reasoning and speaking.
“This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.
Whether this propensity be one of those original principles in human nature of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to inquire.”
(Smith 1977: 29)
Such conceptions suggest the existence of “market”, “natural market law” and money prior of the State, emerging from a natural and spontaneous division of labour.
“…the labour-time socially necessary to produce them asserts itself as a regulative law of nature. In the same way, the law of gravity asserts itself when a person’s house collapses on top of him. The determination of the magnitude of value by labour-time is therefore a secret hidden under the apparent movement in the relative value of commodities.”
Despite of success of such a view there is no evidence of the existence of any pure and simple barter economy (Caroline Humprey 1985, Tcherneva 2016). On top of that it should be pointed out that there is a different meaning occurring between, on the one hand, a complex of bilateral exchange happening with a multitude of subjective and autonomous term of exchange and, on the other hand, a coordinating system for the allocation of real resources resulting in a general multilateral exchange mechanism with some degree of interdependence – equalization between the term of exchange emerging from it. To have the latter, which is probably the only possible object of inquiry that can lead to a rigorous scientific generalization, a commensurable and “socially constructed standardized measure of abstract value is needed (Ingham 2013: 124).
Indeed historically the unit of account has been created first, then came the means of payment – both designed by the State; and just after that, a multilateral and generic system of exchange emerged (Tcherneva 2016); all those institutional steps have been developed as tools for the transfer of real resources between the parties in general and for the public provisioning of the State in particular (Tcherneva 2016) .
So, from now on we will refer to “currency” and not generically to “money” in order to make it clear that what we are referring to the creature of a particular State, more specifically a monopoly of it, and we are not referring to conception of means of payment grounded on the gross idea of “purchasing power” disconnected to any understanding of non-reciprocal obligation which benefits a specific State lying behind every currency transaction. For instance the understanding of currency which is used here makes a clear difference between currency creation and credit creation (general framework).5
In the case of currency the monopoly on violence is not directly used for the extraction of economic surplus by confiscating part of the production, but to impose a tax payable just by means of currency created by the State.
The tax aim is to create seller of labour and goods looking forward to exchange them for the specific currency6 in which the tax is denominated, so to allow the State to provide itself with real resources simply by creating its currency with its spending (Mosler 1997,Mosler 1998a). Currency in fact is nothing more than an accounting record and it is produced through the State spending only (Mosler 1995, Mosler 1998a).
Taxation introduces a non-reciprocal obligation in the system connected to the imposition of an “abstract commodity” (currency) supplied in the regime of monopoly. Once realized that there is no way that currency can be considered as “neutral” and it is impossible too see the exchange characterized by symmetry between the two side of it (Tcherneva 2016).
1.4. Defining what Market is
Market in this work is defined as a generic system of exchange-arbitrage7 of currency that collaterally expresses itself as generic system of exchange of goods and services. Market is defined as such since it is not the natural propensity for exchange of goods and services that leads to it but, on the contrary, it is the coercive imposition by the State of its own currency to the national socio-economic system.
Since currency is a monopoly8, (Mosler 1995, Mosler and Forstater 1998, Tcherneva 2016) when the need for it is imposed to a larger population than the one that has direct access to the currency9 there is a structural discrimination that emerges in the market between those who have direct access to currency and those who doesn’t have it. In other words, since currency can be created and gets into the private sector solely with public spending, the higher the number of passages the currency needs to do before to reach a private agent, the more the value of the currency is likely to increase. Let’s make a simple pedagogic example to clarify the point.
Imagine that the State hires a big firm to build a big new parliament. Imagine that such firm then leaves half of its work to another firm, a subcontractor. It is clear that the currency first goes to the first firm and just after that it reaches the second one. Therefore the two firms are in a fundamental different position since that “arbitrage” of currency is enough to create a divergence in prices, and consequently also in both profits and salary, between the 2 firms. The national market, the market inside a country, resemble to a set of long chain of currency arbitrage that goes from those who receive the currency from the primary supply, the public spending, to anybody else who’s receiving a payment in the system.
This is one of the reason explaining why the same product, or the same service, has a different price – which means that the currency has a different value – where we have the concentration of many private agents receiving the currency directly by the State, for instance in the States capital, from where the State expenditure is pretty limited, for example in the rural area. Obviously on top of such discrimination in the access to currency, and, consequently, structural non equalization of prices, profits and salary, there could be all other kinds of dynamics justifying the emergences of a distribution in those variables within the system: many of which are well framed in the “real competition” framework (Shaik 2016).
All this “non-neutrality of the system” emerges already just by taking into account the process of currency creation – the public spending – but a very intuitive discourse could be made for the process of currency destruction – taxation – that in its distribution provides another layer of financial discrimination, since it is very unlikely to be shaped in the same way for all the private actors.
Of course also the way banking, and more precisely banking regulation is organized, provides a layer of discrimination. Just to mention few sources of that we have: the discrimination in the access to credit that different sector face, the access to the primary supply of State’s bond, or the way the evaluation of assets, liabilities and banking capital ratio are managed. There is no need to go into further details here.
The world market is then the interpenetration of all the markets of all the currency which are present in the world system under all the balance of power described above.
A country that adopts a foreign currency or a fix exchange rate to a foreign currency becomes, from both a financial and economic stand point, as an extension of the private sector of the State that creates such currency. Such country, including its State, became user of such foreign currency developing the need to provide itself with it.10
Currency price, exchange rate, policy space and the so called foreign constraint
An implication of the currency being a public monopoly is that its value in terms of other things, which will be called here its “term of exchange”, is at its source what the private sector needs to do (or to provide) to the monopolist to get the next unit of it – not to get the units that are already owned by the private sector (Mosler 1998a, Tcherneva 2016, Mosler and Silipo 2017). Just as if there was a monopolist of water the price of water at its source would be what people would need to do – or to provide- to the monopolist in order to get the next litter of water – not to get the water that they already got in the past and that they still own.
In other words, the general level of prices in a moment in time is a function of the prices that the State is about to pay to the private sector for what the latter provides to him.
Thus, in first approximation we could say that the exchange rate is a function of the ratio of the prices paid by the two States. For instance, in condition of equivalent technological development if a State pays ten unit of currency A for 1 hour of unskilled labour at average intensity applied to prevalent technique, what we can call abstract labour, and the neighbour State, with similar level of economic development, pays one unit of currency B for 1 hour of unskilled labour, with all other things been equal, the structural ratio around which the exchange rate between currency A and B would tend to gravitate is 10/1. Put differently, to buy one unit of currency B, ten units of currency will be necessary (fee excluded).
This is just the very starting point of a discourse that should take into account real competition (Shaik 2016) and real economic dynamics’ differences between country in: net desire of saving in foreign currency, different discrimination in access to currency, different economic structure and economic dependency and credit dynamics.
