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The challenge of long-term structural change
370
Technology and Growth
TECHNOLOGY The challenge
AND
GROWTH
of long-term
structural
change Margaret
Sharp
In the next 15 years, provided that aggressive rearmament is avoided, the world economy is likely to grow relatively slowly and erratically, constrained by the availability of oil. Besides energy, two other factors are challenging the established economic order-Third world industrialisation and new technologies. The author argues that the only way for a developed economy, particularly the UK, successfully to meet all three challenges is by adopting these new technologies as quickly as possible: to yield to protectionist pressures would be self-defeating since growing Third world markets will be essential to the growth of the developed world. The policy dilemma is that slow growth and rising unemployment exacerbate the rigidities of the system and slow down adjustment at a time when the need for change is at its greatest.
THE PURPOSE of this article is to discuss the economic environment in which it seems likely that the UK will have to operate within the next IO-15 years, and the challenges which this environment will pose. It derives from various aspects of work at the National Economic Development Office (NEDO)l which have been concerned with longer-term economic issues. This article contains a personal synthesis of this material. NED0
work on the longer-term
economic
environment
The industrial policy of the 1974-1979 Labour Government in the UK focused on the improvement of the ‘supply side’ of industry, and particularly that of manufacturing. Under the National Economic Development Council (NEDC),l some 40 tripartite sector working parties were established whose main function Margaret Sharp is with the National Economic Development Office, Millbank Tower, London SWlP 4QX. Although this article draws upon work she has done at NEDO, expressed are personal and should not be attributed in any way to the Office.
OOIS-3287/80;050370-16 $02.00 0
1980 IPC Business
Press
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was to analyse sector performance and suggest improvements. For their first two years (1976 and 1977), the working parties concentrated on performance in home and export markets for 1979 or 1980, and revealed many shortterm problems. Surprisingly little heed was given to the longer-term context in which British industry would be operating in the latter half of the 1980s. The deficiency was made good in 1978, when the National Economic Development Office put in hand an exercise known as “the 1990s project”. The purpose of the study was to clarify likely developments during the next lo-15 years in a number of ‘environmental’ influences on the UK economy-environmental not in the physical planning sense, but because their development was largely outside the control of the UK government. The main emphasis in this exercise was on a wide ranging literature and research review conducted for the Office by a consultancy group of Oxford economists (Oxford Analytica) .2 Since 1978, NED0 has been involved in a number of other longer-term projects. In 1979, all of its sector working parties considered the application and impact of microelectronics which has led to a reorganisation of tripartite work in electronics and the establishment of a new working party on informatics. In addition, many working parties have become very conscious of the growing challenge to their sectors from the Third world. The impending renegotiation of the GATT multifibres agreement has been a focal point of interest for the textile group of working parties, while the incursions of countries like South Korea and Brazil into iron and steel, shipbuilding, cars, and mechanical engineering have caused other working parties to consider the impact of the tide of world industrialisation in their home and overseas (particularly Third world) markets. Meantime, NED0 has also sponsored a major study on computer manpower needs; has subscribed to a multiclient study on the strategic impact of intelligent electronics; has been monitoring the ACARD, Sleigh, and Finniston reports; has considered the TUC and CBI work on employment and technology; and has studied projects in OECD and the EEC which have a futures content, eg the OECD INTERFUTURES report and the EEC’s own (internal) 1990s project.3 This article will discuss some of the key issues arising from all this material. By its nature such a synthesis is qualitative; but even had we wished to do so, NED0 does not possess the resources to translate these views into a formal model. The result is, inevitably, a certain blurring around the edges. Given that uncertainty is one of the dominant features of the next decade, such a blurring may be both realistic and justifiable. There is one further proviso. The underlying assumption is that no major change in the political ‘stance’ of the world occurs over the next lo-15 years : friction and brush fires will continue but, as in the last two decades, these will be contained and limited in both scope and repercussions. A general shift from the current state of stalemate towards a more aggressive mood of rearmament would, however, pose problems. In particular, given the stimulating effect of rearmament on economic activity, to what extent would the tight energy balance foreseen over the next decade provide tinder for something rather bigger than a brush fire?
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The world economic
environment
for the next 10-15 years
It seems generally agreed that the world economy in the 1980s and early 1990s will experience slower growth than in earlier post-war decades, and this slow down will affect the developed world and the poorer countries of the Third world to a greater degree than the emerging ‘middle class’ of newly industrialising and oil-rich economies. However, considerable uncertainty surrounds the issue of how much slower, with the key elements emerging as energy (and the interplay between energy and inflation), the growth of protectionism, the underlying rate of growth of productivity, and perhaps above all, uncertainty itself, playing as it does on fears and prejudices. Energy and oil supplies For the rest of the century the world economy is likely to remain dependent upon oil4 The problem is not so much lack of proven energy reserves (and therefore of potential supplies both of oil and of other fuels) as of the time scale necessary to develop these and the consequent divergence between short- and long-run elasticities of demand and supply. For the next decade oil will be the crucial energy resource. Of the four major primary fuels (oil, coal, natural gas, and nuclear) it has the advantage of being the one whose supply is most easily expanded or restricted. It is therefore the marginal fuel and the one that is most vulnerable to swings in market demand. Because most oil-importing countries give preference to non-OPEC oil sources, such suppliers are generally stretched and cannot increase output in the short term, even if they wished to do so. This, in turn, means that the full impact of market fluctuations falls upon OPEC sources, making them particularly vulnerable to changes in demands. The faster the world economy grows, the more rapid is the growth in demand for energy-for oil in general, and for OPEC oil in particular. In the short run this may be met by an increase in OPEC supplies, or, if OPEC chooses not to increase supply (as in 1973 and 1979)) by an increase in real prices. When this happens the demand push from faster growth would be, in effect, siphoned off into higher energy prices. The availability of oil is therefore at present a constraint on world growth rates. To take a slightly wider and longer perspective, for the next two decades world growth rates will be limited by: l l
l
the the oil), the
rate of growth of OPEC oil supplies, rate of exploitation of alternative sources of energy (including and rate of conservation.
non-OPEC
The first is likely to be near zero or even negative, the second is unlikely to be substantial until the latter part of the 199Os,5 and conservation, the most important potential ‘source’ of energy, remains rather an unknown quantity. The present world energy coefficient (the percentage increase in energy demand for every percentage increase in world income) is about 0.8. If world income grows by 3% annually during the next decade, an annual 2.4% increase in energy supplies will be necessary. If OPEC supplies do not expand,
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this increase has to come from increased production elsewhere or from conservation. Yet North Sea oil will, at its peak production (2.9 million barrels per day) add only 5% to world supplies. 6 In other words, without conservation, we need to add the equivalent of the North Sea oil field to world supplies every two years; the faster the world rate of growth, the more we shall need. Present forecasts suggest that non-OPEC oil resources will increase only slightly (allowing for slowing production from older oil fields) in the next decade. The development and exploitation of other sources of energy-partitherefore provide the cularly coal, nuclear power, and conservation-must leeway for growth. But all these alternatives take time to develop. The building of a nuclear power station, or the development of a new coal field takes a minimum of five years, and more realistically (taking environmental objections into account) at least ten years. Conservation probably offers the largest and most immediate gain.7 Improved insulation standards can yield up to 50% savings in energy usage-but such building regulations only apply to nezerhouses. It will be a long time before insulation in older houses is improved up to these standards. Substantial improvements can be made in the efficiency of motor-car engines. By 1985, US regulations require the average performance of new American cars to be 35 miles per imperial gallon-a 40% saving on the 1979 fuel consumption level of 25 mpg. The US Department of Energy estimates that, by 1985, this will reduce total US energy demand by 6%, rising to a saving of up to 25% by 1995.* Savings may also be made in electricity generation. The present thermal efficiency of coal- or oil-fired power stations is 36%. A system of combined heat and power generation can achieve a thermal efficiency of 80%. (This is the efficiency to be achieved in the Hereford scheme).g Although such schemes are easy to install when building a new town or new suburbs, as happened in Sweden, they are less easily introduced in an established urban environment. The potential gain is large, but the build up slow with the main benefits later. Moreover, many sceptics about conservation point, with justification, to how little was achieved amidst the fervour after the 1973 oil crisis. Unless reinforced by high and rising prices, they maintain that much of the fervour is again likely to be no more than hot air. For the next lo-15 years, given reasonably optimistic assumptions about world growth,iO the global balance between supply and demand for energy will be very fine and the developed world will, to a degree, remain hostage to OPEC oil. From about 1995 onwards current investments in new coalfields, nuclear power stations, and energy efficient technologies, together with developments in solar, tidal and biotechnologies should begin to lift the heavy dependence upon oil. The interplay between inflation and energy availability The constraint on growth, however, comes not so much from the lack of availability of oil, as from the repercussions of shortage on other markets. A sharp rise in the price of a commodity like oil, which may constitute as much as 10% of a country’s import bill, means:
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a transfer of resources from oi1 consumers to oil producers, and the necessity to readjust relative prices to take account of the oil price rise,
