Economic Growth and Structural Change: A Possible Explanation of the Long Wave

NOT FOR QUOTATION WITHOUT THE PERMISSION OF THE AUTHOR

ECONOMIC GROWTH AND STRUlXUPLAL CHANGE:

A POSSIBLE EXPLANATION OF THE LONG WAVE

C. W.A.M. v a n P a r i d o n

September 1 9 8 5 WP-85-58

Working Papers are interim r e p o r t s on work of t h e I n t e r n a t i o n a l Institute f o r Applied Systems Analysis a n d h a v e r e c e i v e d only limited review. Views o r opinions e x p r e s s e d h e r e i n d o n o t n e c e s s a r i l y r e p r e s e n t t h o s e of t h e Institute o r of i t s National Member

~iOfiS.

Organiza' ^'

IKTERNATICNAL INSTITGTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg, Austria

FOREWORD

Many o f t o d a y ' s most s i g n i f i c a n t s o c i o e c o n o m i c p r o b l e m s , s u c h a s s l o w e r economic g r o w t h , t h e d e c l i n e o f some e s t a b l i s h e d i n d u s t r i e s , a n d s h i f t s i n p a t t e r n s o f f o r e i g n t r a d e , a r e i n t e r - o r t r a n s n a t i o n a l i n n a t u r e . I n t e r c o u n t r y c o m p a r a t i v e a n a l y s e s o f r e c e n t h i s t o r i c a l d e v e l o p m e n t s a r e n e c e s s a r y when w e a t t e m p t t o i d e n t i f y t h e u n d e r l y i n g p r o c e s s e s o f e c o n o m i c s t r u c t u r a l c h a n g e a n d f o r m u l a t e u s e f u l h y p o t h e s e s c o n c e r n i n g f u t u r e de- v e l o p m e n t s . The u n d e r s t a n d i n g o f t h e s e p r o c e s s e s a n d f u t u r e p r o s p e c t s p r o v i d e s t h e f o c u s f o r IIASA's p r o j e c t on C o m p a r a t i v e A n a l y s i s o f Economic S t r u c t u r e and Growth.

To u n d e r s t a n d t h e s e economic p r o c e s s e s c o m p l e t e l y however, a n i d e n t i f i c a t i o n o f t h e r o l e p l a y e d by dynamic p r o c e s s e s o f l o n g d u r a t i o n i s a l s o n e e d e d . I n many economic i s s u e s i t i s i m p e r a t i v e t o a s c e r t a i n t h e p a r t s p l a y e d by s t r u c t u r a l a n d c y c l i c a l c a u s e s . Such e v e n t s a r e s t u d i e d i n s o - c a l l e d l o n g - waves t h e o r i e s which f o r a l m o s t a c e n t u r y h a v e f a s c i n a t e d n o t o n l y e c o n o m i s t s . To d a t e t h e r e a r e s e v e r a l long-waves t h e o r i e s t h a t t r y t o e x p l a i n t h e s e c a u s e s w i t h v a r y i n g d e g r e e s o f s u c c e s s . However, t h e s p e c t r u m o f v i e w s on t h e long-wave phenomenon i s v e r y w i d e , i n c l u d i n g t h o s e who q u e s t i o n t h e i r e x i s t e n c e a l l - t o g e t h e r . N e v e r t h e l e s s , t h e c o n s e n s u s seems t o b e t h a t t h e long-wave phenomenon may h e l p i n u n d e r s t a n d i n g complex e c o n o m i c p r o c e s s e s .

T h i s s t u d y by

C.W.A.M.

v a n P a r i d o n i s a n i l l u s t r a t i o n o f t h e numerous a n d v a r i o u s i n t r 2 c a t e p r o c e s s e s o n e h a s t o con- s i d e r when t r y i n g t o e x p l a i n long-wave b e h a v 2 o r . T h i s work was i n p a r t p r e p a r e d d u r i n g t h e a u t h o r ' s s t a y a t IIASA a s a w i n n e r o f t h e P e c c e i F e l l o w s h i p Award a n d d r a w s o n h i s p r e v i o u s work on s t r u c t u r a l c h a n g e and f o r e i g n t r a d e .

A n a t o l i S m y s h l y a e v T i b o r Vasko

P r o j e c t L e a d e r L e a d e r

C o m p a r a t i v e A n a l y s i s o f C l e a r n i n g h o u s e A c t i v i t i e s

Economic S t r u c t u r e a n d Growth

EZONOMIC GROWTH

AND

SLXUCTURAL CHANGE:

A POSSIBLE EXPLANATION OF

T m

LONG

WAVE

C. W.A.M. van P a t i d o n

1. INTRODUCTION

1984 became a y e a r in which important questions were posed, and not only be- cause of t h e Orwellian context. In economics heavy discussion arose

as to

whether 1984 w a s t h e f i r s t y e a r of a new, long wave upswing o r just a n o t h e r y e a r in t h e more prosperous phase of t h e normal business cycle in a still continuing, long wave downward movement. The problem w a s c l e a r l y e x p r e s s e d in t h e opening s e n t e n c e of t h e Economic Outlook of t h e OECD (July 1984): 'With t h e OECD economy, and mosr, economies individually, now well into r e c o v e r y , c r u c i a l questions are how s t r o n g , and how d u r a b l e , t h e r e c o v e r y will p r o v e t o be" (OECD, 1984, p. 15). How p r e g n a n t t h e s e questions were became clear when t h e OECD p r o j e c t i o n s f o r t h e n e x t y e a r were taken into account. Real

GNP

f o r t h e OECD area rose from 2.4% in 1983

to

4.5% in 1984, but f o r 1985 a slowdown w a s e x p e c t e d

to

2.7%. Two o t h e r im- p o r t a n t variables, t h e

rate

of inflation and t h e unemployment r a t e , showed only

a

v e r y slight improvement in t h i s projection.

I t cannot b e said t h a t economic s c i e n t i s t s and economic policymakers have t r e a t e d t h e c u r r e n t economic depression in t h e

m o s t

optimal way. Too o f t e n , a r a t h e r short-term view h a s been held and short-term solutions proposed, while i t became more and more clear t h a t long-term developments had

to

b e analyzed, and a l s o t h a t only in t h e longer t e r m could a r e a l improvement of t h e economic situa- tion b e expected. The question a r i s e s : "Why w a s t h e r e t h i s short-sightedness?"

Two r e a s o n s can b e given. On t h e one hand, political decision-making h a s been n e a r l y always d i r e c t e d at short-term r e s u l t s because of e l e c t o r a l motives. Politi- cians want

to

see immediate r e s u l t s of t h e i r policy proposals and are less demand- ing f o r longer term improvements. This short-term a t t i t u d e in t h e economic area w a s especially strengthened in t h e post World War I1 period, b e c a u s e of t h e intro- duction of mostly Keynesian inspired models, v e r y usable f o r short-term f o r e c a s t s . And since

most

of t h e time t h e s e f o r e c a s t s have been confirmed by r e a l i t y , i t i s not s o s t r a n g e t h a t t h i s a t t i t u d e prevailed.

However, and t h i s i s t h e o t h e r s i d e of t h e s t o r y , economists h a v e not given sufficient warning of t h e possible d a n g e r or, even worse, they h a v e not themselves realized well-enough t h e possibility t h a t at some moment t h e s e models would fail.

Each model w a s constructed on t h e assumption t h a t t h e basic, underlying s t r u c t u r e of a n economy would not change in t h e s h o r t term. By t h e basic, underlying s t r u c - t u r e I mean:

(1) The s t r u c t u r e of consumption and production.

(2) A constancy in t h e behavior of a l l t h e r e l e v a n t actors in t h e economic p r o c e s s

-

consumers, p r o d u c e r s , investors

-

on t h e v a r i o u s markets.

A s long as t h i s basic economic s t r u c t u r e did not change, t h e models p r e d i c t e d v e r y well. However, in t h e longer

t e r m ,

(1) gradually changed a n d , as soon as t h e stag- nation s t a r t e d , (2) changed drastically. Immediately, t h e models were no longer

able t o trace t h e economic developments in a reasonable way.