For what concerns the development of this work, it is necessary to introduce the most important aspect of some of those dynamics. First of all it is important to acknowledge that in a floating exchange rate system the foreign net desire to save domestic currency reflects itself as trade unbalances and doesn’t imply any debit-credit relation in foreign currency that needs to be balanced by the State. If the foreign desire to save domestic currency at current terms of exchange (including the ones of foreign States) is higher than the residents’ net desire to save in foreign currency (including the one of the local State) at current terms of exchange, this will express itself in a trade unbalances.11
On the contrary, in the context of fix exchange rate, foreign net saving desire expresses itself in terms of the shift of foreign currency net reserves and/or of interest rate (Mosler 1998).
Net saving desire has a side that expresses itself as credit demand since taking a loan implies a negative net desire to save at the individual level. On the aggregate level credit expansion is very likely to translate in a decrease of the aggregate net saving desire – it is very unlikely indeed for a credit expansion to be compensated by an increase in the net saving desire of the remaining part of the population. In case of a passive State fiscal policy those shifts in net saving desire drive the boom and bust of the economy in a way that it is somehow close to the one described by Hyman Minsky (Minsky 1992).
For what concerns the discrimination in the access of currency, it is important to note that the smaller the ratio between those who get directly the currency from the monopolist and those who don’t, the greater the space provided for an increase of currency’s value in the process of arbitrage of the currency. On top of that the greater is the level of unemployment in a country, so of the unsatisfied domestic saving desire in the State’s currency, the greater is the number of those for whom the currency terms of exchange skyrocket to infinite meaning that it simply is not accessible to them at any price.
Those fluctuations of currency term of exchange within the system of course have an impact on exchange rate, but it is important to say that they happen within a scenario settled up by the State itself. In fact it is the State that sets both discrimination in the access of currency and the fiscal policy that result in unemployment (Mosler and Silipo 2017, Tcherneva 2016, Mosler 1995). Indeed, both can always be eliminated with an employer of last resort, or job guarantee program (Mosler and Silipo2017, Mosler 1997) in the context of an active anti-cyclical fiscal policy ,sometime called functional finance. Such policy consists of State setting the term of the exchange of the currency and letting its quantity adjust to the net private saving desire, so to maximise the price stability and to maintain permanent full employment (Mosler and Silipo 2017, Mosler 1997).
On the side of real competition dynamics it is necessary to point out that the permanent presence of technological differences implies different cost structure between the productive units of the world system; and since technological know-how is in the process of permanent evolution and diffusion, the pressure for equalization that real competition brings over prices can’t lead to profit and salary equalization. Different technological cost structures imply different total vertically integrated labour time for the same production and therefore remarkably different levels of salary and profit rates also in presence of a similar price (Shaik 2016).
Therefore both national and world market will always tend to present turbulence in the currency term of exchange-foreign exchange rate.
On top of that there are monopoly power in real production and a consequent international division of labour that contribute to enlarge the asymmetry and the distribution of terms of exchange of the currency in the world system. Those monopoly powers often takes the form of economic or financial dependence which we will discuss in the second chapter.
1.5. The determination of the Market design
As we already Stated there is no such a thing as “Market” or “Market forces” a-priori to the State. Market itself is the result of a set of State’s interventions. It is therefore interesting to note that any State intervention has an impact on comparative cost or on balance of power of private agents. Therefore any market interaction is “in nature” necessarily structurally influenced by the State.
“At each point there is a labourer there is State pressure on the labourer’s income. At each point there is an “exchange” of product, there is State pressure on the “price”.
Also a minimal State will select specific infrastructural and technological option to support and to maintain its monopoly of violence and bureaucratic apparatus. This alone has an unequal impact on private agents. Moreover, the impact of the State on comparative costs emerges considering that any States intervention – or not intervention – in a very basic area like waste, basic physical infrastructure and schooling – i.e. “production of manpower” – or knowledge production, like R&D, is always going to favour some sector or firm more than other, some area more than other, some social class more than other and some individual more than other.
At this point here must be introduced how the State creates economic divergences on purpose: economic monopoly power. Out of the obvious way to build monopoly power the most important one is technology: more precisely its development, “protection” and associated “know how” cumulative process. It is not a case that intellectual property rights, patents and other restriction have been so strongly supported at international level by the core country. It is not a case either that those same countries have been imposing “free trade” everywhere they could kill any chance for the development of “infant industry” in “core sectors” in peripheral countries. There is therefore a difference between underdevelopment and non-development: the first is a condition connected with the impact of the core of the world system on the rest of it. The second is a direct expression of the autonomous historical pattern of the country.
“The axial division of labour of a capitalist world-economy divides production into core-like products and peripheral products. Core-periphery is a relational concept. What we mean by core-periphery is the degree of profitability of the production processes. Since profitability is directly related to the degree of monopolization, what we essentially mean by core-like is those that are controlled by quasi-monopolies. Peripheral processes are then those that are truly competitive.”
“ … quasi-monopolies depend on the patronage of strong States, they are largely located juridically, physically, and in term of ownership with in such States.”
This is another chain of hegemonic power that leads to another increase in the economic appropriation in favour of somebody and against the interest of somebody else operated by the system. This time in particular by means of the world market.
In the next chapter we will study in details the constraint provided by the world system on its component by focusing in particular on the technological dimension.
On hegemony, exploitation and peoples domestication
Summarising the overview just presented it could be said that unlike Marx who used to see the natural development of “force of production” leading to the formation of specific “mode of production” and from those the development of States and culture; here States are considered to be the “structure” that determines the mode of production and affects cultural development.
Also this work could therefore been presented as caring a materialistic conception of history, but with different premises than in Marx. Despite this different premises the Gramscian understanding of cultural hegemony is fully compatible with the framework that is proposed by this text. As Gramsci explained, the State and those who are benefiting from it needs to disguise their domination and to prevent dangerous clashes. That’s why Socio-economical hegemony translates itself, to a certain extent, in cultural hegemony orientating moral and intellectual direction of the masses.
“The supremacy of a social group manifests itself in two ways, as domination and as intellectual and moral direction”
(A. Gramsci, Quaderni del carcere, 1948-1951, Q. 19 § 24)
Such a need for clashes prevention is also met by allowing for “passive revolution” where in some degree the system adapts its economic development to the material need of the labour force.
Chapter 2 – STATE, ECONOMIC STRUCTURE, DEPENDENCY AND DEVELOPMENT
This chapter will provide tools to get an understanding of what the national economic structure of a country is and how it is related to the rest of the world system with dependency-hegemony connection of various forms. Such tools will be used in the next chapter for policy design approaches.
2.1 National Economic Structure
Taking inspiration from Marx’s concept of technical basis and technical composition (Marx 1867), National Economic Structure will be defined as the set of relations between instruments of labour and labour-power in a country.
This set of relations are the expression of specific underlining capabilities and they result in a specific national productive composition.
