- Email: [email protected]
Macroeconomic Disequilibrium and Stimulation of Economic Growth
7th IFAC Conference on Manufacturing Modelling, Management, and Control International Federation of Automatic Control June 19-21, 2013. Saint Petersburg, Russia
Macroeconomic Disequilibrium and Stimulation of Economic Growth Robert M. Nizhegorodtsev* Nina P. Goridko**
* V.A. Trapeznikov Institute of Control Sciences, Moscow, Russian Federation (e-mail: bell44@ rambler.ru). ** South-Russian Technical State University (NPI), Novocherkassk, Russian Federation (e-mail: [email protected]) Abstract: The paper invents the main principles of so called disequilibrium paradigm in a macroeconomic theory. It deals with two types of disequilibrial macrosystems, in recessional gap and inflation gap. The realities of Russian regions’ disequilibrium are discussed. The relationship between GDP growth and GDP per capita in different types of countries is under consideration. The main conclusion is that the macroeconomic realities of stagnating developed countries are not the proper example for contemporary Russian economy. The path of new industrialization is a way for stimulation of innovative activities in Russia. Keywords: Macroeconomic disequilibrium. Regional economy. Institutional transition. GDP growth. New industrialization.
1. THE PRINCIPLES OF DISEQUILIBRIUM PARADIGM Most meaningful conclusions about the behavior of macrosystems offered by contemporary economics, obtained under the assumption of the equilibrium nature of the dynamics of these systems. Is it any wonder that those conclusions are absolutely irrelevant for the analysis of any real economy and, even more, for macroeconomic policies. The dominance of so-called equilibrium paradigm in modern economics is expressed, in particular, that the state of macroeconomic equilibrium is still considered as "normal", "typical", and therefore worthy to study. That is why most important macroeconomic models are deemed the models of macroeconomic equilibrium, whereas it is the opposite in the reality: a typical one and therefore deserves priority attention is the state of disequilibrium. Similarly, when it comes to macroeconomic dynamics, theory often discusses the problem of restoring the equilibrial states of macrosystem, whereas in fact the typical norm is a series of transitions from one disequilibrial state to another. This contradiction between theory and reality leads to the fact that the logic of the real macrosystems behavior (not described in textbooks but really so much rampant), is surprisingly little understood - so little, that the decisionmakers still do not find intelligible answers for clear and seemingly long-standing issues related to control over modern economic systems. The basic postulates of so-called equilibrial paradigm for macrosystems are the following.
978-3-902823-35-9/2013 © IFAC
1. The investigated macrosystems are equilibrial. 2. Processes occurring in them are linear. 3. Technological structure of production processes is uniform and stable. 4. The external influences on the dynamical trajectories of systems can be neglected. Paradigm of disequilibrium consistently overcomes those postulates, allows to make meaningful conclusions about the prospects of the world economy and its parts and to offer some conclusions on the formation of anti-crisis macroeconomic policies (Nizhegorodtsev, 2011). 2. TWO DISEQUILIBRIAL STATES: THE SPECIAL FEATURES The modern practice of macroeconomic analysis can distinguish two main non-equilibrial states, the opposite to each other - recessional gap (Fig. 1) and inflation gap (Fig. 2). In the recessional gap the general price level is fixed at the level above the equilibrium, and that the economy of overproduction, where the aggregate supply consistently outperforms aggregate demand. The overall level of prices is stable below the equilibrium in inflation gap, and this is the economy of deficit, where the aggregate demand due to the low level of prices always ahead of aggregate supply. No one of those two types of non-equilibrium macrosystems can evade problems concerned with market failures and bounded capacities of government adjustment of economy. Macrosystems in a certain state of disequilibrium, are able to keep it during dozens of years without any "desire" or “bias” to an equilibrium state, which is attributed to them by tutorials. Therefore, imbalances of macrosystems wrongfully seem to be deviations from macroeconomic equilibrium, they
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10.3182/20130619-3-RU-3018.00467
2013 IFAC MIM June 19-21, 2013. Saint Petersburg, Russia
are a different subject of investigation and economic measurements. Under the realities of a global crisis and the need for anti-crisis remedies, the subjects deserving to be studied are both the theoretical logic of non-equilibrium systems and particular manifestations of that imbalance, realized in macrodynamics of separate countries and regions.
Export of goods from a macrosystems must also be centralized, - otherwise the difference in the price level will lead to immediate devastation of the country through the efforts of residents who want to sell everything they can, in order to make a quick profit, though even get a little one. Actually, that is what happened to the economy of postsocialist countries, when they had liberalized their foreign trade. Insulation of resources markets in a planned economy with its resource underevaluation, is a way to counteract the attempts of non-residents to break the domestic market and buy its resources on the cheap. So one of the cornerstones of ideology in the macrosystem of that type – is to maintain the thesis of a hostile environment, creating an image of an external enemy, etc. Indeed, the environment is really hostile, but non-residents providing their activities not for the sake of destroying that macrosystem, but because of striving for the realization of their economic interests. The "hostile" environment can solve problems in different ways to master the resources of macrosystems staying in an inflationary gap. Here are four basic scenarios, sometimes complementing each other.
