Maastricht Chronicles: Innovation * Economics * Research

Problem Statement: The WTO Boundary-Setting Controversy and The Role of Economic Traditions

2005-05-07T04:56:00.000-07:00

FIRST CHAPTER DRAFT
comments warmly welcomed
May 2005

Over the last half century, international trade has experienced unprecedented and accelerating growth. Between 1950 and 2002, the share of global GDP traded across borders more than tripled, from 8% to 29% (WTO 2003). The international legal framework for regulating cross-border trade - the Multilateral Trade Regime - has grown in tandem with trade itself. Its scope has expanded steadily since the 1960s. Slowly at first, and later fast enough to create serious conflict between trading partners, the multilateral regime overseen by the World Trade Organization has expanded into areas of economic policy making that had not before been seen primarily (or even at all) as trade related. The question of just how far the multilateral regime's jurisdiction should extend is what I will call the WTO boundary-setting problem.

The last six years have witnessed unprecedented conflict over this problem, beginning with the riots outside the Seattle Ministerial Conference in 1999 and continuing into the metaphorical riot inside the confidential negotiation room at the Cancún Ministerial Meeting in 2003, when developing country ministers caused the collapse of negotiations rather than agreeing to expand the WTO's jurisdiction further. This dissertation aims to provide a knowledge-based analytical framework to explain the reasons why developed and developing countries find it so difficult to agree on where to set the WTO system's boundaries. In doing so, I hope to clarify a number of issues relating to appropriate distribution of powers between national and supranational governance instances, as well as the interaction between the WTO system and development strategy.

This chapter proceeds in five parts. The first describes the shifting boundaries of the multilateral trade regime over the last fifty years as tariff discussions have increasingly given way to negotiations on non-tariff issues. Part two reviews the rocky history of the current Doha Round of multilateral negotiations, drawing attention to the systematic North-South split over the appropriate extension of the WTO's jurisdiction. The third section constitutes a first approach at theorizing the subject, briefly discussing the unsuitability of traditional international relations theory to the study of the subject and finding knowledge-based international relations theories a more promising avenue. The fourth part introduces the notion of "Economic Traditions" into the debate, as a means of starting to operationalize a knowledge-based framework for analysis of the WTO boundary-setting problem, and examines the role of economic traditions in helping states conceptualize their understandings of "state interest." Section five reviews Ha-Joon Chang's "Kicking away the ladder" argument, focusing on its congruence with knowledge-based views of the WTO boundary setting controversy. I will then conclude with by briefly suggesting how a research design based on in-depth interviews of key "discourse generators" and attitudinal surveys of WTO negotiators can illuminate the questions set out in this chapter.

1.1 The Shifting Focus of Multilateral Trade Negotiations

Multilateral trade negotiations are not what they used to be. When the General Agreement on Tariffs and Trade (GATT) was launched in 1948, the nascent multilateral trade regime (MTR) was thought of as a means of expanding world trade by reducing border barriers. In the late 1940s, and as GATT's name implies, border measures like import tariffs and quotas were the predominant policy instruments states used to regulate international commerce, with tariffs playing the preeminent role. "Tariff abatement" and "trade liberalization" could be and were used as rough synonyms. System participants took it for granted that GATT was predominantly an institutional mechanism for negotiating tariff reductions on a multilateral, non-discriminatory basis. Border barrier negotiations were the bread-and-butter of the GATT system.

From 1947 until 1986, seven rounds of multilateral negotiations were concluded under the auspices of GATT. The first five of these, between 1947 and 1961, dealt exclusively with tariffs. The 1964-1967 Kennedy Round added anti-dumping measures to the negotiations, representing the first incipient expansion in the MTR's remit beyond the realm of tariffs. The 1973-1979 Tokyo Round added non-tariff barriers to trade formally onto the agenda for the first time. However, the non-tariff barrier agreements reached in the Tokyo Round were carefully circumscribed to particular industries (e.g. civil aircraft, bovine meat) and limited to such uncontroversially trade-related matters as export subsidies and customs valuation. Moreover, most of the Tokyo Round's non-tariff agreements were "plurilateral" rather than multilateral: they were voluntary opt-in agreements applying only to some of GATT's contracting parties, not to all (WTO 2005). For the most part, then, the first seven rounds of multilateral trade negotiations (or MTNs) led to agreements that "stopped at the border" - they had only limited implication for the conduct of domestic economic policy by the contracting parties.

With the 1986 Punta del Este declaration that launched the Uruguay Round MTNs, the agenda for world trade talks dramatically broadened. After seven rounds of liberalization, average tariff rates for manufactured goods had already been brought down considerably, from 40% at the launch of the multilateral system to a mere 4.7% after implementation of the Tokyo Round agreements (WTO 2005). As average tariff rates fell, tariffs lost their traditional role as the primary negotiable impediment to cross-border commerce. Not surprisingly, trade negotiators responded by shifting their attention from tariffs to other policies judged to have trade-restricting effects analogous to those of tariffs: a heterogeneous range of policy-instruments grouped under the catch-all term "non-tariff barriers to trade" ( or NTBs.) This shift in focus led to the inclusion, in the Uruguay Round agenda, of a broad range series of policy-areas that had not before been subjected to multilateral disciplines. These included everything from trade in services to sanitary standards to intellectual property rights and a broad range of trade-related investment measures such as technology transfer provisions, local sourcing targets, and minimum export requirements. As Ariff (1999) points out, "the argument that the effects of these measures are similar to those of border taxes and subsidies is relatively new."

This growth in the scope of multilateral negotiations raises a series of concerns quite different from those implied by the original GATT framework. As negotiations on non-tariff barriers tend to displace traditional tariff abatement talks as the daily fare of MTNs, the nature of the multilateral trade regime has changed. A system that once stopped at the border now "extends well beyond border measures and reaches deep into domestic regulatory structure," (Sampson 2001) requiring policy change in broad swathes of formerly domestic economic policy areas to ensure compliance with new supranational disciplines.

So expansive were the Uruguay Round agreements that, as Sampson (2001) notes, "WTO rules now apply not only to the one-fifth of world production that is traded but also to goods and services that may never enter into trade." In the words of Sylvia Ostry (2000), a former Canadian trade negotiator, "the degree of intrusiveness into domestic sovereignty bears little resemblance to the shallow integration of the GATT with its focus on border barriers. (...) The WTO has shifted from the GATT model of negative regulation - what governments must not do - to positive regulation, or what governments must do."

Another way to conceptualize this phenomenon is to say that the Uruguay Round agreements substantially redefined the boundary between national and supranational levels of governance, in favor of the latter. In this sense, the system's name change in 1995 points to a real transformation: the MTR is no longer chiefly an "agreement on tariffs," but rather a world organization, a locus of supranational governance. According to the Consultative Board to the Director-General Supachai Panitchpakdi (2004), as analysis points to the need to extend supranational governance "one could see the WTO becoming essentially an international economic regulatory level of government." Of course, the board members add, this "is a challenge to more traditional thinking about the sovereignty of states."

The shift in negotiating focus towards NTBs has highlighted concerns that hardly arose before the Uruguay Round. Before the Punta del Este Declaration, common-sense understandings of what constituted the proper purview of the MTR hardly appeared in need of elaboration. Since then, questions regarding what belongs within MTN agendas and what does not have acquired increasing salience. The boundary-setting debate has injected an unprecedented degree of conflict into MTNs. Indeed, as I will show in the following section, the boundary setting problem has become one of the most controversial questions in the current round of multilateral negotiations.

Moreover, as scholars of the WTO system have noted, there is no broadly shared criteria for deciding what does and does not belong within the organization's purview (Charnovitz 2002). In addition to the so-called Singapore Issues (analyzed below,) observers have called for environmental and labor issues, human rights, health, and corruption control measures, among others, to be added to the WTO's negotiating agenda. While all of these can be seen as "trade related" in some sense, the proliferation of suggestions starkly demonstrates that the WTO's potential remit is virtually limitless. Almost any aspect of economic policy - and some that are not economic at all - can be interpreted as "trade related." It is not surprising, then, that agenda setting has become one of the most contested aspects of the Doha Round MTNs: negotiations about what ought to be negotiated have increasingly come to dominate the negotiating process.

1.2 From Cancún to Geneva

One practical result of the growing scope of the MTR can be seen on the matter of implementation. The conclusion of GATT negotiating rounds until the Tokyo Round had called for nothing more complicated than altering the tariff rates contracting parties applied to various goods at the border. By contrast, implementation of the Uruguay Round agreements called for a complex and costly process of institutional adaptation across a variety of economic policy areas newly deemed to be "trade related."

The implementation problems arising from the breadth of agreements reached in the Uruguay Round affected developing countries particularly adversely, leaving them ill-disposed to proposals for further expansions of the MTR's scope. As WTO Director-General Supachai Panitchpakdi (2001) acknowledged a lack of effective participation meant many developing countries "signed up to commitments whose consequences and implications were not assessed in terms of their applicability to the least developed countries' levels of economic development." Implementation costs in some cases exceeded the total development budgets of LDCs (Sampson 2001). As a result, UN Secretary General Kofi Annan (2001) could summarize the post-Uruguay Round sentiment in the developing countries saying that "not surprisingly, many of them feel they were taken for a ride." While developed country delegations saw further expansion of the MTR's remit as a natural area for negotiations in any new round of MTNs, the bitter aftertaste the Uruguay Round left in many developing country Members hardly predisposed them to back such a program.

Soon, the prevailing atmosphere of disenchantment in developing country governments created an impasse. On August 14th, 2003, the WTO Ministerial Meeting in Cancún, Mexico, "adjourned without an agreement" - to use the diplomatic euphemism. Talks had deadlocked over a controversy on the inclusion of four new policy areas into the negotiations' agenda. While a group of developed countries led by the European Union, Japan and South Korea insisted on expanding the WTO's remit to include the new areas, the developing countries, led by the newly formed G20 group of developing countries (comprised of Argentina, Brazil, Bolivia, Chile, China, Cuba, Egypt, Guatemala, India, Indonesia, Mexico, Nigeria, Pakistan, Paraguay, Philippines, South Africa, Tanzania, Thailand, Venezuela and Zimbabwe), refused to launch negotiations on any of them. Under such circumstances, the Mexican chair of the talks adjourned the conference, having concluded that no consensus would be possible. Although developing and developed Members certainly disagreed on a wide range of areas, ranging from farm subsidy reductions and further manufacturing tariff cuts to proposals for a special regime for cotton, all sides concurred that the controversy over the inclusion of the four new issues was the proximate cause of the Cancún impasse.

The new issues at the center of the impasse - transparency in public procurement, competition policy, investment policy and trade facilitation - were first proposed as areas for future negotiations in the 1996 WTO Ministerial Conference held in Singapore, and so they came to be known as the "Singapore Issues". At the 1996 meeting, working groups were created at the WTO secretariat to conduct preliminary research into the relationship between each of these policy areas and trade, with the implicit aim of eventually expanding the MTN agenda to include the four areas. But in the following seven years, no consensus was reached on inclusion of the Singapore Issues. Instead, starting with the ill-starred 1999 Seattle Ministerial Meeting, the question of agenda expansion increasingly separated WTO Members until the dramatic collapse in Cancún.

The collapse of the Cancún Ministerial meeting brought the Doha Round to a temporary halt. Kenya's Trade Minister George Oduor, who participated in the exclusive "green room" negotiations where the talks collapsed, was categorical about the central bone of contention: "The Singapore issues were at the centre of the deadlock, all of them. The developing countries say that they are not ready for any of them." Mutual recriminations quickly followed. U.S. Trade Representative Robert Zoellick lay blame on those who resisted expanding the organization's remit, saying "there were 'can do' and 'can't do' countries here. The rhetoric of the 'won't do' overwhelmed the concerted efforts of the 'can do'. 'Won't do' led to impasse." (Guardian 2003)

Developing country delegations were incensed to find that the text presented for agreement at Cancún ignored their consistently articulated opposition to inclusion of the Singapore Issues into the negotiating agenda. Echoing the view of a number of African delegations, Chandrakant Patel, a Ugandan trade official, wrote, "nowhere was the sense of being marginalized and let down greater than with respect to the Chairman's text that dealt with the four Singapore issues. (...) Not only did the text completely ignore the views of a strong majority of WTO’s membership, but also worse, it linked progress on issues critical to their livelihood (agriculture and non-agriculture market access) to Singapore issues, which are of only marginal concern to the EU’s businesses and public. The reaction of African delegations (and most of the other developing countries) was of outrage." (Patel 2003) In his statement to the press, Mr. Oduor was even more direct: "You ask me who is to blame? I would say it is those who have been trying to manipulate the process. Those who have been trying to manufacture consensus. The EU and the US, we believe ourselves, are to blame." (Guardian 2003)

Beyond the immediate recriminations, many saw the collapse at Cancún as heralding a realignment of North-South power relations within the MTR. Alek Erwin, South Africa's trade minister, welcomed the developing countries' newfound negotiating muscle, telling reporters, "this is the first time we have experienced a situation where, by combining our technical expertise, we can sit as equals at the table. This is a change in the quality of negotiations between developing and developed countries." (Guardian 2003)

Behind the scenes, negotiators moved to seek grounds for a compromise that could relaunch the stalled Doha Round. Recognizing that the highly politically charged atmosphere and compressed time-scales inherent to ministerial conferences had contributed to the difficulties in Cancún, negotiations were launched at the General Council level - i.e. among permanent trade negotiators at WTO headquarters in Geneva - with limited ministerial participation. At the end of July, 2004, permanent trade negotiators at the WTO's General Council in Geneva reached a compromise agreement to break the log jam. As part of this compromise (WTO 2004) - which has come to be known as the July Package - the developed countries agreed to exclude the three most contentious Singapore Issues from the negotiating agenda, while developing country representatives agreed to include only the fourth, Trade Facilitation, in the negotiations.

As far as the WTO boundary-setting question goes, then, the July Package must be seen as a victory for the developing world. "Doing away with negotiations on these issues for the time being is a big relief for developing countries, and also a significant gain." (Khor 2003) The inclusion of the Singapore Issues into the Doha agenda would have substantially shifted the boundary between national and supranational levels of governance. Agreeing multilateral disciplines on issues like competition, investment and public procurement would have required worldwide harmonization of national policies on the new issues, constraining the economic policy-making space available to national governments. As a result of the July Package, negotiations are to be launched only on the least objectionable of the Singapore Issues. Trade facilitation negotiations are meant to achieve a degree of uniformity in customs regulations and administrative practices, subjecting them to supranational disciplines with a view to achieving cost-savings and lowering trade costs. Compared to the three other Singapore Issues, trade facilitation negotiations have much less potential to constrain Members in their choice of domestic economic policies.

This compromise on the Singapore Issues was reached as part of a broader agreement, including difficult areas of negotiation like agricultural subsidies and further tariff reductions on manufactured goods. While the overall package, by necessity, included a mix of gains and losses for both blocks of Members, on the boundary setting question the July Package clearly represented a rare reversal for the developed block's position. Despite the concerted push by developed country negotiators, the trend towards an ever-broadening negotiating agenda for MTNs that started at Punta del Este was, at least temporarily, arrested. Key developing countries' ability to extract important concessions were also seen as important. "In the efforts to restart the talks, and get their way on agriculture, the US and EC were forced to recognize that without talking directly with Brazil and India (for the G20) the WTO talks would not move forward." (Raghavan 2003) There is little precedent for developing country priorities on controversial issues to be reflected in agreements in the WTO system.

As shown by the collapse of the Cancún Ministerial, the WTO's Membership is deeply divided over the proper scope of the MTR. Attitudes to the proposal to expand the WTO's purview split the Members according to their level of development. At the same time, this disagreement did not permanently derail progress in the Doha Round. Through the July Package, Members showed their ability to work out pragmatic compromises despite deep-seated disagreements. Moreover, the July Package showed that, armed with sufficient technical expertise, clarity of purpose, and the political will to negotiate together as a block, developing country members can decisively alter the outcome of WTO decision-making even on the most sensitive of policy areas.