Every product, indeed, needs the presence of a set of necessary capabilities to be produced in a country. In other words, a product could be seen as a Lego construction built with a set of Lego pieces (the capabilities) that are present in a Lego basket (the country).12
So breaking down National Economic Structure into its elementary building blocks we get to a “basket” of capabilities. Those capabilities could be the result of several feature of the country’s economy: intensity of land, labour and capital, techno-scientific knowledge presence of specific institution and other.
A priory from what exactly is providing a set of specific capabilities to a country, if two goods require similar capabilities they will tend to be produced in the same countries. On the other side, if the capabilities they require have very little in common (like, perhaps, fishing and electronics) it will be less likely for them to appear together in the productive composition of a country (Hausmann 2006, 2007,2008, 2009).
The Economic Complexity Index (ECI) measures the productive capabilities of a country in function of the product it makes. More specifically such index is built taking into account the diversity of the export of a country and the ubiquity of the product it exports.
The product equivalent to the ECI is the Product Complexity Index (PCI) which considers the diversity in export of the country making the specific product and the product ubiquity (Hausmann and others 2006, 2007,2008, 2009).
Countries with high ECI are the core countries from an economic stand point (Hausmann and others 2007). Indeed a country with high ECI is way more likely to be able to make products with high PCI – over which it is likely to have some degree of monopoly power. On top of that, the higher the ECI of a country, the more the latter is likely to be able to do everything on its own, so to be less economically dependent on the rest of the world system and, as a consequence, less peripheral than a country with low ECI.
On the other hand the more a country is peripheral, the more it will be pushed to stick to simple production that leads to lower ECI. Those are the easily reproducible sectors where the competition is higher and margin, for both profits and salaries are minimal.
So, to synthesize from high ECI it could be deduced in the first approximation a lower level of economic dependency and some monopoly power of productions – arguably the two main component for economic hegemony. That is why it could be used as an indicator of core-periphery status of a country from an economic stand point.
Next section of the chapter will provide additional elements on dependency, and therefore “core-periphery” status.
2.2 Product Space and Product Ecosystem
The link between capabilities and productions can be displayed in both static and a dynamic forms.
The product space is a network built on a concept of proximity, that is connected to the amount of capabilities which two products share. More specifically, product proximity “of product i and product j is the minimum of pairwise conditional probabilities of a country exporting a good given that it exports another” (Hidalgo and others 2007, p.484). Proximity is calculated on a probability in a specific point in time – for that reason we can refer to the product space as a static description of the link between productions.
The dynamic way to display products’ capabilities commonality between a product i and products j is the product ecosystem. This theoretical tool does so by looking at the probability that “product i was already present when product j appeared”(O’Clery and others 2018).
Product with large ecosystem tends to be more complex, sharing common capabilities with more products, appearing in a country with very diversify export and, therefore, they tend to be made by few countries.
On the other hand, less complex products have smaller ecosystem, but contribute to many ecosystems of other products.
It is interesting to note that several of the products with the largest ecosystem have “primary connection”- meaning that they are very close in the product space. For instance, Machinery & specialized machinery, Lubricating oils from petrol & bitumin, Organic & inorganic compounds.13
2.3 Dependency, its component, versions and implication
Scientific inquiry is aimed at providing tool useful, or potentially so, to the development practical application to impact human life. The present work is no exception.
This implies some degree of predictability of the possible future worlds and of their relation with possible present human actions.
What makes the differences between a predictable and an unpredictable world is the presence of structures in reality constraining and shaping the set of possible futures.
That’s why to understand which are a country policies options we need to understand what its constrains are.
We will start defining and explaining what the external constrains are since, in most of cases, an understanding of those helps understanding better the internal ones. We will call the combined effect of those external constraints “dependency”:
[dependency is defined] as a situation in which the rate and direction of accumulation are externally conditioned
(Evans quoted in (Caporaso 1980) p.609)
External constraints can take different forms and have several components. Those will be organized here in economic and political external constraints. This categorization doesn’t imply those two social dimensions to be separated; the differences between the two are that the political constraint affects local society by means of local state policies.
It is always very important to underlain that dependency is a qualitative feature connected with the way the local socioeconomic system is structured, not a quantitative one. Put differently, trade unbalances are inadequate to signal the degree of dependency of a country, since unbalances of the same sign could be run by hegemonic, semi-periphery and periphery country. In fact, external constraints are first of all the constraints on development, the qualitative progress of the local socioeconomic structure, and not on growth. For instance in case of many Latin American countries between 1850 and 1930 an increase in international economic integration and increasing demand from the core several countries specialized in just one production directed to it, resulted in an increase of dependency leading to simultaneous growth and peripherization (Cardoso, Faletto 1979).
Let’s start with political dependency by underlining the role that military power and socio-cultural hegemony play in the international world system. Both of them are tools with an impact on local policy, the first one in a pretty intuitive way14, the second one in a more sneaky fashion.
Socio cultural dependency consists in having local elites and other social groups sharing interest, value, culture and understanding with the elite in dominant state. This could be the result of multiple causes like backward linkages in local economic structure, the impact of Gramscian “hegemonic culture” that extends itself to an international scale or others. What is peculiar of such dimension of dependency is that it is not directly economical and it is at the same time embodied by groups inside of the country.
“These elites are typically trained in the dominant states and share similar values and culture with the elites in dominant states.”
(Ferraro 2008: 5)
The two most relevant political external constraints are, on one side, the conscious refusal to develop the country’s economic structure because of specific class interest of the enclave economy type of elite – like in the case of Congo (Evans 1989), and on the other side the adoption of a fixed exchange rate or of a foreign currency- which is often a part of an export-led strategy. As it will be discussed at the end of the chapter such policy choice results in a form of export dependency.
Let’s now jump into the economic external constraint and more specifically into those fully expressed in trade relations. We are talking about import dependence and export dependence starting from the further.
Import dependence can be due to either a economic structure with backward linkages outside the country in core like sectors, or to the necessity of import of goods and services functional to the reproduction of the economic structures that are supplied with a degree of monopoly power. Therefore a distinction will be made between technological import dependence and energetic import dependence.
Technological import dependence it is here defined asthe reliance of a country on the rest of the world system for the provision of the necessary technology to advance in terms of ECI. The one just described is the mirror situation of an internal constraint – a low ECI – consisting in having an economic structure incapable to develop technological progress at hedge and therefore mainly pointing to catch up absorbing capabilities from the exterior and importing technological advanced capital goods. It is something with which all the industrial countries had to deal at one point. (Chang 2002, 2008, 2010, 2014)
Technological import dependence is positively correlated with: number of necessary linkages with characteristics as described above, size of the sectors15 having such links relative to GDP of the country, the distance16– in terms of product space – of the country’s economic structure from those sectors which is reliant upon.
As it has been already stated we could deduce in first approximation the degree of import dependence from the ECI of a country, but on top of that, to have a more precise picture, two other factors could be taken in to account. On one side the gap in complexity between a country export and the main net imports – weighted according to their size, and on the other hand Energy dependency in general and fossil fuel dependency17 in particular.