The first effect is deflationary until (and unless) the oil producers spend or recycle their gains-a deflation which may be added to by governments anxious to limit balance-of-payments deficits. The second effect is inflationary, particularly in an economy where money prices are ‘sticky’ downwards and where the only way in which a realignment of relative prices can be secured is by allowing all prices to rise but some (energy) to rise faster than others. This sort of inflation is typical cost-push inflation and is difficult to contain, particularly when it gives rise to expectations of faster inflation (which then through wage demands have a tendency to become self-fulfilling). Most governments attempt to contain such cost inflation by tightening fiscal and monetary policies---ie by deflation. Hence oil consuming countries, confronted by a sharp rise in oil prices, may experience a double dose of deflation; the first from the oil producers themselves, the second from their own governments anxious to contain balance-of-payments deficits and inflationary expectations. The result is what is now becoming a familiar aftermath of an oil crisis, namely worldwide recession. Recession cuts growth, which in turn cuts energy demand. Chronic shortage is followed by glut. The real price of oil tumbles, taking with it much of the stimulus to conservation and development of alternatives. When the world pulls out of recession and begins to push forward into growth, the cycle begins all over again. As one commentator has put it, “For the next ten years, you will either be experiencing an energy crisis or an employment crisis”.11 Another way of Looking at it is to say that, given the short-run elasticities ofdemand and supply for oil, adjustment in the short run has to come through income and empfoyment. The 1979 oil crisis has seen an important development in this scenario. This is the recognition by OPEC that control of the supply side can help to prevent the erosion of their real earnings-that if they can match a fall in demand (stemming from worldwide deflation) with cutbacks in supply, pressure on prices can be maintained. Given expectations of future shortage and of oil as the premium fuel, there is everything to be said for leaving their assets to appreciate in the ground rather than in the form of depreciating dollar balances in New York. Such an argument is particularly strong for countries like Saudi Arabia and the United Arab Emirates which have relatively limited development demands, but less so for countries like Iran or Nigeria. It has still to be seen whether policies pursued in the face of excess demand can be maintained through a period of relative glut. From the point of view of the oil-importing countries, such a policy, although in some respects disadvantageous, does have the beneficial effect of maintaining the (price) pressure for conservation and thus hastening the time when they are freed from dependence upon oil. The newly industrial&&g
world
Within this environment of slower growth and tight energy markets, the countries likely to grow fastest are the so-called newIy industrialising countries. Definitions of precisely which countries come within this category vary, but it is
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generally agreed that the most important of them are the South-east Asian countries of South Korea, Taiwan, Hong Kong, and Singapore; the Latin American countries of Mexico and Brazil; and the Southern European countries of Greece, Spain, Portugal, and Yugoslavia. They are the first of a new middle class of countries between the developed and the underdeveloped world. They are likely to be joined during the next decade by a number of other countries-Malaysia, the Philippines, Indonesia, Venezuela, Colombia, and Chile-while countries such as India, Egypt, Argentina, and China seem set to shift gear from growth based on self-sufficiency to growth based upon the development of a sizeable export sector And in the following decades, there will be yet more countries pushing their way into industrialisation. A substantial shift in the product bases of these countries is also likely. Although much emphasis will continue to be in the traditional labour-intensive areas-textiles, clothing, footwear, wooden goods, toys, plastic goods, and cheap radios and cameras-they are likely to move increasingly into product areas where there is a mature, standardised technology-cars and motor components, steel, chemicals and man-made fibres, mechanical and electrical engineering. Currently these Third world countries (excluding China} contribute only 10% of total world industrial output; by 1995 this will probably have doubled to nearly 20%. Much of what is produced will be exported (by no means exclusively to developed-country markets since Third world markets are becoming increasingly important) and their export earnings will be used to purchase the oil, raw materials, and capital goods necessary for continuing industrialisation. Their great advantage over the older industrialised economies has been, and will remain, plentiful supplies of unskilled and semiskilled Iabour. Often the first stimulus to growth has been the offshore manufacturing and assembly facilities set up by OECD multinationals, either as direct subsidiaries or in association with local businessmen. Such ventures frequently attracted others and spawned a host of peripheral activities, creating external economies of scale and generating indigenous sources of capital. The skills learned from the multinationals-production, management, and marketing geared to the needs of the Western industrialised nations and Japan-rapidly spill over elsewhere. The skill profiles of the newly industrial&sing countries rapidly shift upwards once industrialisation is established, and their governments emphasise training and apprenticeship. These factors make such countries easy recipients of new, higher-skill technologies; while rapid growth and increasing local capital resources combine to create a spirit of enterprise and a production flexibility seldom found in the rheumatic world of mature capitalism. Is there any limit to this growth ? The example of Japan suggests that industrialisation rapidly erodes the advantage of cheap labour. Indeed the Japanese were among the first to establish offshore assembly plants in Southeast Asia and are now in the process of restructuring their home-based textile, steel, and s~pbuilding industries on the assumption that much of the more standardised production will come from the newly industrialising countries. Already, countries like South Korea and Hong Kong are being forced by higher real wage levels to move up the product ladder towards higher-valueadded goods. Selective protection in industrialised markets often accelerates this process: eg the GATT multifibres arrangement, with its quotas by number
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of garments has stimulated Hong Kong manufacturers to shift to higher-value goods in each category; similarly, quota restrictions on plastic and canvas footwear caused South Korea to shift up market to leather shoes. Protectionism It is this sheer flexibility which makes these countries seem such a threat to Western economies. In turn, this feeling of being threatened promotes the one force that may in the long run do most to limit Third world industrialisation-protectionism. A widespread move towards protection by the developed world would immediately damp the growth of export-oriented economics. As the Brandt report makes clear,12 such a move would be largely self-defeating-the developed economies need Third world markets just as much as Third world countries need our markets. In fact, the newly industrialising countries spend all that they earn from their exports. l3 Imports are a necessary adjunct to industrialisation and they grow as fast, sometimes faster than, exports. For the next two decades the newly industrialising countries could be a continuing and important source of dynamism in the world economy. Yet the pressures for protection will be considerable. Though UK imports from newly industrialising countries constitute a relatively small proportion of total imports of manufactures (currently lo%), they constitute a very high proportion in some sectors (eg 60% for knitwear, a proportion already constrained by the multifibre arrangement), and there have been cases of markets being swamped, seemingly overnight, often as a result of the sudden imposition of controls in other markets. South Korean footwear, for example, flooded into the UK market when controls were imposed on the US market. The problem for the industries concerned is made the worse by the fact that they are often labour-intensive industries located in regions of high unemployment and contracting employment opportunities. It seems likely that these pressures will bear fruit, of some sort, within the EEC. During the next ten years several forces are likely to interact to produce a protectionist direction. l
l
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The nine countries of the current EEC have their full share of traditional and mature industries which will feel the impact of competition from the newly industrialising countries and will call for protection. At the same time, the EEC will take in three countries (Greece, Spain, and Portugal) which are currently classed as newly industrialising countries. In spite of transition arrangements, this will undoubtedly strain the adjustment capacity of existing members, at least in two traditional industries-textiles and footwear. Once they are members, these three countries will probably be as vociferous as existing members in calling for protection against their fellow newly industrialising countries. Enlargement and its concomitants are likely to absorb most of the policymaking capacity in Brussels, leaving little time or patience for major industrial policy initiatives-even though some initiatives on adjustment and restructuring make sense at a Community level. FUTURES
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Add to these factors the uncertainty and, to a degree, the insecurity created by enlargement. The Community is likely to retreat towards reinforcing its basic institutions-the customs union and common agricultural market-through a strengthening of its internal market rules (eg in relation to competition policy and subsidies). A major initiative towards a community-wide industrial policy seems unlikely, and the strengthening of internal market rules will further constrain national initiatives on industrial policy. Greater protectionism combined with stronger internal market rules take the EEC closer to the type of environment enjoyed by its two main rivals, the USA and Japan-more competitive within its own boundaries but more protected (than at present) vis-ci-vis the rest of the world. Whether it would also trigger further worldwide moves towards protection is a moot point. Shifting comparative
advantage
Protectionism is one, rather negative, response from the developed world to the challenges of the newly industrialising countries. The other response is to shift up market to higher-technology goods. Recent developments in the theory and testing of comparative advantage indicate that skill, innovation, and scale provide the main competitive strengths of the developed countries, while specialisation in relatively low-skill, standardised (but not necessarily labourintensive) processes increasingly provides the competitive strength of the less developed world. l4 However, industrialisation is bringing with it increased emphasis upon skills, and many of the ‘older’ newly industrialising countries are rapidly over-coming providing a constant stream of new products the ‘skill barrier’. Innovation, and new processes, thus provides the main source of comparative advantage to developed countries. Scale economy arguments run in both directions-they can be the result as well as the cause of specialisation and can accrue to any firm, whether located in a developed or less developed economy where minimum costs of production are achieved only when output is large relative to market size. Recent studies also indicate that, in their trade with each other, the developed countries are tending to an increasing extent to specialise within industries.14 For example, in textile machinery, Switzerland is the acknowledged leader in the production of weaving machinery while Germany has the lead in dyeing and finishing machinery. Their leads are maintained not by price, but by technical refinement, output quality, and reliability, At the simpler end of the market, developed-country producers are meeting increasing competition from India and South Korea. The simple model of comparative advantage, in which developed countries concentrate upon capital- and technology-intensive products and the less developed world concentrates on labour-intensive products and raw materials, is rapidly becoming obsolete. UK trade with the ‘older’ newly industrialising countries will probably move during the next two decades towards the pattern that has evolved with our developed-economy trading partners-increasing specialisation, based upon a combination of scale and product and process innovation.
