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Trade in capital goods generated by international diffusion of technology
Structural Change and Economic Dynamics 10 (1999) 195 – 208
Trade in capital goods generated by international diffusion of technology Sobei H. Oda * Faculty of Economics, Kyoto Sangyo Uni6ersity, Motoyama, Kamigamo, Kita-ku, Kyoto 603, Japan Accepted 12 May 1998
Abstract This paper examines the dynamics of national income of developing countries, which must import advanced capital goods so as to use technology which has been learned. The main result is that depending on foreign countries for capital goods has no negative effects on real wage rates, which are determined solely by labour productivity of indigenous industries. The analysis also covers the mechanism of export-oriented growth of developing countries and its effects on developed countries. All of the explanations are quite simple, however, none of them can be derived if international learning or trade in capital goods is ignored. © 1999 Elsevier Science B.V. All rights reserved. JEL classifications: F43; O41 Keywords: Structural change; Technical progress; Capital goods
1. Introduction Pasinetti (1981) (Chapter 11) describes trade between developed and developing countries in terms of international learning, or developing countries’ constant efforts to learn developed countries’ technology. His analysis persuasively shows that the wealth of modern nations depends on the will and ability to master new technology rather than on the relative or absolute abundance of natural resources. * E-mail: [email protected] 0954-349X/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII S0954-349X(98)00043-5
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Nevertheless, he only examines trade in consumption goods, ignoring the fact that developing countries must import advanced capital goods to use learnt techniques. In this paper, we shall thus introduce trade in capital goods into Pasinetti’s model, which will deepen our understanding of the dynamics of national income of developing countries. Pasinetti (1981) (p. 246) stresses that real per capita income is ten times greater in one country than in another country if and only if per capita labour productivity is ten times higher in the former. In Section 2, we shall show that this holds true if capital goods are tradable: real wage rates are lower in developing countries than in developed countries not because developing countries depend on developed countries for capital goods but because the productive processes are less efficient in developing countries. In other words, in order to raise per capita income, developing countries must increase the productivity of indigenous industries rather than home-made ratios of commodities. This may be apparent to everyone, for instance to explain why per capita income is low in such countries as China and India, while it is high in such countries as Sweden and Switzerland, which are obviously too small to be self-sufficient in capital goods. However, believing that this is the very principle that governs the modern world, we shall demonstrate it in terms of vertical hyper-integration (Pasinetti, 1988). On the other hand, trade in capital goods completely destroys Pasinetti’s dynamic price theory based on the comparative rates of change of productivity. Nevertheless, this does not necessarily complicate the dynamics of international competitive power. In fact, by cancelling out intricate changes in the international price system, importation of capital goods can make it easy for developing countries to establish exporting industries. For example, if an industry in developing countries can master the same technique as used in developed countries and can import all the necessary capital goods from developed countries, the production cost of the industry is lower than that of its overseas competitors by the difference of the direct labour cost. This plain fact carries rich implications, which we shall examine in Section 3. In short, we shall firstly discuss how local wage rates are determined if capital goods are tradable in Section 2 and then consider the international competitive power of individual industries on the assumption that wage rates are given in Section 3. Our analysis is straightforward, however, we must emphasise that it cannot be offered by the most sophisticated theory that ignores trade in capital goods or developing countries’ learning activities.
2. The determination of real wage rates Most countries import both commodities which they can produce and those which they cannot. Economists, however, seem to have concentrated on analysing the former, paying little attention to the latter. Perhaps this is because economists have considered that explanations are only required for the importation of those commodities which can be produced indigenously. The importation of those commodities which cannot be produced at home
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has been considered self-evident. In fact, nothing seems to be able to be added to the plain fact that what cannot be produced at home must be imported. Moreover, most economists seem to consider that trade in natural resources and agricultural products is, though considerable in absolute terms, not as important as trade in industrial products, which can in principle be produced everywhere in the world1. We also believe that trade in industrial goods characterises the modern world, but we must reconsider what it actually means that industrial products can in principle be produced everywhere in the world. Certainly, developed countries import industrial products, in general, not because they do not know how to produce them but because they do not have a cost advantage in producing them. Developing countries, however, import high-technology products from developed countries because they do not have the technology for producing such commodities. Should a country have successfully learnt every technique, it could produce every industrial commodity; yet no country could immediately master every technique. Assuming justifiably that developing countries cannot make all the commodities that developed countries can produce, Krugman (1979) describes trade between them. Nevertheless he presumes that all the commodities that developing countries import are consumption goods. This distorts the facts that most of the imports of developing countries are capital goods 2 . In fact, if developing countries learn developed countries’ techniques one after another as Krugman suggests, developing countries must import various capital goods from developed countries. As an example, let us suppose that having mastered how to assemble cars, a developing country U can now produce cars as finished goods. However, they may not be completely U-made, because some car components or machine tools to make cars may be imported. Even if these capital goods are all produced in U, some of them may not be produced without foreign-made capital goods. In order to make cars completely home-made, U must produce the directly necessary capital goods, the capital goods necessary for producing the directly necessary capital goods, the capital goods necessary for producing the capital goods necessary for producing the directly necessary capital goods, etc.
1
In the 1990s, according to GATT statistics, over three-quarters of internationally traded commodities have been manufactured. 2 Ministry of Finance (1995) (p. 123) classifies the import of APEC regions. From that data we can calculate the percentage of manufactured goods (including intermediate goods) to that of all manufactured goods:
1985 1993
Mexico
Chinese Taipei
Philippines
Thailand
74.5 58.3
59.4 60.6
69.2 78.0
75.9 81.4
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The assumption that U imports only consumption goods implies that U has decided that it would not use already developed techniques until it could produce all the necessary capital goods completely at home. Following this strategy, U could use little new technology. In order to use mastered techniques, U must import those capital goods which are directly or indirectly necessary for manufacturing but which cannot be produced at home. Certainly, as U learns new techniques, U may be able to replace imported capital goods with home-made ones. Nevertheless production of new capital goods may create imports of other capital goods which have not been hitherto imported. Krugman describes developing countries’ acquisition of new techniques as the increase in the number of commodities which they can produce completely at home. In reality, however, what increases is the number of commodities which they can produce as finished goods; the home-made ratios of the products may probably increase too, but few of them will be 100%. Now, what do developing countries export in exchange for advanced capital goods? Some underdeveloped countries can only export natural resources and agricultural products. Nevertheless let us consider hereafter more industrialised developing countries (regions) such as Korea, Taiwan, Hong Kong and Singapore. These countries mainly export industrial products, which can of course be produced in developed countries too. The circumstances do not seem favourable to developing countries, which must import advanced capital goods at any price while they can export their products only if their prices are competitive. Nevertheless developing countries can see this from a more optimistic viewpoint: by importing such advanced machines as they cannot produce, developing countries can produce sophisticated commodities without establishing all the industries whose products are directly or indirectly necessary for producing them. By making the most use of it, developing countries can do well in the circumstances. Let us see it with a simple model3. Let us suppose that the world consists of the developed country Q and the developing country U. Q can produce n commodities completely at home, while U can produce only the first m ( 5 n) commodities, importing those capital goods which it cannot produce. Assuming linear production techniques with no joint products, we can express the prices of completely Q-made products: P1, P2, …, Pn as
3 Freeman (1988) (p. 78) remarks: ‘Fears of an inability to catch up or to maintain competititivity are often based on the idea that it is necessary to become a producer of the new key factors and/or of the new leading products in the world economy. … But past experience of changes in techno-economic paradigm suggests that it is not necessary to have a technological and production capability in all the major new products associated with a new techno-economic paradigm in order to catch up or maintain competitiveness. What is necessary is to have the capacity to use the new technologies in some industries and to produce a part of the wide range of new products and services appropriate to local conditions, resources and comparative advantages.’ We believe that our analysis will give some theoretical explanations of the ‘past experience’.