Yet, the July Package should perhaps be seen as a truce in the ongoing battle between WTO's developing and developed Members over the proper place for the boundary between national and supranational governance, rather than as a definitive solution. The wording of the Geneva declaration did not permanently exclude the three remaining Singapore Issues from the purview of the WTO; it merely stated that no further negotiations on those issues would be conducted within the framework of the Doha Round MTNs. Although "constructive ambiguity" in the agreement's wording left the issue purposefully nebulous, some Members have interpreted this to mean that ongoing research within the WTO secretariat's working groups may continue, with a view to including the three remaining issues in future rounds. Certainly, developed Members' perceived interest in instituting supranational disciplines on competition, investment and public procurement remains intact, and continue to be advanced in other negotiating fora, such as regional and bilateral trade agreements. Undoubtedly, the excluded Singapore Issues stand every chance of making a return to the arena of MTNs at some point in the future.

Yet the broader question of the appropriate scope for the multilateral trade regime is no closer to being settled now than it was before the July Package. While trade representatives in Geneva reached a politically unavoidable compromise to relaunch the Doha Round, Members have yet to find a broadly shared formula to determine which issues belong within the purview of the multilateral trade regime and which do not. Developed Members continue to perceive that expanding the scope of supranational governance through the WTO mechanism would be beneficial to their interests, while the bulk of the organization's developing Members continue to perceive such a program as a threat.

1.3 Making sense of the gap in positions

The emergence of stable, divergent positions between developed and developing Members on the WTO boundary setting problem is one of the most striking aspects of the post-Uruguay Round MTR. Yet the academic literature has little to say about the problem. Jackson (2003) and the Consultative Board to the Director-General Supachai Panitchpakdi (2004) address the problem in general terms, discussing broadly the considerations that ought to inform "power allocation decisions" generally, but they have little to say about the specific questions surrounding inclusion of the Singapore Issues. Moreover, the north-south divide on the question has received scant attention. Why does one group of countries perceive the expansion of supranational governance as beneficial while another perceives it as prejudicial? This dissertation will seek to set out an analytical framework capable of elucidating the question.

The main strains in international relations theory - realism and internationalism - are of little help in answering such questions. Both traditions assume that states' foreign policy decisions unproblematically reflect their interests. Leading realists like Hans Morganthau and George Kennan "held that states were the central actors in world affairs and that they acted purely in their own self-interest in a single-minded pursuit of political and military security." (Barfield 2001) While it departs from realism on a series of issues, internationalist IR theory shares realism's assumptions that states have little difficulty in understanding their interests and rationally formulating policies to advance them. Institutionalists agree that "states in international negotiations rationally base their goals solely on their own interests." For institutionalists, "rational states can calculate the future benefits and costs of their actions." (Abbott 1989)

While the schools diverge on their views of what constitute appropriate state interests - with realists confining the calculus strictly to defense and security matters and institutionalists considering a broader range of objectives including political stability, wealth, distributive justice, etc. - they coincide on the view that states are the basic unit of analysis, that states unproblematically know their interests, and that states are able to formulate rational policies to advance their interests. Analysis is geared at elucidating how states interact given a pre-existing understanding of what their interests are. This is not surprising, considering that such traditions were elaborated largely to deal with problems of international security where interest can be defined relatively straightforwardly: it would be idle to spend much time questioning why precisely states may have an interest in safeguarding themselves from external attack. For both of these traditions, then, the notion of "state interest" is a given rather than an object of analysis: no complex inquiry is necessary to understand how it is formulated.

Neither realism nor institutionalism can serve as a reliable guide when the focus of analysis shifts to questions as abstract and technically complex as the WTO boundary setting problem. On such a question, "state interest" is far from intuitively evident, and the process whereby states come to an understanding of what is in their interest itself becomes a key matter for analysis. Moreover, even once a state has formulated an understanding of its interest, the causal connections between means and ends is far from self-evident. Again, this is the case particularly on complex technical policy areas. When "state interest" is not intuitively evident, inquiry must be pushed back one level of abstraction: from "how do states pursue their interests?" to "how do states come to formulate a view about what is and what is not in their interests?"

In accepting such a position, this dissertation will adopt the standpoint of constructivist international relations theory, sometimes also referred to as "cognitive" or "knowledge-based" theory. Constructivist theorists criticize realists and institutionalists for "assuming that state identities and interests exist exogenously." (Barfield 2001) Instead, knowledge-based theories hold that state interest formulation must be endogenized, that they must be taken as a key area of scholarly interest. Within a knowledge-based framework, ideas matter in the process of state identity and state interest formulation. As Haas (1990) puts it, "the knowledge that actors carry in their heads and project in their international encounters significantly shapes their behavior and expectations."

The core cognitive insight is that cooperation cannot be completely explained without reference to ideology, the values of actors, the beliefs they hold about the interdependence of issues, and the knowledge available to them about how they can realize specific goals. (Haggard and Simmons 1987)

It is from this substratum of ideas, beliefs and positions that state representatives formulate (or, in cognitivist terms, "construct") an understanding of state identity and state interest, of who they are and what they want.

The WTO boundary setting controversy is a clear illustration of a policy area where state interest is far from intuitively and unproblematically self-evident. Moreover, it is a clear example of an area of deep divergence between different states in their formulation of interest. The history of the MTR since the Punta del Este declaration shows vividly that boundary setting has become a key area of disagreement between developed and developing Members in the WTO. At present, no universally accepted criteria exist to determine which policy areas should be regulated at the multilateral level, and which should be left to national jurisdiction.

This dissertation will argue that state negotiators set out their positions on this question on the basis of perceptions of state interest that are constructed rather than given. But taking into account the considerable complexity of the issues involved such construction must necessarily represent the outcome of long logical chains, of a complex series of calculations, discussions, and persuasions - a process where knowledge and perceptions of relevant causal relationships play the leading role.

In short, the WTO boundary setting controversy is precisely the sort of problem that knowledge-based international relations theories were developed to elucidate. This dissertation will set out a knowledge-based framework for analysis of that problem.

A cautionary note is in order. The constructivist approach has often been criticized for a degree of intellectual sloppiness. Palan (2000) launches one such critique by drawing attention to the heterogenous variety of intellectual traditions knowledge-based theorists claim as their own, calling constructivism "an incredibly broad movement encompassing, among other schools of thought, Weberian interpretative sociology, Symbolic Interactionism, variants of Marxism, Veblenian institutionalism, post-structuralism(s) and hermeneutics." This multiplicity, he argues, has led to serious confusion among those claiming the constructionist mantle. Overall, he holds, "constructivism is not a well-defined sociological approach. Terms such as constructivism, constructionism, and constitutiveness are frequently used in different branches of the social sciences and are, unfortunately, used by different people to describe different things." Self-described constructivists in International Relations disagree over such fundamental matters as what is constructed (is it identities? is it interests? both?) and who does the constructing (state elites? cultures? policy subsystem participants? and, in any case, how is each of these to be understood?) In order to operationalize constructivist insights into a coherent, rigorous framework, clear answers need to be provided to these questions.

My approach will follow the pioneering work of Kingdon, Sabatier and Jenkins-Smith. If, as Kingdon (1984) argues, "elite perceptions of causal relationships can play a critical role in the selection of policy alternatives to which they accord serious consideration," the main task facing us shall be systematically to identify how system participants construct stable understandings of "state interest" on the basis of the key causal relationships they see as relevant to the WTO boundary setting problem. This approach, centered on perceptions of causality and their role in configuring understandings of appropriate policy choices, contrasts with an older vintage of theorizing that centered scholarly interest on the normative orientation of policy makers (Sabatier and Hunter 1989). This focus on causal perceptions seems particularly germane to policy questions marked by technical complexity, where disagreements about the likely outcome of a given policy course weigh more heavily than divergent ideological positions.

The WTO boundary setting controversy appears to be a clear example of such a policy area. The persistence of disagreements between blocks of countries on the matter can then be recast in these terms: In formulating their understanding of national interest, developed countries have come to the view that expanding supranational governance is in their interest, while developing countries have, on the whole, come to the opposite conclusion. Due to the complexity of the policy area, it is not immediately evident how those holding each view conceive of the links between cause (expansion of the WTO's borders) and effect (positive or negative outcomes for the country they represent.) Normative orientation can only very partially elucidate the question. It is perceptions of causal relationships that come to the fore: what chains of reasoning have led each group of state representatives to come to construct their given understanding of state interests? Which causal relationships have they focused on to reach a set of conclusions that allow them to construct a stable and coherent view of state interests?

Given the stability of positions in the north-south disagreement on the WTO boundary setting question, a further set of questions arises. Why is it that participants seem to vary in their conclusions depending on the level of development of the country they represent? Do system participants reach different conclusions from an analysis of the same set of causal relationships, or does the disagreement arise at a more fundamental level? Do they share a framework of perceived causal relationships but disagree on its implications, or do they arrive at their conclusions by reference to different, perhaps even incompatible, sets of perceived causal relationships?

As hypothesis, I postulate that the persistent disagreements between developed and developing countries on the proper extension of the WTO's jurisdiction is rooted at this deeper level. The gap in negotiating positions, I will seek to show, is rooted not in disagreements over the implications of a shared framework of perceived causal relationships, but rather in a more fundamental disagreement over the nature of the relevant causal relationships involved.

1.4 The Role of Economic Traditions in Constructing State Interest

When dealing with an issue as complex as the WTO boundary setting problem, the set of potentially relevant causal relationships that may inform system participants' policy stances is nearly limitless. Expanding the MTR's remit to cover competition policy, for example, would have different, perhaps contradictory, consequences for different firms within a given industry, as well as different industries within any given country. Specific outcomes are far from fully knowable a priori - indeed, the impact of the Uruguay Round's expansion of the MTR's jurisdiction is the subject of heated academic controversy even today, 10 years after they came into effect, and in all likelihood will remain so for years to come. Uncertainty about likely outcomes is pervasive in such a decision-making setting. Nevertheless, participants manage to navigate this potentially endless morass of possible causal relationships and construct stable, coherent views of state interest. How?

They do so, I hypothesize, by referring to pre-established and economically meaningful frameworks of understanding - which I will call economic traditions.

By economic traditions I mean not only the formal theories economists develop, but also the less formalized discourses that emanate from such theories, the patterns of regularity in the reasoning put forth to discuss economic matters. Within a given economic tradition, formal theories will coexist with discourses of varying levels of sophistication and coherence. What is essential is that economic discourses seek to capture the key insights of the formal theories within a tradition, providing a link between the abstract world of economic science and the practical needs of decision-makers.

The relationship between the formal theories that underpin an economic tradition and the discourses that translate them into politically useful insights is complex and problematic. Significant simplification is normally required. Assumptions stated explicitly as part of the theory-building process may be overlooked, and the policy-oriented advice arising from a tradition's discourse may not be borne out by its theory. However, due to the abstract, often contingent nature of economic theory, some process of discursive simplification will be necessary to inform the choices of economic policy decision-makers. This problematic relationship between theory and discourse will be more extensively analyzed in a later chapter.

Developed country advocates for expanding WTO jurisdiction to an expanding set of policy areas usually frame their preference by reference to the Neoclassical Tradition. Rooting their choices in a neoclassical discourse that stresses the welfare-enhancing characteristics of international trade, they strongly favor policy choices they believe are likely to lead to an expansion in trade.

Arguments in favor of expanding supranational jurisdiction are often put forward within the discursive framework of this tradition. In its report on the Future of the WTO, for instance, the Consultative Board to the Director-General Supachai Panitchpakdi (2004) argues in favor of expanded supranational jurisdiction as a means of attenuating market failures arising from the fragmentation of national jurisdiction in a setting of global markets. The drive to launch negotiations on trade facilitation is meant to increase international trade by lowering trade costs. Competition policy negotiations are meant to increase trade by ensuring the contestability of markets. In general, the expansion of supranational jurisdiction over economic policy is advocated as a means of correcting market failures and ensuring the contestability of markets.

Such discoursive trends are evident both in academic and diplomatic treatments of the problem.
Careful analysis of the terms used by system participants serve to highlight the operation of various economic traditions within this transnational debate. In Chen's (2003) formulation, for instance, key neoclassical concerns are put front and center in the analysis.

We are living in a world of global markets for merchandise and capital. Economists have had a common understanding that regulations are needed in case of market failures. International institutions are needed therefore to regulate global market failures when the sovereign national governments are not able to implement regulations in global markets 'efficiently.'

Similarly, in his statement to the Cancún Ministerial Conference, South Korean Trade Minister Hwang Doo-yun expressed the dominant view of the organization's wealthier members by linking the debate on the Singapore Issues to the expanding scale of the global market and the question of market access, both standard neoclassical terms of reference:

The WTO must continue to evolve to keep abreast with the fast-changing global trade environment. The call for negotiations on the Singapore Issues is a response to this challenge. After seven years of discussion, we cannot afford to waste any more time in launching the negotiations on the issues of investment, competition policy, transparency in government procurement, and trade facilitation. These issues are real trade concerns that touch upon the very heart of market access. In order for the WTO to remain relevant in the global economy, the WTO must start negotiations on the Singapore Issues. (WT/MIN(03)/ST/15)

In these formulations, the discoursive emphasis on market failures and the changing nature of the world economy - implying an alteration of the relevant locus for governance to correct them - as well as on the importance of market access, identify flag them as belonging to the neoclassical conceptual family.

In the same vein, for Balasubramanyam and Sapsford (2003) expanding WTO jurisdiction to cover foreign direct investment is necessary to help reduce distortions in factor prices common in economies that receive little FDI due to insufficient institutional safeguards. Stressing the need for international cooperation to counter the effects of supranational market failures, the Consultative Board to the Director-General Supachai Panitchpakdi (2004) argues:

Increasingly often, states cannot regulate effectively in the globalized economy. This is particularly relevant to economic factors that are global and mobile. (...) Yet markets will not work unless there are effective human institutions to provide the framework that protects the market function. Thus, the core problem is the globalization-caused need for developing appropriate international institutions. (...) If market failures need to be avoided or treated then it will increasingly happen at the multilateral level. That is why the WTO plays such a crucial role - for developed and developing countries alike - and why arguments about loss of "sovereignty are often ill-considered and misplaced. (...) Ultimately what counts is whether the balance between some loss of "policy space" at the national level and the advantages of cooperation and the rule of law at the multilateral level is positive or negative. Our view is that it is already a positive for all WTO Members and will increasingly be so in the future.

Even such a schematic outline of the arguments put forth on the question of WTO boundary setting within the neoclassical tradition shines a spotlight on a rich assortment of perceived causal relationships. In the neoclassical view, regulation is warranted only to correct market failures - when such failures occur on a global scale, it is appropriate to seek to correct failures at the supranational level. Analysis is strongly focused on the efficiency gains to be achieved by correcting market failures. The benefits of such a correction are seen as flowing to all trade partners.

As we have seen, such views are common in developed country policy elites, and they have typically led to an expansive view of the desirable scope for supranational governance through the WTO mechanism. The view has become dominant among trade representatives for the developed countries, but has met widespread resistance in developing country governments.

What's interesting is that the reasons usually given to counter the expansion of supranational governance often seem to spring from an entirely different economic tradition. Rather than focusing on problems of market failure and the 'efficient' level of governance for countering it, opponents of an expansive view of the WTO's jurisdiction focus on the twin areas of economic sovereignty and development strategy.