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This underlines the crucial, and growing, importance of innovation if competitiveness in world markets is to be maintained. Such innovation depends on the acceptance, and application, of new technologies. The new technologies The dominant new technologies to the year 2000 are likely to be in three main areas-energy, microelectronics-telecommunications, and biotechnologies. The relative shortage of oil and its importance in world growth will make energy an area of extremely active development. Considerable gains are likely in the energy efficiency of production methods, but this will not result in radical alterations in production techniques. In the long run, biotechnologies may well lead to major changes in production methods: during this century, however, developments are likely to be concentrated in four sectors-agriculture, energy, chemicals, and pharmaceuticals-with most industrial processes unaffected. By contrast, developments in microelectronics and telecommunications will have far reaching effects during the next two decades, on both industrial processes and our established way of life. The ‘information revolution’ will bring ever cheaper and easier methods of data storage, retrieval, and analysis. Automation will enter the office-eg word processors, desk-top visual display units, facsimile transmission (eroding, incidentally, the function of head office and enhancing that of the branch office). Through the telephone-linked viewdata systems, the individual at home will be linked not only with other individuals, but with major information systems, eventually replacing many functions currently performed by the printed word. The other major change will be automation on the factory floor, where microelectronics will have its greatest impact on production processes. Robotics will carry mass production a stage further, while automated warehousing and stock control will bring highly sophisticated feedback control to the organisation of production. The most important impact, however, will not be upon already highly automated production but upon batch production. Computer-aided design combined with computer-aided manufacture brings a flexibility and quality control hitherto unknown to batch production. Rejigging tools becomes a matter of seconds rather than hours, and will often be achieved automatically according to the preprogrammed product mix required. In addition, the product range will alter. Customers will look for products which incorporate microelectronic components, not only because they are more sophisticated and flexible, but because they are more reliable, accurate, and sometimes cheaper, than the mechanical components they replace. We are already seeing this in areas like instrumentation-microelectronics is not only revolutionising production techniques but also the product. TO lag behind in either area spells competitive disaster. Productivity
growth
may lead to an investment
boom
What effect will these new technologies have on productivity? Their application to production processes almost invariably raises labour productivity. In many
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cases they lower the capital-output ratio as well as the labour-output ratio, which means that capital productivity will be increasing alongside labour productivity. And product quality and reliability also increase. In all senses, therefore, microelectronics and associated technologies will increase productivity. The effects on perceived productivity will depend on the rate of diffusion -the faster new technologies are adopted, the faster they will make their impact. Conventional growth theory suggests that the energy-inflation interplay discussed earlier would, by constraining world growth rates, dampen expectations of profits and market growth and result in less investment. Given that new techniques are embodied in new investment, such a slowing down in growth rates might be expected to slow down the rate of implementation of new techniques. Against this background, the microelectronics ‘revolution’ might be expected to have very little impact on productivity growth-indeed slow implementation is consistent with the slowing down of productivity growth generally predicted for the decade. An alternative, Schumpeterian, view can be taken. New technologies are not a passive agent in the macroeconomic world, but in themselves provide a stimulus to economic activity. Slower world growth and the increasing intensity of competition amongst industrialised countries, far from slowing technical progress, may promote it, as firms seek cheaper methods of production.r5 With US, Japanese, and (to a lesser extent) West German firms vying for technological leadership, the pace of technical change has already accelerated. The emphasis is now on application and diffusion. Those countries and firms that do invest will grab markets (because their products are superior and their costs lower) and start (or intensify) a virtuous circle of growing productivity and growing output. Those who fail to seize the opportunity will suffer a cumulative loss of competitiveness and start (or intensify) a period of relative decline. l6 Recognition of the importance of innovation to competitiveness has led many governments to introduce measures to speed the take up of microelectronic techno1ogies.l’ With the emphasis on diffusion rather than promoting national champions, these policies are not self-cancelling. From a world point of view they are speeding up the introduction of new products and new processes and increasing the rate of growth of productivity. In the short term there will be greater cross-sectional divergence of investment and productivity growth. In the longer term, competition should close this gap. Could we be on the verge of a Schumpeterian investment boom? In line with conventional growth theory and current trends many commentators are predicting a slowing down of productivity growth during the next decade.ls There will be some factors which will certainly tend in this direction. Major investments in energy projects-eg nuclear power stations, tidal barrages-are capital intensive, raise the capital-output ratio, and tend to lower productivity. The information revolution will increase the capital intensity of the service sector (which until now has had a relatively low capitallabour ratio) and may similarly lower overall productivity.19 Factors which were earlier seen to be depressing productivity-the pressure for more widespread environmental controls (where it could be argued that we
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are taking increased productivity in the form of increased quality of life) and the increasing number of untrained and unskilled young people and married women in the labour force-are still important features of most industrialised economies. But the substantial improvements to productivity stemming from developments in microelectronics and associated technologies combined with the degree of international competition surrounding these developments should not be dismissed as negligible. It seems quite possible that, at least in manufacturing industry, they will promote faster overall productivity growth. The Schumpeterian view is the more optimistic one. Should it prove correct we would expect to find that the current recession bites less deeply,20 and that longer term rates of growth are faster than current expectations, particularly if (as is the case) the new technology has an energy-saving bias. A faster rate of growth of productivity, however, poses problems in the labour market. If overall growth rates are constrained by the availability of energy, faster productivity growth means higher unemployment. This in turn increases labourmarket resistance to new techniques of production, and slows down the adjustment process. Even if faster, such a growth path will not be an easy one. The UK economy:
challenge and response
The world economic environment which has been outlined above makes it clear that the UK now faces a future of considerable uncertainty. How tightly will OPEC countries succeed in reining production and with what impact on world growth rates ? How far will protectionism spread in the developed economies and stifle the growth of industrialisation in the Third world ? How far will predictions of slow growth be confounded by dynamism injected into the developed economies by the exploitation of new technologies ? Or how far will such exploitation be bridled by the problems of stagflation? And would a major programme of rearmament make predictions irrelevant? Amidst these uncertainties it is clear that the UK is going to have to face up to two major challenges within the next decade-new technologies and growing industrialisation in the Third world. The answer to both challenges is the same. A shift to high-technology industries not only helps to maintain competitiveness vis-ri-vis developed-economy competitors, but simultaneously decreases the vulnerability of our industries towards the newly industrialising world. The management of technological change, both in innovation and in applications to products and processes, has become central to the UK’s economic well-being. The biggest question of all is whether the UK economy can respond appropriately-whether it can meet change with change. The ability of an economy to respond flexibly to external market forces is often referred to as its ability to adjust. Part of the normal process of a dynamic economy is the constant movement of resources from slow-growing or declining sectors to faster-growing sectors. Market signals aid and abet this movement: scarcity is signalled by relatively high prices (eg the salaries of systems engineers in California) and surplus by relatively low prices (eg teacher’s salaries at times of falling rolls). But the market is imperfect: many factors obscure the signals or inhibit the