Fig. 1. The recessional gap in a macroeconomic system
1. Destruction of the economy being in the inflation gap, promoting its recession in any possible way. In this case national currency weakens and residents begin their flight from money for other, more liquid, currency. It’s readily accepted by residents of the macrosystem. The next step: residents of developed countries simply come in with their own currency on the domestic market of the country and pump out the resources they need.
Fig. 2. The inflation gap in a macroeconomic system Macrosystems, staying in an inflationary gap, are forced to isolate their resource markets from other macrosystems, where the resources are highly evaluated. Economic system without entry barriers tends to Pareto-optimal state, i.e. each unit of each resource eventually goes to an agent who pays more than any other one, for the possession of it, for its using. In particular, the economy in an inflationary gap cannot be opened concerning the monetary circulation. When neglecting that principle, its currency becomes to circulate free and can be accumulated in the hands of non-residents, they will come in the domestic market of the country with this currency and expose it to the systematic plunder due to difference in the general price level.
2. If the organization of a crisis fails for some reason, it’s possible to integrate those countres into a macro-currency zone. The developed country is an emitent of the common currency, and the less-developed one permits its legal circulation through its territory. The result will be, in general, the same, but without devastating short-term consequences for a plundered macrosystem. This option puts some responsibilities for the country-emitent, at least in part of execution of their emission commitments. Such algorithm is usually applied to under-developed countries, most of which are also in a state of an inflation gap and have a general underevaluation of resources. 3. If the integration of a potential object of robbery into a common currency zone is impossible (for example, due to so much area of territory, or so large differences in institutional arrangements of the economy), the effective step is to use membership in international economic organizations. Through this mechanism the developed countries can achieve by other countries to open their domestic markets for foreign capital penetration. The further procedure of pumping resources (mineral raw materials, labor, intellectual and financial assets) becomes just a technical problem.
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2013 IFAC MIM June 19-21, 2013. Saint Petersburg, Russia
4. At worst, you can link the government or private agents of the country by long-term contracts for the supply of necessary resources (for examle, energy), and it is crucial those resources be exported in the least processed form containing low value added. When critics of the planned economy assert its economic inefficiency, they often mean two things. First, the low overall level of prices discourage production processes, and the aggregate supply can overtake the aggregate demand only due to non-value incentives for production. Attempts to "whip up" the aggregate supply under the absence of economic incentives take non-economic forms, like employee’s initiatives and campaigns, advanced production teams (plants, factories, etc.), various forms of so called socialist competition, traditional struggle for fulfillment of a plan, etc. Second, the production increase is impossible without investments, but pumping up the economy by investments heats aggregate demand, that leads to further breaking AD away from AS (look at Fig. 2). It is dangerous for the planned economy, so investment activity should be strictly controlled by a government. Moreover, from time to time, the periods occur when a boon to a macrosystem is not increasing investment but their partial withdrawal from the economy, disinvestment, as it happens, for example, in China, during so called "restraints following the chaos". Considering the fact that the macrosystems staying in a recessionary gap, by all means seek for pumping cheap resources from macrosystems in an inflationary gap, it should be understood that the economic growth of developed countries is based on the resources those initially did not belong to them. Thus, under the slogan of mass consumption society, the thing actually formed is a society of mass robbery. It is easy to see directly from the comparison of statistics: the share of countries, representing about one sixth of the world's population, in the world consumption reaches for 75 to 90% of different types of resources - energy, ferrous and non-ferrous metals, drinking water, etc. Macrosystems of two considered types are characterized by different institutional environments. Institutions operating in one of them, cannot be imported into another one without a proper adaptation, because the same institution will perform other functions in the importing system. This is the main reason why the import of institutions from a market economy into transitional countries has been never completed successfully. Janos Kornai not accidently called an institutional system of transitional economies "plastic model of Wall Street": it looks exactly like its original, just does not work. The most reliable way of institutional development of macrosystems is to grow institutions on their own basis, when the formation of an institute begins with the determination of functions, it is called upon to perform.
One of the major difficulties of economic analysis and forecasting of development of modern macrosystems is their heterogeneity. In particular, some of Russians regions (as well as in many other countries) are stay in the inflation gap and the other part - in the recessional gap. Accordingly, the factors that are the sources of growth for some regions, are the barriers for the others and limit their development, and vice versa. Strong irregularity persists inside the regions, too. The difficulty of developing and implementing a common macroeconomic policies to ensure the necessary restructuring and technological modernization, connected with this fact largely. The problem is that the strategy to isolate resources markets, typical for entire countries which staying in the inflation gap, is not suitable for a region. A region cannot isolate its markets form other regions of the same country, to avoid the capital flight and labor migration. Therefore, the regions that have the status of inflation gap, are plundered by strong and successful regions of the same country. Eventually, they become depressive regions, and if this trend is not stopped, they will turn into an investment wilderness, a barren ground. This danger is so much real for Russia unfortunately. Macrosystems in recessional and inflational gap - are systems of different types, and they must be managed differently. So far, the decisions made in our country at the federal level, mainly reflect the interests and needs of the most powerful and wealthy regions. Is it any wonder that the differentiation of regional development has steadily deepened over the last 25 years: more affluent regions continue to enrich themselves, the poor get poorer and are losing investment and internal sources of capital accumulation. The government pays attention to this group of problems. Investment programs of several depressed areas have been adopted in recent years. Structural changes are also committed. In particular, the North Caucasian Federal District have been formed in early 2010, it included the region with inflation gap, whereas the regions in a recessional gap remains in the Southern Federal District. The idea of forming federal macroregions was to facilitate the management of economic development, as stated originally. Initially, the idea of the federal districts was intended to facilitate the management of economic development. The allocation of the North Caucasian Federal District from this point of view, was quite correct and logical, it had the same goal: to make better and more operational the long run decision-making - to facilitate and improve the governing for Russian economy (Nizhegorodtsev, 2012a). The fragmentation of economic space, the differentiation of economic development is typical of many countries in the contemporary world economy. That means that they have a common, similar problem in the macroeconomic policy, the solution of which requires the development of appropriate institutional arrangements.