The neglect of t h i s change in t h e basic s t r u c t u r e of t h e economy a l s o oc- c u r r e d with r e g a r d t o t h e t h e o r y of economic growth, a n o t h e r main b r a n c h of r e s e a r c h in t h e 1960s t h a t was d i r e c t e d

at

a n explanation of long-term develop- ments. The mistake n o t

to

account f o r changes in t h e b a s i c s t r u c t u r e of t h e econo- my

w a s

a major determinant in t h e t h e o r y ' s failure at t h e end of t h e 1970s.

Although economic s c i e n c e h a s lost much of i t s s t a t u s in r e c e n t y e a r s , i t must b e said in f a v o r of i t t h a t some changes did occur in i t s r e s e a r c h program as soon as i t became clear t h a t t h e old a p p r o a c h e s failed

to

fully a c c o u n t f o r t h e changed circumstances. One of t h e most promising new a p p r o a c h e s h a s been t h a t of long wave r e s e a r c h .

Since 1975, renewed attention has been paid to t h a t old, n e a r l y f o r g o t t e n , and sometimes ridiculed a s p e c t of economic science. Culminating in Schumpeter's Business Cycles, r e s e a r c h on long waves had been v e r y important in t h e 1930s.

Van Gelderen, d e Wolff, Kondratieff, and Schumpeter, among o t h e r s , had t r i e d to prove t h e e x i s t e n c e of s u c h a long wave and

to

d e s c r i b e a possible t h e o r e t i c a l ex- planation of it. A f t e r World War 11, long wave t h e o r y w a s d r o p p e d from sight. The f i r s t signs, however, of a new economic c r i s i s revived i n t e r e s t . Since then,

a

re- markable growth h a s a p p e a r e d in this a r e a ; witness t h e s t i l l increasing

stream

of publications and c o n f e r e n c e s on t h i s subject.' Without a n y doubt, r e s e a r c h h a s deepened o u r insights i n t o t h e causes of t h e p r e s e n t economic depression and, more generally, i n t o t h e longer term development of industrialized economies. But i t is also clear t h a t a t h e o r y with t h e definitive answer i s s t i l l lacking. In t h i s working p a p e r I p r o p o s e some, in my view, indispensable, materials f o r s u c h a theory.

P a r t l y based o n some of my e a r l i e r publications, published in ~ u t c h , ' and p a r t l y based o n ongoing r e s e a r c h f o r my d o c t o r a l thesis. I p r e s e n t h e r e

a

possible explanation of t h e phenomenon of t h e long wave. In t h i s outline developments in and between (a) economic growth, (b) transformation of t h e economic s t r u c t u r e , and (c) international economic relationships, a r e important elements.

To make my position in t h e a r e a of long waves

a

b i t more clear, I

start

with a brief s u r v e y on r e c e n t developments in long wave r e s e a r c h . T h e r e a f t e r , I d e s c r i b e my view of long wave economic development. Finally, I r e t u r n to t h e problems r a i s e d in t h e Introduction as to t h e position t h e industrialized c o u n t r i e s find themselves with r e g a r d t o t h e long wave a t this moment. On t h e basis of t h e p r e s e n t e d outline, I try to give some preliminary answers. In t h i s r e s p e c t , I a l s o broaden t h e discussion by presenting some thoughts on t h e economic and social consequences of some possible choices with r e g a r d t o a ( d e s i r e d ) f u t u r e economic development.

2. Research on Long Waves:

An

Overview

Normally, to p r e s e n t

a

s u r v e y of a p a r t i c u l a r r e s e a r c h a r e a i s one of t h e more difficult t a s k s . All t h e d i f f e r e n t opinions have to b e t a k e n into account and valued. Even more difficult i s

to

survey a n a r e a in which t h e opinions

are

not y e t fully crystallized and in which new opinions ing. However, f o r t h e case of long wave r e s e a r c h , s e v e r a l a u t h o r s have r e c e n t l y are still a p p e a r i n g

at t 5

e time of writ- compieted t h i s t a s k in

a

way t h a t i s difficult t o improve upon. I h a v e decided

to

u s e one of t h e s e s u r e y s , namely t h e most r e c e n t by Delbeke (1984), as a framework f o r t h i s section.' Delbeke classifies long wave r e s e a r c h in t h r e e d i f f e r e n t ways;

f i r s t , on t h e basis of a n inductive or a deductive a p p r o a c h ; second, on t h e basis of t h e main e x p l a n a t o r y determinant; and, t h i r d , on t h e methodology chosen.

A s in t h e normal p r o c e s s of s c i e n c e , f i r s t t h e more inductive p h a s e had t o oc-

cur.

R e s e a r c h in t h i s p h a s e was d i r e c t e d

at

identifying p a r t i c u l a r long wave developments in s e v e r a l kinds of v a r i a b l e s , r e a l as well as monetary, a n d

at

t r y i n g

to

p r o v e t h e (non)existence of t h i s kind of wave. I t cannot b e s a i d t h a t t h i s kind of r e s e a r c h h a s y e t a c h i e v e d c l e a r - c u t a n s w e r s . The conclusions h a v e r a n g e d from full a c c e p t a n c e of a wave with a fixed r e g u l a r i t y

to

o u t r i g h t r e j e c t i o n of a n y wave-like c o n c e p t

at

a l l , especially f o r r e a l v a r i a b l e s s u c h

as

i n d u s t r i a l o u t p u t o r

GNP.

S e v e r a l r e a s o n s c a n b e given f o r t h e e x i s t e n c e of t h i s confusing situation.

F i r s t , s e v e r a l v e r y d i f f e r e n t methods

-

d e s c r i p t i v e , h i s t o r i o g r a p h i c , empirico- inductive

-

^were used in t h e formulation of t e n t a t i v e hypotheses a n d assumptions, t e n t a t i v e b e c a u s e n o firm body of deductive r e s e a r c h was y e t available. S e c o n d ,

a

n e c e s s a r y r e q u i r e m e n t f o r a n y inductive r e s e a r c h could not b e met sufficiently, namely t h e availability of qualitative, a c c u r a t e d a t a on

a

s u f f i c i e n t number of economic a n d noneconomic v a r i a b l e s o v e r a sufficiently long p e r i o d . And t h i r d , a n d c e r t a i n l y n o t t h e l e a s t important, scepticism a b o u t t h e long wave c o n c e p t also arose b e c a u s e of s e v e r e criticism of t h e a p p l i e d s t a t i s t i c a l p r o c e d u r e s . In s p i t e of a l l t h e s e correct r e s e r v a t i o n s , a n d of a l l t h e d i f f e r e n c e s of opinion o n t h e ex- i s t e n c e of long waves, I am inclined

to

s u p p o r t t h e view t h a t t h e industrialized economies h a v e shown, a f t e r t h e i r r e s p e c t i v e take-off p h a s e s , a wave-like development i 3 t h e i r r e a l a n d monetary v a r i a b l e s , with a d u r a t i o n of between 40 a n d 6 0 y e a r s . S p e c i f i c c i r c u m s t a n c e s a n d developments, d i f f e r e n t in d i f f e r e n t p e r i o d s , s t r o n g l y influence t h e length of e a c h wave, especially in t h e downward p h a s e .