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movement of resources. Such market rigidities may stem from innate imperfections in the economic system (eg divergences between social costs and benefits which mean that the market signals are misleading) or from man-made imperfections (eg planning controls, public-housing tenure systems). A period of slow growth tends to strengthen rigidities, since it adds to frustrations and uncertainties and makes people more conservative about facing the future. A distinction is often made between negative adjustment policies, whose purpose is job creation or job retention (and which might therefore appear to be the antithesis of adjustment), and positive adjustment policies, which aim to help the movement of resources. There is, however, a link between the two and a trade-off between negative and positive, for example, in regional policies -superficially, such policies seem to inhibit the movement of resources, but they nevertheless can play a part in limiting frustrations (from unemployment) and help, in this sense, to encourage flexibility. Doubts about the UK’s ability to meet the challenge of new technology centre on its history of relative decline, and particularly its poor productivity performance compared to that of its European partners in the last three decades. The failure to move, as the other European countries have done, into the virtuous circle of growth leaves the UK with a legacy of frustrated ambition and uncertainty which adds to the rigidities of the economy at a time when the ‘demand for adjustment’ from the external economic environment has, if anything, increased. The UK has two advantages In another sense, however, this is a most propitious time for the UK to be meeting the technology challenge. There are two important factors operating in the UK’s favour. First, the emphasis in microelectronics has shifted from mainstream developments in circuitry and memories towards developing the manifest uses and applications of this technology. A lack of expertise or production facilities in the mainstream technology matters little-indeed there may even be advantages in bypassing intermediate developments. Provided the UK is now prepared to import technology and to devote resources to diffusion and application, it ought to stand as good a chance of success as any of its competitors. A second factor which presently confers economic strength is North Sea oil. It is sometimes suggested that the availability of North Sea oil insulates the UK economy from the effects of any energy crisis. This is not the case. The price of North Sea oil is determined by world energy prices and in no sense is UK industry shielded from the effects of a worldwide shortfall in oil. However, an increase in the price of oil benefits the balance of payments and (from now onwards) the Exchequer. It therefore insulates the UK economy from the balance-of-payments effect of an oil crisis (and the deflationary macroeconomic consequences) as well as providing a windfall gain to public funds. These advantages are shared by none of the UK’s advanced-economy competitors. Five adjustment
hurdles
But North Sea oil is something of a double-edged advantage. It has also brought the ‘Dutch disease’ to the UK. The balance-of-payments gain has probably
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already been largely discounted in the boosting of the real exchange rate. Short-run market pressures are therefore pushing the economy to reduce indigenous industrial production-to adjust to being an oil-rich economy. This would not matter if North Sea oil were more than a transitory benefit. But with reserves, at current rates of depletion, unlikely to last much beyond the turn of the century, the UK may soon face some nasty withdrawal symptoms. In addition to the Dutch disease, four other problem areas on the supply side seem likely to inhibit the speed with which the UK economy can adjust to new technologies. Investment. Diffusion of new technologies depends upon “a new cycle of reinvestment and re-equipment”. 21 When real profitability is very low and investment is required in ‘high-risk’ areas, will either external or internal funds be made available? R and B and innovation. A similar doubt hangs over this area. Product and process development spending are essential if there is to be a genuine diffusion of technological knowledge. Yet, with profitability low, where will the funds come from? Skilled manpower. Has the UK invested (or indeed is it investing) sufficiently in human capital to cope with the demands of new technology? Japan’s success in this area is no surprise : 20 o/0 of Japanese school leavers achieve the equivalent of GCE A-level mathematics. Fewer than 5% of UK school leavers gain this qualification. Attitudes. This is probably the most crucial stumbling block to the take up of new technologies. The fear of unemployment, exacerbated by experience of slow growth, leads frequently to shop-floor opposition to new machinery and new production methods. At best this will delay the introduction of new technology and at worst prevent it. Yet in the long run, such technologies present the opportunity of a higher standard of living and shorter working hours-the achievement of which is very much a collective benefit. The difficulty is that as individuals, faced by the prospect of redundancy and unemployment, it is wholly rational that we (and the unions that represent us) should oppose such developments. The problem is that of reconciling the collective with the individual benefit. These problems are not unique to the UK, although they are exacerbated by the fact that our economy lacks the ebullience born of a period of sustained and relatively fast growth such as that experienced by Japan and many of our European competitors. They represent the manifestation of a common problem -increasing uncertainty is inhibiting the taking of risks and compounding the rigidities which already exist in the economic system. Investment, R and D and innovation, and skilled manpower exemplify a common externality problem 22-the divergence of the private from the social rate of time preference. The widely acknowledged existence of this gap can be used to justify positive adjustment policies in the form of selective subsidies to investment, R and D, and product and process innovation. Indeed, many of Britain’s European competitors have countered the increasing uncertainty of the last decade by a substantial extension of such measures with particular emphasis on the diffusion of new technologies and product and process innovation.17 This creates yet another problem for the UK, a problem which econo-
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mists would classify as a ‘second-best’ problem. Even if we do not ourselves think subsidy is justified, we lose out on all scores if our competitors are subsidising such activities and we are not. The question of attitudes raises a somewhat different issue of externality, akin to the problem that arises in the supply of public goods, where there is established divergence between rational maximising behaviour on the part of the individual and that of the collective. It provides the justification for state involvement in the issues of redundancy and retraining. Again, the increased threat of technological unemployment in the last few years has seen increased provision in these areas in many European countries, and, to a degree, the acceptance through job creation programmes and the deliberate expansion of employment in (public) social and environment services of a role for the state in absorbing transitional unemployment. 23
Uncertainty
remains
but interdependence
increases
When NED0 first considered the long-term issues discussed in this article, it was hoped that the work would help to remove some of the “environmental uncertainties” which seemed to be paralysing investment decisions, and would thereby stimulate investment and growth. 24 What has emerged, however, has if anything emphasised the role of uncertainty and its inhibiting influence on decision taking. For the UK, the most urgent and important task is to find some method of coping with uncertainty: above all some way of preventing it from exaggerating and exacerbating the rigidities which already characterise the economy. If uncertainty is one dominant characteristic of the environment the UK economy faces, the other is interdependence. The Brandt report emphasised the increasing interdependence between industrialised and less developed countries, but for each country the degree of interdependence is also increasing. Whatever our predilections as a nation, we cannot ignore what is going on around us: to try to swim against the tide of technological change spells disaster. Nor is it to our advantage to stand alone against other trends, be it protectionism or intervention (although it is, of course , always open to us to seek multilateral action to limit both developments). Whether we like it or no, the world in which we operate is very much a second-best one. The policy challenge for the UK is to find some means of reconciling these two worlds. On the one hand our increasing interdependence with the world economy brings greater demands for change and adaptation. On the other, increasing uncertainty adds to doubts and fears about the future and inhibits rather than encourages change. What are needed are policies which encourage and promote adaptation but which at the same time are seen to help to minimise the costs that such adaptation imposes on society.
Notes
and references
1. The National Economic Development Office (NEDO) provides the professional staff for the National Economic Development Council (NEDC or Neddy), the Economic Development Committees (EDCs or Little Neddies) and the Sector Working Parties (SWPs). Neddy
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2.
3.
4.
5. 6.
7.
Technology and Growth
is the national forum for economic consultation between government, management, and unions. The committees bring together leading representatives of management, unions, and government who use this neutral meeting place to study the efficiency and prospects of individual industries. See M. Sharp, “The NED0 1990 project”, Futures, October 1979, 11(5), pages 454-455; also the report on the Futures symposium on futures research in government, November 1979, Futures, April 1980, 12(2), page 163. The publications referred to in this paragraph are listed by sponsoring organisation. Cabinet Office, Advisory Council for Applied Research and Development (ACARD), The Afiplications of Semiconductor Technology, September 1979; Industrial Innovation, December 1978; Joining and Assembly: The Impact of Robots and Automation, October 1979; Technological Change: Threats and Opportunities for the United Kingdom, December 1979; Computer Aided Design and Manufacture, January 1980; R and D for Public Purchasing, February 1980; Biotechnology, March 1980. All are published by HMSO, London. Confederation of British Industry, International Trade Policy and Industrial Change, CBI discussion document, November, 1979; Jobs-Facing the Future, CBI discussion document, January 1980. EEC, Project 1990 (internal discussion documents not generally available). Engineering our Future: Report of the Committee of Enquiry into the Engineering Profession, chairman Sir M. Finniston (London, HMSO, 1980). NEDO, Computer Manpower in the 1980s (London, HMSO, 1980). OECD, Facing the Future: hfastering the Probable and Managing the Unpredictable, the INTERFUTURES report (Paris, OECD, 1979). Jonathan Sleigh, Brian Boatwright, Peter Irwin, and Roger Stanyon, T/le ManPower Implications of Microelectronic Technology, the Sleigh report (London, HMSO, 1979). TUC, Employment and Technology, report by the TUC general council to the 1979 congress (London, TUC Publications, 1979). Precise forecasts of the degree of dependence vary, but ‘typical is the Stanford Research Institute forecast of oil constituting 35% of world energy supplies in the year 2000 (compared with 460/, today). Their model is contained in “Fuel and energy price forecasts: quantities and long term marginal prices”, EA 433, Electric Power Research Institute, Palo Alto, 1977. There is an additional unknown here-the extent to which the Soviet Union is likely to become a net importer of oil. Mexico looks like yielding a richer harvest. Production there is currently 2.25 million barrels per day and could rise to 4 million barrels a day and be maintained over a much longer period than North Sea production. But it should also be remembered that many ‘older’ oil-producing areas, eg in the USA, are approaching the end of their lives. Commission of the European Communities, Crucial Choices for the Energy Transition, EUR 6610(EN) (Brussels, EEC, 1980).
