Economic Growth & Development in East Asia PDF

Economic Growth and Development in East Asia ○ The World Economic Outlook underlines that Asia will contribute about 70% of global growth this year, with China being the biggest driver at about 35%. But how do the western concepts...

Economic Growth and Development in East Asia ○ The World Economic Outlook underlines that Asia will contribute about 70% of global growth this year, with China being the biggest driver at about 35%. But how do the western concepts and theories of growth and development apply to East Asian countries like Japan, China and South Korea? Do these countries apply these theories? How do they influence them? ○ Trade openness graph → it shows how open trade has developed in the world since the birth of Capitalism and the Industrial Revolution. After reaching a new high in 1915, the period between the start of WW1 and the end of WW2 marked the lowest point since the establishment of free trade. It then grew systematically until the 70s (briefly interrupted by the oil crisis) and the late 80s. Trade openness started to regain momentum in the 90s and the 2000s until the 2008 global financial crisis, which made it slow down, and the 2020 Covid-19 pandemic. ○ “Economy” → Xenophon: «Oiko» + «Nomos»: the rules for the correct administration of a house. Aristotele adds the «Polis» perspective, the «community» of people. History of economic thought Adam Smith → Specialization through his works, Smith gives birth to the study of economic systems as a unified discipline. This discipline is Political Economy, which originates within moral philosophy. His main works are: “The theory of moral sentiments” (1759) and “An inquiry into the nature and the causes of the wealth of nations” (1776). Smith observes the shift from a feudal society to a capitalist society and describes the birth of the so-called “market economy”. The “market” is intended as an institution where equal individuals exchange property rights. The social organisation of production as well as the organization of production within a company are at the centre of his studies. In Smith’s time, English society wanted to overcome the old feudal system and let a new social and political class emerge (the industrial bourgeoisie). The position in a society depends upon one’s ability. For this to happen you need to have a shared system of rules and values and a system of equal rights. This shift was possible thanks to the Industrial Revolution, which originates from the English Revolution of 1688-89 and the Scientific Revolution. Smith understood that some nations are richer than others thanks to the division of labour and the extent of the market. According to Smith, the market is an “invisible hand” that operates without being noted. At the time, it justified freedom of exchange in a society that wanted to overcome the feudal system of production and let a new social and political class emerge. If there are equal rules and rights and shared values, there is no problem in letting individuals free to exchange goods and services. David Ricardo → Trade Ricardo introduces the concept of comparative advantages. It means that it is possible for all countries to engage in win-win international exchanges of goods and services, provided that a country specializes in the production of goods and services in which they have a clear advantage compared to the others due to differences in technology. When one country can produce a unit of a good with less labour than another country, we say that the first country has an absolute advantage in producing that good. The Ricardian model examines differences in the productivity of labour. It is the basis of other theories, such as the Heckscher-Ohlin model, which examines differences in labour, labour skills, physical capital, land, or other production factors (so not just technology) between countries. Karl Marx → Economy and Society The industrial revolution and the expansion of economic activity in the UK gave birth to an extraordinary social transformation, with two new classes actually emerging. On the one side there was the industrial bourgeoisie, but on the other there was the urban proletariat which was becoming the antagonist force, asking for more political power and voice; “Das Kapital”. He is the economist behind the theory of the conflict between the bourgeoisie and the proletarian class, both born after the Industrial Revolution. According to Marx, perpetual growth on a global scale would be the only way of managing this conflict. In other words capitalism had to become imperialism and the proletarian revolution had also to become international; There are two types of conflict: internal (between workers and capitalists) and external (between early capitalists and latecomers). The only way to manage this conflict was a proletarian Revolution. Alfred Marshall→ Organization of production at the local level The most important economist of the Neoclassical or marginalist revolution. He marks the shift away from Political Economy towards Economics. The “political” aspect is taken away in order to separate the positive analysis from the normative one. Economics is meant to become a science free from “value” judgements. “Principles of economics”: Economics as the understanding of markets through the laws of demand and supply. Economics gradually became the science studying the choice (over different options) of a representative agent (person or company) that, in a rational way, maximizes its utility, at the margin. Organization of production becomes part of a theory of prices. “Industry and trade”: treats the issues of colonialism/trade and the organization of production. “Cooperation”: he suggests that cooperatives would be a better way of organising production as opposed to capitalist firms, a view shared by John Stuart Mill. John Maynard Keynes In “the Economic consequences of the peace”, Keynes warns against forcing defeated nations to pay for war damage. He was suggesting to help Europe and in particular Germany to recover from the war. The bad management of the peace process (with enormous consequences on inflation) paved the way for the ascent of totalitarian regimes, and in particular for the ascent of Hitler in Germany. He then published the “General Theory of Employment, Interest and Money”, in which he provides a critique to the mainstream/neoclassical economic theory, which according to him only represented a special case and not the usual case. He stressed that unregulated and completely free markets generate failures and therefore public intervention is needed to guarantee employment levels. According to