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The cyclical nature of multiplicative effects in the economy corresponds to the general logic of economic cycles. Investment multiplier impacts to a recessional economy and to a growing one in the different way. Just as, there is a multiplier of investments for healthy and growing economy, as well as a disinvestment multiplier in a crisis economy: withdrawal of money from the investment process (disinvestment) leads to a loss of a certain amount of GDP, far more than the amount of investment, which the macrosystem has missed. For example, one rouble of a domestic public debt (not promptly paid from the budget of salaries and social transfers) in Russia in the mid-90s (the period of the most severe recession) led to a loss of 5.6 roubles in total GDP (Checheleva (ed.), 2001), while one rouble of investment and government spending in the growing Russian economy of the middle of the 2000s (the years of most rapid rise) brought a little more than two roubles in short-term GDP growth. The asymmetry of this kind is understandable quantitatively. In times of crisis, when the standard of living falling, increases the marginal propensity to consume (MPC) and therefore increases the investment multiplier. Thus, the multiplier is the highest while the multiplicative impact on the economy is the most destructive. That "asymmetrical" multiplier effect is one of the key reasons why the decline in physical volumes of production is always faster than the postcrisis recovery of macroeconomic system (Nizhegorodtsev, 2012b). This hysteresis effect is explained and modeled through a combination of forward and backward linkages in the macroeconomic system. Marginal propensity to save grows faster, the higher the overall effectiveness of the investment, but this efficiency is growing more slowly than the higher marginal propensity to save. A well-known model of the "predator-prey" is the result, it can be described by a system of Lottka-Volterra differential equations (Sadovnichiy et al., 2012). Solution of this equations system are periodic, or (depending on conditions) almost periodic functions, the dynamics of which can be easily explained by cyclical fluctuations in the marginal propensity to save, and, therefore, the above-mentioned "pulsations" of the investment multiplier. Similarly, you can simulate the logic of technological shifts. Capital productivity grows more rapidly, the higher the efficiency of innovation, but the innovation efficiency ascendence is the faster, the lower capital productivity, because in these times requirement for innovation strengthens and its implementation continues due to the increasing demand for new technological solutions. This idea goes back to Y. Schumpeter can be a base for simulating Kondratieff cycles generated by technological change, the invention of innovation cluster into a techno-economic system. For modeling of this kind of cyclical fluctuations it’s important to know what control actions can compress the cycle amplitude in order to reduce the negative impact of these cycles on economic behavior (the problem of counter-
cyclical regulation). Modern paradigm of managing economic dynamics doesn’t require to suppress the cyclical fluctuations, but only based on the feasibility of management in accordance with the logic of the challenges that the macroeconomic system faces (Ashimov et al., 2012). This control permits to improve the validity of macroeconomic policies used in order to adjust a macrosystem and to stimulate its economic growth. Reproduction of the human capital of a certain skill level can change the nature of the dynamics of macroeconomic systems. Underevaluation of labor leads to conservation of low-tech productional structure, thus providing a long-term trend of cost inflation increasing. When inflation takes its open, price forms, it deepens a price gap between labor and equipment that leads to further underevaluation of labor. The result is so called retardation funnel (Popkova, 2005), leading to dissipation of resources and slacking the dynamic trajectory of a macrosystem. So, the state of inflationary gap perpetuates, and many countries in different periods of their history have fallen into a similar trap. 3. NEW INDUSTRIALIZATION: THE WAY OF INNOVATIVE BREAKTHROUGH FOR RUSSIA Relationship between GDP growth and the volume per capita in developed countries in 2010 is shown in Fig. 3 (Goridko and Nizhegorodtsev, 2012). There are two consistent trends: the first - of the countries with a relatively high level of GDP per capita, however, with low GDP growth (mainly, countries of Western Europe); the second one shows an upward trend, which expresses a direct relationship between GDP growth and GDP per capita. Growth in the "old world" is stabilized: for any two years GDP growth in most countries does not change by more than 2 percentage points. We believe that existing technologies in such countries have exhausted their resource productivity and cannot lead to a significant increase in the volume of the final product. Only change in technological system, the transition to information technology can be a way out of this situation (Goridko and Nizhegorodtsev, 2011). Countries, whose indicators are in the ascending part of the graph in Fig. 3, are the so-called "newly industrialized" countries: Macau and Hong Kong (China’s regions, statistics for which are reported separately), Singapore, Cyprus, Israel, South Korea. Together with them, we are consider other newly industrialized countries, which according to various estimates include: China, Saudi Arabia, Venezuela, Chile, Uruguay, Brazil, Turkey, Kazakhstan, Argentina, Mexico, Malaysia, South Africa, Thailand, Indonesia, Paraguay, Philippines, India. For this group of countries, we have plotted the data in Fig. 4. The extremum of the resulting quadratic function is (19 648, 3.642), i.e., "newly industrialized" countries that have reached the level of GDP per capita about 20 thousand dollars or more, tend to sustainable GDP growth with a further increase of the gross output per capita. The minimum value
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of GDP growth for these countries, according to the found trend is 3.642% per year. This kind of dependence means that
the basis of the economy of these countries is a new way of technologies that are in the phase of most rapid growth.