Energy dependency however is a specific kind of dependency that needs some specific attention and its own policy. This being said, the suggestion for the process of policy design is to first select the set of product industrial policy should target, and subsequently to design the best energetic policy possible in function of the given present and the forecasted economic structure. This would be harder for less developed countries since they are more likely to be willing to introduce more energetically intense product to get in an “industrialization process”. That’s why in case industrial policy objective goes in some degree in contrast with energetic policy objective the former would need to be revised limiting the size or the presence of the most energetic intense industrial sector. This revision process would not be the object of this work.
There can be two levels of export dependence. The first is the simple need of the foreign market to absorb the production of some specific sector18 – not production in general – that without foreign market would be prevented to reach the minimum efficient scale or that at least has a relevant gap between local productive capacity and local demand of such product. The last situation is not necessarily pernicious since export reliance could also emerge in a world with somehow balanced complementary interdependent relation between countries in a world with limited hegemony. Something like the world described by the models such as Hecksher-Ohlin and Ricardo Model.
On top of the first level described above we could have an export dependency where the local socio-economic structure is vulnerable to very severe prices shifts imposed by the world market in general, or by some specific monopolistic or monopsonistic power in it. The archetypical exemplification of this second situation is the case of any country net exporter of oil out of Saudi Arabia.
Saudi Arabia is the only oil producer that doesn’t use all its productive capacity leaving systematic excess capacity. Any other oil producers accept the prices that market provides setting at their supply limit local capacity production. On the contrary Saudi Arabia decides the price it sets – by fixing a discount from the Brent19– and adapting not the price, but the quantity. This dynamic is possible because the world without Saudi Arabia would not be able to produce the amount of oil on a daily basis sufficient to maintain current consumption of it. This puts Saudi Arabia in a position of marginal monopoly where indirectly it can fix the international price of oil, that will end up at the point where the discount set on its oil will reflect relative difference in oil quality. This power could be used from Saudi Arabia to kill competitor by temporarily shooting oil price like in recent year. The target of such policy were likely to be North American investor in new oil reservoir that went rapidly out of business20. It goes without saying that oil price can also be geopolitically a very powerful tool against both hydrocarbon net importer and net exporter – of course used in opposite direction.
In this little example we have displayed how export dependency can take different forms and how a peripheral export dependent country with monopoly power can provide not negligible economic constraint to a the core countries.
There are two very important aspects that show the nexus between this economic constraint and the political and social dimension of a country. The first consists of the fact that developing large export dependencies imply local elites, private or in the state’s bureaucracy, that have the interest of decreasing the real term of exchange of the country by decreasing, in a way or another, the ability of the country to import meanwhile increasing export. Put differently the captains of industry whose main source of income is export, and therefore they see “wages as pure costs” (Jaffee 1985), are potentially damaged by an increase of internal demand that would decrease their relative political and economic importance by changing political and economic balance of power within the country. In some extend this means that export dependence tends to call for more export dependence and against the expansion of sectors oriented to the local economy.
“Many of the policy decisions essential for the development of domestic industry, such as protective tax and tariff regulations, are contrary to the interests of the export sector, and are apt to be fiercely resisted by the elite” (Jaffee 1985).
Another pernicious effect of export dependence is that it is very likely to result sectoral disarticulation consisting in “missing, or very weak links between productive sectors” constraining the positive impact of investment in a sector on the others preventing in some extent “systemic progress” (ibidem p. 104)
The other aspect is that very often export dependence is politically built and supported with the adoption of a foreign currency, or a fixed exchange rate. This institutional set up in fact limits the state in expanding internal demand and calls for a chronic local need for foreign currency to support the exchange rate. Since this institutional set up is oriented towards a specific foreign country, it creates an direct hegemonic power of such country on the local socioeconomic system. It is the case of France with the African CFA or of USA with the dollarized Ecuador. More on that is at the end of the chapter.
Export dependency is positively correlated, once seasonal dynamics are excluded, with the relative gap between productive capacity of a sector and portion of such production internally absorbed and by an estimation of the potential variability of both prices and quantity demanded.
The last external economic constraints that will be presented here results in some extension in a combination of the previous ones, but it will be presented separately since there is something more to it than just the feature already exposed. We are talking about the dependency embedded in foreign ownership and control of local means of production (FOCMP).
FOCMPimplies foreign interest groups determining which product to produce for which targeted market by using which input coming from where in which productive process. It is a dependency grounded on ownership of means of production, therefore directly expressing a parallel between social class position and interstate position. Such situation, in case if the ownership is geographically concentrated, creates the premises for foreign state pressure on the local state.
This form of dependency is exercised first of all “through the authority channels of hierarchical bureaucratic organizations” (Evans 1976) and is therefore potentially more pervasive and direct than any other economic one.
A way to deal with FOCMP is to create dispersion of its nationality so to decrease the incentive of a foreign state to political or military action to defend “national capital abroad” and in so doing providing more policy space to the domestic State (Evans 1976) .
2.4 More on financial dependency/autonomy and their implications
All fix exchange regimes, including currency board and any anchoring to commodity fall under the case of financial dependency,21 as well as adoption of foreign currency and any currency over which both parliament and executive has not complete control.22
In this situation the fiscal policy space of the state is restricted over its ability of maintaining a reserve buffer-stock of the anchor23in order to be able to maintain the exchange rate fixed. In particular the reserve buffer-stock of the anchor is necessary for the state to be always able to sell foreign currency at the fixed exchange rate in exchange with the local currency at any body willing to buy it. This must be done in order to avoid depreciation of the local currency and the consequent loss of control over the fixed exchange rate (Mosler 1997).
This condition severely restrict the ability of the state to spend and therefore to enhance the productive resources on its territory – first and foremost labour force.
The inability of maintaining permanent full employment lead to capability losses and to the general degradation of the socio-economic environment.
Unemployment rate is indeed correlated with crime rate (Raphael and Winter‐Ebmer 2001), Suicide (Norström and Grönqvist2015), mortality rate in general (Martikainen 2000), psychiatric symptoms (Urban1997) and very likely inefficiency due to social stratification all of which are not favourable to industrial development.
In case of financial dependence the local state became de facto an economic subordinate of the state monopolist of the specific foreign currency to which the exchange rate is fixed or to the producers-owner of the anchor commodity.
Moreover, out of the case in which the anchor is a commodity, the need of foreign currency , need that is not reciprocal, brings the local state to a position similar to the one of the taxed private economic agent: the need of currency translate in the supply of real resources in exchange for it.
This supply of real resources doesn’t necessary mean direct export from a state to the other but export of local country – included domestic private sector- to who in the foreign sector has the specific anchor foreign currency.
The end result is the foreign state monopolist of the currency facing an increase in foreign net desire to save its currency; which implies imply higher level of import for any given level of export, i.e. better real terms of trade for the country and increase ability of controlling real resources for the state.
