Small economies can flourish: Nobel Laureatesqwcgadmin
13th May, 2015
SMALL economies can flourish, even with diminished resource reserves, provided they have invested much of their resource income and developed good infrastructure.
This was said by Nobel Laureate speaker Sir James A Mirrlees while delivering a keynote speech at the opening ceremony of the International Food and Biotech Investment Conference yesterday.
Mirrlees, who won the Nobel Memorial Prize in Economic Science in 1996, highlighted how small economies can change the world economy.
They can benefit from being part of the growing world economy, though at some cost in recessions and along a bumpier path than the larger economies. Wages may not rise, he said, but rich economies can compensate with a general subsidy.
The economies of the world, large and small, interact increasingly, he said, noting that world production has been growing faster than the world population for many years.
In most of the richer countries, real wages for unskilled work have been falling recently. Mirrlees added that there is a current major problem of too little demand, particularly in Europe. More could be produced, he said, if it would be bought.
“This is not a problem in most of Asia, except here,” he said, highlighting that the cause is people, specifically the owners of resources, putting too much of their income into financial assets. Another cause, he noted, is a long-run tendency to bring rich-country wages down.
He then touched on the theory of comparative advantage, which says that countries should specialise in goods for which the production needs what the respective countries have most of, relative to others.
“Usually, it is said that countries with little capital should make things labour-intensively,” he said. “High-tech goods would be made by countries with a well-educated labour force.”
However, he said that this seems to be a poor theory. “Countries have not specialised so much. Countries sell cars or clothes to one another. One reason is that design ideas arise all over the place, but we need to explain why they are produced where the design is done,” he said.
Mirrlees further touched on the movements of people and capital, saying, “Our old economic model with capital and labour confined to the countries where they are born is increasingly inappropriate.
“Indeed, capital is cheaper to transport than anything else; people meet constraints,” he continued. “Technology is widely available too. If capital really were perfectly mobile, the rate of return to capital investment would equalise.”
A world of equal returns would ignore land, he said.
On capital mobility, he highlighted, “It is easy to understand why the rate of return to capital can be quite different in different countries, or in different parts of a country.”
On his next point, he spoke on “Dutch disease”, which, in economics, pertains to the apparent relationship between the increase in economic development of natural resources and a decline in the manufacturing sector.
“Countries with a resource windfall are said to suffer from the decline of manufacturing,” he said.
The problem such countries face is deficient demand and not spending their income from selling oil. “It should be invested usefully, perhaps abroad.”
When it comes to deciding what to specialise in, comparative advantage considerations do arise. Naming bio-tech and high-tech as examples, he said that many countries, cities and special zones are thinking of the same thing.
“You need better access, sometimes, to technology ideas than your competitors,” he said. “Close contact with research laboratories seems to be needed.”
Speaking on risk, he highlighted that failure may be quite likely, especially if success is research dependent. “It is possible that the best hedge is investment elsewhere, not domestically, perhaps in the competition, if possible.”
Source: Borneo Bulletin