Fig. 3. Relationship between GDP growth and GDP per capita in the developed countries in 2010
Fig. 4. Relationship between GDP growth and GDP per capita in the "newly industrialized" countries in 2010 It can be argued that it the technological saturation but not financial collapses, is the true reason for the global economic crisis that erupted three years ago. Thus, it is reasonable to assume that different countries will overcome the crisis in the economy, solving this difficult technological global problem. Therefore, choosing the path that has to move Russia for "new industrialization", necessary to pay attention to the experience of similar reforms in the countries, which are in
the ascending part of the trend at Fig. 4. The new logic of economic adjustment requires a fundamental change concerning to macroeconomic planning. Countries standing on the threshold of modernization need national investment programs, which would accumulate investment resources in key areas of technological development and ensure the modernization shift. Realization
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of those programs will inevitably require not only the system of middle-run (4-5 years) macroeconomic planning, but also arising of long-term programming and forecasting. If the economy bases on information technologies, and their life cycle takes 50-55 years, – so, the government (as well as private agents) needs to look ahead at least for half of that period, otherwise the question about the consequences of making investment decisions and comparative efficiency of investments loses reasonable reliance (Nizhegorodtsev (ed.), 2009). The response to this demand (mostly spontaneous) is the development of long-run macroeconomic programs and forecasts in a number of developed and rapidly developing countries. It’s necessary to put this prediction to a proper level, implying not only proper quality of forecasts but systematic efforts in this area. Investigations in that field now are often sporadic and mostly experimental, significantly lagging behind the needs of business practices. Today it is necessary to realize that the cloudless past, when it was possible to rely on the built-in stabilizers, will never return. We are witnesses of fulfilment the curse of Keynes, who once claimed that the traditional way out of the industrial crisis, based on self-regulation of macrosystems must be impossible. The efforts of a government becomes a thing without which any country can neither overcome the crisis, nor build any path of sustainable growth. Adequate approach to this situation is not suppression or overcoming the emerging macroeconomic risks, but learning to live in a global instability and manage those risks. To adapt economic policies to those conditions is an incredibly difficult task, but, unfortunately, the alternative doesn’t exist. The next few years push for new leaders who will take this approach and learn to operate inside the system of risks, uncertainties and instabilities. Managing economic systems today, means managing disorder, complex and full of risks. Mastering this skill will be a major competitive advantage for both firms and countries. This is the backbone for the world economy.
Let’s wish success in this way for each other. REFERENCES Ashimov, A.A., B.T. Sultanov, Zh.M. Adilov, Yu.V. Borovskiy, D.A. Novikov, R.M. Nizhegorodtsev and As.A. Ashimov (2012). Macroeconomic Analysis and Economic Policy Based on Parametric Control. N.Y., Dordrecht, Heidelberg, London: Springer, 265 p. Checheleva T.V. (Ed.) (2001). Efficient Economic Growth. Moscow: Financial academy, 368 p. (Rus.). Goridko, N.P. and R.M. Nizhegorodtsev (2011). The technological saturation and a problem of investment efficiency in the modern economy of Ukraine. In: The Bulletin of South-Russian Technical State University (NPI), 1, 13-21 (Rus.). Goridko N.P. and R.M. Nizhegorodtsev (2012). The technological trap or new industrialization trend: a choice for Russia. In: The Russian Economic Model: Content and Structure: Collective monograph. Ed. by V.I. Gaiduk, A.V. Buzgalin. Krasnodar: ProsveschenieYug, 186-200 (Rus.). Nizhegorodtsev, R.M. (ed.) (2009). Contemporary Frameworks of Institutional Economics. Gomel: Center for Market Institutions Research, 261 p. (Rus.). Nizhegorodtsev, R.M. (2011). Disequilibrium Dynamics of Macrosystems and Mechanisms of the Global Crisis Overcoming. Novocherkassk: NOK Publishing, 100 p. (Rus.). Nizhegorodtsev, R.M. (2012a). The middle-run cycle under inflation gap: the macroeconomic policy goals. In: Philosophy of Economy, 2, 198-203 (Rus.). Nizhegorodtsev, R.M. (2012b). The global economic crisis: the second wave anticipation. In: Proceedings of Ural Economic State University, 2 (40), 16-24 (Rus.). Popkova, Ye.G. (2005). New Quality of Economic Growth under Globalization. Volgograd: Polytechnic Publishers, 356 p. (Rus.). Sadovnichiy, V.A., A.A. Akayev, A.V. Korotayev and S.Yu. Malkov (2012). Modelling and Forecasting World Dynamics. Moscow: Institute for Social and Political Studies RAS, 360 p. (Rus.).
