topic03

							National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 EC301 Irish Economy

 • Topic 3
 • Growth, Technological Change, and
   Innovation




                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 Background

 •   Recent strong growth
 •   Is is a miracle?
 •   Analogy with Asian Tigers
 •   Krugman
 •   Roubini
 •   The role of science
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 Asian Tigers and the Celtic Tiger

 •   Paul Krugman
 •   “The myth of Asia’s Miracle”
 •   Neo-classical growth model
 •   Solow growth model
 •   Y= F(K,L)
 •   Diminishing marginal products
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 Neo-classical growth

 • Sources of growth:
 • Labour input
       – (including improved human capital)
 • Capital input
       – (investment)
 • Total Factor Productivity
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 The Solow Decomposition

 • y = aL + (1-a)K +TFP

 • y = extensive growth + intensive
   growth


                                               Dr Aidan Kane
National University of Ireland, Galway     Department of Economics
Ollscoil na hÉireann, Gaillimh             Roinn na hEacnamaíochta


 Extensive vs. intensive growth
   Example from Roubini web reading
   Singapore 1960-1990 (average annual growth rates)




                                                 Dr Aidan Kane
National University of Ireland, Galway               Department of Economics
Ollscoil na hÉireann, Gaillimh                       Roinn na hEacnamaíochta


 Extensive vs. intensive growth
   Example from Roubini web reading
   Singapore 1960-1990 (average annual growth rates)
   % DGDP                8.4% % Dpop          6.4%
   % Dcapital            11.3% share of capital = 0.33




                                                           Dr Aidan Kane
National University of Ireland, Galway               Department of Economics
Ollscoil na hÉireann, Gaillimh                       Roinn na hEacnamaíochta


 Extensive vs. intensive growth
   Example from Roubini web reading
   Singapore 1960-1990 (average annual growth rates)
   % DGDP                8.4% % Dpop          6.4%
   % Dcapital            11.3% share of capital = 0.33
   Contribution of captial = 0.33 x 11.3 =             3.73%




                                                           Dr Aidan Kane
National University of Ireland, Galway               Department of Economics
Ollscoil na hÉireann, Gaillimh                       Roinn na hEacnamaíochta


 Extensive vs. intensive growth
   Example from Roubini web reading
   Singapore 1960-1990 (average annual growth rates)
   % DGDP                8.4% % Dpop          6.4%
   % Dcapital            11.3% share of capital = 0.33
   Contribution of capital = 0.33 x 11.3 =             3.73%
   Contribution of labour = 0.67 x 6.4 =     4.29%
   Extensive growth              =     8.02%


                                                           Dr Aidan Kane
National University of Ireland, Galway               Department of Economics
Ollscoil na hÉireann, Gaillimh                       Roinn na hEacnamaíochta


 Extensive vs. intensive growth
   Example from Roubini web reading
   Singapore 1960-1990 (average annual growth rates)
   % DGDP                8.4% % Dpop          6.4%
   % Dcapital            11.3% share of capital = 0.33
   Contribution of capital = 0.33 x 11.3 =             3.73%
   Contribution of labour = 0.67 x 6.4 =      4.29%
   Extensive growth              =     8.02%
   Intensive growth (%DTFP) =          8.04% - 8.02%
                                         =    0.38%
                                                           Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 TFP in Ireland

 •   Private sector non farm employment:
 •   1987 620,000
 •   1997 900,000
 •   Annual average growth = 4.2% approx
 •   Labour share:     .60 approx
 •   Contribution of L = 2.5%
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 TFP in Ireland (cont’d)

 •   Contribution of capital = 0.5%?
 •   Extensive growth = 3% approx
 •   Intensive growth = 8% - 3%
 •   i.e. %DTFP        =5%?
 •   But is this wrong? Is it real?
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 Sources of a slow-down in growth

 •   TFP might be artificially inflated
 •   Limits to expansion of labour force
 •   Limits to expansion of education
 •   DMP of investment
 •   Monetary factors (vs. real factors)
 •   Lack of innovation
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 Innovation, basic science and Irish
 economic policy
 •   Chapter 1 of on-line Forfás report
 •   Sunday Business Post article
 •   Main policy initiatives
 •   Explanations of innovation
 •   What role for policy in Ireland?
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


    TFP, Innovation, and Irish policy

• Problems with industrial policy
• Lack of linkages from MNCs
• Culliton Report 1992
• Science, Technology and Innovation Advisory
  Council (Tierney) Report (1995)
• Government White Paper on STI (1996)
• ICSTI, Information Society Commission,
  Technology Foresight Initiative (Forfás)
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


How does this relate to
economics?                               (1)
•   Neoclassical growth theory: TFP is exogenous
•   ‘manna from Heaven’
•   TFP is a left-over, (the Solow Residual)
•   But TFP is hugely important, so...
•   We need to endogenise TFP
•   i.e. explain innovative activity
•   We’ll look at Basic Science as one part of this
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 How does this relate to
 economics?                               (2)
 • A policy debate is underway
 • i.e. one about ‘the nature of markets and the role
   of the state’
 • Can welfare economics/public choice theory help
   Irish policy makers?



                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 ‘Manna from Heaven’

• The linear model:
• ‘Eureka!’
• i.e. first random
  inspiration/invention/innovation/basic science
• Then, to the firm, (the D of R&D)
• Then to the market
• Given this…what’s the role for policy?
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 A role for policy in supporting
 innovation?
 • Classic 1962 welfare economics argument by
   Kenneth Arrow
 • Identifies market failures in research:
       – Indivisibility
       – Inappropriability
       – Uncertainty
 • These imply a ‘public good’ rationale for govt
   funding?
 • A “free ride for an SOE”?               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


    But...

•    Is the linear model wrong?
•     complex knowledge
•    is uncodified, is tacit, implicit
•    i.e. appropriable
•    not a public good
•    No market failure?
•    Companies can and will do it?             Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 And even more...

• Historically, much basic science arises from the
  marketplace/applications, rather than vice versa
• Computing
• Materials science
• Mathematics



                                               Dr Aidan Kane
National University of Ireland, Galway            Department of Economics
Ollscoil na hÉireann, Gaillimh                    Roinn na hEacnamaíochta


 Modes of knowledge production
 Mode 1                                      Mode 2

 • Problems set/solved                   • ..in the context of
   by academics                            applications
 • Disciplinary                          • Transdisciplinary
 • Homogeneous                           • Heterogeneous
 • Hierarchical                          • Heterarchical
 • Internal quality                      • Socially
   control                                 accountable
                                                        Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


Economic benefits of basic research
(Section 1.3 Forfás report)



•   New, useful information
•   New instrumentation and methodologies
•   Skills, especially skilled graduates
•   Access to networks of experts and information
•   Solving complex technological problems
•   Spin-off companies
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 Implications for policy?

 •   Science dos not ‘cause’ innovation
 •   Don’t rely on spin-offs
 •   Technological Capability
 •   You can’t free ride
 •   The System is Complex
                                               Dr Aidan Kane
National University of Ireland, Galway   Department of Economics
Ollscoil na hÉireann, Gaillimh           Roinn na hEacnamaíochta


 Institutional concerns

 •   Role of ICSTI etc. is ‘co-ordination’
 •   State is highly centralised
 •   Importance of accountability
 •   e.g. in Universities Act 1997
 •   National Curriculum
 •   Rent-seeking
                                               Dr Aidan Kane