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Æ(1 +r)(A 11P1 +a21P2 +… +an1Pn )+ WL1 = P1 Ã (1 +r)(A 12P1 +a22P2 +… +an2Pn )+ WL2 = P2 Ã ........... Ã È(1+ r)(A 1nP1 +a2nP2 +… +annPn )+ WLn = Pn
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(1)
and the prices of the commodities produced as finished goods in U: p1, p2, …, pm as
Æ (1 + r)(a 11p1 +… +am1pm +am + 1,1Pm + 1 + …+ an1Pn )+ wl1 = p1 Ã (1 + r)(a 12p1 +… +am2pm +am + 1,2Pm + 1 + …+ an2Pn )+ wl2 = p2 Ã ........... Ã È(1 +r)(a 1mp1 +… +ammpm +am + 1,mPm + 1 + …+ anmPn )+ wlm = pm
(2)
where r represents the globally dominant profit rate; W, Aij and Lj stand for the wage rate, input coefficients and labour coefficients in Q respectively, while w, aij and lj are the corresponding values of W, Aij and Lj in U. The price systems Eqs. (1) and (2) are theoretical ones that will be realised only if they define the same prices: pi =Pi for all i (15i 5m). However, let us start our analysis with the hypothetical cases where U’s techniques are proportionally less efficient than Q’s:
a ij =Aij for all i(1 5i 5n) and j(15 j5 m) l j =(1 +z)Lj for all j(15 j5 n)
(3)
where z is a positive constant. Then, as is readily checked, w/W can be such that both Q and U can produce all the commodities that they can produce at the same prices: pj =Pj for all j(1 5j 5n) if w =
W 1+ z
(4)
Except that U cannot produce commodities without importing capital goods, Eq. (3) corresponds to the case which Pasinetti (1981) (p. 245) calls hypothetical and analytically simple but extremely useful. Supposing that U can learn Q’s techniques to increase the number and/or productivity of its techniques, we can readily define import substitution and technical progress: U’s products become more U-made if and only if m increases, while U’s techniques become more efficient if and only if z decreases. Moreover the effect of import substitution can be distinguished clearly from that of technical progress: the wage rate in U is, in terms of every commodity, 1/(1 + z) of the wage rate in Q; w/W is independent of m. Since the labour productivity of each techniques of U is 1/(1 + z) of that of the corresponding technique of Q (the capital productivity is the same), we can see that the introduction of trade in capital goods does not amend the conclusion of Pasinetti (1981) (Chapter 11, Section 2): however largely a country depends on foreign-made capital goods, its real wage rate is determined by its labour productivity. Needless to say, the above argument presupposes that demand for the first m commodities is enough to absorb U’s labour force. In other words, if U suffers
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unemployment, import substitution without technical progress (to increase m without decreasing z) could raise national income. This possibility cannot be ignored by very poor countries, but it is not important for more industrialised developing countries. Once full employment is achieved, domestic production never increases without technical progress. How is the above-mentioned principle modified if U’s techniques are non-proportionally less efficient than Q’s? Let us reexamine Eqs. (1) and (2) without Eq. (3). Assume that among the m commodities that can be produced in both countries the first one is gold which always has the same price in both countries. In the circumstances gold is produced in both countries, while each of the other m− 1 commodities is produced by the country which has cost advantage in producing it. Without losing generality we can assume that international specialisation is such that U produces the first k( 5m) commodities while Q makes the other n− k commodities and gold. Let p be the n-row vector whose jth element stands for the price of the jth commodity. Since U-made gold and Q-made gold coexist in the specialisation where all the prices are the same in both countries, p satisfies the following: (1+r)pAU +lUWU =p = (1 +r)pAQ + lQWQ
(5)
where the left term expresses the prices of commodities for the production of which only U-made gold is used directly or indirectly, while the right term expresses the prices of commodities for the production of which only Q-made gold is utilised. Here AU, lU, WU, AQ, lQ and WQ stand for the n× n matrix whose (i, j ) element is aij (if 15 j 5k) or Aij (if k +1 5j 5n), the n-row vector whose jth element is lj (if 1 5 j5 k) or Lj (if k + 1 5j 5n), the n×n diagonal matrix whose first k diagonal elements are w and whose other diagonal elements are W, the matrix which is the same as AU except that the first row is not (a11, a21, …, an1) but (A11, A21, …, An1), the vector which is the same as lU except that the first element is not l1 but L1, and the matrix which is the same as WU except that the (1, 1) element is not w but W, respectively. Now, Eq. (5) implies two expressions for the price of gold: p1 = lUWU[I −(1 + r)AU] − 1e1 =lQWQ[I− (1+ r)AQ] − 1e1
(6)
where I stands for the n × n identity matrix and e1 is its first column. By virtue of the two expressions we can express w/W in terms of r and technical coefficients: w lQ[I −DQ][I− (1 + r)AQ] − 1e1 − lU[I− DU][I − (1+ r)AU] − 1e1 = lUDU[I −(1 +r)AU] − 1e1 − lQDQ[I− (1+ r)AQ] − 1e1 W
(7)
where DU stands for the n ×n matrix whose first k diagonal elements are unity and whose other elements are all zero; DQ is the same as DU except that the (1, 1) element is not unity but zero. The economic meaning becomes apparent if we consider such a case where the global demand for gold increases at the rate of r. Applying the dynamic labour theory of value (Pasinetti, 1988) to the right hand above, we can see that the numerator expresses the quantity of Q’s labour which a unit of the Q-made gold
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embodies dynamically more than a unit of the U-made one, while the denominator represents the quantity of U’s labour which a unit of the U-made gold embodies dynamically more than a unit of the Q-made one. In other words, Eq. (7) states that the wage rate in Q is twice as large as the wage rate in U in terms of gold, if and only if Q’s techniques which are used only for the Q-made gold are twice as efficient as U’s processes which are used only for producing the U-made gold. We can say therefore that, though much more complicated, Eq. (7) has the same properties as Eq. (4): it is the difference in the vertically hyper-integrated labour productivity between Q’s techniques and U’s that explains the discrepancy in wage rates between both countries; home-made ratios of commodities have nothing to do with it4. It goes without saying that gold is not used in terms of chemistry; we are referring only to such a commodity as is produced as a finished good both in U and Q and has the same price in both countries. Though we have assumed that the first commodity is gold a priori, this is not always the case. If U is a small country, gold 4
The economic interpretation of Eq. (6)
Input cogold efficients corn iron labour Output co- gold efficients corn iron
U’s gold industry
U’s corn industry
U’s iron industry
U’s gold industry
U’s corn industry
U’s iron industry
0
0
0
0
0
0
a21 a31 l1 1
0 0 l2 0
0 0 l3 0
A21 A31 L1 1
0 0 L2 0
0 0 L3 0
0 0
1 0
0 1
0 0
1 0
0 1
may be clearer in the folowing case m=n= 3:Suppose the folowing: L3 A31L3 + L1 − a31L3 L2 B B , r =0 and p1 =P1 l3 a21l2 + l1 − A21l2 l2 In the circumstances trade adjusts w/W so that U can make gold and corn while Q may produce gold and iron: if w A31L3 + L1 − a31L3 = W a21l2 + l1 − A21l2
(i)
then p1 =a21p2 + a31p3 + l1w= P1 = A21p2 + A31p3 +L1W, p2 =l2wB P2 =L2W and p3 =L2WB p2 = l2w Eq. (i) is the expression of Eq. (7) for the present example. The numerator of its right-hand side expresses the quantity of Q’s labour which Q-made gold embodies more than U-made gold, while the denominator represents U’s labour which U-made gold embodies more than Q-made gold. Neither home-made ratios of Q-made and U-made gold nor the quantity of labour for both Q-made and U-made gold is taken into account in the determination of the relative wage rate. In fact if A21 =49, A31 =a21 −a31 = 50 and L1 = l1 = l2 = 1, U-made gold and Q-made gold embody almost the same labour: U-made gold is made by 51 hours of U-labour and 50 hours of Q-labour, while Q-made gold is made by 49 hours of U-labour and 50 hours of Q-labour. Yet Eq. (i) implies that w/W =1/2.