Keynes, during a crisis a state should spend more instead of less, in order to influence individuals’ expectations. Mainly through public investment the State can help the recovery, especially when private investment is scarce (es. Roosevelt’s New Deal). ○ Specialization: what a country produces in the «international division of labour» and how this specialization evolves over time. ○ Trade: the type of interactions – import and export - a country has with the rest of the world. ○ The political economy of production: how the society organizes itself to achieve certain goals. ○ The organization of production at the firm/local level: what type of firms or systems of firms prevail in the organisation of production. ○ Government: the capacity of government to be effective and efficient when intervening in market dynamics. Growth vs Development ○ Growth and development are not the same thing. Growth is the mean through which an aim, development, is reached. Development is the final objective. ○ How do we measure the wealth of a nation? Our perception of the world depends upon what we measure and how we measure it. The first indicator that was used on an international scale after WW2 is GDP. GDP – Gross Domestic Product It is the market value of final goods and services newly produced within a nation during a fixed period of time. It is measured by national accounting systems, following international standards. Market value: allows adding together unlike items by vakuing them at their market prices. - The problem of GDP as a parameter is that it misses non-market items such as homemaking, the value of environmental quality, and natural resource depletion. - To reflect the value of underground economy, a few adjustments are made. - Government services (which aren’t sold) are valued at their cost of production.  Newly produced: counts only things produced in the given period, excludes things produced earlier. Final goods and services: A country’s GDP includes final goods, final services, inventory investment and capital goods (since are goods used to produce other goods but in another period), while it does not consider intermediate goods (those used up in the production of other goods and services in the same period), all financial activities, used items, goods and services produced abroad. GDP as a measure of development: GDP is a measure of “quantity” of production; it says little about the “desirability” of that production under different sets of values. In principle, there could be little relationship between GDP and development, as many more economic and non-economic variables are needed to understand the well-being of a nation. GDP is still important as a metric it should be monitored, but it should not be interpreted as the final end of development policies. An increase in GDP does not automatically translate into an increase in development for everyone: it might be coupled with an unequal income distribution; furthermore, a higher GDP per-capita might not be employed for uses that increase development, such as health and education. ○ Other economic variables: employment; employment rate and unemployment rate; wages; labour productivity; exports; R&D investments; patents. Human Development According to Amartya Sen, development is multi-dimensional and people-centred. People should be seen as ends, not means, as development is the process of expanding the capabilities of each individual. Human development is defined in terms of: functionings (ways of living); capabilities (ability to choose your functionings); entitlements (rights over goods). Sen influences the way we look at and measure development. Human Development Index HDI the HDI is a first attempt to overcome the identification of development and GDP. It goes beyond the use of GDP as a sole indicator, accounting for the multidimensionality of development. It can be found in the Human Development Reports published by the UNDP since 1990. Factors that are used in the calculation of HDI: health (life expectancy); education - adult literacy: percentage of people that can read and write -enrolment: percentage of people enrolled in primary, secondary or tertiary edu. income indicator (income per-capita PPP). These indicators constitute the HDI. ○ Poverty and inequality: poverty has always been on the agenda for economists, while inequality has often been overlooked. It is considered as a normal consequence of a capitalist system, in which the distribution of wealth cannot be equal for everyone. Today, inequality is more talked about as it has become clear that it impacts growth. In the US, between 1977 and 2007 the total growth has gone for three quarters of its total to the richest 10% of the population. The richest 1% of population has gained about 60% of the growth of the period. ○ Economic development is a process of structural change, but it’s not automatic, it depends also on the comparative advantage you have when it comes to natural resources. Globalization increases the costs of getting policies wrong, just as increases the benefits of getting them right. When joining globalization, one of the true comparative advantages of a country is its ability to get the policies right or wrong, to define the right industrial policies, and to coordinate efforts in certain sectors. ○ Structural change: Structural change means shifting people and resources from one sector to the other. The timing of the change may not be desirable, or maybe changes can be too fast, making people lose their jobs, either because the job disappears or because labour can be substituted by technology. A part of society will lose out, so the government needs to have strategies to ensure the sustainability of these structural changes (i.e. training people). Some structural changes can be gradual changes, such as the SEZs and opening up the economy to trade: dealing with the speed of change is an important issue. Structural change is strictly connected to the organization of production, industrialization and the shifting of people and resources (from agriculture to industry, from industry to services). Some countries skip the stage of industrialization (instead of shifting resources from agriculture to industry, they directly go from agriculture to services) International economics International economics: International economics is about how nations interact through trade of goods and services, flows of money, and investment. As nations get closer and closer, international economics become more and more relevant. There are two main topics: ○ international trade, which focuses on transactions involving movement of goods and services across nations (gains