The a b s o l u t e a n s w e r as

to

t h e e x i s t e n c e of long waves c a n n o t b e given in t h e v e r y n e a r f u t u r e , s i n c e , f o r i n s t a n c e , time-series o v e r

a

sufficiently long p e r i o d

are

s t i l l scarce. Also, s i n c e waiting f o r a n o t h e r 1 0 0 y e a r s cannot b e s e e n

as a

rea- s o n a b l e option, r e c e n t l y most r e s e a r c h o n long waves h a s b e e n d i r e c t e d

at

a n ex- planation of t h e long wave and

at

t h e underlying c a u s a l mechanisms. Delbeke (1984) u s e two kind of classifications in analyzing t h e s e v e r a l

more

d e d u c t i v e a p - proaches.' One classification i s based upon t h e main e x p l a n a t o r y d e t e r m i n a n t , t h e o t h e r on t h e methodology chosen. With r e s p e c t

to

t h e f i r s t kind of classification, D e l b e k e distinguished between r e a l , monetary, a n d institutional t h e o r i e s , of which t h e r e a l t h e o r i e s h a v e a t t r a c t e d most a t t e n t i o n r e c e n t l y . In c o n t r a s t with t h e ear- l i e r p e r i o d s of flourishing long wave r e s e a r c h , monetary t h e o r i e s

are

now pushed

to

t h e background. One of t h e main r e a s o n s f o r t h i s decline in t h e i m p o r t a n c e of m o n e t a r y t h e o r i e s i s t h a t , a f t e r World War I1 p r i c e s h a v e only i n c r e a s e d a n d h a v e n o t declined, as would b e e x p e c t e d from h i s t o r i c a l p a t t e r n s . Institutional t h e o r i e s h a v e i n c r e a s e d in r e l a t i v e importance.

In t h e s e v e r a l t e a l t h e o r i e s , Delbeke saw a common b a s i c p a t t e r n , namely t h a t t h e a u t h o r s t r i e d t o explain t h e a l t e r n a t i o n of p e r i o d s of s h o r t a g e a n d a b u n d a n c e of a production f a c t o r o r input. As p r o d u c t i o n f a c t o r s or inputs, h e l i s t e d , ac- c o r d ' g

\PL

to t h e d i f f e r e n t t h e o r i e s , c a p i t a l , l a b o r , r a w materials, and e n t r e p r e n e u r - s h i p . A t t h e lower t u r n i n g point t h e r e l e v a n t p r o d u c t i o n f a c t o r shows a n a b u n d a n t s u p p l y with

a

r e l a t i v e l y l o w p r i c e . During t h e upswing

it

becomes s c a r c e r , r e s u l - t a n t with r i s i n g p r i c e s , in t h i s way c o n t r i b u t i n g to t h e lowering of p r o f i t a b i l i t y of t h e p r o d u c t i o n p r o c e s s . Another f a c t o r f o r t h e d e c l i n e in p r o f i t s is t h e l a c k of

a

s u f f i c i e n t income r e d i s t r i b u t i o n , h i n d e r e d as i t i s by s o c i a l a n d institutional i n e r - t i a . Only a f t e r a p a r t i c u l a r p e r i o d when t h e s e i n e r t i a are removed a n d income r e d i s t r i b u t i o n h a s s u c c e e d e d , d o e s t h e s c a r c i t y of t h e f a c t o r decline and i t s rela- t i v e p r i c e d e c r e a s e .

The second g r o u p of t h e o r i e s , t h e m o n e t a r y o t i e n t e d , h a s shown

a

d e c l i n e in i m p o r t a n c e , although most a u t h o r s o n long wave t h e o r i e s would a g r e e with t h e s t a t e m e n t t h a t p r i c e formation, i n t e r e s t r a t e s , c r e d i t , and money c i r c u l a t i o n are e s s e n t i a l elements. Delbeke states t h a t t h e s e elements are n e g l e c t e d t o o much in

r e c e n t theories. ⁸

The same remark does not apply t o t h e t h i r d group, t h a t of social a n d i n s t i - t u t i o n a l theories. The a u t h o r s of t h e s e t h e o r i e s consider a p u r e economic analysis

as

too narrow, and propose a n a p p r o a c h in which t h e whole system and t h e i n t e r a c t i o n s between social, institutional, technological, and economic subsystems are

take^

into account. Also, r e s e a r c h on market behavior falls into t h i s c a t e g o r y .

Delbeke concluded t h a t although t h e s e v e r a l t h e o r i e s emphasized d i f f e r e n t a s p e c t s of t h e long wave movement and although they had d i f f e r e n t s t a r t i n g points and assumptions, t h e y were more complementary t h a n i s normally suggested. Ac- cording

to

him, a fruitful a p p r o a c h t o t h e phenomenon of t h e long wave i s not pos- s i b l e if a l l t h e t h r e e main b r a n c h e s of t h e o r i e s , r e a l , monetary, and institutional, are not integrated. He t h e r e f o r e p r e f e r r e d , along with Van Duijn and o t h e r au- t h o r s , a n e c l e c t i c a p p r o a c h . because such a complex p nomenon

as

t h e long wave could not b e reasonably explained in a monocausal way.

Ps

The second classification i s based on s e v e r a l methodologies developed

to

analyze long waves. Delbeke distinguished between t h e historical-institutional ap- p r o a c h . t h e growth t h e o r e t i c a l a p p r o a c h , t h e macroeconomic a p p r o a c h , and t h e analysis of noneconomic variables.

In t h e h i s t o r i c a l i h s t i t u t i o n a l a p p r o a c h , each wave i s s e e n as

a

unique e v e n t . Any deterministic i n t e r p r e t a t i o n of history i s r e j e c t e d . These a u t h o r s

stress

t h e point t h a t t h e

start

of a n upward phase of a long wave i s dependent on t h e r a p i d diffusion of

a

new, important technology

-

microelectronics and t h e re- lated communication-oriented technologies in 1985, f o r instance. This diffusion.

however, i s initially hindered by t h e lack of accompanying institutional innova- tions, on both a national a n d international level. Each wave i s t h e n c h a r a c t e r i z e d by a p a r t i c u l a r match of technological and of social and institutional innovations.

Once in t h e upward phase, t h e possibilities of t h e new technology are explored t o t h e end (along

a

technoeconomic paradigm). Coming close t o exhaustion, t h e growth p r o c e s s slows down, passing into t h e downward phase. A new group of technologies h a s t o emerge, involving not only technical innovations, but a l s o new managerial and organizational pripfiples,

to

change t h e economic development once again in t h e positive direction. On t h e whole t h e analysis of t h i s a p p r o a c h i s r a t h e r ver- bal. Authors like Freeman and P e r e z - P e r e z show in t h e i r way of analysis a c e r t a i n resemblance

to

Schurnpeter, s t r e s s i n g t h e need of a qualitative dimension in t h e long wave debate.

Conversely, t h e o t h e r a p p r o a c h e s have

a

much s t r o n g e r mathematical/statistical background. In t h e growth-theoretical a p p r o a c h , non- l i n e a r dynamic models are used

to

study t h e emergence of new configurations from s t r u c t u r a l instability. Mensch, taken as t h e most important r e p r e s e n t a t i v e of t h i s g r o u p , u s e s

a

metamorphosis model of long-term industrial innovation, showing t h a t f o u r p h a s e s can b e discerned by t h e mix of innovation types, basic/improvement, a n d product/process. Inventions are assumed

to

b e made randomly o v e r time.

Transformation into a basic innovation t a k e s time and i s strongly dependent on t h e s t a t e of t h e economy, i.e., t h e old technologies must a p p r o a c h t h e i r level of sa- t u r a t i o n . If t h e conditions a r e f a v o r a b l e , t h e n many of t h e accumulated inventions may b e t u r n e d into p r a c t i c a l applications within

a

relatively s h o r t period of time.

Above a c e r t a i n threshold level, t h e y push t h e economy in a n upward movement.

Reaching t h a t threshold level gives, normally, a situation of heavy competition between t h e new technologies, filtering o u t t h e s t r o n g e r ones, which t h e n become t h e new leading s e c t o r s Once t h e s e sectors a p p r o a c h t h e i r s a t u r a t i o n level, t h e downward phase begins. 12

In t h e macroeconomic a p p r o a c h , t h e systems dynamics methodology of F o r r e s t e r and his

MIT

g r o u p d e s e r v e s a detailed description. Their goal is t o develop a theory with a n endogenous s t r u c t u r a l explanation of t h e long wave. To avoid problems with collecting sufficient d a t a of good quality, t h e y constructed t h e so-called System Dynamic National Model (SDNM), based on f o u r mechanisms; name- ly, self-ordering of capital goods, d e b t p r i c e dynamics, technology and innovation, a n d political and social values. Of t h e s e mechanisms t h e self-ordering of capital goods, using b o o t s t r a p s and lags, is s e e n as t h e basic one, g e n e r a t i n g

a

long wave of i t s own, while t h e o t h e r t h r e e mechanisms simply amplify t h a t wave. These mechanisms

are

constructed on t h e basis of t h e behavior of microeconomic agents, with limited information and bounded rationality in t h e p r o c e s s of decision making.