8. European cars, having faced historically much higher fuel costs, tend to be more efficient than American counterparts, if only because they have been smaller and lighter. But they are driven very much faster. Enforced motorway speed limits would bring energy savings of the same order-eg a car being driven at 85 miles per hour is likely to use 50% more fuel than one being driven at 65 miles per hour. 9. Set, “Heat
plus power switch”, Financial Times, 6 May
1980, page 6.
10. It is, of course, easy to deflate world energy demand by deflating world growth estimates. The main reason why some of the international oil majors are now predicting “no energy gap” is because they have revised their estimates of world growth rates radically downwards. But growth and energy are interdependent-it is not clear which is cause and which is effect. 11. Robert Mabro, fellow of St Anthony’s seminar, London, 20 February 1979.
College,
Oxford,
12. Independent Commission on International Development for Survival, the Brandt report (New York, UN, 1980).
at a Department
of Energy
Issues, North-South : a Programme
13. As far as the UK is concerned the newly industrialising countries spend more than their earnings : loo,/, of UK imports of manufactures come from such countries but they take
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Technology
14.
15. 16.
17. 18. 19.
20.
21. 22.
23.
24.
and Growth
385
countries and the 30% of our exports of manufactures. See, “The newly industrialising adjustment problem”, Government Economic Service working paper 18, HM Treasury, London, 1978. “The expansion of manufactured exports in developing J. B. Donges and J. Reidel, countries : an empirical assessment of supply and demand issues”, Weltwirtschaftliches Archiv, 1977; Kiel Institute, “Analysis of the determinants and consequences of a selective compared to an unselective research and development strategy”, mimeo, 1978; G. White, “UK international competitiveness and the role of R & D”, mimeo, Department of Industry, comparative advantage in UK manufactured products”, 1978; C. Bowe, “Revealed mimeo, Department of Industry/Department of Trade, 1977; G. K. Helleiner, “Industry characteristics and competitiveness of manufactures in less developed countries”, Weltwirtschaftliches Archiv, 1976. S. Hirsch, Rich Man’s, Poor Man’s and Everyman’s Goods: Asfiects of Zndustrialisation (Tubingen, J. C. B. Mohr, 1977). G. Fels, “The choice of industry mix in the division of labour between developed and underdeveloped countries”, Weltwirtschaftliches Archiv, 1972. For a fuller development of this theme see D. K. Stout, “The impact of technology on economic growth in the 198Os”, Daedalus, winter 1980. For a discussion of the growing importance of technical innovation to international competitiveness see Keith Pavitt, ed, Technical Innovation and British Economic Performance (London, Macmillan for the Science Policy Research Unit, 1980), chapters 2 and 3. See paper prepared by NED0 for June 1980 NEDC on European adjustment policies (available from NED0 press office). For example, Prognos Euro-Report 1979, published by Prognos AG, Basle, Switzerland. Experiments with word processors indicate substantial improvements in labour productivity. But the greatest danger with the information revolution lies in the suffocation of decision taking by the availability of too much information. For example, has photocopying increased productivity through the cheap and speedy dissemination of information, or has it caused unnecessary and time consuming proliferation of reading matter and encouraged the formation of large committees and advisory bodies? There is evidence in the USA, Japan, and Europe of a surprising buoyancy in capital goods industries, particularly machine tools and electronic hardware. See “American industry rediscovers innovation”, The Economist, 5 July 1980, page 79. Chris Freeman, director of SPRU, in his Bernal memorial lecture, “Government policies Science Policy Research Unit, Sussex University, July 1978. for industrial innovation”, Externalities is a term used when there are divergences between social and private costs and benefits. For example, driving to work in rush hours imposes costs which go beyond (ie are external to) the individual who initiates the action and affects a much wider group within society. Their existence stems from the fact that we do not exist as independent entities in society but that we are (perhaps increasingly) interdependent on one another. This job creation role, however, is also closely tied up with the birth-rate bulge of the early 1960s and the very large number of young people coming on to the labour market during the period 1977-1982. The fear that this group will, if they experience long-term unemployment at the beginning of their working life, remain an alienated and disaffected group within society has, as in the UK, stimulated many youth employment programmes. The term “environmental uncertainties” derives from its use by J. E. Meade, The Theory of Indicative Planning (Manchester, Manchester University Press, 1970).
FUTURES
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Technology and Growth
TECHNOLOGY The challenge
AND
GROWTH
of long-term
structural
change Margaret
Sharp
In the next 15 years, provided that aggressive rearmament is avoided, the world economy is likely to grow relatively slowly and erratically, constrained by the availability of oil. Besides energy, two other factors are challenging the established economic order-Third world industrialisation and new technologies. The author argues that the only way for a developed economy, particularly the UK, successfully to meet all three challenges is by adopting these new technologies as quickly as possible: to yield to protectionist pressures would be self-defeating since growing Third world markets will be essential to the growth of the developed world. The policy dilemma is that slow growth and rising unemployment exacerbate the rigidities of the system and slow down adjustment at a time when the need for change is at its greatest.
THE PURPOSE of this article is to discuss the economic environment in which it seems likely that the UK will have to operate within the next IO-15 years, and the challenges which this environment will pose. It derives from various aspects of work at the National Economic Development Office (NEDO)l which have been concerned with longer-term economic issues. This article contains a personal synthesis of this material. NED0
work on the longer-term
economic
environment
The industrial policy of the 1974-1979 Labour Government in the UK focused on the improvement of the ‘supply side’ of industry, and particularly that of manufacturing. Under the National Economic Development Council (NEDC),l some 40 tripartite sector working parties were established whose main function Margaret Sharp is with the National Economic Development Office, Millbank Tower, London SWlP 4QX. Although this article draws upon work she has done at NEDO, expressed are personal and should not be attributed in any way to the Office.
OOIS-3287/80;050370-16 $02.00 0
1980 IPC Business
Press
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was to analyse sector performance and suggest improvements. For their first two years (1976 and 1977), the working parties concentrated on performance in home and export markets for 1979 or 1980, and revealed many shortterm problems. Surprisingly little heed was given to the longer-term context in which British industry would be operating in the latter half of the 1980s. The deficiency was made good in 1978, when the National Economic Development Office put in hand an exercise known as “the 1990s project”. The purpose of the study was to clarify likely developments during the next lo-15 years in a number of ‘environmental’ influences on the UK economy-environmental not in the physical planning sense, but because their development was largely outside the control of the UK government. The main emphasis in this exercise was on a wide ranging literature and research review conducted for the Office by a consultancy group of Oxford economists (Oxford Analytica) .2 Since 1978, NED0 has been involved in a number of other longer-term projects. In 1979, all of its sector working parties considered the application and impact of microelectronics which has led to a reorganisation of tripartite work in electronics and the establishment of a new working party on informatics. In addition, many working parties have become very conscious of the growing challenge to their sectors from the Third world. The impending renegotiation of the GATT multifibres agreement has been a focal point of interest for the textile group of working parties, while the incursions of countries like South Korea and Brazil into iron and steel, shipbuilding, cars, and mechanical engineering have caused other working parties to consider the impact of the tide of world industrialisation in their home and overseas (particularly Third world) markets. Meantime, NED0 has also sponsored a major study on computer manpower needs; has subscribed to a multiclient study on the strategic impact of intelligent electronics; has been monitoring the ACARD, Sleigh, and Finniston reports; has considered the TUC and CBI work on employment and technology; and has studied projects in OECD and the EEC which have a futures content, eg the OECD INTERFUTURES report and the EEC’s own (internal) 1990s project.3 This article will discuss some of the key issues arising from all this material. By its nature such a synthesis is qualitative; but even had we wished to do so, NED0 does not possess the resources to translate these views into a formal model. The result is, inevitably, a certain blurring around the edges. Given that uncertainty is one of the dominant features of the next decade, such a blurring may be both realistic and justifiable. There is one further proviso. The underlying assumption is that no major change in the political ‘stance’ of the world occurs over the next lo-15 years : friction and brush fires will continue but, as in the last two decades, these will be contained and limited in both scope and repercussions. A general shift from the current state of stalemate towards a more aggressive mood of rearmament would, however, pose problems. In particular, given the stimulating effect of rearmament on economic activity, to what extent would the tight energy balance foreseen over the next decade provide tinder for something rather bigger than a brush fire?