from trade, explaining patterns and volume of trade, effects of government policies on trade); ○ international finance, which focuses on financial or monetary transactions across nations (balance of payments, exchange rate determination, international policy coordination, capital markets). U.S. exports and imports as shares of gross domestic product have been on an upward trend. ○ International trade has roughly tripled in importance compared to the economy as a whole in the past 60 years. ○ Both imports and exports fell substantially in 2009 due to the recession. ○ Both imports and exports fell again in 2020 due to the COVID-19 pandemic. The composition of world trade: a 2017 study by the WTO acknowledged that 70% of world trade consists in manufactured goods, while fuels and mining products stand at 15%. Agricultural products are the third largest type of traded goods at 10%, with other goods coming at 5%. Most world trade is in manufactured goods, but minerals—mainly oil—remain important. ○ The changing composition of developing-country exports: Over the past 50 years, the exports of developing countries have shifted toward manufactures.60 years ago, agricultural products made up about 60% of the total exports of developing countries, while today they stand at 10%. Manufactured goods have taken the undisputed lead, rising from 10% to 70% since 1960. Over the past 50 years, the exports of developing countries have shifted toward manufactures. ○ Reliance on international trade: the US are often taken as a reference when we talk about trade, as they are the biggest economic power in the world. It should be noted that, due to its size and diversity of resources, the US relies less on international trade than almost any other country. Compared to the United states, other countries are even more tied to international trade, and their imports and exports as a share of GDP are substantially higher. In general, the bigger and more diversified a country, the less its imports-exports as a share of GDP ratio. The gravity model of trade: It is a theoretical approach for the study of commercial trade through the application of the gravitational physical instrument. The value of trade between two countries depends on several factors: ○ the size of their economies, ○ Distance between markets influences transportation costs and the cost of imports and exports. ○ Cultural affinity: close cultural ties, such as a common language, usually lead to strong economic ties. ○ Geography: ocean harbors and a lack of mountain barriers make transportation and trade easier. ○ Multinational corporations: corporations spread across different nations import and export many goods between their divisions. ○ Borders: crossing borders involves formalities that take time, often different currencies need to be exchanged, and perhaps monetary costs like tariffs reduce trade. This is why Canada and Mexico are the US’s biggest commercial partners (NAFTA free trade agreement, then USMCA agreement), with stronger economies such as China, Japan, Germany, UK, France etc. right behind. If we consider European countries, we see a clear pattern: the bigger a country’s economy, the bigger its trade with the US. Germany is first, followed by UK, France, Italy, the Netherlands and Spain. Due to N A F3T.A and because Mexico and Canada are close to the United States, the amount of trade between the United States and its northern and southern neighbors as a fraction of G D P is much larger than between the United States and European countries. Canada’s economy is roughly the same size as Spain’s (around 10 percent of E U G D P) but Canada trades as much with the United States as does all of Europe. The causes of international trade: if one of these conditions is not met, there will be international trade. Five conditions of uniformity among countries guarantee the absence of trade: ○ Identical functions of productions ○ Same relative endowments of factors of production ○ Constant returns to scale ○ Homogeneous preferences (vs love of variety) ○ Absence of distortions (taxes, subsidies, imperfect competition) The gains from international trade: countries selling goods and services to each other almost always generate mutual benefits. 1. When a buyer and a seller engage in a voluntary transaction, both can be made better off. Ex. Norwegian consumers import oranges that they would have a hard time producing. 2. Countries use finite resources to produce what they’re most productive at (which means producing a good that they have a comparative advantage producing), then trade those products for what they want to consume. 3. Countries can specialize in production, while consuming many goods and services through trade, thus becoming more efficient due to economies of scale and large-scale production. 4. Trade benefits countries by allowing them to export goods made with relatively abundant resources and imports goods made with relatively scarce resources. 5. Countries may also gain by trading current resources for future resources (international borrowing and lending) and due to international migration. Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country: ○ International trade can harm the owners of resources that are used relatively intensively in industries that compete with imports. ○ Trade may therefore affect the distribution of income within a country. Gains from trade come from specializing in the type of production that uses resources most efficiently, and using the income generated from that production to buy the goods and services that countries desire. Consumption possibilities expand beyond the production possibility frontier when trade is allowed. Using resources most efficiently” means producing goods in which a country has a comparative advantage. With trade, consumption in each country is expanded because world production is expanded when each country specializes in producing goods, in which it has a comparative advantage. Pattern of trade it describes who sells what to whom. Differences in climate and natural resources explain why Brazil exports coffee, and Saudi Arabia exports oil. Some countries export certain manufactured products due to differences in: - labour productivity; - relative supplies of capital, labour, land and their use in the production of different goods and services. That’s why Japan exports cars. Exchange rate determination: exchange rates are an important financial issue for most governments, as they measure how much domestic currency can be exchanged for foreign currency, thus affecting how much goods denominated in foreign currency (imports) cost in the home country and how much