With t h i s model t h e y show how rational, microeconomic behavior c a n c r e a t e i r r a - tional consequences on t h e macrolevel. The validity of t h e i r a p p r o a c h i s shown by con onting t h e r e s u l t s g e n e r a t e d by t h i s model with a c t u a l d a t a f o r t h e US econo- my.

15

The fourth and last a p p r o a c h . on t h e importance of noneconomic v a r i a b l e s in explaining t h e long wave, is probably t h e b e s t example of interdisciplinary r e s e a r c h in this field. Most a u t h o r s

stress

t h e r o l e of t h e s e v a r i a b l e s in t h e long wave, but i t h a s been r a t h e r difficult s o far

to

i n t e g r a t e them into t h e s e v e r a l t h e o r i e s and models in a p r o p e r way. S e v e r a l promising attempts t o overcome t h i s o b s t a c l e have been made in r e c e n t times. Some have analyzed t h e relationships between long waves and social variables

-

p h a s e s of class s t r u g g l e , sociopsycho- logical variables. and measures of motivation. Other a u t h o r s , a n d in t h i s r e s p e c t t h e work of Perez-Perez d e s e r v e s special attention, have described a t h e o r e t i c a l explanation of t h e long wave, in which t h e upward phase shows a positive interac- tion between t h e technoeconomic and t h e socioinstitutional systems. In t h e down- ward phase, t h e changing technoeconomic system shows major f r i c t i o n s with an as y e t unchanged socioinstitutional environment. Only when t h i s l a s t system h a s changed too, through t h e a p p r o p r i a t e social and institutional innovations, c a n

a

new upswing be unleashed.

3. S o m e D e b a t a b l e h e s

After t h i s r a t h e r s h o r t overview on long waves, 1 now discuss t h e following is- s u e s in g r e a t e r detail:

(1) The concept of innovations.

(2) The r o l e of investment.

(3) The p r o c e s s of s t r u c t u r a l change.

(4) The methodology in t h e deductive a p p r o a c h .

In explaining t h e o c c u r r e n c e of long waves, t h e concept of i n n o v a t i o n i s t h e most prominent. Firmly based on Schumpeterian insights, a u t h o r s such as Mensch, Freeman, and Van Duijn h a v e recently developed t h i s concept f u r t h e r ; however, e a c h with d i f f e r e n t accents. Mensch s t r e s s e d t h e endogenous c h a r a c t e r of t h e p r o c e s s , showing t h a t b a s i c innovations h a v e

to

a p p e a r in c l u s t e r s b e f o r e a new upward p h a s e

starts,

and t h a t innovations d i f f e r in c h a r a c t e r along t h e long wave.

Freeman emphasized t h e diffusion a s p e c t of innovation, c r e a t i n g new possibilities in many s e c t o r s o t h e r t h a n t h e one in which t h e innovation originated. Van Duijn connected t h e concept of innovation with t h a t of t h e p r o d u c t life cycle, in this way introducing t h e element of leading s e c t o r s . Innovations

are,

according

to

Van Duijn's opinion,

a

n e c e s s a r y b u t not a sufficient condition f o r t h e

start

^of a new upswing. T h e r e f o r e , i n f r a s t r u c t u r a l investment on a l a r g e s c a l e i s a l s o necessary.

With t h e concept of innovations, i t i s made c l e a r t h a t technological knowledge, in t h e b r o a d e s t sense, does not grow

at

a constant r a t e , and t h a t it i s a costly pro- cess, in both time and money. This vision c o n t r a s t s strongly with ideas used in most of t h e neoclassical growth models.

T h e r e a r e , however, a l s o some problems with t h e concept of innovation. F i r s t , t h e r e a r e some methodological problems with r e s p e c t

to

both t h e e x a c t definition and classification of innovations and t h e e x a c t dating of innovations. Even in more r e c e n t analyses t h e meaning of innovation i s mostly curtailed

to

product and pro- c e s s innovations,

at

t h e expense of o t h e r f e a t u r e s such as t h e opening of new m a r k e t s and t h e introduction of new organizational s t r u c t u r e s .

The main problem, however, i s whether innovations can really g e n e r a t e long waves. F o r r e s t e r and h i s group, and a l s o Mandel, have t h e i r doubts a b o u t this.

One of t h e most c r i t i c a l reviews in t h i s r e s p e c t w a s published r e c e n t l y by Rosen- b e r g and Frischtak (1984). They

state

t h a t t h e theory does not fulfill t h e neces- s a r y requirements with respect

to

causality, timing, economy-wide r e p e r c u s s i o n s , a n d r e c u r r e n c e . They conclude t h a t t h e concept of innovation

as

t h e explanation of t h e long wave could not y e t b e validated. I s u p p o r t t h e main lines of t h i s a r t i c l e , s t r e s s i n g especially t h e elements of causality and timing. I t h a s not been made c l e a r , in my opinion, why a n upward phase

starts at

a c e r t a i n moment and which conditions have

to

b e fulfilled, with r e s p e c t t o f a c t o r supplies and p r i c e s , f o r in- s t a n c e , t o give more positive expectations t h a t , in t u r n , stimulate investment in t h o s e directions. S o f a r , t h e innovation explanation can only give a good descrip- tion of t h e p r o c e s s during t h e upswing, once i t has s t a r t e d .

Another problem with t h e concept of innovations i s related

to

t h e l a r g e d i f f e r e n c e s in technological knowledge between countries. The normal situation i s t h a t some countries have a leading position, while o t h e r s follow

at

d i f f e r e n t

rates.

Only f o r t h e leading c o u n t r i e s

are

new, important innovations a n e c e s s a r y b u t not sufficient element f o r t h e continuation of t h e i r economic development. Normally, t h e y cannot compete with t h e i r f a c t o r p r i c e s because t h e r e e x i s t s a r a t h e r s t r o n g relationship between t h e level of technological knowledge and t h e wage

rate.

F o r t h e o t h e r countries t h i s necessity t o s e a r c h f o r new, important innovations i s less s t r o n g , because they c a n t r y

to

r a i s e t h e i r level of knowledge

to

t h a t of t h e i r p r e - cursors by buying p a t e n t s and licenses, or by copying c e r t a i n p r o d u c t s o r organi- zational s t r u c t u r e s , t h u s benefiting from t h e lower f a c t o r costs. Although I en- d o r s e t h e statement t h a t t h e long wave i s a n international phenomenon, strongly in- fluenced by t h e leading, l a r g e countries, I a l s o believe t h a t if all t h e o t h e r coun- t r i e s behave according t o t h e life-cycle hypothesis of international production, i.e., by upgrading t h e i r s t r u c t u r e of production, using already existing technologi- c a l knowledge, and taking advantage of lower costs, then t h e impact of t h e long wave would be

less

t h a n i t actually is. Technological knowledge i s available, a t a c e r t a i n p r i c e of c o u r s e , but combined with lower l a b o r c o s t s t h i s must r e s u l t in p r o f i t a b l e production possibilities. That t h e s e o c c u r in c e r t a i n p e r i o d s a n d f a i l in o t h e r s i s , t o me, a n o t h e r indication t h a t i t i s not s o much innovation as o t h e r fac- tors t h a t

are

ultimately decisive f o r a wave-like, long-term economic development.

As is clear from Section 2, in some explanations t h e r o l e of investment i s im- p o r t a n t , especially in t h e a p p r o a c h e s of F o r r e s t e r and Van Duijn. In t h e explana- tions t h a t stress t h e impact of innovations. t h e role and importance of investment i s r a t h e r neglected. Wrongly, because innovations need t h e medium of investment t o become effective.