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is determined independently of demand; U will specialise in producing a commodity whose production technique brings about the highest wage rate in terms of the given profit rate and prices. However, if neither Q nor U is a small country, what commodity becomes gold usually depends on demand and consequently w/W is not determined only by the profit rate and technology 5 . Setting this question aside, we must emphasise that whatever commodity is chosen as gold, it always fulfils Eq. (7). Though being a posteriori equation, Eq. (6) is applicable to every commodity that has the same price in every country.
3. International competitive power of industries Let us imagine that U has succeeded in mastering the same technology that the developed country Q is using: a unit of iron+L units of labour a car
(8)
but the technology for producing iron is so advanced that U must import from Q. We can illustrate the basic features of production of exports by means of imports accompanying international learning with this simple example. Obviously U’s car makers can produce a car cheaper than Q’s car producers by the difference of the direct labour cost: (P+WL) − (P +wL) = (W− w)L
(9)
where P stands for the price of a unit of iron. Hence U’s car makers can price their products lower than Q’s automobile producers, while enjoying a greater profit rate than their overseas competitors. Since the lower price usually promises a large demand for the U-made cars and the high profit rate provides an abundant internal investment fund, U’s car industry will be able to boost car exports; it will contribute to U’s employment and — unless U increases the production of cars so rapidly that their dynamic home-made ratios (Oda, 1995) become negative—to U’s balance of payments.
5 Let us assume that r and W are given. Applying the theory of choice of techniques which assures the existence of the minimum non-negative price vector in the single production model ((i) at the switch points between techniques a and b, each commodity has the same price irrespective of whether it is produced by technique a or by technique b, or by any linear combination of the two. (ii) if, at a certain rate of profit, one of the two techniques is more profitable than the other, it will yield prices, in terms of the wage rate, that are strictly lower than those yielded by the other technique; this being so for all commodities.) of Pasinetti (1974) (pp. 158–159) to the global economy, we can see that unless r is too large, a specialisation is defined for every w and gives the minimum non-negative international price vector. Now let us replace Eq. (5) with the equality between the value of Q’s exports and that of U’s exports. This determines w and the specialisation, which is usually incomplete in the Ricardian trade model (see for example Steedman, 1979, p. 110) so that a commodity can be regarded as gold. Yet the commodity cannot be gold for ever, unless both countries proportionally at the same rate without technical progress.
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Generalising the above analysis, we could say that if developing countries have such industries as can master any new technique invented in developed countries with a short lag and can import any necessary capital goods, it is a good strategy for them to specialise in such industries. Such industries will not lose international competitive power till developing countries’ overall techniques catch up those of developed countries so that the difference in wage rates disappears. It might be interesting to compare the above suggestion with the policy recommendation which Pasinetti (1981) (Section 15 of Chapter 11) deduces from the comparative rates of change of productivity. Pasinetti insists that U could specialise in producing cars if over the relevant period of time CU −MU \CQ − MQ
(10)
where CU stands for the rate of technical progress in the vertically hyper-integrated sector for the U-made cars; MU represents the average rate of technical progress in U; CQ and MQ are the corresponding values in Q. Pasinetti’s argument, however, presupposes that international learning is not accompanied by import of capital goods. As stated in Section 2, it is scarcely possible in practice6. Apart from this problem, we must say that it is rather difficult to see a priori whether or not Eq. (10) is satisfied in the long run. First, CU depends on technical progress of all the industries that participate in producing the U-made cars directly or indirectly. To foretell MU is as difficult as to predict which commodity will be gold in the analysis of the previous section. Moreover U must estimate also CQ and MQ, which must be even more complicated and uncertain. In short, Eq. (10) may be able to explain why U’s car price has been internationally competitive a posteriori, but does not teach U how to create a dynamic comparative advantage in producing cars. This severely limits the use of Eq. (10) for policy guidance7. On the other hand, our strategy allows U to concentrate international learning on the car industry. As long as U’s car industry and Q’s car industry adopt the same technique and input the same capital goods at the same price, U can produce a car cheaper than Q by the difference of direct labour cost; having the same price effect on U-made cars and Q-made cars, all the foreign and domestic technical progress can be ignored. Actually U’s car industry must follow the strategy suggested; it must want to establish international competitive power through its own effort of international learning rather than by chance.
6 Pasinetti (1981) (p. 271) claims: ‘If technical knowledge were perfectly mobile, international mobility of goods would be made unnecessary’. Even if trade of commodities can cease to exist after all technical knowledge has been diffused, commodities are necessarily traded when technical knowledge is being diffused. In fact the international input–output tables for the Asia – Pacific region (Institute of Developing Economies, 1982, 1995a,b), which is now undergoing a rapid and sweeping diffusion process of technology, unmistakably shows the dependence of developing countries on developed countries for capital goods. 7 Yet Milberg (1991) shows that Eq. (10) holds in the period 1961 – 1972 between Canada and the USA.
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Obviously unrealistic is our assumption that developing countries have some industries which can master any new technique as soon as it is invented in developed countries. However, though failing to master exactly the same techniques as used in developed countries, some industries in developing countries may find that their lower wage rates still give their products international competitive power. It is apparent that the lower the capital – labour ratios those techniques have, the larger are the cost advantage. (Imagine the extreme cases in our example. If L is nearly zero, U’s car industry cannot create a cost advantage without mastering the same technique as Q’s car industry uses. If cars are produced only by direct labour, U’s car industry can input W/w times as much as labour for producing a car without losing the cost advantage.) From this view point, it would be easier for developing countries to establish a cost advantage in producing ‘labour-intensive’ commodities8. Now, let us examine U’s car production from Q’s standpoint. If U’s car industry produces cars by means of imported capital goods successfully, U’s cheaper cars will rush to Q’s market. It may not worsen Q’s trade balance rapidly; as Oda (1995) shows, the more U boosts car exports, the more U must import capital goods per car from Q. However, as long as the dynamic home-made ratio of the U-made cars is positive, the net effect of U’s car export on Q’s balance of payments is negative in the long run. In order to cancel it out, Q must export something which does not belong to the vertically hyper-integrated sector for the U-made cars. The same applies to Q’s employment; even if Q’s car industry is destroyed completely, the decrease in employment is not so drastic as it would be if U produced cars completely at home. However, workers who had been employed in the car industry must be transferred somewhere. If demand for some of Q’s products increases rapidly enough, those industries which produce them directly or indirectly will be able to absorb labour and capital from the car industry; otherwise Q might suffer increasing unemployment9. 8 Needless to say, this has nothing to do with the textbook version of the Heckscher – Ohlin model: endowed with relatively abundant labour and scarce capital, developing countries have a comparative advantage in producing labour-intensive commodities. Comparison with the work of Ethier (1979) might be more interesting. He shows that the basic results of the Heckscher – Ohlin model, such as factor – price equalisation and the Rybczynski theorem, hold true if the capital stock is heterogeneous and tradable. Nevertheless Ethier maintains two crucial assumptions of the standard Heckscher – Ohlin model. Fisrt, Ethier presumes that optimal choice of techniques out of the set common to both countries, while our argument takes account of international learning accompanied by importing capital goods and the possibility of failing to learn foreign advanced techniques. Secondly Ethier assumes that the profit rate varies so as to fully utilise the capital stock. Such a mechanism is not presumed in our analysis. 9 The effect of developing countries’ activities on developed countries may be uneven. Seeing that developed countries cannot export without importing advanced capital goods from developed countries, the effect of developing countries’ exports on each developed country depends on whether or not it exports such capital goods to them. For example, Korea imports capital goods largely from Japan and exports finished goods to the USA. In the circumstances the counterbalancing mechanism mentioned in the text does not work for the USA; in 1994 Korea shows a twelve billion dollar trade deficit against Japan and a one billion dollar trade surplus against the USA. On the other hand, Japan has been functioning as the main supplier of capital goods to Asian NIEs; see the following graph (JETRO, 1994, p. 70), where the increasing rate of export of manufactured goods from East Asia (the broken line) is strongly correlated to the increasing rate of capital goods from Japan to East Asia (the solid line).