goods denominated in home currency (exports) cost in foreign markets. Some exchange rates float, while others are fixed over periods of time. Balance of payments: governments measure the value of exports and imports, as well as the value of financial assets that flow into and out of their countries. Trade deficits, which is where countries import more than they export in value, may be offset by net inflows of financial assets. The official settlements balance, or the balance of payments, measures the balance of funds that central banks use for official international payments. All three values are measured in the government’s national income accounts. International capital market: capital markets are arrangements by which individuals and firms exchange money now for promises to pay in the future. International capital markets cope with special regulations that countries impose on foreign investments. The changing pattern of world trade: the negative effect of distance on trade explained by the gravity models is significant, but it has grown smaller over time due to modern transportation and communication. A global economy, with strong economic linkages between even very distant nations, is not new. There have been two great waves of globalization with the first wave not relying on jets and the Internet but on railroads, steamships, and the telegraph. International Finance Topics Exchanging risky assets such as stocks and bonds can benefit all countries by diversification that reduces the variability of income—another source of gains from trade. Most international trade involves monetary transactions. Many monetary events have important consequences for international trade. ISI (protectionism): Many countries protected their economies from foreign competition at some point, choosing protectionism. After a while, they opened up their economies to free trade, shifting towards trade liberalization. The effects of the integration into free international markets have been different. Protectionism, or Import Substitution Industrialization (ISI), is connected to structuralism and is designed to make the economy shift from the export of raw materials to an industrial footing. The new industries are in charge of producing the goods that were previously imported (import substitution) and also of processing domestic raw materials so that dependency on foreign resources can be reduced; ISI was needed to improve the balance of payments. A greater extent of market failure in less developed as opposed to richer economies provided the basic rationale for expanding the scope of state intervention and justifying ISI strategies. The main tools of protectionism are: economic protection through trade tariffs (additional prices on imported goods) and quotas (a limit on the number of imports); promotion of the most efficient and productive domestic companies (national champions), those that can compete against international companies; major role for the government and for state-owned enterprises; allowing wages and unions to raise the internal demand (people in the country should have a disposable income that they can spend to buy things within the country. Protectionism is inefficient, though using it temporarily allows domestic companies to emerge internationally, and is a delicate topic, as it requires government intervention. Protectionism has many downsides: dangerous dependency on imports of capital goods; short, artificial push for growth that can last a limited number of years, without ever making companies efficient; massive misallocation of resources is often coupled with errors in the implementation of the policies; creation of infant industries that never really grow; introduction of market distortions (such as tariffs) into already imperfect markets. ○ Export Oriented Industrialization (EOI): EOI is a method that aims at the promotion of manufacturing exports, through a reduction of export duties and the concession of tax incentives or subsidies (government provides a % payment of the price of exported goods). The timing and the speed of change strongly affect the results. During the process, there will be coalitions of consumers and producers that support the opening, while domestic industries will presumably fight against it, generating decreased consensus for the government. ○ Governments can also decide to adopt a mixed ISI – EOI strategy, just like China did with the “open door policy” since 1978. Gradual opening to foreign trade (SEZs) and foreign direct investment, the latter through the establishment of Joint Ventures (25% foreign-owned, Chinese-managed). Although Special Economic Zones and joint ventures were established and the economy was opened to foreign trade and FDI, there were limitations and restrictions, which explains why this was a mixed strategy. Variety of firms ○ Corporations (American model. Pepsi, Ford, AT&T, Boeing, Exxon Mobil, etc); ○ Zaibatsu (Japanese model: Mitsubishi, Nissan, etc.); ○ Chaebols (Korean model: Hyundai, Samsung, LG, etc); ○ State-owned, state controlled or participated enterprises (BBC, Air France, KLM, Renault, Airbus,) ○ SOEs - State owned enterprises (Chinese model: China National Petroleum, China Construction Bank, China Mobile Communication, SAIC Motor, etc); ○ Cooperatives (Credit Agricole, REWE, CONAD, etc.) ○ Non-for-profit enterprises CRAFT FIRMS AND «COTTAGE INDUSTRY» - BEFORE THE INDUSTRIAL REVOLUTION Craft Enterprises Before the industrial revolution, craft workshops were one of the most common ways of setting up an enterprise. Craft workshops were usually small enterprises where a master worked alone (perhaps with an apprentice). Families often participated (women and children). There was no spatial separation between the workshop and home. Small amounts of production were mainly for local demand. There was no division of labour in the workshops. Both master and worker produced a complete product. The “bottega” is a type of craft workshop which became extremely popular in Italy during the Renaissance. The cottage industry model Those employed in the cottage industry had their raw materials delivered by a merchant who also handled sales. In this way, agricultural workers became de facto waged workers. In some cases, the dependency was particularly strong: the merchant supplied the tools, determined quality standards and dictated delivery times. The commissioning system originated as early as the 14th century, spread widely in the 16th and 17th centuries (especially in textile production) and only gradually disappeared in the 20th century. THE RENAISSANCE WORKSHOPS «BOTTEGA» (XV° SECOLO CIRCA) THE INDUSTRIAL REVOLUTION – XVIII