T h e r e are two a s p e c t s of investment I stress h e r e . In t h e f i r s t place, i t i s n e c e s s a r y , in my opinion, t o t a k e more account of t h e unpredictable element of

"animal spirits". A s i s w e l l known, a n investment decision is dependent on many v a r i a b l e s , such a s i n t e r e s t r a t e s , availability of innovations or new technological

knowledge, and demand expectations; but i t is also dependent on t h e motivation o r willingness

to

t a k e r i s k s . Sometimes, a situation can o c c u r in which t h e more ob- jective f a c t o r s show quite similar values as in t h e past. Yet, t h e decision t o invest can g o a different way because of changes in t h e more subjective f a c t o r s .

The second point stresses t h e concept of time in relation

to

investment, in two ways. On t h e one hand, t h e r e i s a time lapse between t h e decision

to

invest and t h e moment t h a t t h e investment i s completed o r , in t h e case of

r a w

materials o r semi- p r o d u c t s , t h e o r d e r i s fulfilled. The introduction of t h i s kind of lag and delay, as i s d o n e in t h e SDNM. i n c r e a s e s t h e level of reality of any explanation. On t h e oth-

er

hand, and even more importantly, a realized investment not only positively influ- e n c e s t h e production c a p a c i t y o r t h e level of technological possibilities, but also h a s a negative impact. in t h e s e n s e t h a t in t h e long

run

i t lowers t h e possibility of adjusting

to

changing circumstances. The higher t h e volume of investment

in

a p a r t i c u l a r industry o r s e c t o r o v e r a p a r t i c u l a r period of time, t h e more expensive a n d more time consuming any change becomes, and s o t h e adjustment p r o c e s s can develop more slowly. In t h i s way, firms, industries, s e c t o r s , o r even countries c a n e x p e r i e n c e t h e consequences of previous, l a r g e investment p r o j e c t s , in t h e sense t h a t , when necessary. disinvestment c a n b e a costly p r o c e s s , both in economic and s o c i a l terms. This creates a disadvantageous position with r e s p e c t

to

those com- p e t i t o r s who h a v e y e t t o

start.

Of c o u r s e , previous investments have contributed t o economic growth, resulting in h i g h e r income, in h i g h e r technological knowledge ('learning by doing'), and in more possibilities f o r new r e s e a r c h m d development, b u t in t h e long r u n t h e y c a n hamper, because of vested i n t e r e s t s , t h e necessary . p r o c e s s of adjustment when economic conditions begin t o change fundamentally.

In considering adjustment I come

to

t h e t h i r d point of my argument. Adjust- ment assumes changes in consumer demand, in technology, in competition with oth- er f i r m s at home and a b r o a d , and in sectoral relationships, i.e., in all t h e internal a n d e x t e r n a l relationships in which a firm, a n industry, a s e c t o r , o r a country i s involved. I t cannot b e s t r e s s e d enough t h a t structural change i s c h a r a c t e r i s t i c of t h e economic development of a l l those countries who have passed t h e take-off p h a s e of industrialization, I t s influence is not limited t o t h e so-called developing c o u n t r i e s ; i t applies as much t o t h e developed o r industrialized c o u n t r i e s of t h e

western world and c e n t r a l l y planned economies.

In my opinion, economic growth and s t r u c t ~ l change

are

two sides of t h e same medal. Economic growth

creates

t h e impulse f o r change by raising t h e in- come level, and s o changing consumer p r e f e r e n c e s ; by raising more funds f o r r e s e a r c h and development. f o r investment, and f o r providing b e t t e r educational f a c i l i t i e s , and s o embodying new technology and t h e benefits of increasing r e t u r n s of s c a l e ; and by allowing g r e a t e r u s e of t h e international division of l a b o r . Howev- er, t h e continuation of t h i s p r o c e s s i s strongly dependent on t h e way t h e s e new op- p o r t u n i t i e s a r e used, on whether t h e necessary investments are c a r r i e d out, and, especially important, on whether t h e s e investments

are

in t h e r i g h t direction. By t h e

term

t h e r i g h t direction. I mean t h a t t h e investments have t o influence t h e pro- cess of adjustment in such a way t h a t t h e newly c r e a t e d s t r u c t u r e , b e i t on t h e lev- el of a firm, a n industry, a s e c t o r , but especially of a c o u n t r y , i s c a p a b l e of pro- viding t h e same facilities of employment and output growth

as

b e f o r e . In s h o r t , economic growth creates s t r u c t u r a l changes, but without incorporating t h e s e c h a n g e s economic growth will slow down more and more. Accordingly,

as

economic growth continues in t h e upward p h a s e of economic development, more and more i s invested in t h e leading s e c t o r s . S o just

at

t h e time when adjustment is needed t o r e a c t

to

o c c u r r i n g changes, towards new leading s e c t o r s , t h e r e are fewer possibil- i t i e s , both financial and social,

to

implement it. In t h e end, a s t a t i o n a r y situation c a n o c c u r .

In r e a l i t y , c o u n t r i e s d i f f e r in t h e i r attitude toward adjustment. T h e r e is not much argument with t h e statement t h a t Japan adjusted b e t t e r toward changes than did o t h e r countries post World War 11. T h e r e f o r e , Japan h a s s o f a r withstood t h e impact of t h e worldwide depression b e t t e r t h a n many o t h e r countries. But t h e Japanese,

too,

were confronted with adjustment problems and with vested i n t e r e s t s t h a t could not b e changed without cost. Included in t h e s e vested i n t e r e s t s are

ear-

l i e r investments in machines, plants, i n f r a s t r u c t u r e , and human capital, t h a t lost profitability because of changes in t h e consumption or production s p h e r e s , both inland or a b r o a d . Also, t h e institutional s t r u c t u r e resembles vested i n t e r e s t s in t h a t i t cannot change without losses (for some). A s long

as

t h e

costs

of implement- ing changes combined with insecure p r o f i t expectations are valued h i g h e r t h a n those of remaining s t a t i c , b e t h i s a p r i v a t e o r public judgment, t h e n e c e s s a r y ad- justments will not be executed. The consequence i s slower growth or even h i g h e r costs of adjustment in t h e f u t u r e and less opportunities f o r reorganizing t h e old economic situation.

With r e g a r d

to

t h e chosen methodology, t h e f o u r t h and last point of my a r g u - ment, I give h e r e a few r e m a r k s about t h e

SDNM

a p p r o a c h . The two o t h e r main methods used f o r r e s e a r c h on long waves are r a t h e r well-known. One method comprises t h e more v e r b a l description, in which a t h e o r y i s c o n s t r u c t e d based on a logic sequence of valid arguments, sometimes supplemented with real-life exam- ples. The o t h e r method i s t h e statistical/mathematical one, which r e l i e s heavily on t h e availability of d a t a and of statistical methods. A weak element of t h i s a p p r o a c h i s t h e i n t e r p r e t a t i o n of t h e r e s u l t s . To overcome both shortcomings, a r e s e a r c h group, under t h e guidance of F o r r e s t e r , c r e a t e d t h e a l r e a d y d e s c r i b e d SDNM, in which, on t h e basis of c e r t a i n assumptions r e g a r d i n g human decision-making, s e v e r a l cycles could b e g e n e r a t e d t h a t

are

superimposed on

a

long wave. In t h i s way t h e y were not dependent o n t h e quality a n d / o r quantity of d a t a and s t a t i s t i c a l methods available.

If t h e chosen mechanisms are t h e r i g h t ones, if no important mechanism i s for- gotten, and especially if t h e microeconomic behavior of a l l t h e a g e n t s i s t r a n s l a t e d into t h e model c o r r e c t l y t h e n t h i s method may b e judged as a c c e p t a b l e in long wave analysis. The question now is, whether all t h e s e statements c a n b e answered posi- tively. My answer must b e in t h e negative. Although I underline t h e importance of t h e self-ordering mechanism, I am of t h e opinion t h a t o t h e r mechanisms a r e ,

at

least, equally important. In t h i s r e s p e c t , t h e influence of new technologies and i t s gradual working through t h e whole economic and social s t r u c t u r e , and t h e ongoing changes in r i v a l countries, are both mechanisms t h a t h a v e t o b e i n c o r p o r a t e d . As- suming technological p r o g r e s s as an exogenous v a r i a b l e , with a uniform growth r a t e , gives t h e same unrealistic description of t h i s phenomenon as in many of t h e o l d e r growth models.