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Technology and Growth
The world economic
environment
for the next 10-15 years
It seems generally agreed that the world economy in the 1980s and early 1990s will experience slower growth than in earlier post-war decades, and this slow down will affect the developed world and the poorer countries of the Third world to a greater degree than the emerging ‘middle class’ of newly industrialising and oil-rich economies. However, considerable uncertainty surrounds the issue of how much slower, with the key elements emerging as energy (and the interplay between energy and inflation), the growth of protectionism, the underlying rate of growth of productivity, and perhaps above all, uncertainty itself, playing as it does on fears and prejudices. Energy and oil supplies For the rest of the century the world economy is likely to remain dependent upon oil4 The problem is not so much lack of proven energy reserves (and therefore of potential supplies both of oil and of other fuels) as of the time scale necessary to develop these and the consequent divergence between short- and long-run elasticities of demand and supply. For the next decade oil will be the crucial energy resource. Of the four major primary fuels (oil, coal, natural gas, and nuclear) it has the advantage of being the one whose supply is most easily expanded or restricted. It is therefore the marginal fuel and the one that is most vulnerable to swings in market demand. Because most oil-importing countries give preference to non-OPEC oil sources, such suppliers are generally stretched and cannot increase output in the short term, even if they wished to do so. This, in turn, means that the full impact of market fluctuations falls upon OPEC sources, making them particularly vulnerable to changes in demands. The faster the world economy grows, the more rapid is the growth in demand for energy-for oil in general, and for OPEC oil in particular. In the short run this may be met by an increase in OPEC supplies, or, if OPEC chooses not to increase supply (as in 1973 and 1979)) by an increase in real prices. When this happens the demand push from faster growth would be, in effect, siphoned off into higher energy prices. The availability of oil is therefore at present a constraint on world growth rates. To take a slightly wider and longer perspective, for the next two decades world growth rates will be limited by: l l
l
the the oil), the
rate of growth of OPEC oil supplies, rate of exploitation of alternative sources of energy (including and rate of conservation.
non-OPEC
The first is likely to be near zero or even negative, the second is unlikely to be substantial until the latter part of the 199Os,5 and conservation, the most important potential ‘source’ of energy, remains rather an unknown quantity. The present world energy coefficient (the percentage increase in energy demand for every percentage increase in world income) is about 0.8. If world income grows by 3% annually during the next decade, an annual 2.4% increase in energy supplies will be necessary. If OPEC supplies do not expand,
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this increase has to come from increased production elsewhere or from conservation. Yet North Sea oil will, at its peak production (2.9 million barrels per day) add only 5% to world supplies. 6 In other words, without conservation, we need to add the equivalent of the North Sea oil field to world supplies every two years; the faster the world rate of growth, the more we shall need. Present forecasts suggest that non-OPEC oil resources will increase only slightly (allowing for slowing production from older oil fields) in the next decade. The development and exploitation of other sources of energy-partitherefore provide the cularly coal, nuclear power, and conservation-must leeway for growth. But all these alternatives take time to develop. The building of a nuclear power station, or the development of a new coal field takes a minimum of five years, and more realistically (taking environmental objections into account) at least ten years. Conservation probably offers the largest and most immediate gain.7 Improved insulation standards can yield up to 50% savings in energy usage-but such building regulations only apply to nezerhouses. It will be a long time before insulation in older houses is improved up to these standards. Substantial improvements can be made in the efficiency of motor-car engines. By 1985, US regulations require the average performance of new American cars to be 35 miles per imperial gallon-a 40% saving on the 1979 fuel consumption level of 25 mpg. The US Department of Energy estimates that, by 1985, this will reduce total US energy demand by 6%, rising to a saving of up to 25% by 1995.* Savings may also be made in electricity generation. The present thermal efficiency of coal- or oil-fired power stations is 36%. A system of combined heat and power generation can achieve a thermal efficiency of 80%. (This is the efficiency to be achieved in the Hereford scheme).g Although such schemes are easy to install when building a new town or new suburbs, as happened in Sweden, they are less easily introduced in an established urban environment. The potential gain is large, but the build up slow with the main benefits later. Moreover, many sceptics about conservation point, with justification, to how little was achieved amidst the fervour after the 1973 oil crisis. Unless reinforced by high and rising prices, they maintain that much of the fervour is again likely to be no more than hot air. For the next lo-15 years, given reasonably optimistic assumptions about world growth,iO the global balance between supply and demand for energy will be very fine and the developed world will, to a degree, remain hostage to OPEC oil. From about 1995 onwards current investments in new coalfields, nuclear power stations, and energy efficient technologies, together with developments in solar, tidal and biotechnologies should begin to lift the heavy dependence upon oil. The interplay between inflation and energy availability The constraint on growth, however, comes not so much from the lack of availability of oil, as from the repercussions of shortage on other markets. A sharp rise in the price of a commodity like oil, which may constitute as much as 10% of a country’s import bill, means:
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l l
Technology and Growth
a transfer of resources from oi1 consumers to oil producers, and the necessity to readjust relative prices to take account of the oil price rise,
The first effect is deflationary until (and unless) the oil producers spend or recycle their gains-a deflation which may be added to by governments anxious to limit balance-of-payments deficits. The second effect is inflationary, particularly in an economy where money prices are ‘sticky’ downwards and where the only way in which a realignment of relative prices can be secured is by allowing all prices to rise but some (energy) to rise faster than others. This sort of inflation is typical cost-push inflation and is difficult to contain, particularly when it gives rise to expectations of faster inflation (which then through wage demands have a tendency to become self-fulfilling). Most governments attempt to contain such cost inflation by tightening fiscal and monetary policies---ie by deflation. Hence oil consuming countries, confronted by a sharp rise in oil prices, may experience a double dose of deflation; the first from the oil producers themselves, the second from their own governments anxious to contain balance-of-payments deficits and inflationary expectations. The result is what is now becoming a familiar aftermath of an oil crisis, namely worldwide recession. Recession cuts growth, which in turn cuts energy demand. Chronic shortage is followed by glut. The real price of oil tumbles, taking with it much of the stimulus to conservation and development of alternatives. When the world pulls out of recession and begins to push forward into growth, the cycle begins all over again. As one commentator has put it, “For the next ten years, you will either be experiencing an energy crisis or an employment crisis”.11 Another way of Looking at it is to say that, given the short-run elasticities ofdemand and supply for oil, adjustment in the short run has to come through income and empfoyment. The 1979 oil crisis has seen an important development in this scenario. This is the recognition by OPEC that control of the supply side can help to prevent the erosion of their real earnings-that if they can match a fall in demand (stemming from worldwide deflation) with cutbacks in supply, pressure on prices can be maintained. Given expectations of future shortage and of oil as the premium fuel, there is everything to be said for leaving their assets to appreciate in the ground rather than in the form of depreciating dollar balances in New York. Such an argument is particularly strong for countries like Saudi Arabia and the United Arab Emirates which have relatively limited development demands, but less so for countries like Iran or Nigeria. It has still to be seen whether policies pursued in the face of excess demand can be maintained through a period of relative glut. From the point of view of the oil-importing countries, such a policy, although in some respects disadvantageous, does have the beneficial effect of maintaining the (price) pressure for conservation and thus hastening the time when they are freed from dependence upon oil. The newly industrial&&g
world
Within this environment of slower growth and tight energy markets, the countries likely to grow fastest are the so-called newIy industrialising countries. Definitions of precisely which countries come within this category vary, but it is
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generally agreed that the most important of them are the South-east Asian countries of South Korea, Taiwan, Hong Kong, and Singapore; the Latin American countries of Mexico and Brazil; and the Southern European countries of Greece, Spain, Portugal, and Yugoslavia. They are the first of a new middle class of countries between the developed and the underdeveloped world. They are likely to be joined during the next decade by a number of other countries-Malaysia, the Philippines, Indonesia, Venezuela, Colombia, and Chile-while countries such as India, Egypt, Argentina, and China seem set to shift gear from growth based on self-sufficiency to growth based upon the development of a sizeable export sector And in the following decades, there will be yet more countries pushing their way into industrialisation. A substantial shift in the product bases of these countries is also likely. Although much emphasis will continue to be in the traditional labour-intensive areas-textiles, clothing, footwear, wooden goods, toys, plastic goods, and cheap radios and cameras-they are likely to move increasingly into product areas where there is a mature, standardised technology-cars and motor components, steel, chemicals and man-made fibres, mechanical and electrical engineering. Currently these Third world countries (excluding China} contribute only 10% of total world industrial output; by 1995 this will probably have doubled to nearly 20%. Much of what is produced will be exported (by no means exclusively to developed-country markets since Third world markets are becoming increasingly important) and their export earnings will be used to purchase the oil, raw materials, and capital goods necessary for continuing industrialisation. Their great advantage over the older industrialised economies has been, and will remain, plentiful supplies of unskilled and semiskilled Iabour. Often the first stimulus to growth has been the offshore manufacturing and assembly facilities set up by OECD multinationals, either as direct subsidiaries or in association with local businessmen. Such ventures frequently attracted others and spawned a host of peripheral activities, creating external economies of scale and generating indigenous sources of capital. The skills learned from the multinationals-production, management, and marketing geared to the needs of the Western industrialised nations and Japan-rapidly spill over elsewhere. The skill profiles of the newly industrial&sing countries rapidly shift upwards once industrialisation is established, and their governments emphasise training and apprenticeship. These factors make such countries easy recipients of new, higher-skill technologies; while rapid growth and increasing local capital resources combine to create a spirit of enterprise and a production flexibility seldom found in the rheumatic world of mature capitalism. Is there any limit to this growth ? The example of Japan suggests that industrialisation rapidly erodes the advantage of cheap labour. Indeed the Japanese were among the first to establish offshore assembly plants in Southeast Asia and are now in the process of restructuring their home-based textile, steel, and s~pbuilding industries on the assumption that much of the more standardised production will come from the newly industrialising countries. Already, countries like South Korea and Hong Kong are being forced by higher real wage levels to move up the product ladder towards higher-valueadded goods. Selective protection in industrialised markets often accelerates this process: eg the GATT multifibres arrangement, with its quotas by number