In his initial declaration to the Cancún Ministerial, India's Commerce and Industry minister Arun Jaitley, expressed the views of the group as he set out his reservation on each of the four issues in turn:

The need for a multilateral agreement on investment itself is not clear. It can neither promise additional investment flows nor reduce transaction costs for investors significantly. However, an agreement will certainly curtail the policy space of developing countries. An agreement in this area will not be advantageous to all Members as the benefits of such an agreement will accrue entirely to developed countries from which two thirds of all cross border investments originate. (...) Countries at different stages of development have viewed competition issues differently based on the effects they have on their economies. Convergence in views can arise only between countries at similar stages of development. The WTO membership is too diverse to admit a framework that suits all. (...) Multilateral rules, binding in nature, in respect of trade facilitation and transparency in government procurement would entail high costs for developing countries. (WT/MIN(03)/ST/7)

The view expressed by African trade officials gathered at the Southern and Eastern African Trade Negotiations Institute four months before the start of the Cancún Ministerial echoes a number of these same themes:

Before Doha the developing countries were of the opinion that the WTO membership should in the next years focus on resolving the problems arising from the Uruguay Round and the institutional and systemic issues. However the developed countries pushed very hard to have the WTO expand to incorporate new areas. Most developing countries were resistant to this, as evidenced by the decisions and declarations of the LDCs Ministerial Conference in Zanzibar and the African Trade Ministers Meeting in Abuja. (...) The more aware our African delegations have become of the issues, the more worried we have become, in that the new obligations arising from the proposed new agreements would limit our policy space and flexibility and could severely damage our present and future development... (SEATINI 2003)

Some key words spring up at once. The concern with "policy space", for instance, is largely absent from neoclassical discussions of WTO boundary-setting issues. Moreover, the sense that broadening the WTO's jurisdiction could have positive effects for some members and negative effects on others - that WTO expansion could imply a zero-sum rather than a positive-sum game - is altogether alien to neoclassical accounts, where the presumption that trade is welfare-enhancing for all parties is strongly rooted. These two themes, in particular, recur systematically in Listian treatments of WTO boundary-setting issues.

In the Listian view, the neoclassical focus on the need to correct market failures at the supranational level obscures the costs of diminishing national sovereignty in terms of states' ability to pursue appropriate development policies. Expressing a commonly held view, for instance, Corrales (2003) writes:

...if trade liberalization is to be made more supportive of sustainable development, developing countries must have the autonomy to make use of active policies and relevant policy instruments to promote supply-side capacities, enhance learning processes and pursue competitiveness. Whether this entails diversifying production towards higher value-added goods, supporting infant industries, promoting greater inter-firm linkages, or shifting into the production of goods and services with higher knowledge intensity, all developing countries – regardless of their level of development – require more ‘spaces for development policy’ 7 to be able to make trade work for development. (emphasis in the original.)

Similarly, expressing its consensus view after the UNCTAD XI conference in Sao Paolo in June 2004, the UN Conference on Trade and Development Secretariat concluded that,

The ability of Governments to pursue the most suitable development policies should not be unduly constrained. The international trade system needs to allow for legitimate policy space necessary for developing countries to pursue a proactive, strategic mix of trade and development policies suited to initial conditions, dynamic comparative advantage and changing needs and circumstances. It is for each Government to evaluate the trade-off between the benefits of accepting international rules and commitments and the constraints posed by the loss of policy space. (UNCTAD 2004)

This focus on the costs of expanded supranational sovereignty in terms of constricting the spaces for development policy making forms the basis for the developing countries' rejection of an expansive view of the WTO's optimal jurisdiction. Such opinions merely highlight Jackson's observation that, "at times, the controversy over the level on which to place a government decision is truly a controversy over the substance of an issue." (Jackson 2003) This view is common in Listian critiques of WTO expansionism: the sense that, in seeking to broaden the MTR's remit, developed countries seek to impose policies on developing countries that would not be adopted outside a multilateral negotiation setting because they serve only the interests of the developed countries.

From a constructivist point of view, what is relevant about such formulations is that they do not seem to stem from the same economic tradition as the arguments put forth by developed country advocates of expanding the MTR's remit. Implicit in Corrales' and UNCTAD's view is a Listian view of the state's role in economic development, one that stresses the potentially beneficial outcomes of targeted state intervention in the supply side to promote particular industries, and therefore bemoans the constraints that an expansive MTR places on scope of promotion policies at the disposal of developing states. A preliminary textual analysis of each side's position suggests that the question is not one of disagreement on the basis of a single, widely agreed upon economic tradition, but rather a tussle between largely incompatible traditions. It appears, then, that at the center of divergences over the WTO boundary setting questions we find a disagreement over first principles.

1.5 Chang's "kicking the ladder" argument

Pleas for expansion of the WTO's jurisdiction stemming from the neoclassical tradition tend to hold that the growth of supranational governance would be beneficial for all members of the MTR. The overwhelming neoclassical presumption in favor of trade as a welfare enhancing mechanism for all parties leaves little room for consideration of the possibility that the impact of expanded supranational jurisdiction could differ according to levels of development. Naturally, resistance to further expansion of the WTO's jurisdiction come to be seen as grounded on error, whether as a consequence of interest group pressure or generally muddled thinking.

The Listian tradition brings a fundamentally different point of view to the question. In a Listian framework, different sets of policies are appropriate for economies at different stages of development. The distinction is implicit in the basic Listian recipe for special policies in favor of "infant industries" in developing countries. Targetted supply side policy interventions seen as desirable to foster the early stages of an industry's development are, by nature, contingent and temporary policy recipes. Once an industry leaves behind its infancy, the case for policy intervention disappears. In a Listian framework, different, often opposed policy courses are seen as appropriate for countries at different levels of development.

As a consequence, thinkers in the Listian tradition do not see developed country positions on the WTO boundary-setting question as grounded in error in the same way neoclassicists interpret developing country positions on the matter. On the contrary, the expansion of supranational jurisdiction - and the concomitant reduction of spaces for national policy making - come to be seen as a reflection of a policy positions well-suited to serve developed country interests, but not those of developing countries.

This is the insight at the heart of Ha-Joon Chang's (2002) influential "kicking away the ladder" argument. On the basis of a critical rereading of economic history, Chang finds that "virtually all of today’s developed countries...actively used interventionist trade and industrial policies aimed at promoting, not simply 'protecting,' it should be emphasized, infant industries during their catch-up periods." Such interventionist policies included protective tariffs, export subsidies, directed credits, the granting of monopoly rights, support for industrial espionage, investment subsidies, restrictions on foreign investment, subsidies for industrial research, regulation on firm entry, exit, investment and pricing, and a host of others. Clearly, these are precisely the kinds of policies that are ruled out by the progressive expansion of the WTO's remit.

In Chang's view, today's developed countries only switched their policy stance to more orthodox, laissez-faire positions once they had managed to catch-up with the international frontier. But then support for orthodox policies should be seen as a matter of cementing their lead positions in the international economy. To this end, Chang cites the passage from List that gave the title to his book:

It is a very common, clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he has climbed up, in order to deprive others of the means of climbing up after him. In this lies the secret of the cosmopolitical doctrine of Adam Smith, and of the cosmopolitical tendencies of his great contemporary William Pitt, and of all his successors in the British Government administrations. Any nation which by means of protective duties and restrictions on navigation has raised her manufacturing power and her navigation to such a degree of development that no other nation can sustain free competition with her, can do nothing wiser than to throw away these ladders of her greatness, to preach to other nations the benefits of free trade, and to declare in penitent tones that she has hitherto wandered in the paths of error, and has now for the first time succeeded in discovering the truth. (List 1885, as cited in Chang 2003.)

In stylized form, then, Chang holds that relatively underdeveloped countries make use of active trade and industrial policy instruments as part of their catch-up strategies, while developed countries find their interests are better served by placing such policy instruments out of bounds for their developing competitors. From this point of view, there is nothing particularly novel about the persistent differences between developed and developing countries on the WTO boundary-setting dispute. It has always been the case that industrial leaders move to protect their advantage by closing down policy spaces developing countries would need to catch-up with them, while developing countries work to protect the policy spaces available to them.

Chang's treatment of the subject is particularly germane because all three of the most contentious Singapore Issues concern policy instruments that were actively used by today's developed countries as part of their development strategies during their catch-up periods. Active interventions meant to limit or channel foreign investment, strategic regulations on firm entry and exit and the use of public procurement budgets to foster specific domestic industries were precisely the kinds of practices developed countries hoped to limit by including the Singapore Issues in the WTO's negotiating agenda. Such practices, in a Listian reading of economic history, are also key instruments today's developed countries used to become developed in the first place.

The Listian economic tradition, then, leads to a more variable conceptualization of "state interest" than the neoclassical tradition. While, in the neoclassical view, the developing-countries' insistence on protecting policy space must be seen as grounded in error, in the Listian view the persistence of the disagreement between developed and developing countries on the proper scope of the MTR is grounded on a divergence between the actual interests of developed and developing countries.

Conclusion
My purpose in this dissertation is not to assess the validity of either tradition, merely to identify the cognitive processes whereby the theoretical insights of each tradition are translated into specific policy proposals, and to measure the degree to which participants in the WTO system do or do not subscribe to the views implicit in each tradition. From a constructivist point of view, the key scholarly concern is to elucidate the mechanism that links the habits of thought of an economic tradition to a relatively small, tractable set of ideas about appropriate policy. Ideas, in this framework, are judged worthy in accordance to the extent to which they "fit" within the basic tenets of the economic tradition. They become meaningful by virtue of their coherence within that tradition. By organizing the multiplicity of economic reality into a tractable number of questions, the tradition focuses attention on a manageable set of issues, and providing a set of guidelines for finding the answers.

In order to test this framework, it shall be necessary to ascertain to just what extent WTO system participants actually do conceive of economic reality in terms of incompatible economic traditions. Chapter three will set out a precise methodology to this end, explaining how the use of in-depth interviews with "discourse generators" and attitudinal (Lickert-scale) surveys of country negotiators can be used to identify and measure the strength of various economic traditions in the thinking of system participants, allowing us to rigorously test the clash-of-economic-traditions hypothesis at the center of this dissertation. If participants are thinking what I hypothesize they're thinking, this dissertation will have provided an new framework to understand the difficulties MTNs have faced in recent years. But before turning our attention to the specifics of research design, it's necessary to refine the theoretical framework that underpins the research program in much finer detail.

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The WTO, Vertical Specialization and Institutional Coevolution: Some initial theoretical speculation

2004-10-31T03:12:00.000-08:00

Introduction - This is a Very, Very Early Draft for Comment

The last fifteen years have been a bruising ride for proponents of the standard neoclassical development policy recipe. A now large literature demonstrates that countries and regions that have most closely followed the now standard economic recipe set out by the Bretton Woods institutions have grown less quickly than they had under the previous import substitution industrialization model, less quickly than the developed countries, and less quickly than some countries that have experimented with heterodox development policies (Stiglitz 2002). Empirical studies have failed to show that liberalization strategies can sustain economic growth in the developing world. Even studies on trade liberalization, arguably the least controversial aspects of the standard recipe, have yielded surprisingly ambiguous results. (Rodriguez and Rodrik 2000, UNCTAD TDR 2002). After reviewing recent the growth performance of developing countries in recent decades, UNCTAD (2002) concludes that they "rule out an unequivocal causal link from trade to growth."

Interpreting the reasons for the failure of the standard recipe has become the stock and trade of development economics. In a prominent contribution to the debate, Chang (2002) argues that the historical experience of the now developed countries (NDCs) is fundamentally at odds with the prescriptions of the standard recipe. Documenting the widespread use of active Industrial, Trade and Technology (ITT) policies by the NDCs during their catch-up periods, Chang argues that the current emphasis on liberalization and the efficiency of market mechanisms is based on a misunderstanding of the historical processes that led to catch-up in the NDCs. Such policies, he argues, place obstacles in the way of developing countries seeking to implement the policy regimes that have been most effective in the past. The current orthodoxy amounts, in Chang's suggestive image, to "kicking away the ladder" - denying developing countries the opportunity to apply the types of policies that made the rich countries rich.

Chang's argumentation proceed deductively, from observations of successful catch-up strategies, past and present, to generalizations about the proper conduct of development policy. The analysis, however, has relatively little to say about the specific mechanisms whereby the standard recipe's policies impede development processes.

This dissertation explores one possible set of such mechanisms: those generated by the World Trade Organization trade regime. It will begin reinterpret the current World Trade Organization regime as a product of institutional coevolution in the context of a new technological regime. Drawing on recent research on new patterns of production organization by multinational corporations, it will explore the fit between new production patterns and the global rules of the trade game. The purpose is to identify the mechanisms whereby the new technological regime, and the institutional forms that have arisen to complement it, may serve as obstacles to effective development policies.

Ladder-kicking 101
Chang's argument can be summarized briefly: the standard neoclassical recipe for development is a case of "do as we say, not as we did." While NDCs now insist the market mechanism is sufficient to provide the incentives needed for development, Chang shows that, historically, active ITT policies played a major role in their catch-up strategies. With few exceptions (e.g. Switzerland) NDCs managed to catch up with industrial leaders through a heterodox policy mix including tariff protection for infant industries, export subsidies, technology transfer facilitation, investment subsidies, public research, and a host of other interventions.

Proponents of the standard recipe see this policy menu as wrong-headed from start to finish - so much so, in fact, that substantial portions of it have been banned or substantially restricted by subsequent rounds of multilateral trade negotiations. Chang argues that, in historical perspective, NDC fervor for a laissez faire development model is not at all surprising: while nearly all successful catch-up strategies have entailed use of active ITT policies, once catch-up has been achieved countries have typically shifted positions in favor of liberalization.

Chang shows that enthusiasm for free trade only spread in Great Britain once British firms had achieved technological dominance in a number of key markets, and did not spread to the US, Germany, and other NDCs until they had managed to catch-up with Britain. In this view, internationally competitive NDC firms perceive the world market as an opportunity, whereas less competitive firms in less developed countries tend to perceive international competition as a threat. The resistance in the developing world to a more integrated trade regime is just as "natural," from this perspective, as the enthusiasm for freer trade in the developed world.

Historical perspective in historical perspective
For all its historical focus, Chang's arguments can be criticized for a peculiar sort of ahistoricism: even if one establishes that activist ITT policies were at the center of appropriate development strategies in Europe and North America in the nineteenth century, it does not necessarily follow that such strategies are relevant to today's developing countries. Clearly, the technological and scientific context of production has shifted considerably over the last 200 years, with a number of technological regimes rising and then falling in succession.

Define TR.

The question, then, is whether Chang's insights are applicable given the currently technological regime.To explore this question, it becomes necessary to identify the main features of the new technological regime, and its implications for production organization and institutional structures. The term "globalization" has dominated discussions of the changing nature of technology and production in recent years, yet much debate remains on the specific characteristics of globalization, about what makes globalization truly different. At its most basic, the term refers to closer cross-border economic integration. While the dramatic increase in international trade and foreign direct investment in recent decades is commonly cited as evidence of globalization, skeptics can easily retort that levels of trade and cross-border investment were even higher at the end of the nineteenth century. (Hobsbawm)

From a technological regimes perspective, the question appears to be wrongly framed. Rather than focusing on the degree economic integration, the technological regimes framework focuses attention on the specific features of new patterns integration, on the "how?" question rather than the "how much?" question of globalization. For globalized production to constitute a new technological regime, it must be qualitatively different from the patterns of production that preceeded it: more of the same does not a new technological regime make.

There is, however, evidence that the new, globalized patterns of production organization are indeed qualitatively different from those of the past. A growing literature on multinational corporate strategies bears directly on this question. The key insight of this literature is that trade in intermediate inputs has grown much more quickly than trade in final products in recent years.

Cite a bunch of stats about growing trade in intermediate inputs here.

-Yeats (2001) finds that trade in inputs has grown much faster than trade in final goods, with intermediates counting for 30% of world trade in manufactures.
-Hummels, Ishii and Yi calculate that the increase in exports from Vertical Specialization accounted for a third of world export growth.
-According to the US BEA (2002) in 1999, 93% of exports by US parent firms to their foreign manufacturing affiliates were inputs for further processing.
--> From Hanson, Mataloni and Slaughter (2004)

A bewildering series of competing labels have been proposed in recent years to describe this phenomenon, a sure sign that the activity is growing faster than academic attempts to come to grips with it. Labels range from the clunky (intra-mediate trade -Antweiler and Trefler 1997, International Fragmentation of Production, Helg 2004) to the politically loaded (outsourcing) to the quirky (slicing up the value chain - Krugman 1996) to the psychedelic (kaleidoscope comparative advantage - Bhagwati and Dehejia 1994.) Feenstra (1998) describes the new technological regime as one of "integrated trade and disintegrated production." But the most descriptively useful label was proposed by Yi (2002), who describes the new pattern of production organization as Vertical Specialization.