Another point of criticism applies

to

t h e translation of microeconomic behavior into t h e model. Of c o u r s e , i t i s a r e a l improvement t h a t , unlike in t h e more neoclassical o r i e n t e d economic theory, i t i s not assumed t h a t economic agents have p e r f e c t and costIess information or t h a t t h e y a r e acting as optimizers.

However, t h e model assumes, as f a r as I am aware,

a

constancy in human behavior, while in r e a l i t y changes o c c u r t h a t c a n g r e a t l y influence economic development.

Already, changes in "animal s p i r i t s " regarding e n t r e p r e n e u r i a l behavior have been noticed, but changes in expectations about t h e f u t u r e , and s o about decisions t o b e made, a r e r e l e v a n t f o r a l l economic agents. They can c r e a t e a n atmosphere in which self-fulfilling p r o p h e c i e s , both positive and negative, c a n b e realized.

In t h i s s h o r t section I h a v e reviewed some elements I judge as crucial. In t h e n e x t section, I t r y t o s k e t c h a c o h e r e n t , t h e o r e t i c a l framework f o r explaining t h e long wave development of industrialized countries, in which economic growth,

s t r u c t u r a l change, and changing international economic r e l a t i o n s are t h e crucial elements.

4. The Interplay between Economic Growth and Structural Change

In t h i s section I d e s c r i b e t h e processes of economic development f o r t h e more developed, industrialized c o u n t r i e s , showing why i t is inevitable t h a t p e r i o d s of re- latively high growth and of stagnation a l t e r n a t e . In my view, t h e c r u c i a l relation- ship is t h a t between economic growth and s t r u c t u r a l change, in t h e s e n s e t h a t economic growth is a n e c e s s a r y condition f o r s t r u c t u r a l change, while s t r u c t u r a l change is, in i t s t u r n . a n e c e s s a r y condition f o r prolonged economic growth. A s long as t h i s relationship holds, t h e p r o c e s s of economic development evolves steadily, with p r o s p e r o u s f i g u r e s f o r most of t h e economic indicators. However, f o r two r e a s o n s t h i s p r o c e s s cannot continue indefinitely. On t h e one hand,

struc-

t u r a l change slows down because of previous investments in firms, industries. o r s e c t o r s t h a t are n o longer p r o f i t a b l e because of a change in t h e r e l a t i v e competi- tive position, but t h a t cannot b e withdrawn without c o s t s ; s t r u c t u r a l change a l s o slows down because of growing organizational and institutional s c l e r o s i s . On t h e o t h e r hand, s t r u c t u r a l change h a s t o be brought about as soon as (new) competi- tors

start

t o provide t h e m a r k e t with t h e same products, but of lower p r i c e a n d / o r b e t t e r quality, o r when demand shows a s e c u l a r decline. A t t h a t moment t h e deci- sion h a s to b e made

to

a d j u s t one's own production t o r e s t o r e t h e competitiveness o r

to

change t h e s t r u c t u r e of production into o t h e r directions. The necessity f o r t h e s e changes conflicts strongly with t h e growing r e s i s t a n c e

to

change on t h e p a r t of t h e production s t r u c t u r e . A s long

as

t h i s conflict i s not resolved, i.e.,

as

long as t h e production s t r u c t u r e in t h e b r o a d e s t s e n s e h a s not adjusted

to

t h e new c i r - cumstances, t h e period of stagnating economic development continues.

In this analysis, t h e s t r u c t u r e of production, in t h e b r o a d e s t s e n s e , and t h a t of consumption, as well a s t h e organizational and institutional shaping of t h e economic p r o c e s s , both

at

home and a b r o a d , a r e t h e b a s i c elements. The introduc- tion of countries a b r o a d i n t o t h e model means t h a t one h a s t o t a k e account of bal- a n c e of payments c o n s t r a i n t s , exchange r a t e s , wage and productivity differences, and t h e more general p r i c e and quality differences between equal p r o d u c t s from s e v e r a l countries. With r e g a r d

to

t h e s t r u c t u r e of production and consumption, t h e r e a r e s e v e r a l ways of dividing t h e economic s t r u c t u r e into various s e c t o r s o r industries. F i r s t , a division between competitive and s h e l t e r e d s e c t o r s c a n b e made according t o t h e i r e x p o s u r e t o competition from o t h e r countries. Second. s e c t o r s o r industries c a n b e divided according

to

t h e i r dependence on final demand. Nor- mally, a division i s applied between consumer-good and capital-good production s e c t o r s , but in r e a l i t y a whole spectrum of intermediate positions o c c u r s . The more an industry h a s a capital-good production c h a r a c t e r , t h e more i t usually h a s

to

invest in i t s production c a p a c i t y , a n d t h u s t h e more difficulties i t h a s in adapt- ing

to

t h e n e c e s s a r y changes. Third, a division c a n b e made according t o t h e s t a t u s of leading and following sectors. In e a c h period, c e r t a i n s e c t o r s show a r e - latively high growth r a t e because of s t r o n g final a n d / o r intermediate/investment demand by o t h e r s e c t o r s . In t h e s e s e c t o r s , t h e development of productivity, p r i c e s , and employment i s on t h e whole d i f f e r e n t from t h o s e s e c t o r s t h a t are more following. And, f o u r t h , a division according t o technological content i s possible.

A s a l r e a d y s t a t e d c o u n t r i e s show differences in t h e i r level of technological knowledge and in t h e i r ability t o use i t . Some c o u n t r i e s lead, while most countries follow at a l e s s e r o r g r e a t e r distance. Each country s t r i v e s f o r a n improvement in i t s position in t h i s sequence. A country c a n t r y t o improve i t s technological knowledge and s o c r e a t e t h e possibility of making new o r b e t t e r p r o d u c t s of h i g h e r value,

to

gain a leading position o r

to

k e e p

at

t h e same level as i t s competitors.

Which s e c t o r a l division i s a p p r o p r i a t e depends on t h e kind of questions t o b e answered.

The s t r u c t u r e of both t h e production and consumption changes as time passes.

The s t r u c t u r e of consumption undergoes changes mainly because of rising income and i t s consequences, as described by Engel's Law, which implies a change in con- sumption expenditures from basic necessities, such as food,

to

more luxury pro- ducts. To a l e s s e r e x t e n t expenditures

are

a l s o influenced by r e l a t i v e p r i c e s . If w e c o n s i d e r only one country, then t h i s change in consumption alone would necessi- t a t e a corresponding change in t h e s t r u c t u r e of production. With t h e introduction of o t h e r c o u n t r i e s

to

t h e model, t h i s necessity i n c r e a s e s because, in t h e long r u n , an equilibrium position on t h e balance of payments h a s

to

b e r e a c h e d .

The s t r u c t u r e of production e x p e r i e n c e s influences from s e v e r a l directions.

Apart from t h e a l r e a d y mentioned changes in t h e s t r u c t u r e of consumption and in t h e possibility t h a t new competitors e n t e r t h e market

- a

v e r y s t r o n g influence

-

o t h e r f a c t o r s , equally important, are t h e availability and p r i c e of production in- puts, t h e technological development, and t h e economies of scale. In t h e p r o c e s s of production s e v e r a l production inputs a r e used, such as l a b o r , c a p i t a l through in- vestment, e n e r g y ,

r a w

materials, and intermediate products. These production in- p u t s a r e not always in equilibrium between supply and demand. On t h e c o n t r a r y , s t r u c t u r a l discrepancies between supply and demand o r sudden p r i c e i n c r e a s e s of a n input c a n c r e a t e influential disequilibria on t h e s e v e r a l markets, which t h e n work through t h e whole system. Each situation of s t r u c t u r a l disequilibrium re- q u i r e s a c e r t a i n kind of adjustment, with sometimes unpredictable consequences.