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Needless to say, developed countries cannot cease transforming the economic structure as long as their technology progresses, but developing countries’ international learning and participation in the international economy speeds it up. Although such activities in developing countries can benefit developed countries (in our example, consumers and producers in Q can buy cheaper cars while Q can shift labour, capital and research to more high-technology industries), accelerating structural change is not always easy. From this viewpoint, the combination of international learning and production of exports by means of imported capital goods should not be regarded as simply a strategy which makes use of the difference in direct labour cost. It also aims at simplifying the dynamic of economic growth. But for international trade, individual producers will be continually faced with unforeseen changes in activities caused by technical progress and non-proportionally increasing consumption demand, as Pasinetti (1981) (p. 224) remarks: There is here an interesting contrast that represents perhaps one of the most problematical aspects of any policy of economic growth in modern industrial societies. The contrast is between the steady possibilities of efficient growth of the single organizational units of production and the necessarily unsteady nature of the expansion of demand for each commodity. (Economic development would become so much easier if production of all commodities were to expand proportionally!) However, by participating in international trade, countries may be able to increase exports proportionally so as to increase imports non-proportionally; export-oriented growth makes it possible to increase consumption non-proportionally without increasing production non-proportionally!10
10
Murakami et al. (1970) and Economic Council (1977) claim that in the 1960s the Japanese economy developed almost on the von Neumann ray. Although it seems apparent to us that the economic growth was non-proportional and accompanied by continual technical progress, the Japanese may have made use of international trade to develop their economy as proportionally as possible.
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Of course, world consumption can grow non-proportionally only when world production increases non-proportionally. If a country grows proportionally while enjoying non-proportionally increasing consumption, the rest of the world shoulders the burden of the non-proportional growth of production for the country. Not a few trade frictions between developed countries and developing countries arise from the same problem: how the cost for the non-proportional growth should be shared. Formal analysis of such frictions is difficult, but at least we can say the following. Developing countries for their part must keep their trading activities acceptable to developed countries, which provide the market, technology and capital for them. On the other hand, developed countries must understand that developing countries cannot perform international learning without exerting non-proportional influence on developed countries. Economic aid must not end with helping underdeveloped countries to improving their productive capacity; developed countries must be generous enough to submit to the possible non-proportional effects which the increased capacity may cause. The worst scenario is that developed countries might try to prevent imports from developing countries or to control the outflow of new technology or advanced capital goods so as to weaken the impact from developing countries. There remains another important fact which our simple example clarifies. A worker equipped with modern machines shows higher labour productivity than a worker using primitive tools even if their ability is the same. Hence, as stated in the last section, workers in developed countries enjoy higher wage rates than workers in developing countries. Nevertheless if advanced techniques can be used in developing countries as efficiently as in developed countries and the necessary capital goods can all be sent there, developed countries’ private firms must prefer to produce there. Indeed, they have no alternative if they are challenged by developing countries. Let us remember our example. If U’s car industry performs international learning successfully, the difference of labour cost is fatal to Q’s car industry. Then Q’s car makers will shift factories to U; though wages are payed to workers living in U, profits belong to them. In this way, managers and shareholders can survive, but workers who had worked in Q’s car industry cannot escape dismissal. If capital goods are internationally mobile, multinationals will pay workers living in developed countries wages ten times as high as workers in developing countries only when the former work ten times as efficiently as the latter. Unskilled workers in developed countries could not find a job in those factories which can also be built in developing countries. Those who live in developed countries must improve their skill and ability to work in industry, or be engaged in service industries where outputs are inseparable from workers, or become unemployed. In order to maintain the industries and employment, the governments of developed countries must improve the ability of workers. If they stimulate the final demand without these measures, production and employment may increase not at home but abroad. In the circumstances, ironically enough, those who benefit from Keynesian policy are not workers but rentiers who have shares in multinationals.
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4. Concluding remarks Developing countries do not incorporate new technology because they import new capital goods; there is no point in buying a new machine without knowing how to use it. Nevertheless learning new techniques without importing any capital goods is also meaningless unless all the capital goods that are directly or indirectly necessary for using the learnt techniques can be produced at home. The importation of advanced capital goods is not the origin of acquisition of new techniques, but the latter is almost inevitably accompanied by the former. We thus believe that our model can provide a better theoretical foundation than such approaches as treat diffusion of technology and trade in capital goods not as the essential aspects of modern international relations but as something which can be introduced later without much modification. However, limiting our study to the effect of developing countries’ international learning on developed and developing countries via trade in capital goods, we have regarded the acquisition of new technology by developing countries as an exogenous rather than endogenous component. In order to make analysis more relevant, we must introduce some theory to explain how technology develops. In fact every endogenous theory of international diffusion of technology must be formulated in a framework which can properly express trade in capital goods and non-proportional changes in technology and growth rates, and we hope that the model of Pasinetti (1981) can provide such a framework if it is developed as in the previous sections.
Acknowledgements I thank Professor Pasinetti, Professor Schefold, Professor Satoshi Sechiyama, Dr David Evans, Dr Lynn Mainwaring, Dr Nick von Tunzelmann, and two anonymous referees for useful comments on earlier versions. I also owe much to an illuminating discussion with Professor Yasunori Baba and his colleagues at RACE (Research into Artifacts Centre for Engineering, University of Tokyo), where I am a visiting researcher. The study received financial support from Grant-in Aid for Scientific Research (07243105 and 009630018), Japan Society for the Promotion of Science (96P00702) and Nissan Foundation.
References Ethier, W., 1979. The theorems of international trade in time-phased economies. J. Int. Econ. 9, 267 – 71. Economic Council (Japan), Economic Committee, 1977. Multi-sectoral Model for Economic Planning, Fifth Report of the Economic Committee, Tokyo. Freeman, C., 1988. Technology gap, international trade and the problems of small and less-developed economies. In: Freeman, C., Lundvall, B.A. (Eds.), Small Countries Facing the Technological Revolution. Pinter, London. Institute of Developing Economies, 1982. International Input – output Table for Asian Countries. Institute of Developing Economies, 1995a. International Trade Matrix for Asia – Pacific Region by Industrial Group, vol. 1 (export).