In vertically specialized production, the ricardian logic of specialization is taken beyond its traditional domain of trade in finished goods and into the value chains for individual products. In a number of industries characterized by discrete, sequential stages in the production of finished goods (e.g. electronics), vertical specialization allows firms to take advantage of cross-country differences in factor prices by locating each production activity in its lowest-cost country. The textbook example here is the Maquiladora industries on the US-Mexico border, where capital and knowledge-intensive inputs are produced in the capital and knowledge-rich US, then exported to labour-rich Mexico for labour-intensive assembly and packaging, with the finished product then re-exported to the United States for final sale.

Vertical specialization constitutes the organizational manifestation of a new technological regime. The breakneck rate of growth in vertically specialized production in recent years has been enabled by a range of technological innovations. At the most basic level, improvements in shipping and transportation have brought down "natural" trade barriers enough to make vertically specialized production practicable. The ICT revolution has lowered communications costs sufficiently to overcome the logistics and coordination challenges poised by vertically specialized production. The internet has received particular attention in this regard. (Gereffi 2001)

Institutional Coevolution: Why the WTO?
Yet, as with every shift in technological regimes, technological change in and of itself is only half the story. The other half, concerning the way the institutional context changes and "coevolves" with the new regime, will be the focus of my dissertation. The new technological regime poses a series of international policy coordination challenges that could not be met with the institutional scaffolding that developed to sustain the old, vertically integrated production regime of the postwar boom years.

In particular, a vertically specialized regime depends on a comprehensive, liberalized multilateral world trade system for institutional viability. Research emphasizes the high sensitivity of vertically specialized production to tariff rates - an intuitively plausible concern, given that inputs in vertically specialized value chains cross borders repeatedly, magnifying the effects of tariffs (Yi 2002, Hanson et al. 2004, etc.). Low tariffs and non-tariff barriers, institutional predictability and liberal investment regimes are key institutional components of the new regime.

Cite a bunch of stats about own-price elasticities of demand for intermediate inputs - Yi, Hanson, Slaughter, Feenstra...

The World Trade Organization can be seen as an instance of institutional coevolution, where new institutional forms are introduced to exploit the full potential of the new technological regime. Whereas previous technological regime shifts had tended to call forth institutional innovations limited to the national level, the Vertical Specialization regime is international in nature. It is not surprising, then, that the new institutional forms that have arisen in tandem with the growth of vertical specialization are themselves international.

Observing the WTO Rule-making Process
In effect, the trade-related rules agreed through the multilateral negotiating framework at the WTO directly impact firms' ability to exploit the potential of vertically specialized production. While no one would deny this, vertical specialization researchers have tended to take the multilateral trade regime as exogenous to the firms engaged in vertically specialized production. Firms, in this model, take the transnational rules of the game as they find them, and adapt their corporate strategy to them.

Anecdotal evidence, however, suggests that reality is a good deal messier, with firms working actively to influence the negotiation process through a variety of channels.

MNCs do not, to be sure, negotiate multilateral trade rules directly. However, by their very nature, they are directly affected by the outcomes of such negotiations. They are certainly large enough to mobilize the resources to lobby the WTO system. And their influence over certain aspects of the current multilateral trade regime have been well documented, the influence of pharmaceutical companies in pressing for adoption of the TRIPs and TRIMs agreements being the most often-cited example.

In some areas of political economy, firms' influence over trade policy decisions has become part of the standard academic model. Grossman and Helpman's influential 1994 model explicitly links tariff levels with firm lobbying activities within a national context. An extensive literature has grown arisen to provide empirical backing for the model, with quite some success.

The question, ultimately, is whether the institutional coevolution of the WTO and new patterns of vertically specialized production act as a kicking away the ladder mechanism, generating obstacles to the implementation of effective development policies in the developing countries.

One can hypothesize a number of routes through which the WTO regime may generate kicking away the ladder effects. Chang argues that in placing a number of active ITT development policies "out of bounds," the WTO accords can be seen as the heirs of the "unequal treaties" forced on peripheral countries by NDCs at the end of the nineteenth and the beginning of the twentieth century.

Recent developments, however, caution against simplistic interpretations of the rule-making dynamics in the WTO system. The collapse of the Seattle and, especially, the Cancun ministerial conferences due to resistance from groups of developing countries to NDC negotiating priorities show that WTO rule-making is not (or is no longer) a matter of rubber-stamping the policy agendas of the developed countries and their MNCs. Already, pressure from developing countries has forced the WTO to strike competition, investment and government procurement policy from the Doha Round's negotiating remit. A successful characterization of the WTO rule-making system, then, must take into account the complex interactions between developed and developing countries in the negotiations.

What is needed, then, is a research methodology able to precisely characterize these complex interactions. We shall adopt the Advocacy Coalition Framework to systematize the study of the WTO policy process.

Notes on UNCTAD 2003

2004-09-14T07:56:00.000-07:00

UNCTAD 2003: "Trade Negotiation Issues in the Cotonou Agreement: Agriculture and Economic Partnership Agreements."

Main question: What should Africa's negotiating stance be in the Doha Round?

1-African countries often lack the "ability to recognize and argue effectively against proposals that are not in their interests and the capacity to articulate and defend alternative and more acceptable proposals." p. 4, (thus, need for tech. assistance to train negotiators.)

2-Development lacuna in Uruguay Round Agreements
e.g. single undertaking, watering down of SD&T

3-Implementation costs
-institutional crowding out
-$150 million compliance price tag as much as typical yearly dev. budget in Africa
-Past promises of technical assistance didn't pan out.

4-P. 6: "Two key elements of a development dimension that one might, therefore, look for in the WTO Agreements would be provisions for dev-oriented institutional capacity building and provisions for enhancing the supply capacity of the LDCs and DCs. This derives from the widely accepted observation that the major obstacle to increased trade and growth in the low-income countries is the inadequate response of domestic producers to market access opportunities abroad."

"The policy-autonomy component of the SDT provisions were under sustained attack during the UR"

Developed country promises on SDT often couched in "best endeavour" language, wishy-washy and unenforceable.

Pre-UR trading system was more dev. friendly than post-UR version.

Sec. B African proposals

Page 7: list of meetings where these ideas were developed.

3 Main Areas of proposals

1-Better market access
2-Development issues are to be tackled "decisively." i.e. Supply side measures.
3-Negotiation and dec. making process need transparency.

also - Taming TRIPs, investment and TRIMs (especially local content requirements)

p. 10: making SPS agreements contingent on contractually binding technical assistance.
On Subsidies and Counterveiling measures: make subsidies for development, diversification and industrial upgrading non actionable.

On decision-making system: Open up the "Green Room"

On Agriculture, 2 main points:
1-Get rich countries to implement commitments they've made already (Marrakesh)
2-Get extra concessions (such as ammending the green box to make it more development friendly)

SDT (p. 11) - Gutted during the Uruguay Round
Mostly it's down to longer implementation times and a Generalised System of Preferences (GSP)
BUT - GSP is unilateral, unstable, and a shaky grounds for development.

Then: Need for Capacity Building for the African delegations in Geneva. "Very intensive training needed"

Sec. C: Agriculture

Get rid of or reduce the PROTECTION, DOMESTIC SUPPORT and EXPORT SUBSIDIES offered now by rich countries.

-> Watch the Green Box like a hawk.

Bring down tariff peaks on key products...like food staples, fruit and vegetables and processed food.

BUT the Green Box has a bunch of NIS-friendly aspects that should be protected (e.g. general services to agriculture like research and extension, pest and disease control)...also crop insurance, income insurance, etc.

Idea: Development Box (p. 18) - a kind of SDT box with a number of Green-Box-like goodies, plus others, available only to LDCs and DCs.

Then GATS discussion

Research Proposal

2004-06-01T03:34:00.000-07:00

Francisco P. Toro
June 2004
MERIT/UNU-Intech Doctoral Programme

Proposed Title

Thinking About Technology Policy in the WTO Era: Is the multilateral trade regime
learning about innovation?

Abstract

The multilateral trade regime set out by the World Trade Organization creates barriers to the adoption of a broad range of policies that developing countries have traditionally used to upgrade national innovative capacity. But the multilateral trade regime is not a static system: its rules are renegotiated continuously between member states in a sui generis process of state-to-state bargaining. The literature has so far failed to theorize the nature of the policy process at WTO. The proposed research will explore the policy dynamics of the WTO rule-making system using a learning-based explanatory framework. It will identify key participants in the WTO rule-making system and map their causal and normative beliefs on the impact of innovation and technology policy on economic development. Following Sabatier (1999) and Jenkins-Smith (1991), the research will seek to identify the advocacy coalitions at work on the rule-making system, and to characterize the epistemic communities at their core. The goal will be to propose a theory of the WTO rule-making system that stresses the roles of new technical information, persuasion and policy-learning.

"Politics finds its sources not only in power but also in uncertainty - men wondering what to do. Policy-making is a form of collective puzzlement on society's behalf. "
-Hugh Heclo, 1972

Research aim

Researchers are increasingly sensitive to the importance of appropriate policies to aid technology transfer and local innovative capacity in the process of economic development. However, views differ sharply on what constitutes appropriate technology policy (Rodriguez & Rodrik 2000, Hausman & Rodrik 2004). Policies praised by some are considered so wrong-headed by others that they have been banned at the multilateral level, as part of the agreements that launched the World Trade Organization in 1995. Innovation-related matters play an ever larger role in trade negotiations, while questions about development have moved center-stage, even lending its name to the latest round of multilateral trade negotiations - the Doha, or "Development" Round.

But how does the WTO rule-making system decide which technology-relevant policy spaces are to be closed to developing countries, and which are to be opened? How does the system "think" about that question? The proposed research will examine the way participants in the WTO rule-making system understand the roles of innovation and technology policy in the process of economic development, and how their causal and normative beliefs on the subject shape the rule-making process.

In contrast with the standard neorealist approach that "presumes that a state's self-interests are clear and that the ways in which its interests may be most efficaciously pursued are equally clear" (Haas 1992) the proposed research will question the processes of agenda-setting and problem-conceptualization within the WTO rule-making system. Using qualitative methods to capture and measure system participants' beliefs and understandings, the proposed research will explore the connection between the "inner world" of policy-making elites and the trade regime that multilateral negotiations configure.

Drawing on the complementary literatures on Advocacy Coalitions and Epistemic Communities, the research will analytically describe (map) the belief systems of the system's participants and track the evolution of those beliefs over time, or policy learning.

In keeping with Heclo's (1972) idea of policy-making as "a form of collective puzzlement", the research will seek to measure the impact of new specialist knowledge on system participants' beliefs. It will explore how policy actors assimilate new knowledge on the links between innovation, technology policy and development, and it will seek to determine under what circumstances this process of policy learning can alter their policy preferences and, ultimately, the policy outcomes at the WTO level.

The overall goal of the proposed research will be to develop a framework for understanding the WTO rule-making system on technology policy issues that emphasizes the role of "persuasion, knowledge and learning as motivating factors in the process of policy change" (Schlager and Blomquist 1996).

Research context

For a generation now, economic researchers have increasingly centered their attention on innovative capacity as a critical determinant of national economic performance (Freeman 1997, Lundvall et al. 2002). Writing from an institutionalist perspective, this school has focused on the National System of Innovation as a key explanatory factor for economic performance. Researchers working within this tradition have put forward increasingly sophisticated formal alternatives to the standard neoclassical model of economic development and growth, emphasizing the role of innovation and technological change (Nelson and Winter 1982, Metcalfe 1994, 98, Silverberg and Lehnert 1993).

Though first formulated to account for the performance of developed economies, the innovation system approach was quickly adopted by scholars interested in development (Lundvall et al 2002, Edquist 1997). A number of studies persuasively credits firms' innovative capacities and the institutional structures that support them for the superlative economic performance of several of Asia's Newly Industrialized Countries (Lall 1997, 2001, Kim 1993, 1999, Johnson 2004.) Others have used the insights of the NIS framework to account for the relative under-performance of Latin American economies since the 1970s (Katz 2001, Katz & Stumpo 2001, Cassiolato 2003, Palma 2003.)

The innovation system approach sees firm competitiveness as a function of the knowledge intensity and innovative capacity of firms. Knowledge-intensity and innovative capacity, in turn, are seen as largely determined by the institutional context firms operate in. As Mytelka and Barclay (2004) put it, "Underlying the system of innovation approach is an understanding of innovation as an interactive process in which enterprises in interaction with each other and supported by institutions and a wide range of organizations play a key role in bringing new products, new processes, and new forms of organization into economic use" The approach emphasizes the multiplicity and variety of the institutional linkages that foster innovative behavior in firms. These include knowledge-rich forward and backward linkages, as well as interactions with universities and public research institutes, financial institutions, government regulatory agencies and near-by firms.

A series of policy proposals stem logically from this heterodox understanding of competitiveness and development. "Conceptually, the innovation system approach acknowledges the role of policies, whether tacit or explicit, in setting the parameters within which actors make decisions about learning and innovation. It recognizes that innovation is not the outcome of a unique policy, but a set of policies that collectively shape the behavior of actors" (Mytelka and Barclay 2004). In contrast with the standard recipes arising from the neoclassical tradition, innovation system scholars are skeptical of claims that market forces, on their own, show an inherent tendency to launch developing countries on a path to ever-rising productivity and development. Instead, they argue policy matters, so states must implement active and selective technology policy instruments designed to foster firms' innovative capacity.

In the developing world, such policies include measures to ease and hasten the transfer of new technologies from developed to developing country firms. The policy mix also includes measures to foster dynamic networks of small firms through local content requirements on foreign firms, as well as technology-transfer requirements on foreign entrants, targeted R&D subsidies and other industry-specific technology policies. Some variant of this policy mix was implemented in each of the Asian NICs. Many obstacles stand in the way of successful implementation of such a policy mix in the developing world today. The proposed research will focus on one: the trade regime set out in World Trade Organization rules.

Trade analysts working from the Innovation System perspective warn that significant portions of the international trade regime managed by the World Trade Organization is incompatible with much of the policy agenda outlined above (Corrales et al. 2003, Singh 2003). The implication, then, is that the WTO regime constitutes a structural impediment to the development of the world's poorest countries.

Many parts of the WTO regime have been questioned in this regard. The Trade Related Investment Measures (TRIMs) agreement is designed to prohibit discriminatory or trade-restricting performance requirements, effectively bars access to a wide range of policy tools that states might otherwise use to increase the knowledge intensity of firms' forward and backward linkages (Corrales et al. 2003, UNU-Intech 2003). The Agreement on Subsidies and Counterveiling Measures bans all industry or firm specific subsidies, closing the way to infant industry protection policies that are seen as particularly important tools to aid enterprise development, clustering and network effects, technology, knowledge and innovation policies, as well as policies for enhancing marketing and design capabilities (Corrales et al 2003, Singh 2003, Hausmann and Rodrik 2004).

In a similar vein, the agreement on Trade Related aspects of Intellectual Property Rights (TRIPs) closes spaces for compulsory licensing to aid the rapid diffusion of new technologies, the 1994 GATT agreement further restricts the use of infant industry protections, and the Agreement on Agriculture restricts some subsidies as well as other mechanisms to provide incentives for firms to improve their performance. Moreover, the current negotiations on the so-called Singapore Issues (Investment, Competition Policy and Trade Facilitation) threaten to introduce new restrictions on developing countries' spaces for implementing critical technology policies. (Corrales et al. 2003)

Taken as a whole, the WTO regime appears to substantially restrict the spaces for technology policy making available to developing countries as they attempt to implement an innovation-system based package of policy reforms. In effect, the current multilateral trade regime is rooted in a series of causal and normative beliefs that are strongly inimical to the use of targeted technology policies to improve national innovative performance, seeing such policy interventions as likely merely to "get prices wrong" and thereby interfere with the market's allocative efficiency. Measuring just how prevalent such views are today, and to what extent they have become contested and open to change will be a central goal of the proposed research.

The WTO regime must not be seen as a static, unchanging entitity. In fact, the current round of multilateral negotiations has seen considerable debate on many technology policy-relevant issues as they impact the developing world, under the broad rubric of Special and Differential Treatment (SDT.) The 2001 Doha Declaration pledges to make SDT provisions "stronger, more precise, more effective and more operational." IISD (2003), Corrales (2003), and Singh (2003) see the SDT debate as the key to enshrining new rules that expand the menu of technology policy options open to developing countries.