This creates uncertainty and thus influences f u t u r e expectations negatively. Tech- nological development i s one of t h e main determinants in t h e whole p r o c e s s . I t s

rate

of growth determines t h e productivity growth r a t e , and s o t h e possibility of changing r e l a t i v e p r i c e s , in a decisive way. The growth

rate

of technological development i s mainly dependent on t h e e x p e n d i t u r e s f o r r e s e a r c h and develop- ment a n d on t h e amount invested in t h e production p r o c e s s t o apply p r o d u c t o r p r o c e s s innovations. The volume of investment depends positively on t h e volume of demand.

This growth of investment in i t s t u r n creates f u r t h e r possibilities f o r economies of s c a l e , possibilities realized in t h o s e s e c t o r s t h a t c a n r a i s e t h e i r out- p u t level because of rising demand in a n existing m a r k e t

or

by c r e a t i n g new mark- ets, f o r instance through more e x p o r t s .

To c l a r i f y t h i s line of reasoning, t h e main relationships a r e summarized in two figures. In Figure I, t h e situation i s d e s c r i b e d f o r

a

closed economy. I t i s possible

to

distinguish between new, increasing, stagnating, a n d declining p r o d u c t s , indus- t r i e s , o r s e c t o r s . For e a c h unit, t h e development along t h e s e v e r a l p h a s e s of t h e product-life cycle i s mainly determined through t h e i n t e r p l a y of demand f a c t o r s

-

income elasticity (Engel's law) and disposable income

-

on t h e one hand, and supply f a c t o r s

-

quantity, quality, and p r i c e of production f a c t o r s , intermediate d e l i v e r i e s and r e s o u r c e s , and technological development

-

on t h e o t h e r . This r e s u l t s in a specific p a t t e r n of productivity and p r i c e and quality development, and s o of realized sales, employment, and p r o f i t s .

Simply because of economic growth, e a c h p r o d u c t moves along t h e r e l e v a n t p r o d u c t cycle, implying changes in t h e use of c a p i t a l a n d l a b o r . Some p r o d u c t s in- c r e a s e t h e i r demand f o r production f a c t o r s ; o t h e r s , however, d e c r e a s e t h e i r demand, which leads to redundant capital s t o c k and t h e discharging of l a b o r . When t h e r e s p e c t i v e i n c r e a s e s and d e c r e a s e s in demand f o r production f a c t o r s match e a c h o t h e r exactly, in time, in quantity, in quality, and in place, i.e., when s t r u c - t u r a l changes in t h e s e v e r a l f a c t o r m a r k e t s a r e r e a l i z e d , then an important condi- tion f o r t h e continuation of growth i s realized. However, a n o t h e r condition, equal-

STARTING

PRODUCTS INDUSTRIES SECTORS Situation a t point t :

-

GROWING PRODUCTS INDUSTRIES SECTORS

STAGNATING

PRODUCTS INDUSTRIES SECT0 RS

MOVEMENT OVER TIME ALONG RESPECTIVE PRODUCT LIFE CYCLES

I

^CAUSING

CHANGES IN THE STRUCTURE OF:

PRODUCTION

PRODUCTIVITY

PRICES

EMPLOYMENT

ECONOMIC GROWTH

CHANGES IN:

DECLINING

PRDDUCTS INDUSTRIES SECTORS

Figure I . The relationship between economic growth and structural change in a closed economy.

ly n e c e s s a r y , is t h e introduction of new p r o d u c t s on t h e market

to

s e c u r e growth possibilities.

Whether all t h e s e necessary adjustments are made is strongly dependent o n t h e way t h a t different firms view t h e developments, and how t h e y t r a n s l a t e t h e i r o b s e r v a t i o n s into investment behavior and i n t o m a r k e t policy with r e s p e c t to p r i c e s and sales. Both investors and consumers must also continue

to

h a v e positive expectations about t h e f u t u r e , because otherwise t h e lack of demand negatively in- fluences t h e expectations of o t h e r actors.

In t h e second scheme, t h e r a t h e r unrealistic assumption of a closed economy i s removed. Four different elements h a v e

to

b e t a k e n i n t o account in t h i s r e s p e c t . T h e r e i s probably no country in t h e world t h a t d o e s not have

to

r e l y o n o t h e r c o u n t r i e s . This implies

-

and t h i s i s t h e f i r s t element

-

t h a t t r a d e o c c u r s in t h o s e p r o d u c t s t h a t cannot b e produced in a country. Some n a t u r a l resources and a g r i - c u l t u r a l p r o d u c t s belong

to

t h i s c a t e g o r y . F o r t h e second element, t r n d e in indus- trialized products, t h e c h a r a c t e r i s t i c of not being a b l e to produce one's own goods i s in

m o s t

cases not relevant. Although t h e r e are important d i f f e r e n c e s in techno- logical knowledge between c o u n t r i e s

-

^see t h e t h i r d element

-

^a major p a r t of t h e t r a d e in industrial products o c c u r s even when t h e importing c o u n t r y h a s t h e po- t e n t i a l to produce such p r o d u c t s internally, or even actually p r o d u c e s and e x p o r t s them (intra-industry t r a d e ) . Trade in industrial p r o d u c t s i s caused by t h e i n t e r n a - tional division of l a b o r , making use of t h e possibility of specialization, by impor- t a n t d i f f e r e n c e s in factor r e w a r d s between c o u n t r i e s , especially with r e g a r d

to

la- b o r . and by t h e established fact t h a t with a h i g h e r income t h e r e occurs

a

s t r o n g e r p r e f e r e n c e

for

products from o t h e r c o u n t r i e s b e c a u s e of quality d i f f e r e n c e s ( t h e Linder effect). A s s t a t e d a l r e a d y

-

and t h i s is t h e t h i r d element

-

t h e r e

are

major d i f f e r e n c e s in technological knowledge between countries. Some h a v e

a

leading position. o p e r a t i n g on t h e technological f r o n t i e r . Normally, new p r o d u c t s are in- t r o d u c e d in t h e s e countries, because of t h e available knowledge

to

p r o d u c e them and because of a suitable m a r k e t in which

to

s e l l them. Behind t h e l e a d e r s . t h e o t h e r c o u n t r i e s follow successively, some not far behind and some way b a c k from t h a t l e a d e r . This o r d e r is, of course. not fixed. Countries with a technological lag t r y

to

c a t c h up with t h e technological l e a d e r ,

as

was v e r y visible post World W a r 11, t h r o u g h t h e i r own r e s e a r c h and development, b u t especially through buying pa- t e n t s a n d licenses. Combined with lower l a b o r c o s t s , t h e y c a n achieve a v e r y com- petitive position on markets t h a t had been held by t h o s e c o u n t r i e s with a techno- logical lead. Conversely, t h e leading c o u n t r i e s try to hold t h e i r position or e v e n improve upon i t by commanding enough funds f o r r e s e a r c h and development. The f o u r t h element, t h a t of d i r e c t investments a b r o a d , once again s t r e n g t h e n s t h e pos- sibility of changes in t h e r e l a t i v e o r d e r with r e s p e c t

to

technology. D i r e c t invest- ment in t h e host country, whether

or

not with a positive influence

for

t h a t econo- my, implies t h a t investment in t h e home c o u n t r y is lower t h a n otherwise possible.

In t h i s way, d i r e c t investments c a n negatively influence t h e economy in which t h e funds originated. The introduction of a n open economy i n c r e a s e s t h e number of factors t h a t m u s e s t r u c t u r a l changes, in comparison with closed economies, s u c h as in Figure I. In Figure 11, t h e situation is s k e t c h e d for a n economy with e x t e r n a l r e l a t i o n s with t h e

rest

of t h e world. Five d i f f e r e n t relationships c a n b e indicated.