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Technology and Growth
of garments has stimulated Hong Kong manufacturers to shift to higher-value goods in each category; similarly, quota restrictions on plastic and canvas footwear caused South Korea to shift up market to leather shoes. Protectionism It is this sheer flexibility which makes these countries seem such a threat to Western economies. In turn, this feeling of being threatened promotes the one force that may in the long run do most to limit Third world industrialisation-protectionism. A widespread move towards protection by the developed world would immediately damp the growth of export-oriented economics. As the Brandt report makes clear,12 such a move would be largely self-defeating-the developed economies need Third world markets just as much as Third world countries need our markets. In fact, the newly industrialising countries spend all that they earn from their exports. l3 Imports are a necessary adjunct to industrialisation and they grow as fast, sometimes faster than, exports. For the next two decades the newly industrialising countries could be a continuing and important source of dynamism in the world economy. Yet the pressures for protection will be considerable. Though UK imports from newly industrialising countries constitute a relatively small proportion of total imports of manufactures (currently lo%), they constitute a very high proportion in some sectors (eg 60% for knitwear, a proportion already constrained by the multifibre arrangement), and there have been cases of markets being swamped, seemingly overnight, often as a result of the sudden imposition of controls in other markets. South Korean footwear, for example, flooded into the UK market when controls were imposed on the US market. The problem for the industries concerned is made the worse by the fact that they are often labour-intensive industries located in regions of high unemployment and contracting employment opportunities. It seems likely that these pressures will bear fruit, of some sort, within the EEC. During the next ten years several forces are likely to interact to produce a protectionist direction. l
l
l
l
The nine countries of the current EEC have their full share of traditional and mature industries which will feel the impact of competition from the newly industrialising countries and will call for protection. At the same time, the EEC will take in three countries (Greece, Spain, and Portugal) which are currently classed as newly industrialising countries. In spite of transition arrangements, this will undoubtedly strain the adjustment capacity of existing members, at least in two traditional industries-textiles and footwear. Once they are members, these three countries will probably be as vociferous as existing members in calling for protection against their fellow newly industrialising countries. Enlargement and its concomitants are likely to absorb most of the policymaking capacity in Brussels, leaving little time or patience for major industrial policy initiatives-even though some initiatives on adjustment and restructuring make sense at a Community level. FUTURES
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Add to these factors the uncertainty and, to a degree, the insecurity created by enlargement. The Community is likely to retreat towards reinforcing its basic institutions-the customs union and common agricultural market-through a strengthening of its internal market rules (eg in relation to competition policy and subsidies). A major initiative towards a community-wide industrial policy seems unlikely, and the strengthening of internal market rules will further constrain national initiatives on industrial policy. Greater protectionism combined with stronger internal market rules take the EEC closer to the type of environment enjoyed by its two main rivals, the USA and Japan-more competitive within its own boundaries but more protected (than at present) vis-ci-vis the rest of the world. Whether it would also trigger further worldwide moves towards protection is a moot point. Shifting comparative
advantage
Protectionism is one, rather negative, response from the developed world to the challenges of the newly industrialising countries. The other response is to shift up market to higher-technology goods. Recent developments in the theory and testing of comparative advantage indicate that skill, innovation, and scale provide the main competitive strengths of the developed countries, while specialisation in relatively low-skill, standardised (but not necessarily labourintensive) processes increasingly provides the competitive strength of the less developed world. l4 However, industrialisation is bringing with it increased emphasis upon skills, and many of the ‘older’ newly industrialising countries are rapidly over-coming providing a constant stream of new products the ‘skill barrier’. Innovation, and new processes, thus provides the main source of comparative advantage to developed countries. Scale economy arguments run in both directions-they can be the result as well as the cause of specialisation and can accrue to any firm, whether located in a developed or less developed economy where minimum costs of production are achieved only when output is large relative to market size. Recent studies also indicate that, in their trade with each other, the developed countries are tending to an increasing extent to specialise within industries.14 For example, in textile machinery, Switzerland is the acknowledged leader in the production of weaving machinery while Germany has the lead in dyeing and finishing machinery. Their leads are maintained not by price, but by technical refinement, output quality, and reliability, At the simpler end of the market, developed-country producers are meeting increasing competition from India and South Korea. The simple model of comparative advantage, in which developed countries concentrate upon capital- and technology-intensive products and the less developed world concentrates on labour-intensive products and raw materials, is rapidly becoming obsolete. UK trade with the ‘older’ newly industrialising countries will probably move during the next two decades towards the pattern that has evolved with our developed-economy trading partners-increasing specialisation, based upon a combination of scale and product and process innovation.
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This underlines the crucial, and growing, importance of innovation if competitiveness in world markets is to be maintained. Such innovation depends on the acceptance, and application, of new technologies. The new technologies The dominant new technologies to the year 2000 are likely to be in three main areas-energy, microelectronics-telecommunications, and biotechnologies. The relative shortage of oil and its importance in world growth will make energy an area of extremely active development. Considerable gains are likely in the energy efficiency of production methods, but this will not result in radical alterations in production techniques. In the long run, biotechnologies may well lead to major changes in production methods: during this century, however, developments are likely to be concentrated in four sectors-agriculture, energy, chemicals, and pharmaceuticals-with most industrial processes unaffected. By contrast, developments in microelectronics and telecommunications will have far reaching effects during the next two decades, on both industrial processes and our established way of life. The ‘information revolution’ will bring ever cheaper and easier methods of data storage, retrieval, and analysis. Automation will enter the office-eg word processors, desk-top visual display units, facsimile transmission (eroding, incidentally, the function of head office and enhancing that of the branch office). Through the telephone-linked viewdata systems, the individual at home will be linked not only with other individuals, but with major information systems, eventually replacing many functions currently performed by the printed word. The other major change will be automation on the factory floor, where microelectronics will have its greatest impact on production processes. Robotics will carry mass production a stage further, while automated warehousing and stock control will bring highly sophisticated feedback control to the organisation of production. The most important impact, however, will not be upon already highly automated production but upon batch production. Computer-aided design combined with computer-aided manufacture brings a flexibility and quality control hitherto unknown to batch production. Rejigging tools becomes a matter of seconds rather than hours, and will often be achieved automatically according to the preprogrammed product mix required. In addition, the product range will alter. Customers will look for products which incorporate microelectronic components, not only because they are more sophisticated and flexible, but because they are more reliable, accurate, and sometimes cheaper, than the mechanical components they replace. We are already seeing this in areas like instrumentation-microelectronics is not only revolutionising production techniques but also the product. TO lag behind in either area spells competitive disaster. Productivity
growth
may lead to an investment
boom
What effect will these new technologies have on productivity? Their application to production processes almost invariably raises labour productivity. In many