On the other hand the country who is adopting the foreign currency, or the fix exchange rate to it, became in some degree export dependent. Financial dependency is therefore a specific form of export dependency.
2.4.2 Financial Autonomy24
Financial autonomy it is here defined as the situation in which the state has full control over the currency it uses which means that is the single supplier – the monopolist- of it in regime of floating exchange rate without any debt in foreign currency.
In such situation through fiscal policy the state can always enhance the full utilization of productive resources for sale in its currency (first and for most labour) irrespectively of the country external position.
Indeed in this case it is possible to design a structural framework that sets in motion market forces promoting economic development in term of labour productivity and ECI.
The structural framework just mentioned has two complementary constituent component and at least four main systemic implications.
Two complementary components
The two component are functional finance for full employment and the Job Guarantee.
Functional finance (Lerner 1943) for full employment (Forstater 1999) is here defined as the policy in which the currency monopolist sets the terms of exchange of the currency, so to say the price, and let the quantity adjust to satisfy the currency demand25– i.e. the net saving desire of the non-governmental sector26. This means that the state uses the public deficit flexibly to maintain full employment.
Within this fiscal policy approach the Job Guarantee27 (JG) is an employment buffer-stock that provides access to generic work to anybody able and willing to work. Said differently is a permanent policy that provides an unusual access to currency at a fix term of exchange without any quantitative constrain. In so doing the JG mitigate discrimination in the access to currency28.
This mitigation is likely to affect the demographic distribution on the territory, internal migration, real estate and other goods and services prices differences between “centers and rural area” in the country’s territory.
With the JG in place currency supply is spatially less concentrated and the territory would be less of a filter for the currency flowing mainly from the big centers, for instance the capital, to the smallest one to then get to the most periphery rural areas with arguably several implication in term urban congestion, commute time inefficiencies and other.
So the big picture resulting from the two policies just presented consists in having the labour force permanently full employed and allocated in three sectors: the traditional public sector, the private sector and the Job Guarantee. The three sector don’t have the same determinant and the same dynamic.
The traditional public sector size – of course in term of employee- it is determined a-priori by the state and can’t be crowded out. The state manages the level of taxes to be high enough to always guarantee a sufficient net private saving desire so to enable the state to provide itself with that amount of labour force.
The traditional public sector size is determined in function of what the political decision is over which are the activities in which the state must intervene directly.
The private sector size is, on the other hand, determined by the combination of two variable: on one side the net saving desire of the private sector, on the other side the decision of the state over the level of taxation and the size of the traditional public sector. As we know(Minsky 1992) private sector is dynamic and tend to alternate period of euphoric economic expansion, connected with credit expansion – i.e decrease in private net saving desire, and period of bust.
A very progressive tax system can help limiting shift in size of the private sector but the later would always remain dynamic in its size.
To maintain permanent decent full employment29, there must be a marginal buffer-stock of employment absorbing this shift in size of the private sector. The job guarantee is this employment buffer-stock and exactly because of this function of buffer-stock it can be crowded out by both: private sector and traditional public sector expansion.
Being a buffer-stock also means that it could not go to zero in size otherwise it will lose its ability to set the currency term of exchange at the margin. The JG is indeed a tools for the maximization prices and exchange rate stability (Mosler 1997) (Mosler and Silipo 2017) : the monopolist setting the price of currency at the margin fixes its value in term of the labour hours which, in absence of improbable major relative value shift between labour and goods, maximize price stability and exchange rate stability. Fluctuation of exchange rate out of relative value shift between good and local currency term of exchange could be cause virtually just by a shift in the term of exchange done by the foreign state at the margin.
Four systemic implications
Moving to the 4 most relevant systemic implication for industrial development of the structural framework just explained this are the following: elimination of capability losses due to unemployment, decrease in the labour force transition viscosity, more financial space for industrial policy.
Elimination of capabilities losses due to unemployment: unemployment has two main implication in term of capability. On one side it prevent worker to develop the capabilities, on the other side it degrade the later. The maintenance of full employment, as point of logic, would eliminate the loss due to unemployment and puts the best premises to enhance the development-accumulation of new one.
Decrease in labour force viscosity: economic development imply the restriction in size of some sector in favor of some other. Indeed as consequences of an healthy competition there would necessary been some firm that would increase in size and some other that would shrink or disappear.
The combination of functional finance and JG avoid severe systemic recession preventing the unemployment level to rise but they can’t avoid the necessary shift in labour force allocation – both at firm level and at the sectorial level – intrinsic in economic development.
What they do instead is promoting a scenario in which the size reduction of an industrial sector – or firm – is compensate by the enlargement of others. Differently said a change in workplace can’t imply any involuntary unemployment period any more.
This should help minimize social cost of transition and social resistance related to it making easier for firm to react to new opportunity expanding through additional employment. An employment buffer-stock is indeed a more liquid buffer-stock then an unemployment one (Mosler 1997) (Mosler and Silipo 2017).
Competition over relative surplus value: the JG sets a minimum standard in the labour market in term of labour intensity, labour condition and hourly wage.
Is it so because in providing universal access to a job with specific set up no worker can be obligated to accept offers at any lower condition. JG is therefore a quite precise tool to set the parameter within which the force of the labour market will interact. This puts firms in competition for workers since there is no labour supply in excess over the labour demand below the JG standard. In such labour market environment a pressure for labour saving technology emerges vigorously, resulting in a decrease in social necessary labour time30 for product. Full employment does therefore provide a specific direction to capitalism development, excluding a-priori capitalist dynamic built on the contraction over worker standard of living- in other world over an increase in absolute surplus value extraction.
Chapter 3 – THE PROTOCOL
This last chapter will display the actual protocol that all previous pages were aimed to set the stage to. The protocol is made of two main stages: sector selection and sector development.
Since the product space it is not homogeneous in the distribution of product complexity and since private sector tends to pick sectors which are nearby and profitable, without taking into account systemic benefit in terms of opportunity gain,31 there is the serious risk for a country to get trapped in a local maximum in terms of complexity. For this and other reasons linked with systemic benefit of a country, for example in terms of innovation, the State should run an active industrial policy aimed to promote the progress of the economic structure.
Hausman and others (2014) proposed, based on the product space, two methods to identify productions which would be strategic to target for a given economic structure. The present work will extend one of this by adding criteria that takes into account the innovation side of economic development and introducing a policy tool kit to define the role the State should play to promote the selected sectors.
To begin with, the selection used here as a starting point, is made by normalizing opportunity gain, complexity of each product and the reciprocal of distance. Normalization produces a synthetic variable that combines the three variables with a variance of one and mean of zero. The weight provided to each variable is a policy choice. This been said it must be pointed out that, for what concerns countries with a high ECI, different weights are likely to provide the similar results. It is necessarily so because in case of high ECI there are, as a point of logic, few products with higher PCI than the country’s ECI that are not produced yet by the later. Products with PCI lower than the country’s ECI should be always excluded of course a priory from the selection.
