Class 3 of 2019 Relation between Technology and Economy (with an review of Acemoglu/Robinson) Prof. Paulo Feldmann

Inclusive Institutions Allow and encourage participation Incentive for private property Good system of law Easy to entry of new business Allow people to choose their careers Focus on technology and education to bring prosperity

Extractive Institutions Institutions of a country are designed to extract incomes and wealth from one subset of society to benefit a diferent subset.

Acemoglu & Robinson Given the fear that the elites that dominate the extractive institutions have of the creative destruction, they will resist, and any growth that eventually comes under extractive institutions is bound to be short-lived.

Acemoglu & Robinson Growth under extractive institutions will not be sustained for 2 reasons: 1. To be sustained economic growth requires innovation. 2. Innovation can not be dissociated from creative destruction, which not only replaces the old with the new in the economic sphere but also destabilizes the established relations of power in the political sphere. 3. There is no entrepreneur's wild spirit

Summary Political- and Economic Institutions make the difference Economic Institutions form incentives for individuals and are thus a crucial factor for prosperity Political Institutions form Economic Institutions and determine how the public can control their rulers Differences in Institutions are deeply rooted in the past and tend to persist

Inclusive X Extractive Based on democracy. All the population has representation Those with political power are supposed to win elections peacefully and legitimately The power is in the hands of a narrow elite High intervention of the government/elite

South Korea VS North Korea Institutions encouraged private property and markets, investment and economic growth. Investment in education : advantage for new industries. North : Private property and markets were banned, a centrally planned economy instigated. No investment

City of Nogales City divided in two parts, that share: Same ancestors Music, Food, „Culture“ …but differ extremely in: Life Expectancy Wealth Education Security

Comparing Bill Gates and Carlos Slim Department of Justice controlling abuse of monopoly power of Microsoft Competition in own country pushes Microsoft to be competitive even on a global scale Innovation as a main reason for success Institutions that don´t estimulate competition Reliant on political connections High entry barriers in Mexican market Lucrative contracts and licenses reason for success

…Meanwhile in Mexico Dominated by elites that kept their power Lacking control mechanisms of democracies,the population cannot effictively fight corruption Instead globalization and trade gave elites in Middle- and South America more opportunities to enhance their riches while forcing people to work for them by selling cash crops on the world market

When is possible to have growth under extractive institutions ? It is possible to growth when elites can directly allocate resources to high productivity activities . Exemple : South Korea during the 70’s .

Technology Innovation Productivity

Two forms to calculate productivity of a country GDP per worker TFP

How do we calculate a country's productivity using GDP per worker? Imagine a country with 100 inhabitants (let's call N) of whom 80 are workers (let's call L). That is 20 are small or old that do not work and only consume. This country produces 800 units of a product (let's call Y).

The difference between Productivity and GDP per capita The average productivity per worker in the period is therefore: Y/L = 800/80 = 10 units of GDP The GDP per capita is : Y/N = (Y/L) X ( L/N) = 10 X 0,8 = 8 units of GDP

What does productivity depend on? It grows as the stock of capital (TECHNOLOGY) at the disposal of each worker (let's call K) increases. It grows as society's innovation output increases.

How is it possible to increase the GDP growth rate? Increase in labor productivity + increase in the participation of the active labor force in the population. If the population is aging then the only possibility that remains is to increase productivity

When we should not measure productivity considering only workers ? In many different situations where the costs of people are a small percentage of the total costs we have to take into account the other factors needed to get GDP.

Latin America X Asian Tigers

TFP- Total Factor Productivity Defined as the efficiency with which firms (or countries) turn inputs into outputs

Total-factor productivity (TFP) A variable which accounts for effects in total output growth relative to the growth in traditionally measured inputs of labor and capital. TFP is calculated by dividing output by the weighted average of labor and capital input, with the standard weighting of 0.7 for labor and 0.3 for capital.

Increases in TFP A measure to get the gains in efficiency with which the economy transforms its accumulated factors of production into output. TFP grew of 1 % means that 1 % more output was obtained from the same productive resources.

To measure TFP (or aggregated productivity) We look at GDP that is produced on the basis of the inputs which are labor and capital. For any given stock of capital and labor , the higher the output , the more productive the economy. We use production functions and what is not accounted for by factors of production as estimated by the production function is attributed to productivity

TFP is a residue It reflects everything that affects the differences in income between countries, but that is not accounted for neither in physical nor in human capital measures. As human capital is generally measured taking into account only average years of study, differences in educational quality end up being reflected in TFP differences across countries.

Annualized Growth Rates of TFP in USA

What had happened in each period ? 1920-70 – Impact of electricity and combustion motor 1970- 94 – Few impacting inventions 1994- 04 – IT revolution was not so impacting 2004-14 – Very low innovation impact

Gordon’s projection for the growth of GDP per capita in USA

How to join the club of developed countries? Setting up an infrastructure that will make life easier for companies and stimulate modernization and innovation. Fiscal policy that will stimulate companies to invest in R&D High level education. Internationalization mostly of the manufacturing industry