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Institute of Developing Economies, 1995b. International Trade Matrix for Asia – Pacific Region by Industrial Group, vol. 2 (import). Krugman, P., 1979. A model of innovation, technology transfer, and the world distribution of income. J. Political Econ. 87, 253–266. Milberg, S.M., 1991. Structural change and international competitiveness in Canada: an alternative approach, International Review of Applied Economics, 5, pp. 77 – 93. Ministry of Finance, 1995. APEC Keizai Tembo (1995 Report on the APEC regional economy: performance, structure, outlook, and challenges), Okura-sho Insatsu-kyoku, Tokyo. Murakami, Y., Tokoyama, K., Tsukui, J., 1970. Efficient paths of accumulation and the turnpike of the Japanese economy. In: Carter, A.P., Brody, A. (Eds.), Input – Output Techniques, vol. 2 of Applications of Input–Output Analysis. North-Holland, Amsterdam. JETRO, 1994. 1994-nen Jetoro Hakusho Boeki-hen (JETRO White Paper on International Trade 1994), Nippon Boeki Shinko Kai (JETRO), Tokyo. Oda, S.H., 1995. Dynamic home-made ratios of commodities: the application of Pasinetti’s vertical hyper-integration to trade in capital goods. Camb. J. Econ. 19, 323 – 329. Pasinetti, 1974. (cited in footnote 5). Author, please give full details. Pasinetti, L.L., 1981. Structural Change and Economic Growth. Cambridge University Press, Cambridge. Pasinetti, L.L., 1988. Growing subsystems, vertically hyper-integrated sectors and labour theory of value. Camb. J. Econ. 12, 125–134. Steedman, I., 1979. Trade Amongst Growing Economies. Cambridge University Press, Cambridge.
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Trade in capital goods generated by international diffusion of technology Sobei H. Oda * Faculty of Economics, Kyoto Sangyo Uni6ersity, Motoyama, Kamigamo, Kita-ku, Kyoto 603, Japan Accepted 12 May 1998
Abstract This paper examines the dynamics of national income of developing countries, which must import advanced capital goods so as to use technology which has been learned. The main result is that depending on foreign countries for capital goods has no negative effects on real wage rates, which are determined solely by labour productivity of indigenous industries. The analysis also covers the mechanism of export-oriented growth of developing countries and its effects on developed countries. All of the explanations are quite simple, however, none of them can be derived if international learning or trade in capital goods is ignored. © 1999 Elsevier Science B.V. All rights reserved. JEL classifications: F43; O41 Keywords: Structural change; Technical progress; Capital goods
1. Introduction Pasinetti (1981) (Chapter 11) describes trade between developed and developing countries in terms of international learning, or developing countries’ constant efforts to learn developed countries’ technology. His analysis persuasively shows that the wealth of modern nations depends on the will and ability to master new technology rather than on the relative or absolute abundance of natural resources. * E-mail: [email protected] 0954-349X/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved. PII S0954-349X(98)00043-5
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Nevertheless, he only examines trade in consumption goods, ignoring the fact that developing countries must import advanced capital goods to use learnt techniques. In this paper, we shall thus introduce trade in capital goods into Pasinetti’s model, which will deepen our understanding of the dynamics of national income of developing countries. Pasinetti (1981) (p. 246) stresses that real per capita income is ten times greater in one country than in another country if and only if per capita labour productivity is ten times higher in the former. In Section 2, we shall show that this holds true if capital goods are tradable: real wage rates are lower in developing countries than in developed countries not because developing countries depend on developed countries for capital goods but because the productive processes are less efficient in developing countries. In other words, in order to raise per capita income, developing countries must increase the productivity of indigenous industries rather than home-made ratios of commodities. This may be apparent to everyone, for instance to explain why per capita income is low in such countries as China and India, while it is high in such countries as Sweden and Switzerland, which are obviously too small to be self-sufficient in capital goods. However, believing that this is the very principle that governs the modern world, we shall demonstrate it in terms of vertical hyper-integration (Pasinetti, 1988). On the other hand, trade in capital goods completely destroys Pasinetti’s dynamic price theory based on the comparative rates of change of productivity. Nevertheless, this does not necessarily complicate the dynamics of international competitive power. In fact, by cancelling out intricate changes in the international price system, importation of capital goods can make it easy for developing countries to establish exporting industries. For example, if an industry in developing countries can master the same technique as used in developed countries and can import all the necessary capital goods from developed countries, the production cost of the industry is lower than that of its overseas competitors by the difference of the direct labour cost. This plain fact carries rich implications, which we shall examine in Section 3. In short, we shall firstly discuss how local wage rates are determined if capital goods are tradable in Section 2 and then consider the international competitive power of individual industries on the assumption that wage rates are given in Section 3. Our analysis is straightforward, however, we must emphasise that it cannot be offered by the most sophisticated theory that ignores trade in capital goods or developing countries’ learning activities.
2. The determination of real wage rates Most countries import both commodities which they can produce and those which they cannot. Economists, however, seem to have concentrated on analysing the former, paying little attention to the latter. Perhaps this is because economists have considered that explanations are only required for the importation of those commodities which can be produced indigenously. The importation of those commodities which cannot be produced at home
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has been considered self-evident. In fact, nothing seems to be able to be added to the plain fact that what cannot be produced at home must be imported. Moreover, most economists seem to consider that trade in natural resources and agricultural products is, though considerable in absolute terms, not as important as trade in industrial products, which can in principle be produced everywhere in the world1. We also believe that trade in industrial goods characterises the modern world, but we must reconsider what it actually means that industrial products can in principle be produced everywhere in the world. Certainly, developed countries import industrial products, in general, not because they do not know how to produce them but because they do not have a cost advantage in producing them. Developing countries, however, import high-technology products from developed countries because they do not have the technology for producing such commodities. Should a country have successfully learnt every technique, it could produce every industrial commodity; yet no country could immediately master every technique. Assuming justifiably that developing countries cannot make all the commodities that developed countries can produce, Krugman (1979) describes trade between them. Nevertheless he presumes that all the commodities that developing countries import are consumption goods. This distorts the facts that most of the imports of developing countries are capital goods 2 . In fact, if developing countries learn developed countries’ techniques one after another as Krugman suggests, developing countries must import various capital goods from developed countries. As an example, let us suppose that having mastered how to assemble cars, a developing country U can now produce cars as finished goods. However, they may not be completely U-made, because some car components or machine tools to make cars may be imported. Even if these capital goods are all produced in U, some of them may not be produced without foreign-made capital goods. In order to make cars completely home-made, U must produce the directly necessary capital goods, the capital goods necessary for producing the directly necessary capital goods, the capital goods necessary for producing the capital goods necessary for producing the directly necessary capital goods, etc.
1
In the 1990s, according to GATT statistics, over three-quarters of internationally traded commodities have been manufactured. 2 Ministry of Finance (1995) (p. 123) classifies the import of APEC regions. From that data we can calculate the percentage of manufactured goods (including intermediate goods) to that of all manufactured goods:
1985 1993
Mexico
Chinese Taipei
Philippines
Thailand
74.5 58.3
59.4 60.6
69.2 78.0
75.9 81.4
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The assumption that U imports only consumption goods implies that U has decided that it would not use already developed techniques until it could produce all the necessary capital goods completely at home. Following this strategy, U could use little new technology. In order to use mastered techniques, U must import those capital goods which are directly or indirectly necessary for manufacturing but which cannot be produced at home. Certainly, as U learns new techniques, U may be able to replace imported capital goods with home-made ones. Nevertheless production of new capital goods may create imports of other capital goods which have not been hitherto imported. Krugman describes developing countries’ acquisition of new techniques as the increase in the number of commodities which they can produce completely at home. In reality, however, what increases is the number of commodities which they can produce as finished goods; the home-made ratios of the products may probably increase too, but few of them will be 100%. Now, what do developing countries export in exchange for advanced capital goods? Some underdeveloped countries can only export natural resources and agricultural products. Nevertheless let us consider hereafter more industrialised developing countries (regions) such as Korea, Taiwan, Hong Kong and Singapore. These countries mainly export industrial products, which can of course be produced in developed countries too. The circumstances do not seem favourable to developing countries, which must import advanced capital goods at any price while they can export their products only if their prices are competitive. Nevertheless developing countries can see this from a more optimistic viewpoint: by importing such advanced machines as they cannot produce, developing countries can produce sophisticated commodities without establishing all the industries whose products are directly or indirectly necessary for producing them. By making the most use of it, developing countries can do well in the circumstances. Let us see it with a simple model3. Let us suppose that the world consists of the developed country Q and the developing country U. Q can produce n commodities completely at home, while U can produce only the first m ( 5 n) commodities, importing those capital goods which it cannot produce. Assuming linear production techniques with no joint products, we can express the prices of completely Q-made products: P1, P2, …, Pn as
3 Freeman (1988) (p. 78) remarks: ‘Fears of an inability to catch up or to maintain competititivity are often based on the idea that it is necessary to become a producer of the new key factors and/or of the new leading products in the world economy. … But past experience of changes in techno-economic paradigm suggests that it is not necessary to have a technological and production capability in all the major new products associated with a new techno-economic paradigm in order to catch up or maintain competitiveness. What is necessary is to have the capacity to use the new technologies in some industries and to produce a part of the wide range of new products and services appropriate to local conditions, resources and comparative advantages.’ We believe that our analysis will give some theoretical explanations of the ‘past experience’.