The less the weight provided to “distance” in the normalization process, the more audacious will be the policy32 approach. It is so because more distance means more capability gap to fill up in order to be able to make a new product.
Off course the lower the ECI of a country the more it makes sense to provide a higher weight to the opportunity gain than in the case of a high ECI country, since the former has obviously way more margin for diversification than the later.
The other side of the coin is that it is more desirable for high ECI country to provide more weight to complexity than for lower ECI country.
This being said, for a country with very low ECI a separate process of policy making should take into account additional variables that help shaping the selection in order to design the policy more like the first step of a series than a one-shot long jump. In this case, indeed, variables that need to be taken into account are the number of ecosystem that a product does contribute to and the betweeness centrality: a measure of the number of shortest paths that transition through a product ().
The present work will focus instead on countries that already had an industrialization involved in the primary sector and that are interested not just in catching up but also in innovating.
Taking into account the top 50 countries in terms of normalized variable, in this work it will be suggested to make a stricter selection to distinguish sectors which have a value in terms of catching up and sectors which have a value also in terms of innovation activity. In doing so two groups of sectors with a different strategic level of importance will be defined.
From the side of innovation it should be remembered that there are specific sectors in which innovative effort is larger than others and, as it was found By Pavit (1984), those sectors are also net suppliers of innovation to the other sectors . Bogliacino and Pianta (2016) found that the Pavitt taxonomy for what concerns innovative effort and Castellacci (2008) that the net innovation supplier didn’t change much. Those are the so called “science based” plus few from the “specialized supplier sectors” and the sector “vehicle” from “scale and information intensive sectors”: the list of them at the end of this section.
Of course there is a degree of arbitrariness in where to set exactly the demarcation boundary of innovative- not innovative sector. Possibly future finding would partially shift to some degree sectors placement in terms of innovation, but it is pretty unlikely that this will happen very fast and in a radical fashion.
It should be pointed out that the product space hasn’t taken yet into account the services sector, a separated specific industrial policy oriented towards such sector should be defined. Once the product space will completely integrate the service sector, first and for most information technology, the protocol here described would integrate also the services sector.
Industrial policy can go beyond the simple promotion of economic progress, it can also provide, to some extent, direction to it: a concrete objective. It has been the case any time the State targeted an ambitious very concrete objective from a productive stand point: the nuclear bomb, the race to the space, the race to the moon, the development of an alternative communication system (which led to internet) (Mazzuccato 2016, 2018).
Given a audacious productive mission of this kind a set of product would appear necessary in order to reach the goal. We will define as Major Strategic those sectors that lie at the same time within the innovator sectors groups and within the top sectors selected in function of the product space and those functional to the mission.
The remaining sectors selected with the normalized variable that are not Major Strategic will have to pass two additional criteria in order to be picked up and when this happen will be defined “normal strategic”. First of all they will need to have non negative average growth rate at – the world trade level- for the last 5 years. It is indeed both, harder and less desirable to develop a product of which market is contracting. Second, the sectors will need to be already net imported by the country, so to be sure to have at list a minimum of internal market to begin with. This second criteria limits at the same time current import dependency and the possible emergence of export dependency.
Manufacture of radio, television and communication equipment and apparatus.
Computer and related activities
Research and development
manufacture of electrical machinery and apparatus n.e.c.
Manufacture of other transport equipment
Scale and information intensive
Mineral oil refining, coke and nuclear fuel
3.2. Sector development
The paradigm built on the product space is very useful for selection of production to target, but it doesn’t provide any tools for the State to follow in order to actually promote those sectors.
One of the objective of this work is exactly to extend the model also in this sense. To do so the contributions from two main authors will be combined: Peter Evans and Marianna Mazzuccato.
To begin with, it is necessary to look specifically at the current State’s capabilities. In other words, what the State is already actively doing. Indeed sectoral features, as shortly will be explained, help to understand which role will likely work, but it is the State capability and the rate at which it is possible to improve it, that determines if and how the role can be played.
If the capabilities needed to play its roles which are not already spread in the State, and if they are unlikely to become the features of the entire structure any time soon, it is perhaps possible to create some pocket of efficiency that can play the role needed for the industrial development. On top of that the effort to create a favourable environment for the development of specific sector could be geographically concentrated, at list initially, to few greenhouse area. A historical example of such situation has been recorded in Brazil from the late 50’s (Evans 1976). Of course there is plenty of situations in which the State has a very poor capabilities for historical reason (often connected to a colonial past), but if a country has already been able to go through an industrialization process it has necessarily already developed some experience with various roles.
The prototype of State efficiency from an industrial policy stand point is MITI, one of the key factors behind the Japanese industrial progress from WWII. By summarizing some MITI features it is possible to understand what are the ones needed to implement with great success an industrial policy. To begin with, MITI was an extremely selective and meritocratic institution that attracted the best students of the country and in which just a very small percentage of candidate was actually able to get the job. Salary were competitive with those of the private positions requiring the same level of skills, careers were not determined by political connection and coherent in their development, so to favour capabilities flourishment. In particular position were maintained for a time long enough for people to absorb and develop knowledge connected to it and just after-words they were relocated in another position where the acquired knowledge would be more useful and where other skills could be developed. Moreover, there were rewards for long term pursuit of collective project and the stuff was organized in little bureaucratic rings: small set of individual bureaucrats linked to a small set of individual firms. On top of that there were very dense internal and external informal networks with a healthy character due to the strict entry selection
MITI itself was not directly dependent upon specific political parties or personality and this protected it from being hurt by political tension or shifts in the government. Otherwise MITI was able to define its own goals and strategy efficiently, and in predictable time, thanks to its dense trans-sectoral tie with the private sector in this combination of corporate coherence and connectivity that Peter Evans calls “embedded autonomy” (Evans 1995).
This “embedded autonomy” and its recognized economic leadership was what allowed it to reach solution that it would have been hard for private sector to reach on its own and that contributed to create the joint transformation project between the State and some social groups from which Japan’s success resulted.
All those conditions above contributed to build a very high prestige, a sense of belonging, commitment environment not adverse to risk that could rely on decentralized private implementation of its policies.
In the process of evaluating the current capabilities of a State it is mandatory to have a look at public firm characteristics in terms of products, size, structure and tie with the rest of the economy as well the current capabilities of the public administration in terms of ministries, statistical bureau.
It should be cheeked to which degree the State can have control over which inputs, for instance energy or natural resources, and which product it directly buys from the local economic structure and from the rest of the world system. This being said, as it will be shortly showed, many important roles which the State can play doesn’t necessarily need to involve the State as a producer.
The direct production by the State is called “Demurage” and it is an obliged choice just under the strong assumption of inadequacy of the local private sector. This role is more likely to be the most suited one the higher entry barriers, for example gigantic fixed cost, technology is not held by few big foreign firm, so it is relatively accessible, and it is pretty stable in time. The archetypical sector that follow such characteristic is iron which in fact has been successfully produced directly by the State also in situation of economic structure backwardness. Just to name few case USSR from the 30’s, South-Corea from the 1968 to 1997 with POSCO and India and Brazil in 50’s and 60’s (Evans 1995).