From an innovation system perspective, developing countries are likely to face substantial constraints in their ability to implement appropriate technology policies unless the Doha Round yields a substantially expanded scope for SDT that allows for active technology policy interventions. Proponents of the innovation systems approach therefore have powerful reasons to study the rule-making process as it unfolds in the Doha Round. At stake is the possibility of adopting the policy agenda suggested by the innovation system approach.

Research approach

Breaking with the dominant strand of research into decision-making in the international arena, the proposed research will adopt a learning-centered analytical framework, rejecting the central features of the dominant Neorealist tradition of international relations. As Levy (1994) explains, "neorrealist theories emphasize the rational and efficient adjustment to changing structural incentives, whereas learning theorists emphasize significant variations in individual responses to structural changes deriving from variations in cognitive structures, beliefs, and processes."

Neorealists see the individual as a rational, maximizing agent with perfect information and unlimited computational abilities - a model borrowed from the canon of neoclassical economics. "Realists maintain that institutions are basically a reflection of the distribution of power in the world. They are based on the self-interested calculations of the great powers, and they have no independent effect on state behavior." (Mearsheimer 1995.) By contrast, learning theorists rely on psychologically-derived models of the individual as boundedly rational (Simon 1986, Foss 2002).

Designed largely to explain matters of war and peace, the neorealist approach assumes that states' interests are readily apparent to policy actors. Haas (1992) argues that traditional research approaches "ignore the possibility that actors can learn new patterns of reasoning and may consequently begin to pursue new state interests." Burstein (1991) agrees that, in technically complex issue areas marked by uncertainty about the likely outcome of policy initiatives and where knowledge specialists have a plausible claim to expertise, it cannot be assumed that actors know what is in their state's best interest.

Arguing that the multilateral trade regime is marked precisely by such technical complexity and uncertainty, the proposed research will adopt an alternative approach centered on identifying the process whereby actors in the WTO rule-making system come to identify their states' interests.

As Putnam (1988) puts it, "domestic politics and international relations are often somehow entangled, but our theories have not yet sorted out the puzzling tangle." The proposed research will seek to sort out this tangle by drawing on two separate but complementary strands of the literature.

1. The Advocacy Coalition Framework (ACF) sees actors as instrumentally rational, but draws more heavily on work in cognitive and social psychology than in economics. The framework "does not assume that that actors are driven primarily by simple goals of economic/political self-interest." (Sabatier 1998) Instead, it focuses attention "on the inner world of individuals [and on] the structure and content of their belief systems." (Schlager and Blomquist 1996). Instead of assuming individuals' preferences, ACF analysts develop and test empirically verifiable hypotheses concerning actors' belief systems.

The ACF attempts to account not just for belief systems, but also for how they change over time. Sabatier and Jenkins-Smith, who first developed the framework, emphasize the importance of adopting a time horizon of a decade or more in order to capture meaningful shifts in policy dynamics. Following Heclo (1976), advocates of the framework are especially concerned with "policy learning" - the way actors in the policy system adapt and, less often, change their belief systems to incorporate newly discovered technical and scientific knowledge.

2. The Epistemic Communities Approach (ECA). Unlike the ACF, the Epistemic Communities Approach was originally developed to account for instances of international cooperation, particular on scientifically or technically complex matters. On particularly contested areas of policy, the ECA argues, marked by uncertainty and plausible claims to technical expertise by technical elites (Sebenius 1992) state actors may have no direct or readily apparent way to know what "their" interests are, let alone judge the likely outcomes of various policy option. When faced with such problems, decision-makers will seek to "discover" their interest by turning to scientists and technical experts for interpretation. On given areas of technical dexterity, groups of experts who share particular causal and normative beliefs will form Epistemic Communities - "networks of professionals with recognized expertise and competence in a particular domain and an authoritative claim to policy-relevant knowledge within that domain or issue-area" (Haas 1992). Participants in such networks share normative and causal beliefs about their issue-areas, share standards for the validity of new knowledge, and share a given policy enterprise with regard to their areas of professional competence.

There is important conceptual overlap between the concept of an epistemic community and that of an advocacy coalition. Both take as the unit of analysis human groups brought together by ideas about the world, and by a desire to see those ideas crystalize into a given set of policies.

Yet there are also important differences: whereas Sabatier and Jenkins-Smith have carefully developed a precise methodology for carrying out ACF studies, Adler and Haas (1992) describe the ECA as a "methodologically pluralist" approach, reconcilable with a variety of specific research methodologies.

The advocacy coalition concept is certainly broader, including not only scientific and technical experts but also citizen activists, journalists, and state decision-makers. With their privileged claim to be able to generate scientific knowledge, epistemic communities might be considered the technical knowledge kernels of an advocacy coalition.

The concepts were developed to explain different levels of policy making. Advocacy coalitions are normally cited within a national policy-making context, whereas epistemic communities "are not in the business of controlling societies; what they control is international problems." (Adler and Haas 1992) What's more, the notion of competition between coalitions is a basic tenet of the advocacy coalition framework, while competition between Epistemic Communities is not a feature of the ECA.

Due to the peculiarities of the WTO system, the proposed research will seek to include aspects of both the ACF and the ECA. Although the WTO is a multilateral entity that reaches decisions on the basis of state-to-state negotiations, many of its rules concern matters traditionally governed by national economic policy. Domestic political actors - actors that may form part of given advocacy coalitions in the national context - have much at stake in the outcome of WTO negotiations (Gereffi 2003, Katz 2001).

Based on a highly complex and contested explanatory model developed by academic economists, World Trade and the multilateral regime that reglaments it are certainly areas marked by uncertainties and plausible claims to technical expertise. Yet it's clear that not all of the economists and experts at work on the system share a set of causal and normative beliefs about the role of technology policy and innovation in economic development. In other words, there are a multiplicity of expert-networks working on and shaping the debate about the international trade regime. Instead of the domain of a single Epistemic Community, the multilateral trade regime is an arena of competition between Epistemic Communities.

The ACF holds that in order to make the policy, coalitions need to win the debate first. What it means to "win" such a debate, what the necessary and sufficient conditions for a coalition to be successful are subjects of intense debate in the literature. Sabatier (1999) advances two specific hypothesis to account for major policy change. The first - that policy change is unlikely so long as the advocacy coalition that instituted the current policy remains in power within a jurisdiction - is not directly applicable to a transnational negotiating setting devoid of a central state jurisdictional authority. The second - that policy change is unlikely in the absence of significant perturbations exogenous to the policy subsystem - will be examined in detail (Sabatier 1999).

But there is no reason to think this is the only, or even the main, avenue for policy change. A number of alternative hypotheses postulate that policy-change may be endogenous to the policy-making system. Hall (1993) likens the theoretical bases of given economic policy regimes to scientific paradigms, and explains certain shifts in policy-making as stemming from Kuhnian paradigm shifts in underlying causal models. Sabatier and Hunter (1989) agree that causal perceptions are "most susceptible to change over time because, unlike abstract normative orientation, they are susceptible to modification on the basis of experience and evidence," adding, in line with Kingdon (1984), that "elite perceptions of causal relationships can play a critical role in the selection of policy alternatives to which they accord serious consideration" (Sabatier and Hunter 1989). Other suggested explanations for policy system dynamics include "backlashes" against existing policies, policies that generate undesired outcomes and thereby generate an impetus for change, and path dependent policies (Fenger and Klok 2001).

By tracking actors' beliefs as they move through the Doha Round, the research will seek to adjudicate between these competing theoretical accounts of the determinants of policy-change. How do participants in the WTO rule-making system assimilate new technical information into their causal understanding of the link between innovation and development? How open to falsification are their understandings of the underlying causal mechanisms? What role does persuasion play in the evolution of policy-actors' belief systems? Is there an identifiable backlash against the policies of the dominant coalition? Is there evidence that previously established rules have yielded undesired outcomes that, in themselves, produce an impetus to policy change?

Proposed methodology

The proposed research will employ qualitative methods to question the WTO rule-making system participants' causal and normative beliefs about the innovation-technology policy-development nexus. It will track the changes in these belief systems over time though a research strategy that has been carefully developed and extensively applied in the literature on Advocacy Coalitions.

Though qualitative in nature,the research methodology developed by Advocacy Coalition Framework advocates has been consciously designed to meet scientific standards of falsifiability. The approach relies on a series of research avenues designed to capture (map) policy actors' beliefs of the key causal mechanisms in the policy areas they are engaged in. Three data-gathering strategies are dominant in the literature:

1. Textual analysis of documents and/or statements by policy actors that set out their understanding and beliefs about the policy-area under discussion (Jenkins-Smith, et al. 1991) This method is especially valuable as a means of capturing past beliefs.
2. In depth interviews of policy actors using open or semi-open questionaires. (Sabatier & Hunter 1989)
3. Attitudinal surveys of policy actors, methodology to capture causal beliefs. (Sabatier & Hunter 1989)

The proposed research will employ all three strategies. It will begin by identifying a small nucleus of key informants active in the WTO rule-making system and compiling a broader list of policy actors for subsequent study. An attitudinal survey will then be produced to examine actors' causal and normative beliefs about the role of technology and innovative activity in economic development. These will be compared with views revealed through close textual analyses of actors' past policy pronouncements, and the differences between policy views at different times will be used as a proxy for policy-learning.

The proposed research will follow Sabatier & Hunger (1989), who develop a methodology for identifying membership in a given Advocacy Coalition by coding system's participants' beliefs through attitudinal surveys and looking at the "distance" between various members' beliefs. It will then use more open questioning to seek to identify each coalition's policy core beliefs as well as its crieteria for validation.

As the Doha Round negotiations advance, follow-up surveys may be administered to track the evolution in policy actors' conceptualizations of the key causal relationships in economic development. By capturing system participants' views at several different points in time, the proposed research will be well placed to capture and describe the nature of the policy-learning at play.

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DRAFT - Research Proposal - DRAFT

2004-05-18T04:53:00.000-07:00

THIS IS A DRAFT - Feedback is most warmly appreciated.

Research Proposal
(DRAFT)
May 2004
Francisco Toro
UNU-Intech

Tentative Title:

Making Technology Policy in the WTO-era: Is the multilateral rule-making system learning about innovation?

"Decision-making in public policy is no longer the exclusive act of governments, as other actors are increasingly sharing the responsibilities and often times leading the process. These new patterns of decision-making in economic policy areas consist of negotiations among many actors along 'policy networks', substituting the old hierarchical patterns in which states made decisions centrally. "
Werner Corrales

Research aim:
The proposed research will identify the barriers to the adoption of targeted technology policy instruments posed by World Trade Organization rules, and will analyse the dynamics of the WTO rule-making system on issues relevant to the adoption of such policies. The research will focus on the way participants in the WTO rule-making system understand the role of technology in economic development, and how this understanding shapes their conceptualization of national interests.

In contrast with neorealist approaches that assume problems are well-defined and state interests are readily apparent to actors in the international arena, the proposed research will explore how problems come to be understood and how concepts of national interest come to be formed. Focusing on the interstice between belief systems and technical knowledge, the research will explore how policy actors assimilate and deploy new information. It will question how such information is aggregated into an understanding of state interest, and how such learning processes affect the overall dynamics of the WTO rule-making system with regard to technology policy.

Drawing on the complementary literatures on Advocacy Coalitions and Epistemic Communities, the research will first analyse policy actors' causal and normative beliefs about the policy problems they face (cite, cite, cite, cite.) An important goal, will be to analytically describe (map) these belief systems, drawing out the links between policy actors' understanding of the key relationships in world trade and their policy preferences. The research will seek to explain the dynamics of the WTO rule-making system as a function of such belief systems, and of their evolution over time as a result of a process of policy learning (Kingdon).

The overall goal of the proposed research will be to develop a sophisticated understanding of the WTO rule-making system that emphasizes the role of knowledge and learning as motivating factors in the process of policy change. (Schlager and Blomquist.)

Research context:
For a generation now, economic researchers have increasingly focused on innovative capacity as a critical determinant of national economic performance. Starting with Freeman and Lundvall (cite), scholars have focused on the National System of innovation as a key explanatory factor for economic performance. Researchers working within this tradition have put forward increasingly sophisticated formal alternatives to the standard neoclassical model of economic development and growth, emphasizing the role of innovation and technological change. (Metcalf, Silverberg)

Though first formulated to account for the performance of developed economies, (cite a Swede) the innovation system approach was quickly adopted by scholars interested in the problem of development. A growing number of studies persuasively credit firms' innovative capacities and the institutional structures that support them for the superlative economic performance of several of Asia's Newly Industrialized Countries (Lall, Kim, cite.) Others have used the insights of the NIS framework to account for the relative under-performance of Latin American economies since the 1970s (Katz, Cassiolato.)

The innovation system approach sees firm competitiveness as a factor of the knowledge intensity and innovative capacity of each firm. Innovative capacity, in turn, is seen as largely determined by the institutional context firms operate in. Innovation system scholars argue that firms rely on a multiplicity of linkages to acquire the information and knowledge they need to innovate. These include knowledge-rich forward and backward linkages, as well as interactions with universities and public research institutes, financial institutions, government regulatory agencies and near-by firms. (Mytelka, Metcalf, cite.)

A series of policy proposals stem logically from this understanding of competitiveness and development. In contrast with the standard recipes arising from the neoclassical tradition, innovation system scholars do not believe that market forces, on their own, can launch developing countries on a path to sustainable and sustained development. Insteady, they argue that states must implement active and selective economic policy instruments designed to foster firms' innovative capacity.

In the developing world, such policies are broadly understood to include measure to ease and hasten the transfer of new technologies from developed to developing country firms. The policy mix also includes measures to foster dynamic networks of small firms through local content requirements on foreign firms, as well as technology-transfer requirements on foreign entrants, targeted R&D subsidies and other industry-specific technology policies. As mentioned, some variant of this policy mix was implemented in each of the Asian NICs.

Many obstacles stand in the way of successful implementation of such a policy mix in the developing world today. The proposed research will focus on one: the trade regime set out in World Trade Organization rules.

Trade analysts working from the Innovation System school have warned with increasing vehemence in recent years that significant portions of the international trade regime managed by the World Trade Organization is incompatible with much of the policy agenda outlined above. The implication, then, is that the WTO regime constitutes a structural impediment to the development of the world's poorest countries.

Many parts of the WTO regime have been questioned in this regard. The TRIMs agreement is designed to "prohibit discriminatory or trade-restricting performance requirements (Corrales p.23), effectively barring access to a series of policy tools that states might otherwise use to increase the knowledge intensity firms' forward and backward linkages. The Agreement on Subsidies and Counterveiling Measures bans all industry or firm specific subsidies, closing the way on policies that are particularly important for enterprise development, clustering and network policies, technology, knowledge and innovation policies, as well as policies for enhancing marketing capabilities. (Corrales 24) In a similar vein, the Trade Related Intellectual Property Rights agreement closes spaces for some R&D subsidies, the 1994 GATT agreement imposes restrictions on the use of public procurement as policy instruments for innovation, and the Agreement on Agriculture restricts subsidies as well as other mechanisms to provide incentives for firms to improve their performance. Moreover, the current negotiations on the so-called Singapore Issues (Investment, Competition Policy and Trade Facilitation) threaten to introduce restrict developing countries' spaces for implementing critical policies.

Taken as a whole, then, the WTO regime appears to substantially restrict the spaces for policy-making available to developing countries as they attempt to implement an innovation-system based package of policy reforms. However, the WTO regime must not be seen as a static, unchanging entitity. In fact, the current round of multilateral negotiations has seen considerable debate on many of these issues as they impact the developing world, under the broad rubric of Special and Differential Treatment (SDT.) The 2001 Doha Declaration pledges to make SDT provisions "stronger, more precise more effective and more operational." (IISD 2003) Some observers believe the SDT debate is the key to enshrining new rules that expand the menu of technology policy options available to developing countries.

Unless the Doha Round yields a substantially expanded scope for SDT that allows for active technology policy interventions, developing countries are likely to face substantial constraints in their ability to implement development-oriented technology policies. Proponents of the innovation systems approach therefore have powerful reasons to study the rule-making process as it unfolds in the Doha Round trade talks. At stake is the possibility of adopting the policy agenda suggested by the innovation system approach.