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Macroeconomic Disequilibrium and Stimulation of Economic Growth Robert M. Nizhegorodtsev* Nina P. Goridko**
* V.A. Trapeznikov Institute of Control Sciences, Moscow, Russian Federation (e-mail: bell44@ rambler.ru). ** South-Russian Technical State University (NPI), Novocherkassk, Russian Federation (e-mail: [email protected]) Abstract: The paper invents the main principles of so called disequilibrium paradigm in a macroeconomic theory. It deals with two types of disequilibrial macrosystems, in recessional gap and inflation gap. The realities of Russian regions’ disequilibrium are discussed. The relationship between GDP growth and GDP per capita in different types of countries is under consideration. The main conclusion is that the macroeconomic realities of stagnating developed countries are not the proper example for contemporary Russian economy. The path of new industrialization is a way for stimulation of innovative activities in Russia. Keywords: Macroeconomic disequilibrium. Regional economy. Institutional transition. GDP growth. New industrialization.
1. THE PRINCIPLES OF DISEQUILIBRIUM PARADIGM Most meaningful conclusions about the behavior of macrosystems offered by contemporary economics, obtained under the assumption of the equilibrium nature of the dynamics of these systems. Is it any wonder that those conclusions are absolutely irrelevant for the analysis of any real economy and, even more, for macroeconomic policies. The dominance of so-called equilibrium paradigm in modern economics is expressed, in particular, that the state of macroeconomic equilibrium is still considered as "normal", "typical", and therefore worthy to study. That is why most important macroeconomic models are deemed the models of macroeconomic equilibrium, whereas it is the opposite in the reality: a typical one and therefore deserves priority attention is the state of disequilibrium. Similarly, when it comes to macroeconomic dynamics, theory often discusses the problem of restoring the equilibrial states of macrosystem, whereas in fact the typical norm is a series of transitions from one disequilibrial state to another. This contradiction between theory and reality leads to the fact that the logic of the real macrosystems behavior (not described in textbooks but really so much rampant), is surprisingly little understood - so little, that the decisionmakers still do not find intelligible answers for clear and seemingly long-standing issues related to control over modern economic systems. The basic postulates of so-called equilibrial paradigm for macrosystems are the following.
978-3-902823-35-9/2013 © IFAC
1. The investigated macrosystems are equilibrial. 2. Processes occurring in them are linear. 3. Technological structure of production processes is uniform and stable. 4. The external influences on the dynamical trajectories of systems can be neglected. Paradigm of disequilibrium consistently overcomes those postulates, allows to make meaningful conclusions about the prospects of the world economy and its parts and to offer some conclusions on the formation of anti-crisis macroeconomic policies (Nizhegorodtsev, 2011). 2. TWO DISEQUILIBRIAL STATES: THE SPECIAL FEATURES The modern practice of macroeconomic analysis can distinguish two main non-equilibrial states, the opposite to each other - recessional gap (Fig. 1) and inflation gap (Fig. 2). In the recessional gap the general price level is fixed at the level above the equilibrium, and that the economy of overproduction, where the aggregate supply consistently outperforms aggregate demand. The overall level of prices is stable below the equilibrium in inflation gap, and this is the economy of deficit, where the aggregate demand due to the low level of prices always ahead of aggregate supply. No one of those two types of non-equilibrium macrosystems can evade problems concerned with market failures and bounded capacities of government adjustment of economy. Macrosystems in a certain state of disequilibrium, are able to keep it during dozens of years without any "desire" or “bias” to an equilibrium state, which is attributed to them by tutorials. Therefore, imbalances of macrosystems wrongfully seem to be deviations from macroeconomic equilibrium, they
1212
10.3182/20130619-3-RU-3018.00467
2013 IFAC MIM June 19-21, 2013. Saint Petersburg, Russia
are a different subject of investigation and economic measurements. Under the realities of a global crisis and the need for anti-crisis remedies, the subjects deserving to be studied are both the theoretical logic of non-equilibrium systems and particular manifestations of that imbalance, realized in macrodynamics of separate countries and regions.
Export of goods from a macrosystems must also be centralized, - otherwise the difference in the price level will lead to immediate devastation of the country through the efforts of residents who want to sell everything they can, in order to make a quick profit, though even get a little one. Actually, that is what happened to the economy of postsocialist countries, when they had liberalized their foreign trade. Insulation of resources markets in a planned economy with its resource underevaluation, is a way to counteract the attempts of non-residents to break the domestic market and buy its resources on the cheap. So one of the cornerstones of ideology in the macrosystem of that type – is to maintain the thesis of a hostile environment, creating an image of an external enemy, etc. Indeed, the environment is really hostile, but non-residents providing their activities not for the sake of destroying that macrosystem, but because of striving for the realization of their economic interests. The "hostile" environment can solve problems in different ways to master the resources of macrosystems staying in an inflationary gap. Here are four basic scenarios, sometimes complementing each other.
Fig. 1. The recessional gap in a macroeconomic system
1. Destruction of the economy being in the inflation gap, promoting its recession in any possible way. In this case national currency weakens and residents begin their flight from money for other, more liquid, currency. It’s readily accepted by residents of the macrosystem. The next step: residents of developed countries simply come in with their own currency on the domestic market of the country and pump out the resources they need.