Other two roles that the State can play are midwifery and husbandry. The former consists in helping new entrepreneur entering in to a sector, the latter in cultivating, nurturing and prodding the already present entrepreneurial forces. Some policies can be part of both roles other are more specific to just one of the two.
One of the policy common to both roles is the structuration of technological competition. This can be done by protecting local producer from foreign competitors – with tariffs and quotas- , limiting number of model of a specific product which is allowed to supply, introducing fiscal subsidies subordinate to production expansion and technical opportunity utilization, designing greenhouse zone in competition between each other, playing the role of demiurge for complementary riskier task, signalling State support for access to credit or others. In any of those cases State, out of the demiurge, is not required for the State to be involved in term of micromanagement.
A market shaping policy that fall exclusively under the husbandry role is the limitation of number competing firm. The reason for such a policy could be the presence in the specific sector of scale economy that could not be exploited under a certain market share given the size of the internal market.
Moving to midwifery, this role is mainly about reducing private risk. To do so the State can assure stable and favourable condition in term of both input supply and output absorption. Indeed specific policy for the supply of raw material, energy and other commodity, skilled worker, R&D can be managed by the State and on the other side in some case the State can assure a minimum market size by absorbing directly part of the production. This policies, possibly accompanied with ad-hoc deal to access the internal market, can be used to push transnational corporation to have joint venture with local capital, the State itself or both at the same time. This has proven to be a useful way to transfer technological knowhow to the local economic structure. Technological knowhow is indeed often tacit and it is not fully acquirable just by buying capital goods, patent or reverse engineering. In case of direct State’s involvement it is important that for any risk undertaken by the State there should be a reward for the State itself. In case of joint venture it should be a share in ownership and management, in the other cases it could be a financial return with a return generate mechanism (Mazzuccato 2016, 2018)33.
Of course the case of joint venture with a transnational firm – or of strategic acquisition of one of those by the State – could also be used as husbandry policy.
There is a last role that can be played by the State called custodian. This is mainly a regulatory role that can be played at various degree and is likely to work specially in sector when there are pretty low barrier to entry. It is in fact the role played by a minimalist State though it can go way above it.
As it will be clear shortly the role of custodian can be a component of midwifery or husbandry role but there could be something more to it. For instance falls under the role of custodian activity aimed at restricting the size nature of foreign direct investment to limit foreign ownership of means of production just to case in which it is justified by an appropriate technological transfer; are classified as custodian also all the action preventing private capital in engaging in undesirable or inappropriate activity likely the ones connected to a risk of Dutch disease, natural monopoly, or activity implying undesirable import or export dependency.
The previous taxonomy on the role of the State has been introduced by Peter Evans (1995) but Evans failed to recognize an additional role that will be here called the polar star.
As pointed out by Mazzuccato ( 2016, 2018) State has the power of setting the direction of change not limiting itself to sectors selection by defining a concrete direction: a concrete goals, that can be called mission, involving a series of sector, translatable in concrete problem decomposable in specific task. A technically audacious and clear goal enabling long term investment leading to result measurable their success in a planned time frame.
The atlas of economic complexity provide the top 50 product based on the normalized variable. Changing the weight of complexity, opportunity gain and distance from a percentage from 15/25/60 respectively to a 20/35/45 sectors selection remain unchanged for reason already explained previously connected with the hig ECI of the country. The list of top 50 could be find at the web site of the atlas of economic complexity34.
The mission that the State define is the reduction the reduction of both energetic import dependency and dependency over fossil fuel. This mission can be translated on to a reduction of gdp energetic intensity, a reduction in average import energetic intensity and an increase in the country production capacity of renewable energy. From those specific target specific projects can be derived such the construction of a Tokamak nuclear reactor for civic energy supply and the further development of small hydroelectric power station in other to make it optimal for the exploitation also of canals and rivers. The implication of the first sub project could be an increased participation in the ITER megaproject: the international effort for the construction of an experimental Tokamak nuclear fusion reactor which is aimed in becoming the base for future fusion nuclear reactor for civil energy supply.35
The sectors of the top 50 list which need to be involved such a mission and are included in the list of the innovative sectors ,will be defined as Major Strategic. Those Major Strategic have been identified with the support of Ing. Daniele Busi, graduate student at Politecnico di Milano currently doing a dissertation at the Istituto of Fisica del Plasma of Milan which is part of the CNR (Consiglio Nazionale della Ricerca).
The Major Strategic sectors are the following: chemical elements for electronics, microscope, instrument for physical and chemical analysis, lubricants, electromagnets, balance with sensitivity < 50 milligram. It should pointed out that electromagnets are a core components in any system that use motion to produce electricity, so not just the nuclear fusion, and that anywhere you have electromagnets used for energy creation you need to have the best lubricant for rotor and stator to work as efficiently as possible. It must be pointed out also that lubricant are the product that in the top 50 has the highest number of primary connection – a formal way to say that has many capabilities in common – with other top 50 product including a Major Strategic one: instrument for physical and chemical analysis.
The remaining sectors in the top 50 list that are at the same time net imported and have shown a non-negative global growth in the last 5 years are the following: other salts of acid; inorganic compound, liquid or compressed air; glass, cast or rolled, apparatus and equipment for photographic laboratories, n.e.c, cermets, microscopes, other than optical, halides of non-metal, flat rolled products of other alloy steel width> 600mm, hydroxides or proxides of magnesium; laboratory , hygienic or pharmaceutical glass ware, silicone in primary forms; hybrides, nitrides, azides, silicides and brobides, flat rolled product of < 600mm; acrylic polymers.
Policies directed to the promotion of the development of the sector above are in the case of Italy heavily restricted by the Italian financial dependency connected with the euro-zone structure and the EU neoliberal DNA. No permanent full employment can be maintain with such restriction and the first move in term to promote the development of the economic structure should probably be to change those restriction either staying in the euro-zone and in the EU, which at this point seems pretty unlikely since no step has been ever made in this direction, or to regain financial autonomy. This can bee done since the monopoly of violence on the Italian territory, and therefore taxation, is controlled by the Italian government. A plan to do so has been presented at the University of Bergamo on April the 29 201536.
For what concerns an actual implementation a combination of the role previously presented should be done in function of criteria exposed. It should be noted that Italian State of technological advanced and important firms and institution in science based, specialized supplier and scale and information intensive sectors which present a very favourable starting point for the design of an industrial policy. The most relevant are ENEL, ENI, LEONARDO FINMECCANICA, TERNA Ansaldo Energia, ENEA and CNR. On top of that there are already some very small but advanced private firm like for instance the ASG superconductor that is currently building the magnets for the ITER.