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Æ(1 +r)(A 11P1 +a21P2 +… +an1Pn )+ WL1 = P1 Ã (1 +r)(A 12P1 +a22P2 +… +an2Pn )+ WL2 = P2 Ã ........... Ã È(1+ r)(A 1nP1 +a2nP2 +… +annPn )+ WLn = Pn
199
(1)
and the prices of the commodities produced as finished goods in U: p1, p2, …, pm as
Æ (1 + r)(a 11p1 +… +am1pm +am + 1,1Pm + 1 + …+ an1Pn )+ wl1 = p1 Ã (1 + r)(a 12p1 +… +am2pm +am + 1,2Pm + 1 + …+ an2Pn )+ wl2 = p2 Ã ........... Ã È(1 +r)(a 1mp1 +… +ammpm +am + 1,mPm + 1 + …+ anmPn )+ wlm = pm
(2)
where r represents the globally dominant profit rate; W, Aij and Lj stand for the wage rate, input coefficients and labour coefficients in Q respectively, while w, aij and lj are the corresponding values of W, Aij and Lj in U. The price systems Eqs. (1) and (2) are theoretical ones that will be realised only if they define the same prices: pi =Pi for all i (15i 5m). However, let us start our analysis with the hypothetical cases where U’s techniques are proportionally less efficient than Q’s:
a ij =Aij for all i(1 5i 5n) and j(15 j5 m) l j =(1 +z)Lj for all j(15 j5 n)
(3)
where z is a positive constant. Then, as is readily checked, w/W can be such that both Q and U can produce all the commodities that they can produce at the same prices: pj =Pj for all j(1 5j 5n) if w =
W 1+ z
(4)
Except that U cannot produce commodities without importing capital goods, Eq. (3) corresponds to the case which Pasinetti (1981) (p. 245) calls hypothetical and analytically simple but extremely useful. Supposing that U can learn Q’s techniques to increase the number and/or productivity of its techniques, we can readily define import substitution and technical progress: U’s products become more U-made if and only if m increases, while U’s techniques become more efficient if and only if z decreases. Moreover the effect of import substitution can be distinguished clearly from that of technical progress: the wage rate in U is, in terms of every commodity, 1/(1 + z) of the wage rate in Q; w/W is independent of m. Since the labour productivity of each techniques of U is 1/(1 + z) of that of the corresponding technique of Q (the capital productivity is the same), we can see that the introduction of trade in capital goods does not amend the conclusion of Pasinetti (1981) (Chapter 11, Section 2): however largely a country depends on foreign-made capital goods, its real wage rate is determined by its labour productivity. Needless to say, the above argument presupposes that demand for the first m commodities is enough to absorb U’s labour force. In other words, if U suffers
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unemployment, import substitution without technical progress (to increase m without decreasing z) could raise national income. This possibility cannot be ignored by very poor countries, but it is not important for more industrialised developing countries. Once full employment is achieved, domestic production never increases without technical progress. How is the above-mentioned principle modified if U’s techniques are non-proportionally less efficient than Q’s? Let us reexamine Eqs. (1) and (2) without Eq. (3). Assume that among the m commodities that can be produced in both countries the first one is gold which always has the same price in both countries. In the circumstances gold is produced in both countries, while each of the other m− 1 commodities is produced by the country which has cost advantage in producing it. Without losing generality we can assume that international specialisation is such that U produces the first k( 5m) commodities while Q makes the other n− k commodities and gold. Let p be the n-row vector whose jth element stands for the price of the jth commodity. Since U-made gold and Q-made gold coexist in the specialisation where all the prices are the same in both countries, p satisfies the following: (1+r)pAU +lUWU =p = (1 +r)pAQ + lQWQ
(5)
where the left term expresses the prices of commodities for the production of which only U-made gold is used directly or indirectly, while the right term expresses the prices of commodities for the production of which only Q-made gold is utilised. Here AU, lU, WU, AQ, lQ and WQ stand for the n× n matrix whose (i, j ) element is aij (if 15 j 5k) or Aij (if k +1 5j 5n), the n-row vector whose jth element is lj (if 1 5 j5 k) or Lj (if k + 1 5j 5n), the n×n diagonal matrix whose first k diagonal elements are w and whose other diagonal elements are W, the matrix which is the same as AU except that the first row is not (a11, a21, …, an1) but (A11, A21, …, An1), the vector which is the same as lU except that the first element is not l1 but L1, and the matrix which is the same as WU except that the (1, 1) element is not w but W, respectively. Now, Eq. (5) implies two expressions for the price of gold: p1 = lUWU[I −(1 + r)AU] − 1e1 =lQWQ[I− (1+ r)AQ] − 1e1
(6)
where I stands for the n × n identity matrix and e1 is its first column. By virtue of the two expressions we can express w/W in terms of r and technical coefficients: w lQ[I −DQ][I− (1 + r)AQ] − 1e1 − lU[I− DU][I − (1+ r)AU] − 1e1 = lUDU[I −(1 +r)AU] − 1e1 − lQDQ[I− (1+ r)AQ] − 1e1 W
(7)
where DU stands for the n ×n matrix whose first k diagonal elements are unity and whose other elements are all zero; DQ is the same as DU except that the (1, 1) element is not unity but zero. The economic meaning becomes apparent if we consider such a case where the global demand for gold increases at the rate of r. Applying the dynamic labour theory of value (Pasinetti, 1988) to the right hand above, we can see that the numerator expresses the quantity of Q’s labour which a unit of the Q-made gold
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embodies dynamically more than a unit of the U-made one, while the denominator represents the quantity of U’s labour which a unit of the U-made gold embodies dynamically more than a unit of the Q-made one. In other words, Eq. (7) states that the wage rate in Q is twice as large as the wage rate in U in terms of gold, if and only if Q’s techniques which are used only for the Q-made gold are twice as efficient as U’s processes which are used only for producing the U-made gold. We can say therefore that, though much more complicated, Eq. (7) has the same properties as Eq. (4): it is the difference in the vertically hyper-integrated labour productivity between Q’s techniques and U’s that explains the discrepancy in wage rates between both countries; home-made ratios of commodities have nothing to do with it4. It goes without saying that gold is not used in terms of chemistry; we are referring only to such a commodity as is produced as a finished good both in U and Q and has the same price in both countries. Though we have assumed that the first commodity is gold a priori, this is not always the case. If U is a small country, gold 4
The economic interpretation of Eq. (6)
Input cogold efficients corn iron labour Output co- gold efficients corn iron
U’s gold industry
U’s corn industry
U’s iron industry
U’s gold industry
U’s corn industry
U’s iron industry
0
0
0
0
0
0
a21 a31 l1 1
0 0 l2 0
0 0 l3 0
A21 A31 L1 1
0 0 L2 0
0 0 L3 0
0 0
1 0
0 1
0 0
1 0
0 1
may be clearer in the folowing case m=n= 3:Suppose the folowing: L3 A31L3 + L1 − a31L3 L2 B B , r =0 and p1 =P1 l3 a21l2 + l1 − A21l2 l2 In the circumstances trade adjusts w/W so that U can make gold and corn while Q may produce gold and iron: if w A31L3 + L1 − a31L3 = W a21l2 + l1 − A21l2
(i)
then p1 =a21p2 + a31p3 + l1w= P1 = A21p2 + A31p3 +L1W, p2 =l2wB P2 =L2W and p3 =L2WB p2 = l2w Eq. (i) is the expression of Eq. (7) for the present example. The numerator of its right-hand side expresses the quantity of Q’s labour which Q-made gold embodies more than U-made gold, while the denominator represents U’s labour which U-made gold embodies more than Q-made gold. Neither home-made ratios of Q-made and U-made gold nor the quantity of labour for both Q-made and U-made gold is taken into account in the determination of the relative wage rate. In fact if A21 =49, A31 =a21 −a31 = 50 and L1 = l1 = l2 = 1, U-made gold and Q-made gold embody almost the same labour: U-made gold is made by 51 hours of U-labour and 50 hours of Q-labour, while Q-made gold is made by 49 hours of U-labour and 50 hours of Q-labour. Yet Eq. (i) implies that w/W =1/2.