Century (England) The Industrial Revolution completely changed the paradigm, giving birth to the modern factory. Venice’s first is the “Arsenale”, which is considered one of the precursors of the modern factory. The revolution started in England and the new model was the “pin factory” described by Adam Smith. Taylorism – 20th century The early 20th century saw the emergence of the first management and organisational theories with the aim of maximising workers’ productivity. In his book “The Principles of Scientific Management” (1911), Frederick Winslow Taylor argued that labour productivity could be increased by optimising and simplifying work and by the elimination of unnecessary physical movement by workers. He also suggested matching a worker to a particular job suited to the person's skill level and then training the worker to do that job in a specific way. ○ The micromotion study: Soon afterwards, two industrial engineers, Frank and Lillian Gilbreth, came up with the idea of filming workers to analyse their motions, creating a new technique: the micromotion study. The examination of these visual records showed not only that those workers developed their own peculiar ways of performing a task, but also that unnecessary motions caused employee fatigue. The Gilbreths compared methods and working conditions across various plants and industries, and used this evidence to create a standardized best practice. Fordism An industrial engineering and manufacturing system that serves as the basis of modern social and labour-economic systems that support industrialized, standardized mass production and mass consumption. The concept is named after Henry Ford. It describes an ideology of advanced capitalism centred around the American socioeconomic systems in place in the post-war economic boom. Being based on mass consumption, Fordism does not allow room for differentiation and it creates scale diseconomies. It also brings organizational complexities. This system was challenged and put in a crisis by new approaches, such as Japan’s toyotism and the “Just-In-Time” production model. - JIT: Just-In-Time inventory system (invented in Japan) aim to economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process and not before. Advantages of JIT → The major cost savings come from speeding up inventory turnover, reducing inventory holding costs and thus freeing capital for other uses and/or lowering the total capital requirements of the enterprise. JIT can boost the company’s profitability, reduce risks of having excess unsold inventory, improve product quality by immediately spotting defective inputs. Disadvantages of JIT → no buffer stock in case of big disruption or problems among suppliers. EAST ASIAN INDUSTRY Organization of production in East Asia. The biggest East Asian countries have adopted their own systems in terms of organization of production. Japanese and Korean development are tightly linked, and keep important differences to the US model in terms of ownership, control and aims. Zaibatsu (after Keiretsu) → Literally «wealth produced by powerful families» Big business groups, family-owned and family-controlled, which operate in strict connection with the State, and through a thick network of affiliates in different sectors. They became really important both for industrial development in Japan ( the form of organization of production dominating Japanese economy from mid-1800 to WW2) and for their influence on South Korean growth first and Chinese growth after. The distinctive features of zaibatsu with respect to USA’s corporations: ○ Family control; ○ Management; ○ Linkage with State; ○ Purchase and sales process; ○ Credit; The whole Zaibatsu system was dismantled by the US after WW2, leaving what today are called Keiretsu to dominate Japanese economy and industry. Distinctive features of keiretsu vs zaibatsu: ○ Keiretsu have no longer a family company controlling the whole group; ○ central role is assigned to the group’s bank. ○ Preferential purchase policies within the group protect from competition ○ cross-equity shares within the group protect against external take-over. ○ Strict linkages with government’s industrial policies and national interests remain; Japanese Keiretsu firms have a more stable ownership compared to American corporations; their shareholders are usually experts of the field of production; workers are often shareholders; the different actors of a group are in constant contact. Chaebols The military government of the 60s favoured the ascent of Chaebols following the experience of Zaibatsu in Japan, with the main aim of reconstructing the country after the Korean War. Chaebols became the form of organization of production that was more suitable to reach the aim of a “fast catch-up”: South Korea needed fast structural change, learning, innovation, system stability; once the catching-up was accomplished, the challenges changed and also the organization of production must change. The new challenge is for instance to guarantee social sustainability and contestability. Chaebols are groups of companies that are formally independent, but under the administrative and financial control of one dominant family; the subsidiaries operate in different sectors and they are connected through a system of participations. Features of Chaebol: ○ similar to the Zaibatsu: pyramid with a family-owned company at the top. ○ the relevant unit of analysis is the group and not the single company; ○ operating in several different sectors; ○ Chaebols also maintain a strict relationship with the government as the aims of the companies also respond to national interests and the Chaebols become a tool for growth and economic policies; ○ A strict connection with industrial policies. They grant higher average salaries and access to better health and retirement plans, but have a number of downsides: excessive working hours; a system that can become very closed and rigid; internal complexity and management trouble due to their big dimensions. Variety of models of production organization Enterprise systems Enterprise systems are composed of legally separate enterprises that have relationships with each other in the marketplace. These enterprises benefit from geographical or relational proximity. Operating in an enterprise system has benefits that derive from collective action, external Marshallian economies and pecuniary and technological economies. Depending on the characteristics of the enterprises’ proximity, we can distinguish between: 1. Industrial districts: a socio-territorial entity characterized by the active coexistence in a circumscribed, naturalistically and historically determined territorial area, of a community of people and a population of industrial enterprises. Key factors: a major industry; presence of independent SMEs; industrial atmosphere; division of labour; high product specialization; cooperation; competition; social rootedness; community of people; frequency of face-to-face contacts; high level of trust; circulation of knowledge. 