The dominant strand of research into decision-making in Multilateral Negotiations stems from the Neorealist tradition of international relations. In this view, negotiators seek to apply their country's power to advance their national interest. The model of the individual as a rational, maximizing agents with perfect information and unlimited computational abilities is borrowed from the canon of neoclassical economics.

Designed largely to explain matters of state security, the neorealist approach assumes that states' interests are readily apparent to policy actors. The questions of agenda setting and interest formation are not seen to be in need of explanation. But there is good reason to believe that in technically complex issue areas marked by uncertainty about the likely outcome of policy, it cannot be assumed that actors know what is in their state's best interest (Burstein). Arguing that the multilateral trade regime is marked precisely by such technical complexity and uncertainty, the proposed research will adopt an alternative approach centered on identifying the process whereby actors in the WTO rule-making system come to identify their states' interests.

In contraposition to the neorealist approach, the proposed research will draw on two separate but related strands of the political science literature:

1-The Advocacy Coalition approach sees actors as instrumentally rational, but draws more heavily on work in cognitive and social psychology than in economics. The framework "does not assume that that actors are driven primarily by simple goals of economic/political self-interest." (Sabatier 98 -109) Instead, it focuses attention "on the inner world of individuals [and on] the structure and content of their belief systems." (Schlager and Blomquist 96, p. 661) Instead of assuming individuals' preferences, AC analysts develop and test empirically verifiable hypotheses concerning actors' belief systems.

The AC framework attempts to account not just for belief systems, but also for how they change over time. Sabatier and Jenkins-Smith, who first developed the framework, emphasize the importance of adopting a time horizon of a decade or more in order to capture key shifts in policy dynamics. Following Kingdon (1984), advocates of the framework are especially concerned with "policy learning" - i.e. the way actors in the policy system adapt and, less often, change their belief systems to incorporate newly discovered technical and scientific knowledge.

2-The Epistemic Communities Approach (ECA). Unlike the ACF, the Epistemic Communities Approach was originally developed to account for instances of international cooperation, particular on scientifically or technically complex matters. On particularly contested areas of policy, the ECA argues, marked by uncertainty and plausible claims to technical expertise by technical elites (Sebenius) state actors may have no direct or readily apparent way to know how best to conceptualize the problems at hand, let alone judge what is and what is not in their state's interest. When faced with such problems, decision-makers will seek to "discover" their interest by turning to scientists and "experts" for interpretation. On given areas of technical expertise, groups of experts who share particular causal and normative beliefs will form Epistemic Communities - groups brought together by a shared set of beliefs (cite definition)... As Haas (1992) argues, "control over knowledge and information is an important dimension of power."

There is important conceptual overlap between the concept of an epistemic community and that of an advocacy coalition. The advocacy coalition concept is certainly broader, including not only scientific and technical experts but also citizen activists, journalists, and state decision-makers. With their privileged claim to be able to generate scientifically valid statements about the world, epistemic communities might be considered the technical knowledge kernels of any advocacy coalition.

The concepts were developed to explain different levels of policy making. Advocacy coalitions are normally cited within a national policy-making context, whereas epistemic communities are transnational in nature and seek to explain interactions between states rather than within them. What's more, the notion of competition between coalitions is a basic tenet of the advocacy coalition framework, while it is absent from much of the research into epistemic communities.

Due to the peculiarities of the WTO system, the proposed research will seek to include aspects of both the ACF and the ECA. Although the WTO is a multilateral organism that reaches decisions on the basis of state-to-state negotiations, many of its rules concern matters traditionally governed by national economic policy. Domestic political actors - actors that may well form part of given advocacy coalitions in the national context - have much at stake in the outcome of WTO negotiations.

Based on a highly complex and contested explanatory model developed by academic economists, the WTO accords is certainly marked by the uncertainties and plausible claims to technical expertise. Yet it's clear that not all of the economists and experts at work on the system share a set of causal and normative beliefs about the role of technology and innovation in economic development. In other words, there are a multiplicity of expert-networks working on and shaping the debate about the international trade regime. Instead of the domain of a single Epistemic Community, the multilateral trade regime is an arena of competition between Epistemic Communities.

Focused as they are on the "inner world" of policy actors, both the ACF and the Epistemic Communities Approach see persuasion as an important mechanism in the policy process. The frameworks drive analysis far from the realm of perfect rationality and optimizing decision-makers prevalent in traditional economic and International Relations scholarship, and towards an approach critically concerned with actors' understandings of the causal mechanisms at work in their policy realms, and how those understandings change over time. (Burstein)

The Advocacy Coalition framework holds that in order to make the policy, coalitions need to win the debate first. What it means to "win" such a debate, what the necessary and sufficient conditions for a coalition to be successful are subjects of intense debate in the literature. Sabatier advances two specific hypothesis to account for policy change. The first - that policy change is unlikely so long as the advocacy coalition that instituted the current policy remains in power within a jurisdiction - is not directly applicable to a transnational negotiating system devoid of a central state jurisdictional authority. The second - that policy change is unlikely in the absence of significant perturbations exogenous to the policy subsystem - will be examined in detail.

But there is no reason to think this is the only, or even the main, avenue for policy change. A number of other hypothesis have been advanced. Hall (1993) compares the theoretical bases of given economic policy regimes to scientific paradigms, and explains certain processes of "persuasion" in policy-making as stemming from Kuhnian paradigm shifts in underlying causal models. Freudenburg and Gramling (2002) hypothesize that, in certain circumstances, a coalition's initial success in dominating a policy-subsystem and implementing its policy-preferences may set the stage for a backlash - increased mobilization and organization on the part of opposing coalitions - and may undermine the long-term prospects for the coalition's policy agenda, a process they describe as allogenic succession.

By tracking actors' beliefs as they move through the Doha Round negotiations, the research will seek to adjudicate between these competing theoretical accounts of the determinants of policy-change. How do participants in the WTO rule-making system assimilate new technical information into their causal understanding of the link between innovation and development? How open to falsification are their understandings of the underlying causal mechanisms? What role does persuasion play in the evolution of policy-actors' belief systems? Is there an identifiable backlash against the policies of the dominant coalition? Is there reason to believe that a process of allogenic succession could be in place?

Methodology:
The proposed research will adopt qualitative methods to question the WTO rule-makers' causal and normative beliefs about the role of technology and innovative capacity in economic development. It will track the changes in these belief systems over time though a research strategy well developed in the literature on Advocacy Coalitions.

The research methodology developed by Advocacy Coalition Framework advocates will be applied. Relying on interviews of key informants, Lickert Scale surveys designed to identify and measure actors' causal and normative beliefs, and textual analysis of policy actors' published statements on the policy matters at hand.

Though largely qualitative in nature, the ACF has been consciously designed to meet scientific standards of falsifiability. The approach relies on qualitative research methods designed to capture (map) policy actors' understandings of the key causal mechanisms in the policy areas they are engaged in. Three data-gathering strategies are dominant in the literature:

1-In depth interviews of policy actors using open or semi-open questionaires. (Cite)
2-Surveys of policy actors, often using a Lickert Scale methodology to capture causal beliefs. (cite)
3-Textual analysis of documents and/or statements by policy actors that set out to synthesize their understanding of the policy-dynamics at work. (Cite.)

The proposed research will employ all three strategies. It will begin by identifying a small nucleus of key informants active in the WTO rule-making system, and compiling a broader list of policy actors for subsequent study. A Lickert Scale survey will then be produced to examine actors' causal beliefs about the role of technology and innovative activity in economic development.

As the Doha Round negotiations advance, follow up surveys will be administered to track the evolution in policy actors' conceptualizations of the key causal relationships in economic development. The proposed research will attempt to conceptualize and describe the nature of the policy-learning at play.

The proposed research will also analyse policy actors' causal beliefs as revealed in documents and statements made by key policy actors, and will attempt to discern changes over time in policy actors' public positions on matters relevant to technology policy.

Overall, the research will provide new insights into the WTO rule-making system's impact on nations' abilities to implement technology policies, and describe the systems evolution through the crucial current round of multilateral negotiations.

The best neoclassically-inspired rebuttal I've found yet

2004-03-24T01:40:00.000-08:00

I'm in trouble now. I've spent the last few days reading New Growth Theory papers - ie the literature that arose in the 80s and 90s to take account of non-convergence (i.e. no evident trend towards rich and poor countries converging in their living standards) and to try to solve Neoclassical theory's "innovation problem." We're talking Lucas and Romer mostly, but also Grilliches, Grossman and Helpman, Laura Tyson, Mankiw, Stiglitz, even a bit of Krugman.

Lucas and Romer are definitely the most perceptive analysts in this bunch, and I have to admit my infatuation with Krugman has abated significantly, because he doesn't really seem to understand the nature of the innovation problem. Romer, on the other hand, takes a very peculiar and piercing look at the problem founded on a clear eyed understanding of the nature of the innovation problem. His conclusions straddle the border between neoschumpeterianism and neoclassical thinking - either an arroz con mango or a brilliant synthesis, depending on your mood.

His Oct. 1990 paper in the Journal of Political Economy called "Endogenous Technical Change", is particularly fascinating. He starts - as everyone in the field does - with a simultaneous reverence and critique towards the famous Growth Accounting Model proposed by Robert Solow in the 1950s. It's the model that started the debate, and controversies in the field tend to be structured in terms of what each theorist thinks Solow got right and what they think he got wrong.

Solow's model is disarmingly simple. Economic goods, as everyone knows, are a mixture of labor and capital. Economic growth, then, will be a reflection of the growth rate in labor and the growth rate in capital. If today you have two workers with two shovels and they produce 20 holes per day, all you need to do to double your hole-per-day output is double the level of inputs: 4 workers with 4 shovels should be able to dig 40 holes per day.

The technology problem suggests itself right away: what if instead of doubling the number of inputs, you improved the quality of your capital. Say instead of shovels you gave them bulldozers. Then the productivity of both the capital and the labor you have will raise faster than the growth in inputs. A bulldozer may cost 1000 times as much as a shovel, but if it permits one worker to dig 2000 as many holes as he could with a shovel, the introduction of the new bulldozer techhnique will increase both the productivity of capital and the productivity of labor. Technology raises what Solow called Total Factor Productivity - the overall productivity of the factors involved.

The resulting equation is a Cobb-Douglas production function, where

O=A*(K^b + L^1-b)

Where O is output, A is the level of technology, K is the stock of capital, L the stock of labor, and b is a number between 0 and 1 that determines the percentage of remuneration of capital (whereas 1-b is the remuneration to labor.)

So already in Solow's original formulation, technology had this semi-magical property. In this formulation, A is exogenous to the model: it stands outside the theory, and is assumed to merely grow continuously and diffuse costlessly throughout the economy.

Now, New Growth Theory is mostly about trying to include this process of technological change and difussion into the theory, to endogenize it. Various routes have been proposed - the most usual rely on using the concept of Human Capital to explain changes in technology, others on postulating "spillover effects" where knowledge produced by one company seeps into the rest of the economy. Romer criticizes both of these approaches, though he doesn't discard them.

For Romer, Human Capital cannot be a complete stand-in for technological growth because unlike knowledge, human capital is a rival good. It is costly to train people to do things. Knowledge is non-rival. Once the design for a bulldozer has been created, it can be replicated as many times as you want at the same time. But if you teach me to use a bulldozer, I can only use that one bulldozer at the specific place where I'm working - I cannot be everywhere at the same time, the way a bulldozer design can. Romer suggests that the Human Capital fix is merely a convenient way to run-around the Innovation Twilight Zone, to re-cast the strange properties of innovation into a conceptual model that's easier to deal with because it's been reduced to a kind of capital that can be expected to behave like other standard private goods (like normal capital.)

Romer then takes a detour into the two characteristics that define an economic goods. In standard economic theory, goods can be private or public according to two criteria: rivalry and excludability. Clean air, the typical textbook example of a public good, is non-rival (because you can breathe as much of it as you want without undermining my ability to breathe), and non-excludable (because you can't stop me from breathing clean air, and you can't profit from it.) A banana, by contrast, is your typical private good. But what about knowledge?

Romer follows Arrow in characterizing the weirdness of knowledge. Like a public good, knowledge is non-rival - many people can have it at once without reducing the total stock available for others - but unlike a public good, knowledge is only sort-of, kind-of non-excludable. Plenty of mechanisms exist - from patents to TRIPs to trade secret laws - to help companies exclude others from using the knowledge they have developed.

So Romer's intriguing proposal is to break down the "A" in Solow's original formulation into two bits "AE" (for the part of knowledge that is excludable and "AN" for the bit of knowledge that is non-excludable. The non-rivalry of knowledge, together with the AN term, suggest pervasive positive externalities to knowledge-production, and suggest why innovative activity can generate society-wide rents that are much higher than the economic effort made in generating them.

Romer also criticizes Solow for simply assuming constant returns to scale (since b + (1-b) = 1 by definition) - an assumption that's wildly out of step with the real world. In many industries, and in especially in relatively technologically advanced industries, it pays to be big. There's a reason you don't see mom-and-pop car manufacturers or banks...in these industries b+(1-b) equals way more than one - they show increasing returns to scale.

Romer notes something that's been well-understood by generations of economists: in the presence of increasing returns to scale, a few companies will grow real big and drive out all the others, and at the end you'll have either oligopoly or monopoly, but certainly not a perfectly competitive market in any kind of Marshallian or Pareto-optimal sense. The pervasiveness of increasing returns situations in modern industries puts at risk, one would think, the entire edifice of general equilibrium. Romer goes as far as to -gasp- cite Schumpeter admiringly. At this point I'm thinking, shit, he's come around...he's an evolutionary economist.

Alas, no. Romer accepts that increasing returns and the incomplete excludibility of knowledge puts a component of monopolistic rent-seeking at the center of capitalist development. But instead of extrapolating from this insight into an overall system where firms try to outdo one another by innovating better than their rivals - like Schump does - he proposes a model where all capital goods are differentiated and each is produced by a separate, permanent monopolist that NEVER EXITS but instead extracts monopoly rents from their designs in perpetuity. These perpetual monopolists limit themselves to producing new designs and selling them through arms length transactions to "normal" neoclassical firms that remain price-takers! Though Romer understands that this is an analytical simplification (since firms generally internalize R&D efforts instead of buying their technology from third firms) - he seems to think this is an appropriate way of conceptualizing the co-existence of market dynamics and monopolistic behavior in the economy.

As a result, the representative firm is preserved as a concept outside the monopolistic R&D sector of the economy, and therefore general equilibrium can remain. Moreover, the R&D producing firms do not compete with one another in any meaningful sense since each produces just one monopolistic innovation and then exploits its quasi-rents in perpetuity.

In Venezuela we'd say Romer killed the tiger and got scared of its hide. By ghettoizing the R&D sector and keeping it well away from the rest of the economy, Romer misses the entire point of Schumpeterian analysis - that oligopolistic markets are pervasive, price-taking the exception, and the representative firm a myth.

Romer's model remains fascinating, though. It's the most comprehensive attempt I've seen yet to include the weird aspects of knowledge into an overall theory of general equilibrium growth. I'll have to read the paper 3 more times to quite understand it.

Why it is so hard for people as bright as Romer to understand the way General Equilibrium is incompatible with competition as businesspeople know it I don't quite get. General Equilibrium seems to be such an ingrained concept that neoclassically trained economists can't conceive of discarding it as a concept- it's as though they only think it's proper economics if there's a general equilibrium formulation at its center.

Still, Romer faces up to the fact that innovation is produced by profit-seeking companies that do not act as price-takers. This is a key insight - and from there to the Schumpeterian plunge there's but a short step. It's not a plunge many seem willing to take.

Letter to Jason

2004-03-13T03:07:00.000-08:00

Dear Jason,

The debate on capitalism is a long and involved one. My question back to you would be which capitalism? US capitalism is NOT like German capitalism which is NOT like Japanese capitalism which is NOT like Singaporean capitalism which is NOT like Danish capitalism. Capitalism is not any one thing, it's a menu of options. Me? I want to see Danish-style capitalism in Venezuela. Lots of people will say I'm crazy to even think that's possible, but I think it is.