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is determined independently of demand; U will specialise in producing a commodity whose production technique brings about the highest wage rate in terms of the given profit rate and prices. However, if neither Q nor U is a small country, what commodity becomes gold usually depends on demand and consequently w/W is not determined only by the profit rate and technology 5 . Setting this question aside, we must emphasise that whatever commodity is chosen as gold, it always fulfils Eq. (7). Though being a posteriori equation, Eq. (6) is applicable to every commodity that has the same price in every country.
3. International competitive power of industries Let us imagine that U has succeeded in mastering the same technology that the developed country Q is using: a unit of iron+L units of labour a car
(8)
but the technology for producing iron is so advanced that U must import from Q. We can illustrate the basic features of production of exports by means of imports accompanying international learning with this simple example. Obviously U’s car makers can produce a car cheaper than Q’s car producers by the difference of the direct labour cost: (P+WL) − (P +wL) = (W− w)L
(9)
where P stands for the price of a unit of iron. Hence U’s car makers can price their products lower than Q’s automobile producers, while enjoying a greater profit rate than their overseas competitors. Since the lower price usually promises a large demand for the U-made cars and the high profit rate provides an abundant internal investment fund, U’s car industry will be able to boost car exports; it will contribute to U’s employment and — unless U increases the production of cars so rapidly that their dynamic home-made ratios (Oda, 1995) become negative—to U’s balance of payments.
5 Let us assume that r and W are given. Applying the theory of choice of techniques which assures the existence of the minimum non-negative price vector in the single production model ((i) at the switch points between techniques a and b, each commodity has the same price irrespective of whether it is produced by technique a or by technique b, or by any linear combination of the two. (ii) if, at a certain rate of profit, one of the two techniques is more profitable than the other, it will yield prices, in terms of the wage rate, that are strictly lower than those yielded by the other technique; this being so for all commodities.) of Pasinetti (1974) (pp. 158–159) to the global economy, we can see that unless r is too large, a specialisation is defined for every w and gives the minimum non-negative international price vector. Now let us replace Eq. (5) with the equality between the value of Q’s exports and that of U’s exports. This determines w and the specialisation, which is usually incomplete in the Ricardian trade model (see for example Steedman, 1979, p. 110) so that a commodity can be regarded as gold. Yet the commodity cannot be gold for ever, unless both countries proportionally at the same rate without technical progress.
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Generalising the above analysis, we could say that if developing countries have such industries as can master any new technique invented in developed countries with a short lag and can import any necessary capital goods, it is a good strategy for them to specialise in such industries. Such industries will not lose international competitive power till developing countries’ overall techniques catch up those of developed countries so that the difference in wage rates disappears. It might be interesting to compare the above suggestion with the policy recommendation which Pasinetti (1981) (Section 15 of Chapter 11) deduces from the comparative rates of change of productivity. Pasinetti insists that U could specialise in producing cars if over the relevant period of time CU −MU \CQ − MQ
(10)
where CU stands for the rate of technical progress in the vertically hyper-integrated sector for the U-made cars; MU represents the average rate of technical progress in U; CQ and MQ are the corresponding values in Q. Pasinetti’s argument, however, presupposes that international learning is not accompanied by import of capital goods. As stated in Section 2, it is scarcely possible in practice6. Apart from this problem, we must say that it is rather difficult to see a priori whether or not Eq. (10) is satisfied in the long run. First, CU depends on technical progress of all the industries that participate in producing the U-made cars directly or indirectly. To foretell MU is as difficult as to predict which commodity will be gold in the analysis of the previous section. Moreover U must estimate also CQ and MQ, which must be even more complicated and uncertain. In short, Eq. (10) may be able to explain why U’s car price has been internationally competitive a posteriori, but does not teach U how to create a dynamic comparative advantage in producing cars. This severely limits the use of Eq. (10) for policy guidance7. On the other hand, our strategy allows U to concentrate international learning on the car industry. As long as U’s car industry and Q’s car industry adopt the same technique and input the same capital goods at the same price, U can produce a car cheaper than Q by the difference of direct labour cost; having the same price effect on U-made cars and Q-made cars, all the foreign and domestic technical progress can be ignored. Actually U’s car industry must follow the strategy suggested; it must want to establish international competitive power through its own effort of international learning rather than by chance.
6 Pasinetti (1981) (p. 271) claims: ‘If technical knowledge were perfectly mobile, international mobility of goods would be made unnecessary’. Even if trade of commodities can cease to exist after all technical knowledge has been diffused, commodities are necessarily traded when technical knowledge is being diffused. In fact the international input–output tables for the Asia – Pacific region (Institute of Developing Economies, 1982, 1995a,b), which is now undergoing a rapid and sweeping diffusion process of technology, unmistakably shows the dependence of developing countries on developed countries for capital goods. 7 Yet Milberg (1991) shows that Eq. (10) holds in the period 1961 – 1972 between Canada and the USA.