2. Clusters Geographic concentration of enterprises (both public and private) and activities complementary to production, specializing in the production of one good/service or several related goods/services. They can be firms producing very similar products (clusters of shoes, music products, motorcycles..) Or can also be enterprises that produce at different stages of the production chain, facilitating and accelerating the process of realization of the product. 3. Business networks in networks, the co-location aspect is not central. Business networks can be structured stably even between geographically distant enterprises. According to the level of centralization, formalization and coordination, business networks are structured in: informal networks; global value chains; captive networks; relational networks.  4. Enterprise groups Hierarchy: it is the mechanism for controlling transaction costs within the enterprise. However, this is limited when a crisis in the internal organization arises. As a strategy, firms may seek hierarchical flexibility, as opposed to excessive rigidity. It means a combination of transaction and integration with hybrid forms, so finding other tools and forms of organization to contain transaction costs. One alternative to hierarchy is trust and reputation. By nurturing these two virtues, businesses make themselves co-responsible and act towards lowering transaction costs. Trust: the expectation of a trader with respect to the correct behaviour of the other party. Reputation: a set of transferrable information regarding a practitioner’s history of good behaviour. Clusters and industrial districts are a constant feature of the organization of the economic activity since the Industrial Revolution in England. The most effective examples today are the Silicon Valley or Boston’s biopharmaceuticals cluster, but we can find them in every part of the world (and China as well, in Guangdong’s Specialized cities). It’s not just enterprises that operate in this system: business associations, university, development agencies, local governments, innovation centres, colleges and training schools can all be part of a cluster/industrial district. Benefits of clustering: collective efficiency – External Marshallian Economies access to specialized labour markets. Their existence reduces recruitment costs. local access to specialized input market. The presence of a plurality of activities similar or related to the same industry ensures a local supply of raw materials, machinery and specialized services; access to a specialized stream of knowledge. The location of production promotes skills, educates tastes, fosters the spread of skills and technical knowledge, stimulating the circulation of ideas). This makes production costs lower for firms in a cluster than for those outside. Possible problems of clustering: excessive competition, especially on prices; failures in innovation processes; congestion; pollution; collusion; complexities and fragilities in the mechanism of cooperation. External economies: they can be pecuniary, based on cost savings, for example purchasing a large quantity of an intermediate good from another company by decreasing the price. This also benefits other firms. Or can be technological, focused on R&D and worker training, for example training employees and then moving them to another company. They are often seen as market failures, as they lead to underinvestment. Competition vs cooperation: despite being a cooperative effort, according to Marshall the driving force behind clusters was still competition, while cooperation (or collective action) has been emphasized in later studies. Enterprises cannot be efficient individually given their size, but collective action and the benefits of agglomeration allow to benefit from external economies. Competition and cooperation are not antithetical, rather functional to each other. Competition is based on an inclusive logic. In the cluster they occur at two different times (one invests production processes, the other products). Cooperation\collective action provides access to external economies and economies of scale that the small businesses alone would not otherwise have access to, thus ensuring the very existence of the small business. Thus, the possibility of having competition on final products is also guaranteed. The logic of the competitive process is inclusive and not “one against the other”. Competition → going toward the same goal. Without the opponent the innovation process stops. Collective efficiency: joint action Different types of collective actions: Vertical: made between producers and agents. The producer is connected upstream (sub- suppliers) or downstream (distributors; customers) to them in the production process. Horizontal: made among enterprises that produce the same good. These actions could cover: marketing; purchase of inputs; use of machinery; product and process development; knowledge sharing; quality control; workforce training; sharing of large projects. Multilateral: made by agents that organize themselves into local collective institutions, such as trade associations. These institutions offer different services: legal advice; market research; technical advice; training; financial support; managerial support; assistance in obtaining financing; marketing services; quality control; organization of trade fairs; export consortia. ○ Guangdong’s cluster: Guangdong’s cluster is all but marginal. The region’s GDP is comparable to that of Spain and is 40% made by the Specialized Towns’s GDP. 1/5 of telephones in the world are produced in the Dongguan area. 30% of the global toys production is in Chenghai. Reasons why some clusters are more successful than others: willingness to participate in collective action; presence of intermediate support institutions; a network of extra-cluster linkages; ex. Connections to international research and\or development networks, especially in the case of high-tech clusters. presence of second and third grade educational institutions; cluster upgrades, in emerging economies associated with an increase in quality of life. The Italian development and districts: the different stages Postwar Italy appeared as an “underdeveloped” country. The particularly between the 58-63 Italy experienced the economic miracle with the main economic variables growing between the 9-11%, becoming the world’s 6/7° industrial power. This miracle had various explanations: one is the Lewis model of unlimited availability of labor → to “sudden” push to entrepreneurship, so employees become entrepreneurs, artisans become manufacturing firms etc. Becattini adds the perspective of the postwar historical cultural context: a general liberation from the sense of "personality compression" and "talent waste" that resulted from hierarchical organizations of labor and society as a whole ("which paid no attention to the esteem desires, ambitions, hopes and illusions of the so-called labor force"). In an insight similar to Smith's, political change was the seed for social and economic change. 