Especially for those who care first about the poor, the case for capitalism is way too strong to ignore in good faith. Only one economic arrangement has ever shown that it can bring the vast bulk of a large society from mass scarcity to mass comfort, an that's capitalism. There were over 50 famines in just 100 years in Florence in the 18th century, if you believe Braudel. Mass scarcity of basic items like food has been the common scourge of humanity for literally thousands of years, since agriculture was first invented. Only capitalism has shown, again and again, that it can take the bulk (in Northern Europe, virtually all) of society wih it from generalized hardship to a real security for just about everybody. No other system has ever proven itself able to do so.

Capitalism has shown itself as a devastatingly powerful ally against mass poverty not only in Europe, Japan and North America but also in large if localized parts of the poor world. Done in a certain way, capitalist development has taken a country like South Korea go from the current-day situation of Haiti to the current-day situation of Spain or Greece within a single generation. In other parts of the world, the same change is taking place. Largely ignored by capitalism's critics due to its nasty, awful government (which I don't endorse at all) China has shown that, if well managed, a process of rapid capitalist development can take literally hundreds of millions of Chinese peasants (campesinos) from living on the edge of starvation to living lives that start to resemble the life you take for granted in the US, where you may still be poor, but you can see your children's generation will have a better life than you because of how fast the economy is growing, and how much opportunity that capitalist growth brings them - opportunities they would not have under any other system.

Now, I think there are other debates that are far more important and interestingly than a broad philosophical debate about capitalism as such, and I'm pretty sure you would be bored with the long battery of statistics showing the plainly evident: that as economies grow, large sections of the population go from being desperately poor to being more or less economically secure. The impact of growth on real earnings over time is not really, I think, a contentious issue in economics because the studies of the link are so clear and unequivocal about it.

Now, if you're going to offer me an alternative system that you have reason to believe could work without using markets to allocate resources I'd like to see it - and it better not be old-style Marxism, which is so discredited even the Communist Party of Vietnam, the people who used to shoot at John Kerry in the jungle, has more or less chucked it out the window as a relic and are now trying to emulate the evidently more effective alternative Korea set out. If you have an alternative proposal, if you know of any that have a minimum of scientific plausibility - lets see them!

Otherwise, lets move on from the "capitalism or not" question, which is actually the wrong question, not to mention a much less interesting question.

The more interesting question is which capitalism, the details of the arrangement. Because those "details" are the difference between the particularly brutal and socially disruptive form of capitalism you have in the US, and for instance the Japanese model where companies continue to fight job cutbacks even in a 10 year depression because that is simply not done, if you're an honorable Japanese manager, except as the very last resort. Both are capitalist, but in each country capitalism comes cloaked in a set of societal values that determine what is possible and desireable for businesspeople or government officials to do and not do. Some places, like Denmark, seem to have found a system that satisfied everyone: a fully free economy with government support of companies and open trading links with Europe and the world but, at the same time, very high marginal taxes - in some cases amounting to a virtual "maximum wage" - and aggressive state redistribution of the proceeds to ensure a maximum of social cohesion and minimize income inequality. The result is a rich European economy full of world-class mid-sized firms in biotechnology and agriculture as well as furniture and industrial design fused with a quasi-socialist state that goes out of its way to help business at the same time it taxes them up the wazoo. A society with virtually no poverty, very little violence, high educational standards and economic security for everybody. It's not a theory, it works if you go to Denmark. Holland, to a certain extent, is quite similar, I should add (though not as aggressively redistributionist.)

But this all started with a debate about Venezuela, so I want to be quite clear about what I'm saying. (I wrote a background essay about this you might like to read.) If Hugo Chavez was proposing any sort of plausible, systematically thought out, pathbreaking new solution to the age-old problem of the state's relationship to the economy, I might give him the benefit of the doubt, or at least listen to him. If Chavez was a Marxist, like Allende, and had a clear plan like Allende to switch control of the economy entirely into state hands and institute a soviet-style dictatorship, well, I might agree or disagree with that plan. I can debate it. There is a theory there, an idea about how it is the New Society is to function. For Allende, it was simple, the state would simply seize control of all productive assets and operate them according to a central plan. Well, at least he had a well-developed vision of where he was going, like it or hate it.

But as Manuel Caballero always says, Chavez is not a marxist, he's not a stalinist, he's not a fascist, he's not a bolivarian, he's not a castrista, Chavez is a chavista.

President Chavez plainly could not understand this essay if he tried to read it - he has simply no grasp of any of these questions or concerns. He's an army man, a military man, his understanding of reality is simple: command and control. Every institution he can't control, every institution that won't bend to his will he destroys. As for the economy, he doesn't even pretend to understand anymore, which is nice: his explanations of economic affairs during some Cadenas in 2001-2002 were truly abominable - like a seventh grader trying to fake his way through a pop quiz he hasn't prepared for.

What I'm saying is that there is no such thing as a chavista economic doctrine for me to critique. I would love to engage such an animal if any such thing showed itself. But chavez doesn't need a theory to govern. He has power, and for him, that is enough.

Chavez now personally controls the bulk of state funds and his chief aim is to dispense the money through populist goodies and handouts to try to stay in power. Any question of the economic consequences of such behavior is pushed to the far bottom of the pile. Most of the time, critical reporting on the government's many, many, many economic blunders has simply been dismissed by officials. With the National Comptroller's (our General Accounting Office) office in the hand of a chavista hardliner who never investigates anything, corruption propagates in this environment virtually unchecked. None of the government's new social programs are auditable, which makes little difference, since they weren't going to be audited anyway. Where the money comes from? where it goes? only Chavez and a few palace and Finance Ministry insiders really knows.

The scale of the shambles the economy has become is so vast, I think it would be hard for someone from the first world to understand. I tell my Dutch friends here about it and they can barely believe it. In five years, the country's lost 60% of its manufacturing firms - kaput, bankrupt, gone. Venezuela has shed hundreds of thousands of jobs, the informal economy has for the first time ever grown to employ more people than the proper, legal, tax-paying economy and 90% of those in the informal sector earn less than the minimum wage, which is now below $80/month, parallel rate. With inflation running at 25-30% and wages raising much more slowly - especially in the informal sector - most people have seen large cuts in their already often very low wages. 4 million Venezuelans go to bed without dinner every night, and a three-meal day is beyond the reach of at least half of the population. In a country like Venezuela, where wages are already low, any outside shock really ends up having an effect on how much people eat. A sobering thought considering the 18% fall in GDP Venezuela has experienced over the last two years.

In short, it's just false that Chavez is helping the poor, it's another regime propaganda lie. For the vast majority of Venezuela's poor people, the last five years under Chavez have been an economic calamity. People have to work more and more hours for less and less purchasing power. Things like going to the movies or meals at McDonald's come to seem like extravagant, unaffordable luxuries. The latest statistics show that even coffee consumption has fallen sharply, and you know a Venezuelan is *really* hard up when he stops drinking coffee. It's evident to me that the set of ideological dinosaurs and bumbling youngsters who've been running the economy all this time (from Giordani to Nobrega) bear primary responsibility for this.

The problem is not that they're anti-capitalism, Jason, the problem is that they're not pro-anything beyond very short-term crisis management. Until now, they've simply not produced any kind of plausible vision of an alternative to capitalism - they've been too busy running the country into the ground to bother with trifles like that.

So Jason, please, don't believe the hype.

ft

What Schumpeter doesn't say...

2004-03-11T13:57:00.000-08:00

...is that static equilibrium is meaningless, it's not. The insight of static equilibrium does hold some very important lessons. For instance, it's easy to see that in those markets that most closely ressemble truly competitive markets (agricultural commodities, for instance, or entry level electronics like floppy disks) then something like static equilibrium does seem to take over. With marginal production costs at just a few cents per unit on technology available to many, many producers, profits will always be vanishingly slim. That's the reality of static equilibrium.

These markets are not attractive to the big companies of global capitalism. The large players seek to derive advantage overwhelmingly by specialized, specialist knowledge. Whether you're Hitachi or Vodaphone or Halliburton, what you're really selling is specialist know-how only you have. Through innovation, you've created a technical assymetry in given markets where you can perform a service or build a product better than anyone else's, and that market asymetry by definition leads to a loss of static welfare. It's by shocking the system through innovation and by profiting from the shocks that global capitalism can and does grow.

A typical World Bank extract

2004-03-10T15:52:00.000-08:00

I'm reading Rethinking the East Asian Miracle, edited by Stiglitz and Shahid Yusuf - World Bank big beasts. The book is a re-think of the bank's controversial 1993 oeuvre, "The East Asian Miracle", which sought to argue that the East-Asians were really neoliberals in desguise, that they succeeded by "getting prices right" and getting out of the way of the market. "The East Asian Miracle" served as a manifesto in imposing neoliberal policies on people from Nairobi to Hanoi to Barquisimeto.

The 1997 crash left the world bank with a bit of egg on its face, but when strong growth resumed in 1999, they felt a need for a critical reappraisal of the entire story. The book tries to explain what happened, but its conclusions are fairly muddled.

Missing in action from the analysis is any kind of settled microeconomic understanding of the role of learning interactions in shaping the dynamic effects of trade on development. To show you what I mean, I'll just quote a typical World Bank extract on the relationship between trade and development:

The starting point for understanding the link between trade and growth is the realization that trade can have both static and dynamic effects. Traditional arguments about why countries gain from trade are typically static in nature (Ricardo.) If a country moves from autarky to trade, theory tells us that production and consumption will change in such a way as to raise overall gross national product. These gains are static in the sense that once a country has opened to trade, all of the benefit from trade will be obtained on liberalization. Although traditional theory provides strong arguments for reducing trade barriers, these are essentially seen as one-time gains. Once these gains have been achieved, this theory has little to tell us about future performance.

Other considerations point to dynamic effects that could operate through their impact on competition and profitability. However, it is not obvious whether these effects will be positive or negative. Opening an economy up to trade will increase competition, and this could affect innovation, but economists are divided on the relationship between innovation and competition. On the one hand, there are those like Hicks who believe that competition is good for innovation because monopoly leads to lethargy and a search for "the quiet life"; on the other hand, there are those like Schumpeter who believe that some degree of monopoly is required to stimulate innovation. In fact, it is likely that neither perfect competition nor monopoly is particularly conducive to innovation and that intermediat market structures that combine rents to innovation with competitive pressures will be more stimulative. (p. 381)

They then go through a series of studies showing contradictory results on the link between competition and innovation, before concluding:

Overall, theory is quite ambiguous on the dynamic effects of trade. There are reasons to expect that increased international competition could accelerate productivity growth, but also reasons to expect the reverse. "Sometimes", as the saying goes "a kick in the pants gets you going, and sometimes it just hurts." Given this ambiguity, it is perhaps not surprising that views on the likely impact of trade on growth remain widely divided. (Lawrence and Weinstein, p 384.)

The extract raises a number of concerns. In the first place, if neoclassical theory does not support the view that trade is beneficial to growth, why do WTO accords prevent all countries from using trade barriers when circumstances suggest competition would be harmful? If even neoclassical economists cannot agree on the dynamic effects of trade, why should the poorest people in the world pay the price?

But beyond that I cite that last paragraph - which is not literally speaking typical, insofar as only rarely do World Bank research paragraphs contain folksy sayings - because it shows the neoclassical muddle clearly. Lawrence and Weinstein take the epistemological system of neoliberal economics and use it to try to infer a relationship between trade and growth from that aparatus. They look at various possible hypotheses that throw contradictory results and throw up their hands, saying, in effect, "hell, we can't work this out at all."

The reason is that neoclassical thought is basically aggregative, and has no clear link with any given view of microeconomic behavior beyond broad platitudes of utility maximization. Various patches have been proposed, but the fact is that the logic of neoclassical economics flows from the aggregative downward, not the other way around. There's no unifying microeconomic principle to help sort out the moddle.

For a Schumpeterian, a passage like that is a complete hash. Neoschumpeterianism does have a set of microeconomic foundations, a very definite view about the ways firms actually behave in the real world, and how that micro behavior can be aggregated to produce predictions that fit the historical data at least as well as standard growth accounting models (Nelson and Winter 1974 being the founding study of neoschumpetarianism in this regard.)

By borrowing mathematical models from evolutionary biology, they set out to model the behaviors of firms as though they were engaged in a strategic game with the other firms in the sector. Facing competitive pressures, firms have a choice of how much they will spend on innovative activity, and what strategy they will pursue (passive, imitator, or innovator). Some firms will thrive in a given competitive environment, others will wither and fail. Some will do well in one period in badly in the next. Some will get lucky today and have an R&D dry-spell tomorrow.

The point is that evolutionary theory endogenizes technological competition from the begining, making companies' technological choices - together with an element of chance - as the central engines of change within the dynamic system.

To their credit - and encouragingly, for me - Lawrence and Weinstein do at least cite Nelson and Winter as part of the discussion, even if they clearly treat their heterodoxy with some cautious disdain:

There are paradigms that are different from those of traditional profit maximization in which managers may be stimulated to innovate when international competition threatens their rents (for example, Nelson and Winter 1974). This involves the existence of managers who satisfice rather than maximize and behave under conditions of what is sometimes termed bounded rationality. Basically, they do not innovate continuously; rather they only innovate when subject to an unusual stimulus. In this world, import competition could spur competition, while the greater profitability of exports could do the reverse. (p. 383)

Well, at least they got a mention, even if one feels the authors kind of missed the point of the evolutionary framework altogether. The point about evolutionary models is that, unlike neoclassical models, they are based on behavioral assumptions about firms that are actually believable. They are based on microeconomic foundations you could describe to a businessman without having him furrow his brow and look at you like you're a lunatic. The technological/competitive decisions at the center of evolutionary models are the types of decisions business leaders spend their time making - rather than the optimizing abstractions of the standard model.

(Perhaps for this reason, Innovation Economics is far more prevalent in business schools that in Economics' Departments. It's not surprising - unless you're in finance or banking, if you're a businessman neoclassical theory is about as much use to you as an ashtray on a motorcycle.)

A neoschumpeterian, therefore, can only shake his head at the World Bank extract above. They didn't get it at all - they start from production and proceed to try to infer something about knowledge interactions from that. But we know that that's backwards. You need to start from knowledge interactions and infer production dynamics from that. You'd get something like:

Different types of host country conditions in different kinds of industries affect the potential for learning interactions as a result of trade. In those markets and industries where conditions are conducive to rapid learning, international trade will contribute to pro-poor growth. But when technical gaps are too large, institutional structures are not present, human capital is too scarce or other structural factors undermine the potential for meaningful learning interactions, trade will inhibit the innovative capacity of host country firms. The resulting configuration, led by Multinational companies, may be more technically efficient, but if possibilities for knowledge spillovers to local industry are thwarted, they may do little for the innovative capacities of host countries and will contribute little beyond wages to the economy.

Bengt-Ake Lundvall, the other big-beast of neoschumpeterianism, once put it devastatingly clearly saying that the basic mistake in neoclassical models is that neoclassical theory sees the three fundamental economic processes as production, consumption and accumulation. For neoschumpeterians, the three fundamental economic processes are learning, remembering and forgeting. Products and transactions are simply the embodiments of given states of technical knowledge. They're epiphenomenal. Knowledge interactions operate at a much more fundamental level, and ultimately explain the given production, consumption and accumulation decisions made by firms and households - not, as neoclassical theory would have it, the other way around.

Thomas Friedman regains a few marbles...

2004-03-07T07:19:00.000-08:00

now the guy writes like a schumpeterian...

The Secret of our Sauce
Bangalore, India-
Yamini Narayanan is an Indian-born 35-year-old with a Ph.D. in economics from the University of Oklahoma. After graduation, she worked for a U.S. computer company in Virginia and recently moved back to Bangalore with her husband to be closer to family. When I asked her how she felt about the outsourcing of jobs from her adopted country, America, to her native country, India, she responded with a revealing story:

"I just read about a guy in America who lost his job to India and he made a T-shirt that said, `I lost my job to India and all I got was this [lousy] T-shirt.' And he made all kinds of money." Only in America, she said, shaking her head, would someone figure out how to profit from his own unemployment. And that, she insisted, was the reason America need not fear outsourcing to India: America is so much more innovative a place than any other country.