Fig. 2. The inflation gap in a macroeconomic system Macrosystems, staying in an inflationary gap, are forced to isolate their resource markets from other macrosystems, where the resources are highly evaluated. Economic system without entry barriers tends to Pareto-optimal state, i.e. each unit of each resource eventually goes to an agent who pays more than any other one, for the possession of it, for its using. In particular, the economy in an inflationary gap cannot be opened concerning the monetary circulation. When neglecting that principle, its currency becomes to circulate free and can be accumulated in the hands of non-residents, they will come in the domestic market of the country with this currency and expose it to the systematic plunder due to difference in the general price level.
2. If the organization of a crisis fails for some reason, it’s possible to integrate those countres into a macro-currency zone. The developed country is an emitent of the common currency, and the less-developed one permits its legal circulation through its territory. The result will be, in general, the same, but without devastating short-term consequences for a plundered macrosystem. This option puts some responsibilities for the country-emitent, at least in part of execution of their emission commitments. Such algorithm is usually applied to under-developed countries, most of which are also in a state of an inflation gap and have a general underevaluation of resources. 3. If the integration of a potential object of robbery into a common currency zone is impossible (for example, due to so much area of territory, or so large differences in institutional arrangements of the economy), the effective step is to use membership in international economic organizations. Through this mechanism the developed countries can achieve by other countries to open their domestic markets for foreign capital penetration. The further procedure of pumping resources (mineral raw materials, labor, intellectual and financial assets) becomes just a technical problem.
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2013 IFAC MIM June 19-21, 2013. Saint Petersburg, Russia
4. At worst, you can link the government or private agents of the country by long-term contracts for the supply of necessary resources (for examle, energy), and it is crucial those resources be exported in the least processed form containing low value added. When critics of the planned economy assert its economic inefficiency, they often mean two things. First, the low overall level of prices discourage production processes, and the aggregate supply can overtake the aggregate demand only due to non-value incentives for production. Attempts to "whip up" the aggregate supply under the absence of economic incentives take non-economic forms, like employee’s initiatives and campaigns, advanced production teams (plants, factories, etc.), various forms of so called socialist competition, traditional struggle for fulfillment of a plan, etc. Second, the production increase is impossible without investments, but pumping up the economy by investments heats aggregate demand, that leads to further breaking AD away from AS (look at Fig. 2). It is dangerous for the planned economy, so investment activity should be strictly controlled by a government. Moreover, from time to time, the periods occur when a boon to a macrosystem is not increasing investment but their partial withdrawal from the economy, disinvestment, as it happens, for example, in China, during so called "restraints following the chaos". Considering the fact that the macrosystems staying in a recessionary gap, by all means seek for pumping cheap resources from macrosystems in an inflationary gap, it should be understood that the economic growth of developed countries is based on the resources those initially did not belong to them. Thus, under the slogan of mass consumption society, the thing actually formed is a society of mass robbery. It is easy to see directly from the comparison of statistics: the share of countries, representing about one sixth of the world's population, in the world consumption reaches for 75 to 90% of different types of resources - energy, ferrous and non-ferrous metals, drinking water, etc. Macrosystems of two considered types are characterized by different institutional environments. Institutions operating in one of them, cannot be imported into another one without a proper adaptation, because the same institution will perform other functions in the importing system. This is the main reason why the import of institutions from a market economy into transitional countries has been never completed successfully. Janos Kornai not accidently called an institutional system of transitional economies "plastic model of Wall Street": it looks exactly like its original, just does not work. The most reliable way of institutional development of macrosystems is to grow institutions on their own basis, when the formation of an institute begins with the determination of functions, it is called upon to perform.
One of the major difficulties of economic analysis and forecasting of development of modern macrosystems is their heterogeneity. In particular, some of Russians regions (as well as in many other countries) are stay in the inflation gap and the other part - in the recessional gap. Accordingly, the factors that are the sources of growth for some regions, are the barriers for the others and limit their development, and vice versa. Strong irregularity persists inside the regions, too. The difficulty of developing and implementing a common macroeconomic policies to ensure the necessary restructuring and technological modernization, connected with this fact largely. The problem is that the strategy to isolate resources markets, typical for entire countries which staying in the inflation gap, is not suitable for a region. A region cannot isolate its markets form other regions of the same country, to avoid the capital flight and labor migration. Therefore, the regions that have the status of inflation gap, are plundered by strong and successful regions of the same country. Eventually, they become depressive regions, and if this trend is not stopped, they will turn into an investment wilderness, a barren ground. This danger is so much real for Russia unfortunately. Macrosystems in recessional and inflational gap - are systems of different types, and they must be managed differently. So far, the decisions made in our country at the federal level, mainly reflect the interests and needs of the most powerful and wealthy regions. Is it any wonder that the differentiation of regional development has steadily deepened over the last 25 years: more affluent regions continue to enrich themselves, the poor get poorer and are losing investment and internal sources of capital accumulation. The government pays attention to this group of problems. Investment programs of several depressed areas have been adopted in recent years. Structural changes are also committed. In particular, the North Caucasian Federal District have been formed in early 2010, it included the region with inflation gap, whereas the regions in a recessional gap remains in the Southern Federal District. The idea of forming federal macroregions was to facilitate the management of economic development, as stated originally. Initially, the idea of the federal districts was intended to facilitate the management of economic development. The allocation of the North Caucasian Federal District from this point of view, was quite correct and logical, it had the same goal: to make better and more operational the long run decision-making - to facilitate and improve the governing for Russian economy (Nizhegorodtsev, 2012a). The fragmentation of economic space, the differentiation of economic development is typical of many countries in the contemporary world economy. That means that they have a common, similar problem in the macroeconomic policy, the solution of which requires the development of appropriate institutional arrangements.