2) A series of "right" decisions: accession to GATT and European Community (Treaty of Rome); Strategies of some big companies (establishment of ENI; FIAT productions); Fanfani plan for social housing; the Sinigaglia Plan that will pave the way for the mechanical industry) 3) "certain sectors of the economic ruling class, both public and private, made decisions that were not easy... but which placed Italy on the tracks of economic expansion that were most promising at the time:...intermediate technology goods to clothe and motorize Italians and furnish their homes." Public and private ruling class; people's needs; technologies; The role of districts in the 1970s, a time of great transformations, (oil crisis, Fordist production crisis and big business, changes in demand) became the greatest contribution to the country’s growth. This process, however, was set in a situation where the gap between “North” and “South” was already visible, and two different production models had emerged. Some clarifications on the district It is not a size issue. It is not the defense of SMEs as such ("small is beautiful"). The point is a social organization of production that allows them to be "otherwise large," that is, able to take advantage of economies of scale in the absence of vertical integration; It is not a closed system. There must be sharing of values (an issue that Adam Smith had already raised), but necessarily the district must place the excess production that emerges from specialization on a market larger than the local one i.e., the global market. To do this it must necessarily connect to the rest of the world (through people and technologies). It is more an issue of conscious (shared) choice versus unconscious choice by the community about the type of specialization and production that is to be made On the dimensional question: Recent (and also not recent) debate on the lack of large enterprises in Italy. The "over-emphasis" given by various scholars to industrial districts has penalized the promotion of big business; the idea that "small is beautiful" has led to a denial of the importance of big business; In truth, the two forms of organization are not in opposition- NB the district is not always possible, where there are indivisibilities in production processes integration is necessary; Some conditions make the form of enterprise system rather than large enterprise viable: the type of demand (fragmented and variable); technology; cultural and social environment (sharing the aspiration for entrepreneurship) On the question of ends: "Becattini thus proposes a reversal between ends and means. The goods produced are not the end, but the means to the satisfaction of human needs, which are not limited to the need to consume goods, but more to the need for self-realization and social integration. People's satisfaction depends crucially on the conditions of the environment in which they live and work, and these conditions are not purchased in the market." (Dei Ottati, 2017)... from the theory of GDP growth to the theory of human and social progress. The district becomes a privileged form of production organization because it achieves "human development" goals better than others. Even if firms grow and perform well, these successes are not necessarily distributed (ex. Due to wage dynamics, or because firms do not invest in the surrounding area). There is an issue of Sustainability Silicon Valley: the case of "success" among ICT clusters; Challenges emerge related to the ability to generate innovation within the cluster; "Rather than focusing on growing its own talent, Silicon Valley has become increasingly dependent upon technical talent from other countries [...] insufficient attention has been paid to the local human-resource base" "An ideological model of heroic entrepreneurship is fostered in Silicon Valley that elides some of the collective drivers of regional innovation" Linkage growth – innovative development: Economic growth → Innovation → Improved quality of life Innovation → Economic growth → Improved quality of life Link growth – innovation – development in the perspective of “human development” Cycle between: Policies fostering the community of people Innovation Innovation driven growth Between market and hierarchy: enterprise systems Business networks and global value chains. In the network, the co-location aspect is not central, and business networks can be structured stably even between geographically distant enterprises. Networks are structured in different forms according to the level of formalization, centralization and the type of coordination, giving rise to: Informal networks Global value chains Captive networks Relational networks Industrial policy and structural change Industrial policy: the core of the debate revolves around the need for state intervention on the economy. Former definition: direct and indirect subsidies to particular companies or sectors, or to specific regions, tariffs and quotas on imports, tariffs and subsidies on exports. More realistic definition: a “set of actions promoted by a government that aim at coordinating the structural change of an economy in order to achieve long term economic and social goals”. Industrial policy is first of all a discussion on the long-term aims the organization of production is at its centre. Industrial policies act via structural change their final objective in the long run is necessarily human development. Industrial policies include: policies for education and training (dealing with the mismatch between existing and future jobs); policies for labour;  welfare and social cohesion policies; policies for innovation and transformation. ○ Market failures: with market failure we mean that the market doesn’t achieve an equilibrium that is best for society. Public goods provisions (education), externalities (such as pollution), natural