There is a reason the "next big thing" almost always comes out of America, said Mrs. Narayanan. When she and her husband came back to live in Bangalore and enrolled their son in a good private school, he found himself totally stifled because of the emphasis on rote learning — rather than the independent thinking he was exposed to in his U.S. school. They had to take him out and look for another, more avant-garde private school. "America allows you to explore your mind," she said. The whole concept of outsourcing was actually invented in America, added her husband, Sean, because no one else figured it out.

The Narayanans are worth listening to at this time of rising insecurity over white-collar job losses to India. America is the greatest engine of innovation that has ever existed, and it can't be duplicated anytime soon, because it is the product of a multitude of factors: extreme freedom of thought, an emphasis on independent thinking, a steady immigration of new minds, a risk-taking culture with no stigma attached to trying and failing, a noncorrupt bureaucracy, and financial markets and a venture capital system that are unrivaled at taking new ideas and turning them into global products.

"You have this whole ecosystem [that constitutes] a unique crucible for innovation," said Nandan Nilekani, the C.E.O. of Infosys, India's I.B.M. "I was in Europe the other day and they were commiserating about the 400,000 [European] knowledge workers who have gone to live in the U.S. because of the innovative environment there. The whole process where people get an idea and put together a team, raise the capital, create a product and mainstream it — that can only be done in the U.S. It can't be done sitting in India. The Indian part of the equation [is to help] these innovative [U.S.] companies bring their products to the market quicker, cheaper and better, which increases the innovative cycle there. It is a complimentarity we need to enhance."

That is so right. As Robert Hof, a tech writer for Business Week, noted, U.S. tech workers "must keep creating leading edge technologies that make their companies more productive — especially innovations that spark entirely new markets." The same tech innovations that produced outsourcing, he noted, also produced eBay, Amazon.com, Google and thousands of new jobs along with them.

This is America's real edge. Sure Bangalore has a lot of engineering schools, but the local government is rife with corruption; half the city has no sidewalks; there are constant electricity blackouts; the rivers are choked with pollution; the public school system is dysfunctional; beggars dart in and out of the traffic, which is in constant gridlock; and the whole infrastructure is falling apart. The big high-tech firms here reside on beautiful, walled campuses, because they maintain their own water, electricity and communications systems. They thrive by defying their political-economic environment, not by emerging from it.

What would Indian techies give for just one day of America's rule of law; its dependable, regulated financial markets; its efficient, noncorrupt bureaucracy; and its best public schools and universities? They'd give a lot.

These institutions, which nurture innovation, are our real crown jewels that must be protected — not the 1 percent of jobs that might be outsourced. But it is precisely these crown jewels that can be squandered if we become lazy, or engage in mindless protectionism, or persist in radical tax cutting that can only erode the strength and quality of our government and educational institutions.

Our competitors know the secret of our sauce. But do we?

Schumpeter's departure starts from...

2004-03-07T06:20:00.000-08:00

...his appraisal of what is needed to make a statically optimal world into something more life-like and realistic. You'll have guessed his answer is innovation, but what's interesting is how he treats innovation and why he thinks it makes not only change but growth both possible and inevitable.

What changes when you add innovation into the system?

The first thing to notice is that when an innovation is made, it does not magically and instantenously extend to all of the firms in the economy equally, as neoclassical models would have you believe. The notion that all firms of necessity optimize and therefore all tend to produce at the same technology level are some of the more counter-intuitive in standard growth models.

In reality, innovations normally develop within individual firms, and those firms go to great lengths to protect them through patents, trademarks, trade secret rules, TRIPs, and a whole host of other institutional mechanisms. These institutions allow - in fact, are designed to - allow individual firms to maintain temporary monopoly rights over the things they invent. The innovation economy is an economy of many firms each seeking technological advantage through intensive, on-going, well-funded research and development efforts, and then seeking to protect their right to make money off of those innovations monopolistically for as long as posible.

Notice what has happened here: you've upset the system of perfect efficiency by introducing a market imperfection. You've granted the right to temporarily make additional profits to a single company in the system by granting them a patent over something they've invented. Due to those temporary monopoly pricing rights, that company will be able to extract a portion of the utility that would normally correspond to the consumer - the consumer surplus - because that is what monopolies do.

Now, for the duration of the monopoly (now 20 years by WTO agreement worldwide) that market will not operate as an efficient market. It will have one dominant producer that can extract consumer surplus at will due to patent protection, and other firms who will be forced, if they want to stay in the market, to themselves innovate, either by copying the original innovator as much as they can without infringing their patents, or by developing wholly new techniques that will leave the original innovator in the mix.

Schumpeter's point is that innovation is pervasive. Tens of thousands of patents are issued in the US each year for every conceivable technology in every conceivable market. The temporary market imperfections caused by innovation and accentuated by intellectual property rights laws are a pervasive destabilizing force, keeping the economy from settling into any one equilibrium position where all producers have equal access to technology and there is no tendency to change.

The somewhat counterintuitive result is that capitalism works due to market imperfections not despite them. And that there is a central tension within the system between the allocative tendencies of the market towards steady equilibrium and the pervasive efforts of business to top one another by trying to beat each other out technologically.

I should add quickly that I am not referring just to so-called High-Tech industries here but to the whole of the economy. The technology that allows a fish farmer to produce more fish more efficiently is just as important here as the battles between Microsoft and Sun.

Notice, first off, that once innovation is thrown into the mix, we're faced with a much more life-like, much more intuitively plausible world of corporate behavior than we could conceive in a steady-state equilibrium world. Once innovation is introduced and a competitive dynamic is set off between companies, we see the kinds of corporate behavior we've come to expect from contemporary corporations: aggressive cost-cutting and marketing, an emphasis on new product development and brand image, the works. The Schumpeterian firm is a firm that lives and breathes, a firm that's easy to see as a stylized representation of a real-world firm than the squadrons of mathematical optimizers that neoclassical theory would have us believe runs the business world.

The only problem is that if it's a certain set of market failures that unleash the competitive dynamic that gives capitalism its recognizable face, then most of the theoretical basis for economic policy making are wrong. Correcting market failure comes to be seen as a wrong-headed and simplistic slogan. The problem becomes a much more intricate one of consciously fostering certain kinds of beneficial market failures, of intervening at certain times and in certain places to force the market to fail in order to allow a company to take advantage of a technical breakthrough and thereby set off a competitive dynamic within the sector. The blind adoration for the allocative powers of market mechanisms will not help developing country policy makers to adopt policies that can work in those circumstances.

Selective intervention, therefore, becomes a hot button item. From a neoclassical perspective, there's really no way to explain how a government intervention into a well-functioning market could imaginably improve the performance of that market. But that kind of policy, is precisely Japan and Korea adopted in the 50s and 60s, and look where it's gotten them in just a couple of generations.

The post on the Asian Tiger's as posterchildren for schumpeterian theorizing will have to await until I've read more, but my preliminary point is simply that if Schumpeter is right, then for sure much - but not all - of what the WTO and the IMF are doing is totally backwards.

Schumpeter starts...

2004-03-06T03:20:00.000-08:00

...with a piercing critique of the neoclassical consensus. He does it by taking us into an imaginary world, a world we would not recognize as our world but that, he thinks, corresponds to the reality suggested by neoclassical theorizing.

He calls it the "circular flow" economy - a neoclassical utopia of steady state general equilibrium where all markets clear fully, all the time.

To Schumpeter, such a world would ressemble nothing more than that Bill Murray vehicle, Groundhog's Day. In general equilibrium, all consumers are fully rational and consistent, and so are all producers. Consumers face a demand function - a mathematically derived "consumption basket" that scrupulously maximizes their enjoyment - while producers face a well-defined supply function that dictates their optimal production strategy rigidly.

Because tastes are assumed to be consistent, the demand function doesn't change. Because innovation is not part of general equilibrium theory, the production functions facing producers also remain constant over time.

Nothing changes. Each days producers get up and make the same optimal quantity of their product as they made the day before using the same technology in the same way. Consumers, similarly, wake up every morning and buy the same mix of products at the same prices as the day before, and every day they optimize the utility they get given their spending power. There is nothing in the system to push it to change in any way, at any time. That's what general equilibrium means.

Now, Schumpeter does have a purpose in writing this somewhat arcane reductio ad absurdum. He wants to show, conclusively, how weird general equilibrium is as a goal, and how the postulates of neoclassical theory, if followed to their logical extreme, yield up a society very different from what is commonly refered to as capitalism. Steady state equilibrium theory has a certain mathematical parsimony and elegance that Schumpeter could not help but admire - he waxes dithyrambic on Leon Walras, who he regarded as first to have worked out the system of differential equations implicit in Adam Smith. But as a description of the actual world we live in, Schumpeter argued, it fails badly.

I'll sell you a secret...

2004-02-22T07:26:00.000-08:00

I have this game I used to play with my little niece Clarisa when she was four or five years old. Playing with her, I would tell her, "Clari, Clari, do you want to know a secret?"

And, of course, being four or five, she'd get all excited and say "yes! tell me!"

Only the secret wasn't for free. "I'll sell it to you," I'd say. "100 bolivars."

At this point, Clari would get this kind of quizzical look on her face. Something was not quite right about that, and she could tell. Was 100 bolivars a high price or a low price for that secret?

Well, there was no way for her to tell. Maybe it was a really good secret, in which case those 100 Bs. (about 5 US cents) would be totally worth it. Just go, find Bs.100 and go for it. On the other hand, maybe the secret was something she really had no interest at all in. Maybe the secret was entirely worthless to her, and even Bs.100 was way too high a price.

The problem is, there is no way for her to tell what the worth of that secret was until she knew what the secret was. So she'd tell me things like "No, first you tell me, then I pay you," which might have made sense except then she would put me in a bad position: once she already *knew* the secret, what could possibly be the point of paying for it? I could not be sure I would get paid at all if I gave away my "goods" before having any guarantee of payment.

I don't think Clarisa really liked that little game very much - kind of an obnoxious game to play with your uncle, really - but imagine my surprise when I got all the way to fancy Ph.D. school and realized that the little silly game I used to play with my 4 year old niece actually perfectly encapsulates some of the key problems in the economics of innovation and technical change.

Clarisa's parents will be happy to realize that their 4 year old had already grasped the fundamentals of a paradox whose formal statement earned Ken Arrow a Nobel Prize in Economics a few years back. In a path-breaking theoretical paper written 42 years ago now, Arrow described formally some of the oddball features of knowledge that make it a very odd candidate for a good to be traded in the open market.

Knowledge, Arrow pointed out, is strange in that it has a mix of characteristics that place it somewhere in the gray area betwen private goods and public goods. Like a private good, knowledge can be "owned" through patents, trade secrets, trademarks and copyright protection. In some situations, knowledge can easily be appropriated and accumulated privately - I could have appropriated the "knowledge" contained in this essay simply by not posting it to the internet.

But as Napster made clear, knowledge is not like a traditional private good. In some ways, knowledge is non-rival. When I download a song from you over a p-2-p network, I am not depriving you of this song - my enjoyment of the song does not impair your enjoyment of it (unless you're a real snob!) Unlike a typical private good - like, say, a pizza - knowledge can be used many times without decreasing in value, and in some ways (such as when there are network effects at play) the more users who use it the more valuable it becomes.

More relevant to poor Clarisa, any imaginable exchange of knowledge as an economic good suffers from pervasive market failures. The possibility of trade in knowledge is, by definition, predicated on a knowledge assymetry. There has to be something I know and Clarisa doesn't know for the market to function at all - otherwise, I have nothing to sell her. But if she doesn't know what the secret is, she has no feasible way to gauge the economic value of the knowledge to her. Any guess to its value is just as good as any other guess. She's like a costumer at a record shop holding a shrink-wrapped new CD in her hands. She has no idea if she will like the music on it, but she knows that the only way to find out is by shelling out cash.

Obviously, this situation poses very serious theoretical problems to the very possibility of an efficient market in knowledge-goods. Remember that in standard economic theory, markets are said to be fully efficient (or Pareto optimal) only insofar as participants in market transactions have perfect information about the goods they are buying and selling. When it comes to buying and selling knowledge, the assumption of perfect information is not unrealistic, but in fact it's nonsensical. It undermines the whole point of the transaction: buying knowledge only makes sense if you don't know what it is you're buying!

Put differently, markets are fundamentally unable to measure the economic value of knowledge efficiently, because the very idea of knowledge as a scarce resource in need of efficient allocation is problematic.

When it's a Bs.100 secret at stake, or a $14 CD, that may not be the end of the world. But when you're a business trying to decide whether to shell out thousands or millions of dollars to buy a production plant blueprint, or a software license, or a process algorithm, or an econometric analysis, or any other knowledge good, the stakes are somewhat higher, though the mechanisms underlying the market failure are exactly the same.

Now, this may seem like an incredibly obscure/esoteric detail of economic theory. And in standard economics programs you would hardly spend more than a few minutes even considering it. However, the program I'm enrolled in is gloriously, thankfully, stridently non-standard.

The schol of economic thought I'm being taught at Intech is variously known as Schumpeterian Economics, Innovation Economics, Structuralist Economics or Evolutionary Economics. Leave it to academics to think up four different names for (basically) the same idea. The school, pioneered by Joseph Schumpeter in the 1920s-1940s, is distinctive in that it puts innovation and innovative activity at the center of the economic system, analyzing the way innovation patterns determine the structure of the economy and studying the selection mechanisms that lead some firms to succeed and pushes others towards failure on the basis of their comparative technological level (that's the evolutionary part.)

One of the best teachers I've studied with here told us that the basic differences is that neoclassical economics has consisted, for 230 years, of the systematic ripping-off of Adam Smith's ideas. The "heretical transgression" of Schumpeterian economics is simply to start ripping off somebody else's ideas for once.

The differences between the basic outlooks of Schumpeter and Adam Smith are pretty fundamental. Smith was a theorist of how a free economy can function at all - how decentralized decisionmaking by millions of different economic actors all motivated by greed can lead to some sort of orderly and efficient allocation process rather than to sheer chaos. The vast majority of what neoclassical economists have been doing for 200-someodd years is simply refining and formalizing that insight about spontaneous coordination through the market, expressing it with increasing theoretical subtlety and mathematical sophistication.

By contrast, Schumpeter is concerned not so much with how the economy can function as he is with with how the economy can develop and grow. In innovation, Schumpeter thinks he's identified the ultimate driver of economic change. From that insight, he builds an economics centered on an analysis of innovative processes which he sees as the engine of economic dynamism. Intech, and some other institutes around these days, are all about expressing that insight with increasing theoretical subtlety and mathematical sophistication.

What's clear is that if innovation is a pervasive phenomenon and if most real economic advance can be traced back to innovative activity, then the market economy is kept alive not by its efficiency but by its inefficiency. That might seem like a somewhat odd statement, but Clarisa, on some level, understands it. If innovation drives the process of economic change but markets cannot, by their nature, accurately reflect the value of innovation, then the fundamental engine of economic growth is not the market's allocative efficiency but rather the generation of something that cannot be efficiently traded in an open market.

For this reason, Schumpeterian economic does away with the notion of market equilibria altogether. It's when markets fail to clear that economic growth can happen, not when markets clear. Economic growth springs from a succesion of knowledged disequilibria within an evolutionary selection environment, not from the allocative efficiency of the market. In fact, if you read traditional neoclassical economic theory, it's not entirely clear WHERE growth and dynamism springs from. If Adam Smith and Walras and Marshall and the rest of them were right, efficient markets should generate stable, pareto-optimal steady-state equilibria, not ongoing growth. The fact that the economy shows a marked tendency to continue to grow over time has taken a huge amount of work to explain in neoclassical theory, leading up to the complex formulations of Romer and Lucas and the New Growth Theory crowd. Certainly, it is odd to realize that a major theoretical reworking of the standard textbook models was necessary to make economic growth even intelligible within the neoclassical framework.

I don't want to dismiss neoclassical economics. God knows they've come up with mindbogglingly sophisticated, intricately detailed explanations for all kinds of economic phenomena and there's a real danger of throwing out the baby with the bathwater. In terms of statics analysis, neoclassicists have a huge amount of very interesting and important things to say. But I tend to agree with Schumpeter that "how can the economy grow and develop" is a more interesting question than "how can the economy function" - the dynamic question is much more interesting than the static one. So I'm thrilled to be at Intech studying this stuff.