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The cyclical nature of multiplicative effects in the economy corresponds to the general logic of economic cycles. Investment multiplier impacts to a recessional economy and to a growing one in the different way. Just as, there is a multiplier of investments for healthy and growing economy, as well as a disinvestment multiplier in a crisis economy: withdrawal of money from the investment process (disinvestment) leads to a loss of a certain amount of GDP, far more than the amount of investment, which the macrosystem has missed. For example, one rouble of a domestic public debt (not promptly paid from the budget of salaries and social transfers) in Russia in the mid-90s (the period of the most severe recession) led to a loss of 5.6 roubles in total GDP (Checheleva (ed.), 2001), while one rouble of investment and government spending in the growing Russian economy of the middle of the 2000s (the years of most rapid rise) brought a little more than two roubles in short-term GDP growth. The asymmetry of this kind is understandable quantitatively. In times of crisis, when the standard of living falling, increases the marginal propensity to consume (MPC) and therefore increases the investment multiplier. Thus, the multiplier is the highest while the multiplicative impact on the economy is the most destructive. That "asymmetrical" multiplier effect is one of the key reasons why the decline in physical volumes of production is always faster than the postcrisis recovery of macroeconomic system (Nizhegorodtsev, 2012b). This hysteresis effect is explained and modeled through a combination of forward and backward linkages in the macroeconomic system. Marginal propensity to save grows faster, the higher the overall effectiveness of the investment, but this efficiency is growing more slowly than the higher marginal propensity to save. A well-known model of the "predator-prey" is the result, it can be described by a system of Lottka-Volterra differential equations (Sadovnichiy et al., 2012). Solution of this equations system are periodic, or (depending on conditions) almost periodic functions, the dynamics of which can be easily explained by cyclical fluctuations in the marginal propensity to save, and, therefore, the above-mentioned "pulsations" of the investment multiplier. Similarly, you can simulate the logic of technological shifts. Capital productivity grows more rapidly, the higher the efficiency of innovation, but the innovation efficiency ascendence is the faster, the lower capital productivity, because in these times requirement for innovation strengthens and its implementation continues due to the increasing demand for new technological solutions. This idea goes back to Y. Schumpeter can be a base for simulating Kondratieff cycles generated by technological change, the invention of innovation cluster into a techno-economic system. For modeling of this kind of cyclical fluctuations it’s important to know what control actions can compress the cycle amplitude in order to reduce the negative impact of these cycles on economic behavior (the problem of counter-
cyclical regulation). Modern paradigm of managing economic dynamics doesn’t require to suppress the cyclical fluctuations, but only based on the feasibility of management in accordance with the logic of the challenges that the macroeconomic system faces (Ashimov et al., 2012). This control permits to improve the validity of macroeconomic policies used in order to adjust a macrosystem and to stimulate its economic growth. Reproduction of the human capital of a certain skill level can change the nature of the dynamics of macroeconomic systems. Underevaluation of labor leads to conservation of low-tech productional structure, thus providing a long-term trend of cost inflation increasing. When inflation takes its open, price forms, it deepens a price gap between labor and equipment that leads to further underevaluation of labor. The result is so called retardation funnel (Popkova, 2005), leading to dissipation of resources and slacking the dynamic trajectory of a macrosystem. So, the state of inflationary gap perpetuates, and many countries in different periods of their history have fallen into a similar trap. 3. NEW INDUSTRIALIZATION: THE WAY OF INNOVATIVE BREAKTHROUGH FOR RUSSIA Relationship between GDP growth and the volume per capita in developed countries in 2010 is shown in Fig. 3 (Goridko and Nizhegorodtsev, 2012). There are two consistent trends: the first - of the countries with a relatively high level of GDP per capita, however, with low GDP growth (mainly, countries of Western Europe); the second one shows an upward trend, which expresses a direct relationship between GDP growth and GDP per capita. Growth in the "old world" is stabilized: for any two years GDP growth in most countries does not change by more than 2 percentage points. We believe that existing technologies in such countries have exhausted their resource productivity and cannot lead to a significant increase in the volume of the final product. Only change in technological system, the transition to information technology can be a way out of this situation (Goridko and Nizhegorodtsev, 2011). Countries, whose indicators are in the ascending part of the graph in Fig. 3, are the so-called "newly industrialized" countries: Macau and Hong Kong (China’s regions, statistics for which are reported separately), Singapore, Cyprus, Israel, South Korea. Together with them, we are consider other newly industrialized countries, which according to various estimates include: China, Saudi Arabia, Venezuela, Chile, Uruguay, Brazil, Turkey, Kazakhstan, Argentina, Mexico, Malaysia, South Africa, Thailand, Indonesia, Paraguay, Philippines, India. For this group of countries, we have plotted the data in Fig. 4. The extremum of the resulting quadratic function is (19 648, 3.642), i.e., "newly industrialized" countries that have reached the level of GDP per capita about 20 thousand dollars or more, tend to sustainable GDP growth with a further increase of the gross output per capita. The minimum value
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of GDP growth for these countries, according to the found trend is 3.642% per year. This kind of dependence means that
the basis of the economy of these countries is a new way of technologies that are in the phase of most rapid growth.