monopolies, asymmetric information all require government intervention. ○ Government failures: Government failure happens when governments are inefficient when trying to intervene to fix market failure. Government failure happens because of: regulatory capture (intervening in the interest of a specific sector or group and focusing only on their interests); self-seeking bureaucrats (public officials acting for their own benefit, for example corrupt politicians); rent-seeking (companies trying to maintain their privilege and their advantage created by government subsidies, instead of trying to innovate and develop). ○ Historical facts about industrial policy: following Keynes’s thought expressed in “The economic consequences of the peace” (1919), the winning nations of WW2 decide to not repeat the mistakes made after WW1, thus financing reconstruction in Europe. The USA promote a European Recovery Plan, wanted by the Secretary of State George Marshall with the aim to transfer resources to Europe to finance its reconstruction and development after the end of the war. At the same time, countries create the United Nations, whose aim is to guarantee peace. Bretton Woods Institutions In 1944, the Bretton Woods agreement is defined to set a system of rules for world economy after WW2. The four main rules were: 1) Fixed exchange rates with the dollar as the currency of reference. 2) The institution of the International Monetary Fund (IMF), an international institution that controls monetary policies and lends short-term to guarantee macroeconomic stability. 3) The institution of the World Bank, which lends over the long-run to less developed countries to finance their development. 4) The General Agreement on Trade and Tariff (GATT), which regulated and promoted the opening of economies to international trade. It later became the WTO (1995). The Bretton Woods institutions find themselves in crisis for the first time in the 70s, when Nixon declares the non-convertibility of the dollar due to high inflation and persistent balance of payments deficits in the wake of the oil crisis. In the 1980s the International Monetary Fund finds a new role in helping countries facing debt crises. Mundell Fleming Paradox (1960s) the Mundell-Fleming paradox theorizes the existence of an “impossible trinity”, which means that it is impossible to simultaneously satisfy the following three conditions in international economics: 1) fixed exchange rates; 2) free capital flows; 3) independent monetary policy. For example, Bretton Woods satisfies points 1-3; post-Bretton Woods points 2-3 are satisfied; the EU is based on the satisfaction of point 1-2. External debt crisis of DCs in 1980s - Causes of the Debt Crisis – The 80s bring a new crisis, the external debt crisis of developing countries. The causes are 80% exogenous: the first oil shock of the 70s highlights the surplus of the balance of payments for OPEC (oil producing) countries. Additional money that could be invested was transferred to western banks (petrodollars) and mostly lent to developing countries. Developing countries looked like a good investment venture, as their growth rates were higher than OECD countries. The second oil shock generates an important reaction from the governments: restrictive monetary policies: increasing interest rates; appreciation of the dollar; decrease in prices of primary commodities; increased protectionism through non tariff barriers.. This makes the cost of debt unsustainable for developing countries such as Mexico, Brazil and Argentina, which declare their default in the 80s. There were also endogenous causes: the main one is a bad use of loans, which went on to finance expenditures rather than investments. The next step was the debt relief of the 90s. Highly indebted poor countries (HIPC) became eligible for having their huge debt relieved, provided they: adjusted to the IMF and World Bank standards; were positively evaluated after 3 years; presented a poverty reduction strategy paper for three years. Most countries, mainly located in Africa, have received the full amount of debt-relief. ○ Asian financial crisis: the IMF was again involved in the Asian financial crisis, which arose mainly from private debts. However, at some point financial institutions were nationalized and the IMF lent money to repay international creditors (conditionality on reforms). Washington consensus consensus over specific policies to be implemented in developing countries. Key words: privatization – deregulation - liberalization Policies included: liberalisation of foreign trade, elimination of government subsidies, privatisation, deregulation, encouragement of foreign direct investment, lowering of exchange rates, fiscal and monetary austerity. Structural adjustment programs began to be conditioned upon undertaking of these reforms. There was a consensus between the IMF, the World Bank and the US Treasury. The current situation: 2001 (Twin Tower terrorist attack) marks a turning point and a new phase of globalization. Large economies enter the WTO (China in 2001); the USA become a source of instability in the global economy (2008 global financial crisis). Crises are more systemic, as the global pandemic and the war in Ukraine have shown. There are new global challenges and a new push towards protectionism, as well as a revisitation of some ideas by the IMF, especially on capital control. Main challenges: climate change (economic transition; circular economy); digitalization and artificial intelligence (automatization of creative and manual processes; birth of new jobs and death of old ones); demography (migration; ageing/really young population); interdependence and systemic shocks (reaction to global crisis such as the 2008 financial crisis, the 2020 pandemic, the 2022 energy crisis) Strategic industrial policies: examples are the European Green Deal, China 2025, Chips for America… These are all industrial policies that aim to tackle the current technological, environmental and economic challenges. Many of these are concerned with global competitiveness or the climate, global value chain resilience, geopolitical matters and national security. New paradigms in development economics: need to escape the government against market arguments, while still taking into account market failures and government failures. More research is needed to find remedies to government failure, that can be: improving institutional design (laws for regular reporting, performance criteria…); improving organisational design (evaluation systems for the Public Administration); improving organizational loyalty; improving social capital, trust, moral sentiments.