Technological evolution of the economic structure of a country is an historical phenomena that impact and is influenced by political, economic and social structures that are internal and external to the country. An understanding of those is needed to fully grasp the policy space of a state for both industrial policy design and implementation. Strictly on the economic structure side the fact that the product space is dis-homogeneous make it very desirable for the State to maintain a systemic overview of the economic structure in order to avoid, on one side, “capabilities trap” and, on the other side, promoting the continuous development of capabilities needed for increasingly complex and profitable productions.
The present work did suggest a protocol in order to select and develop sector in function of what above. An example of selection has been made for Italy and some preliminary fundamental consideration has been provided for and industrial policy design. Possible future extension of this work could include kit tools to precisely read the microeconomic structure of the private part of the economic structure and of the desired targeted sectors. More precisely the cost structure, and the degree of technological stability and tightness to transnational firm. Such microeconomic understanding is indeed necessary to complete both policy design and policy implementation. This being said the understanding just mentioned could be reach with different tools and should probably be periodically redefined.
Indeed the microeconomic side of the industrial policy is something that in some extend more related with a managerial dimension to which this work want to emphasize the nexus with the big picture; without though claiming the possibility of a comparable degree of scientific generalization and codability between the macro and the micro. This work could therefore represent the nucleus of a more extensive transdisciplinary effort involving humanity to a larger extent in its “micro side”.
Another dimension that should be developed is the geographical internal one, the regional one, since country are not internally homogeneous in their economic structure, Italy is no exception, and industrial policy should take in to account also this side to the story introducing in to the policy framework the variable “space” and taking in to account also a product space at regional level – which is currently not yet available.
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1 See Collier (1994) for a qualification.
2 In particular the reductionist hypothesis rejected it the present work is the idea that the whole reality is the simple sum of its parts and that the property of the whole is the simple addition of each one of its components; property without any emergent property-agency-function.
3 Ofcourse the sub-system can present very variegated features.
4 With the exception of Antarctica which any way has not native and permanently resident reproducing community.
5 Credit doesn’t change the net position of a subject; it just allows the one to decrease its net position by increasing its liabilities instead of decreasing its assets. Spending has always the will of a unit to decrease its net position as a precondition, and a transaction is always about the movement of net financial assets between units.
6 Defined as net financial assets, amount of assets exceeding liabilities in a specific unit of account for a specific accounting unit in this case using the private sector as a whole as accounting unit.
7 With Arbitrage here it is meant the purchase and successive sale of currency in exchange for real goods or services. In the framework presented in this work – in the presence of the discrimination in the access of currency – the arbitrage benefits the one part that in the exchange is closer to the monopolist. The distance from the monopolist is the number of passages the currency needs to do, starting from the monopolist, to get to a specific economic agent.
8Net financial assets for the non-governmental sector can be supplied just be the State that created such currency. That State is therefore the single supplier of the specific currency. i.e. its monopolist.
9 Defined as net financial assets in a specific unit of account. Something that banks can’t create but just help to move by providing credit. Indeed receiving a loan is not the same as receiving a payment: the first increases your net position the second doesn’t. Purchase, which implies the action of supplying someone with net financial assets, need as precondition the existence of a subject that is willing to decrease its net financial position. Net position defined as assets over liabilities, that, again, banks doesn’t increase by creating a loan.
10 The Euro is a case of floating exchange rate where the monopolist is the consolidation of all member State treasury and the ESCB.
11 To have a net saving desire means to be willing to sell more than what we are willing to buy.
12 For what concerns products that are parts of an international value chain (that therefore do just some production phase in a country), the capabilities incorporated in the product should be diminished by those incorporated in the import required to produce it.
13 Several of the products that those categories include have primary connection. Although the taxonomy used in (Neave O’Clery and others 2018) is not exactly the same of the one used in the product space – the one in the product space is way more precise in defining products – the primary connection between several type of machinery, compound and lubricant is clear.
14 Resulting for example in what a military alliance, or the treat of a war, could imply: we could think of the policy constraint that lies upon North Korea because of potential US military action or in what Italy has been pushed to participate because of its NATO membership.
15Sector defined by Anwar Shaik does as vertically integrated productive system producing a product. Since we know that productive processes are often international, when we are talking about a country, we define it as the portion of vertically integrated productive system present in the country’s economic structure.
16As defined by the “Atlas of Economic Complexity”: “ a measure of a location’s ability to enter a specific product. A product distance from (0 to 1) looks to capture the extent of a location’s existing capabilities to make the product as measured by how closely related a product is to its current exports.
17 Fossil fuel dependency is calculated also in case of export dependency. It has been introduced here since there are more countries that are net importer of fossil fuel than countries that are net exporter of it.
18 The line of reasoning here exposed has nothing to do with a generic “aggregate demand” and generic trade unbalances like it is the case in the seminal work of (Thirlwall 1979) on the so call“balance of payments constrains” which doesn’t understand currency as a monopoly, doesn’t make any differences between a fix exchange rate regimes and therefore has a pretty gross way to explain exchange rate dynamics.
19 The Oil of the highest quality extracted in the Scottish North sea.
21 For example gold and/or silver.
22 By complete control it is meant having no nominal limit for the state budget.
23 The thing to which the exchange rate is fixed.
24 Also called sometime “monetary sovereignty”.
25 Currency demand-supply in MMT is about the net financial assets and it is therefore different from the usual ones that refers to gross assets. Net financial assets in the private sector – resident and not resident- are equal to the public debt, plus the supply of domestic currency that the central bank used to buy foreign currency or real assets or the amount of over price it payed for financial assets. On top of that it should be added also non collateralised permanent overdraft in its account in favor of anybody in the non governmental sector. For most of the country public debt is a very good proxy to what for mmt “supply of currency” is.
26 Non governmental sector is the complex of all the economic actor out of the treasury and the central bank of a specific currency.
27 Some time also called “employer of last resort” (ELR) – also if not alwais with references to the concept of currency as public monopoly has it is done here and in MMT in general – or “labor buffer stock policy”.
28 There could always be discrimination because of gap in term of exchange with in the non JG spending of the state. In other terms is always possible that the state in the non jg spending pays with different prices the same things from two different suppliers.
29 Here defined as 0% of involuntary unemployment rate for jobs with a salary below the absolute poverty threshold.
30 We could refer also to an increase in productivity or decrease in vertical integrated labour time for product.
31 Opportunity Outlook Gain “Measures how much a location could benefit in opening future diversification opportunities by developing a particular product. Opportunity outlook gain quantifies how a new product can open up links to more, and more complex, products.” ( http://atlas.cid.harvard.edu)
32 For obvious reason we refuse the trade-off proposed on this point by Hausman between unemployment and distance. Full employment can always be maintained in a financially autonomous country.
33 Something like the Yozma in Israel, the In-Q-tel in the US or the SITRA in Finland.
35 Tokamak nuclear fusion reactor has a virtually infinite source of fuel (Tritium and Deuterium) and doesn’t produce long term high radioactive waste.
Illustration : leparisien.fr