Fig. 3. Relationship between GDP growth and GDP per capita in the developed countries in 2010
Fig. 4. Relationship between GDP growth and GDP per capita in the "newly industrialized" countries in 2010 It can be argued that it the technological saturation but not financial collapses, is the true reason for the global economic crisis that erupted three years ago. Thus, it is reasonable to assume that different countries will overcome the crisis in the economy, solving this difficult technological global problem. Therefore, choosing the path that has to move Russia for "new industrialization", necessary to pay attention to the experience of similar reforms in the countries, which are in
the ascending part of the trend at Fig. 4. The new logic of economic adjustment requires a fundamental change concerning to macroeconomic planning. Countries standing on the threshold of modernization need national investment programs, which would accumulate investment resources in key areas of technological development and ensure the modernization shift. Realization
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of those programs will inevitably require not only the system of middle-run (4-5 years) macroeconomic planning, but also arising of long-term programming and forecasting. If the economy bases on information technologies, and their life cycle takes 50-55 years, – so, the government (as well as private agents) needs to look ahead at least for half of that period, otherwise the question about the consequences of making investment decisions and comparative efficiency of investments loses reasonable reliance (Nizhegorodtsev (ed.), 2009). The response to this demand (mostly spontaneous) is the development of long-run macroeconomic programs and forecasts in a number of developed and rapidly developing countries. It’s necessary to put this prediction to a proper level, implying not only proper quality of forecasts but systematic efforts in this area. Investigations in that field now are often sporadic and mostly experimental, significantly lagging behind the needs of business practices. Today it is necessary to realize that the cloudless past, when it was possible to rely on the built-in stabilizers, will never return. We are witnesses of fulfilment the curse of Keynes, who once claimed that the traditional way out of the industrial crisis, based on self-regulation of macrosystems must be impossible. The efforts of a government becomes a thing without which any country can neither overcome the crisis, nor build any path of sustainable growth. Adequate approach to this situation is not suppression or overcoming the emerging macroeconomic risks, but learning to live in a global instability and manage those risks. To adapt economic policies to those conditions is an incredibly difficult task, but, unfortunately, the alternative doesn’t exist. The next few years push for new leaders who will take this approach and learn to operate inside the system of risks, uncertainties and instabilities. Managing economic systems today, means managing disorder, complex and full of risks. Mastering this skill will be a major competitive advantage for both firms and countries. This is the backbone for the world economy.
Let’s wish success in this way for each other. REFERENCES Ashimov, A.A., B.T. Sultanov, Zh.M. Adilov, Yu.V. Borovskiy, D.A. Novikov, R.M. Nizhegorodtsev and As.A. Ashimov (2012). Macroeconomic Analysis and Economic Policy Based on Parametric Control. N.Y., Dordrecht, Heidelberg, London: Springer, 265 p. Checheleva T.V. (Ed.) (2001). Efficient Economic Growth. Moscow: Financial academy, 368 p. (Rus.). Goridko, N.P. and R.M. Nizhegorodtsev (2011). The technological saturation and a problem of investment efficiency in the modern economy of Ukraine. In: The Bulletin of South-Russian Technical State University (NPI), 1, 13-21 (Rus.). Goridko N.P. and R.M. Nizhegorodtsev (2012). The technological trap or new industrialization trend: a choice for Russia. In: The Russian Economic Model: Content and Structure: Collective monograph. Ed. by V.I. Gaiduk, A.V. Buzgalin. Krasnodar: ProsveschenieYug, 186-200 (Rus.). Nizhegorodtsev, R.M. (ed.) (2009). Contemporary Frameworks of Institutional Economics. Gomel: Center for Market Institutions Research, 261 p. (Rus.). Nizhegorodtsev, R.M. (2011). Disequilibrium Dynamics of Macrosystems and Mechanisms of the Global Crisis Overcoming. Novocherkassk: NOK Publishing, 100 p. (Rus.). Nizhegorodtsev, R.M. (2012a). The middle-run cycle under inflation gap: the macroeconomic policy goals. In: Philosophy of Economy, 2, 198-203 (Rus.). Nizhegorodtsev, R.M. (2012b). The global economic crisis: the second wave anticipation. In: Proceedings of Ural Economic State University, 2 (40), 16-24 (Rus.). Popkova, Ye.G. (2005). New Quality of Economic Growth under Globalization. Volgograd: Polytechnic Publishers, 356 p. (Rus.). Sadovnichiy, V.A., A.A. Akayev, A.V. Korotayev and S.Yu. Malkov (2012). Modelling and Forecasting World Dynamics. Moscow: Institute for Social and Political Studies RAS, 360 p. (Rus.).
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