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Obviously unrealistic is our assumption that developing countries have some industries which can master any new technique as soon as it is invented in developed countries. However, though failing to master exactly the same techniques as used in developed countries, some industries in developing countries may find that their lower wage rates still give their products international competitive power. It is apparent that the lower the capital – labour ratios those techniques have, the larger are the cost advantage. (Imagine the extreme cases in our example. If L is nearly zero, U’s car industry cannot create a cost advantage without mastering the same technique as Q’s car industry uses. If cars are produced only by direct labour, U’s car industry can input W/w times as much as labour for producing a car without losing the cost advantage.) From this view point, it would be easier for developing countries to establish a cost advantage in producing ‘labour-intensive’ commodities8. Now, let us examine U’s car production from Q’s standpoint. If U’s car industry produces cars by means of imported capital goods successfully, U’s cheaper cars will rush to Q’s market. It may not worsen Q’s trade balance rapidly; as Oda (1995) shows, the more U boosts car exports, the more U must import capital goods per car from Q. However, as long as the dynamic home-made ratio of the U-made cars is positive, the net effect of U’s car export on Q’s balance of payments is negative in the long run. In order to cancel it out, Q must export something which does not belong to the vertically hyper-integrated sector for the U-made cars. The same applies to Q’s employment; even if Q’s car industry is destroyed completely, the decrease in employment is not so drastic as it would be if U produced cars completely at home. However, workers who had been employed in the car industry must be transferred somewhere. If demand for some of Q’s products increases rapidly enough, those industries which produce them directly or indirectly will be able to absorb labour and capital from the car industry; otherwise Q might suffer increasing unemployment9. 8 Needless to say, this has nothing to do with the textbook version of the Heckscher – Ohlin model: endowed with relatively abundant labour and scarce capital, developing countries have a comparative advantage in producing labour-intensive commodities. Comparison with the work of Ethier (1979) might be more interesting. He shows that the basic results of the Heckscher – Ohlin model, such as factor – price equalisation and the Rybczynski theorem, hold true if the capital stock is heterogeneous and tradable. Nevertheless Ethier maintains two crucial assumptions of the standard Heckscher – Ohlin model. Fisrt, Ethier presumes that optimal choice of techniques out of the set common to both countries, while our argument takes account of international learning accompanied by importing capital goods and the possibility of failing to learn foreign advanced techniques. Secondly Ethier assumes that the profit rate varies so as to fully utilise the capital stock. Such a mechanism is not presumed in our analysis. 9 The effect of developing countries’ activities on developed countries may be uneven. Seeing that developed countries cannot export without importing advanced capital goods from developed countries, the effect of developing countries’ exports on each developed country depends on whether or not it exports such capital goods to them. For example, Korea imports capital goods largely from Japan and exports finished goods to the USA. In the circumstances the counterbalancing mechanism mentioned in the text does not work for the USA; in 1994 Korea shows a twelve billion dollar trade deficit against Japan and a one billion dollar trade surplus against the USA. On the other hand, Japan has been functioning as the main supplier of capital goods to Asian NIEs; see the following graph (JETRO, 1994, p. 70), where the increasing rate of export of manufactured goods from East Asia (the broken line) is strongly correlated to the increasing rate of capital goods from Japan to East Asia (the solid line).
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Needless to say, developed countries cannot cease transforming the economic structure as long as their technology progresses, but developing countries’ international learning and participation in the international economy speeds it up. Although such activities in developing countries can benefit developed countries (in our example, consumers and producers in Q can buy cheaper cars while Q can shift labour, capital and research to more high-technology industries), accelerating structural change is not always easy. From this viewpoint, the combination of international learning and production of exports by means of imported capital goods should not be regarded as simply a strategy which makes use of the difference in direct labour cost. It also aims at simplifying the dynamic of economic growth. But for international trade, individual producers will be continually faced with unforeseen changes in activities caused by technical progress and non-proportionally increasing consumption demand, as Pasinetti (1981) (p. 224) remarks: There is here an interesting contrast that represents perhaps one of the most problematical aspects of any policy of economic growth in modern industrial societies. The contrast is between the steady possibilities of efficient growth of the single organizational units of production and the necessarily unsteady nature of the expansion of demand for each commodity. (Economic development would become so much easier if production of all commodities were to expand proportionally!) However, by participating in international trade, countries may be able to increase exports proportionally so as to increase imports non-proportionally; export-oriented growth makes it possible to increase consumption non-proportionally without increasing production non-proportionally!10
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Murakami et al. (1970) and Economic Council (1977) claim that in the 1960s the Japanese economy developed almost on the von Neumann ray. Although it seems apparent to us that the economic growth was non-proportional and accompanied by continual technical progress, the Japanese may have made use of international trade to develop their economy as proportionally as possible.
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Of course, world consumption can grow non-proportionally only when world production increases non-proportionally. If a country grows proportionally while enjoying non-proportionally increasing consumption, the rest of the world shoulders the burden of the non-proportional growth of production for the country. Not a few trade frictions between developed countries and developing countries arise from the same problem: how the cost for the non-proportional growth should be shared. Formal analysis of such frictions is difficult, but at least we can say the following. Developing countries for their part must keep their trading activities acceptable to developed countries, which provide the market, technology and capital for them. On the other hand, developed countries must understand that developing countries cannot perform international learning without exerting non-proportional influence on developed countries. Economic aid must not end with helping underdeveloped countries to improving their productive capacity; developed countries must be generous enough to submit to the possible non-proportional effects which the increased capacity may cause. The worst scenario is that developed countries might try to prevent imports from developing countries or to control the outflow of new technology or advanced capital goods so as to weaken the impact from developing countries. There remains another important fact which our simple example clarifies. A worker equipped with modern machines shows higher labour productivity than a worker using primitive tools even if their ability is the same. Hence, as stated in the last section, workers in developed countries enjoy higher wage rates than workers in developing countries. Nevertheless if advanced techniques can be used in developing countries as efficiently as in developed countries and the necessary capital goods can all be sent there, developed countries’ private firms must prefer to produce there. Indeed, they have no alternative if they are challenged by developing countries. Let us remember our example. If U’s car industry performs international learning successfully, the difference of labour cost is fatal to Q’s car industry. Then Q’s car makers will shift factories to U; though wages are payed to workers living in U, profits belong to them. In this way, managers and shareholders can survive, but workers who had worked in Q’s car industry cannot escape dismissal. If capital goods are internationally mobile, multinationals will pay workers living in developed countries wages ten times as high as workers in developing countries only when the former work ten times as efficiently as the latter. Unskilled workers in developed countries could not find a job in those factories which can also be built in developing countries. Those who live in developed countries must improve their skill and ability to work in industry, or be engaged in service industries where outputs are inseparable from workers, or become unemployed. In order to maintain the industries and employment, the governments of developed countries must improve the ability of workers. If they stimulate the final demand without these measures, production and employment may increase not at home but abroad. In the circumstances, ironically enough, those who benefit from Keynesian policy are not workers but rentiers who have shares in multinationals.
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4. Concluding remarks Developing countries do not incorporate new technology because they import new capital goods; there is no point in buying a new machine without knowing how to use it. Nevertheless learning new techniques without importing any capital goods is also meaningless unless all the capital goods that are directly or indirectly necessary for using the learnt techniques can be produced at home. The importation of advanced capital goods is not the origin of acquisition of new techniques, but the latter is almost inevitably accompanied by the former. We thus believe that our model can provide a better theoretical foundation than such approaches as treat diffusion of technology and trade in capital goods not as the essential aspects of modern international relations but as something which can be introduced later without much modification. However, limiting our study to the effect of developing countries’ international learning on developed and developing countries via trade in capital goods, we have regarded the acquisition of new technology by developing countries as an exogenous rather than endogenous component. In order to make analysis more relevant, we must introduce some theory to explain how technology develops. In fact every endogenous theory of international diffusion of technology must be formulated in a framework which can properly express trade in capital goods and non-proportional changes in technology and growth rates, and we hope that the model of Pasinetti (1981) can provide such a framework if it is developed as in the previous sections.
Acknowledgements I thank Professor Pasinetti, Professor Schefold, Professor Satoshi Sechiyama, Dr David Evans, Dr Lynn Mainwaring, Dr Nick von Tunzelmann, and two anonymous referees for useful comments on earlier versions. I also owe much to an illuminating discussion with Professor Yasunori Baba and his colleagues at RACE (Research into Artifacts Centre for Engineering, University of Tokyo), where I am a visiting researcher. The study received financial support from Grant-in Aid for Scientific Research (07243105 and 009630018), Japan Society for the Promotion of Science (96P00702) and Nissan Foundation.
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