The r e l a t i o n s between t h e s e v e r a l production s t r u c t u r e s are indicated with a n A. A s d e s c r i b e d , t h e y r a n g e f r o m tradeflows of physical production-inputs to s h i f t s of technological knowledge, whether

or

n o t combined with d i r e c t invest- ments. These relations can change t h e p r o c e s s of adjustment within t h e r e s p e c t i v e c o u n t r i e s as well as in t h e i r r e l a t i v e position. If t h e r e are less funds available f o r t h e investment necessary

to

i n c o r p o r a t e new technology or to create i t ,

or to

fol- l o w c h a n g e s in consumption p a t t e r n s , because t h e s e funds are used in o t h e r coun- t r i e s , t h e n t h e income g e n e r a t e d will b e lower t h a n otherwise, and so less funds

Situation at point t :

-

LOW LEVEL OF

INCOME

TECHNOLOGICAL KNOWLEDGE

MEDIUM LEVEL OF

l NCOME

TECHNOLOGICAL KNOWLEDGE

HIGH LEVEL OF

INCOME

TECHNOLOGICAL KNOWLEDGE

7

MOVEMENT OVER TIME

- 4

CHANGES I N STRUCTURES OF

PRODUCTION

CHANGES I N INCOME AND CONSUMER DEMAND

Figure 11. The relationship between economic growth and s t r u c t u r a l change of pro- duction and consumption in a n interconnected world.

Country I:

-

PRODUCTION ^{STRUCTURE OF}

A A

C

A B

STRUCTURE OF

CONSUMPTION

-

•

^v

Rest of the world:

STRUCTURE OF PRODUCTION

C

b

STRUCTURE 0 F CONSLIMPTION

are available in t h e f u t u r e . The r e v e r s e i s , of c o u r s e , a l s o possible.

The relations under B d e s c r i b e t h e "keeping up with t h e Jones"' e f f e c t a t t h e national level. The consumption p a t t e r n of t h e technological l e a d e r forms t h e blue- p r i n t f o r t h e o t h e r economies. They follow with a c e r t a i n delay, t h e i r consumption p a t t e r n is often, r a t h e r advanced compared with t h e existing s t r u c t u r e of produc- tion.

C indicates t h e relations t h a t r e p r e s e n t t h e flows of products produced in a p a r t i c u l a r area and consumed in t h a t same a r e a . This means t h a t t h e s e products h a v e a quality and p r i c e t h a t i s judged p r e f e r a b l e

to

those from o t h e r countries.

This by no means implies a s t a b l e situation. Changing consumer p r e f e r e n c e s , o r

a

r e l a t i v e change in t h e technological o r d e r i n g , a n d / o r changes in productivity, r e s p e c t i v e input p r i c e s , and exchange

rates, are

elements t h a t continuously e x e r t p r e s s u r e s on t h e production s t r u c t u r e

to

adjust in o r d e r

to

continue t h e p r o c e s s of growth and

to

p r e v e n t unemployment.

Otherwise, and t h i s i s r e p r e s e n t e d by t h e relations under D, changes in inter- national t r a d e flows o c c u r , which can c o r r e c t t h e a b s e n c e of c e r t a i n adjustments.

Possibilities of t h i s n a t u r e a r e , f o r a country, r a t h e r limited because of t h e bal- a n c e of payments constraint. International t r a d e relations c a n b e a d a n g e r

to

t h e national economy, as when consumers and investors show

an

increasing p r e f e r e n c e f o r t h e lower p r i c e a n d / o r t h e b e t t e r quality of p r o d u c t s from a b r o a d .

From this more schematic description, i t h a s hopefully become c l e a r t o t h e r e a d e r how extensive

are

t h e variety of changes and t h e possible determinants t h a t o c c u r in t h e p r o c e s s of economic development. Such and analysis r e n d e r s t h e questions of whether t h e s e changes are realized c o r r e c t l y , and if not what t h e consequences are and how they can b e neutralized, even more pregnant. A possi- b l e s c e n a r i o i s given in section 5.

5. A Sketch of a Possible Explanation of the Long Wave

In t h i s section, I s k e t c h briefly a long wave p r o c e s s of economic development in which endogenous f a c t o r s are ultimately responsible f o r t h e a l t e r n a t i o n of up- a n d down-swing.

In t h i s description of economic development according t o a long wave p a t t e r n , in which I i n c o r p o r a t e no s t r i c t time p a t t e r n , I d i s c e r n t h e f o u r usual phases of t h e cycle: r e c o v e r y , p r o s p e r i t y , recession, and depression.

A g r a p h i c r e p r e s e n t a t i o n i s given in Figure 111. The cycle shows t h e smoothed deviations from t h e long-term t r e n d . The dating of t h e phases i s connected with t h e points of inflection on t h i s cycle. The p h a s e s of p r o s p e r i t y and of depression show a more o r less uniform p a t t e r n of deviation development, b e i t positive o r negative. The o t h e r two p h a s e s show t h e transition of t h e positive development of t h e deviations into t h e negative era and vice v e r s a . Whether t h e s e p h a s e s of t r a n - sition, r e c o v e r y , and recession

start at

t h e points indicated i s problematic. In t h e case of r e c o v e r y , f o r instance, growth h a s not y e t r e a c h e d t h e level of long-term growth. However, just as with t h e famous a c c e l e r a t o r mechanism,

a

smaller de- cline t h a n b e f o r e c a n have a profound influence on t h e expectations of t h e s e v e r a l economic a c t o r s , and s o on t h e decisions made. Once investment, as t h e most im- p o r t a n t determinant, h a s s t a r t e d t o r i s e , making t h e development of new s e c t o r s possible, t h e whole situation changes drastically. With r e g a r d t o t h e length of t h e c y c l e , t h e major differences between t h e s e v e r a l cycles are caused in t h e phases of r e c e s s i o n and depression. In t h e s e p h a s e s , human decision-making i s decisive, while in t h e upward phase t h e technoeconomic f o r c e s ultimately influence t h e p a c e of development. T h e r e f o r e , t h r e e d i f f e r e n t cycles are sketched as examples, e a c h

RECESSION

r T I M E

Figure 111. Possible c o u r s e s of a long wave-like development, showing smoothed de- viations of t h e long-term t r e n d , and t h e dating of s e v e r a l phases.

equally probable.

The phase of r e c o v e t y is said t o

start at

t h a t moment when s e v e r a l n e c e s s a r y requirements f o r growth are fulfilled, requirements with r e g a r d to a b r o a d r a n g e of (non)economic variables. The most important requirement

to

b e met i s t h a t t h e s t r u c t u r e of production, f o r intermediate and final demand, and t h e s t r u c t u r e of consumption b e more or less comparable, with a s t a b l e balance of payments. This means t h a t t h e production s t r u c t u r e h a s adjusted as close as possible to t h e re- quirements of t h e consumption s t r u c t u r e . inland as well as a b r o a d , in t h e s e n s e t h a t t h e s t r u c t u r a l l y unprofitable p a r t s were s c r a p p e d in t h e preceding p h a s e of depression. The nonprofitability w a s caused e i t h e r by declining consumer demand, b e c a u s e of s a t u r a t i o n when income w a s r a i s e d , or by t h e r i s e in competitiveness in t h e s e s e c t o r s in o t h e r countries. This s c r a p p i n g inevitably meant not only t h a t c a p i t a l goods, machines, buildings, e t c . , were made redundant, but a l s o t h a t l a b o r , o n c e employed in t h e s e s e c t o r s , had

to

move

to

o t h e r segments during a time of high unemployment a consequence difficult t o a c c e p t . More g e n e r a l organizational and institutional changes were equally r e q u i r e d . This p r o c e s s of s c r a p p i n g d o e s n o t work out smoothly and gradually. I t i s costly, from t h e economic a n d social viewpoint, and people, b e i t investors, l a b o r e r s , or society in g e n e r a l , will firmly r e s i s t in t h e f i r s t instances. A t such times, t h e costs of changing are valued h i g h e r t h a n t h o s e of retaining t h e s t a t u s quo. A f t e r a period, t h e length of which i s dependent on t h e importance of t h e old s t r u c t u r e s , however, changes o c c u r . The i n v e s t o r s c u t t h e i r losses, l a b o r e r s lose t h e i r jobs, and, a l s o

at

t h e institutional level old positions are given up. Sometimes, t h i s p r o c e s s of s c r a p p i n g , of a c c e p t - ing t h e necessity of changes, c a n ' b e a c c e l e r a t e d by major events, of which w a r h a s been t h e most prominent, but also t h e most t e r r i b l e one. Such a n e v e n t s h a k e s t h e