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cases they lower the capital-output ratio as well as the labour-output ratio, which means that capital productivity will be increasing alongside labour productivity. And product quality and reliability also increase. In all senses, therefore, microelectronics and associated technologies will increase productivity. The effects on perceived productivity will depend on the rate of diffusion -the faster new technologies are adopted, the faster they will make their impact. Conventional growth theory suggests that the energy-inflation interplay discussed earlier would, by constraining world growth rates, dampen expectations of profits and market growth and result in less investment. Given that new techniques are embodied in new investment, such a slowing down in growth rates might be expected to slow down the rate of implementation of new techniques. Against this background, the microelectronics ‘revolution’ might be expected to have very little impact on productivity growth-indeed slow implementation is consistent with the slowing down of productivity growth generally predicted for the decade. An alternative, Schumpeterian, view can be taken. New technologies are not a passive agent in the macroeconomic world, but in themselves provide a stimulus to economic activity. Slower world growth and the increasing intensity of competition amongst industrialised countries, far from slowing technical progress, may promote it, as firms seek cheaper methods of production.r5 With US, Japanese, and (to a lesser extent) West German firms vying for technological leadership, the pace of technical change has already accelerated. The emphasis is now on application and diffusion. Those countries and firms that do invest will grab markets (because their products are superior and their costs lower) and start (or intensify) a virtuous circle of growing productivity and growing output. Those who fail to seize the opportunity will suffer a cumulative loss of competitiveness and start (or intensify) a period of relative decline. l6 Recognition of the importance of innovation to competitiveness has led many governments to introduce measures to speed the take up of microelectronic techno1ogies.l’ With the emphasis on diffusion rather than promoting national champions, these policies are not self-cancelling. From a world point of view they are speeding up the introduction of new products and new processes and increasing the rate of growth of productivity. In the short term there will be greater cross-sectional divergence of investment and productivity growth. In the longer term, competition should close this gap. Could we be on the verge of a Schumpeterian investment boom? In line with conventional growth theory and current trends many commentators are predicting a slowing down of productivity growth during the next decade.ls There will be some factors which will certainly tend in this direction. Major investments in energy projects-eg nuclear power stations, tidal barrages-are capital intensive, raise the capital-output ratio, and tend to lower productivity. The information revolution will increase the capital intensity of the service sector (which until now has had a relatively low capitallabour ratio) and may similarly lower overall productivity.19 Factors which were earlier seen to be depressing productivity-the pressure for more widespread environmental controls (where it could be argued that we
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are taking increased productivity in the form of increased quality of life) and the increasing number of untrained and unskilled young people and married women in the labour force-are still important features of most industrialised economies. But the substantial improvements to productivity stemming from developments in microelectronics and associated technologies combined with the degree of international competition surrounding these developments should not be dismissed as negligible. It seems quite possible that, at least in manufacturing industry, they will promote faster overall productivity growth. The Schumpeterian view is the more optimistic one. Should it prove correct we would expect to find that the current recession bites less deeply,20 and that longer term rates of growth are faster than current expectations, particularly if (as is the case) the new technology has an energy-saving bias. A faster rate of growth of productivity, however, poses problems in the labour market. If overall growth rates are constrained by the availability of energy, faster productivity growth means higher unemployment. This in turn increases labourmarket resistance to new techniques of production, and slows down the adjustment process. Even if faster, such a growth path will not be an easy one. The UK economy:
challenge and response
The world economic environment which has been outlined above makes it clear that the UK now faces a future of considerable uncertainty. How tightly will OPEC countries succeed in reining production and with what impact on world growth rates ? How far will protectionism spread in the developed economies and stifle the growth of industrialisation in the Third world ? How far will predictions of slow growth be confounded by dynamism injected into the developed economies by the exploitation of new technologies ? Or how far will such exploitation be bridled by the problems of stagflation? And would a major programme of rearmament make predictions irrelevant? Amidst these uncertainties it is clear that the UK is going to have to face up to two major challenges within the next decade-new technologies and growing industrialisation in the Third world. The answer to both challenges is the same. A shift to high-technology industries not only helps to maintain competitiveness vis-ri-vis developed-economy competitors, but simultaneously decreases the vulnerability of our industries towards the newly industrialising world. The management of technological change, both in innovation and in applications to products and processes, has become central to the UK’s economic well-being. The biggest question of all is whether the UK economy can respond appropriately-whether it can meet change with change. The ability of an economy to respond flexibly to external market forces is often referred to as its ability to adjust. Part of the normal process of a dynamic economy is the constant movement of resources from slow-growing or declining sectors to faster-growing sectors. Market signals aid and abet this movement: scarcity is signalled by relatively high prices (eg the salaries of systems engineers in California) and surplus by relatively low prices (eg teacher’s salaries at times of falling rolls). But the market is imperfect: many factors obscure the signals or inhibit the
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movement of resources. Such market rigidities may stem from innate imperfections in the economic system (eg divergences between social costs and benefits which mean that the market signals are misleading) or from man-made imperfections (eg planning controls, public-housing tenure systems). A period of slow growth tends to strengthen rigidities, since it adds to frustrations and uncertainties and makes people more conservative about facing the future. A distinction is often made between negative adjustment policies, whose purpose is job creation or job retention (and which might therefore appear to be the antithesis of adjustment), and positive adjustment policies, which aim to help the movement of resources. There is, however, a link between the two and a trade-off between negative and positive, for example, in regional policies -superficially, such policies seem to inhibit the movement of resources, but they nevertheless can play a part in limiting frustrations (from unemployment) and help, in this sense, to encourage flexibility. Doubts about the UK’s ability to meet the challenge of new technology centre on its history of relative decline, and particularly its poor productivity performance compared to that of its European partners in the last three decades. The failure to move, as the other European countries have done, into the virtuous circle of growth leaves the UK with a legacy of frustrated ambition and uncertainty which adds to the rigidities of the economy at a time when the ‘demand for adjustment’ from the external economic environment has, if anything, increased. The UK has two advantages In another sense, however, this is a most propitious time for the UK to be meeting the technology challenge. There are two important factors operating in the UK’s favour. First, the emphasis in microelectronics has shifted from mainstream developments in circuitry and memories towards developing the manifest uses and applications of this technology. A lack of expertise or production facilities in the mainstream technology matters little-indeed there may even be advantages in bypassing intermediate developments. Provided the UK is now prepared to import technology and to devote resources to diffusion and application, it ought to stand as good a chance of success as any of its competitors. A second factor which presently confers economic strength is North Sea oil. It is sometimes suggested that the availability of North Sea oil insulates the UK economy from the effects of any energy crisis. This is not the case. The price of North Sea oil is determined by world energy prices and in no sense is UK industry shielded from the effects of a worldwide shortfall in oil. However, an increase in the price of oil benefits the balance of payments and (from now onwards) the Exchequer. It therefore insulates the UK economy from the balance-of-payments effect of an oil crisis (and the deflationary macroeconomic consequences) as well as providing a windfall gain to public funds. These advantages are shared by none of the UK’s advanced-economy competitors. Five adjustment
hurdles
But North Sea oil is something of a double-edged advantage. It has also brought the ‘Dutch disease’ to the UK. The balance-of-payments gain has probably
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already been largely discounted in the boosting of the real exchange rate. Short-run market pressures are therefore pushing the economy to reduce indigenous industrial production-to adjust to being an oil-rich economy. This would not matter if North Sea oil were more than a transitory benefit. But with reserves, at current rates of depletion, unlikely to last much beyond the turn of the century, the UK may soon face some nasty withdrawal symptoms. In addition to the Dutch disease, four other problem areas on the supply side seem likely to inhibit the speed with which the UK economy can adjust to new technologies. Investment. Diffusion of new technologies depends upon “a new cycle of reinvestment and re-equipment”. 21 When real profitability is very low and investment is required in ‘high-risk’ areas, will either external or internal funds be made available? R and B and innovation. A similar doubt hangs over this area. Product and process development spending are essential if there is to be a genuine diffusion of technological knowledge. Yet, with profitability low, where will the funds come from? Skilled manpower. Has the UK invested (or indeed is it investing) sufficiently in human capital to cope with the demands of new technology? Japan’s success in this area is no surprise : 20 o/0 of Japanese school leavers achieve the equivalent of GCE A-level mathematics. Fewer than 5% of UK school leavers gain this qualification. Attitudes. This is probably the most crucial stumbling block to the take up of new technologies. The fear of unemployment, exacerbated by experience of slow growth, leads frequently to shop-floor opposition to new machinery and new production methods. At best this will delay the introduction of new technology and at worst prevent it. Yet in the long run, such technologies present the opportunity of a higher standard of living and shorter working hours-the achievement of which is very much a collective benefit. The difficulty is that as individuals, faced by the prospect of redundancy and unemployment, it is wholly rational that we (and the unions that represent us) should oppose such developments. The problem is that of reconciling the collective with the individual benefit. These problems are not unique to the UK, although they are exacerbated by the fact that our economy lacks the ebullience born of a period of sustained and relatively fast growth such as that experienced by Japan and many of our European competitors. They represent the manifestation of a common problem -increasing uncertainty is inhibiting the taking of risks and compounding the rigidities which already exist in the economic system. Investment, R and D and innovation, and skilled manpower exemplify a common externality problem 22-the divergence of the private from the social rate of time preference. The widely acknowledged existence of this gap can be used to justify positive adjustment policies in the form of selective subsidies to investment, R and D, and product and process innovation. Indeed, many of Britain’s European competitors have countered the increasing uncertainty of the last decade by a substantial extension of such measures with particular emphasis on the diffusion of new technologies and product and process innovation.17 This creates yet another problem for the UK, a problem which econo-
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mists would classify as a ‘second-best’ problem. Even if we do not ourselves think subsidy is justified, we lose out on all scores if our competitors are subsidising such activities and we are not. The question of attitudes raises a somewhat different issue of externality, akin to the problem that arises in the supply of public goods, where there is established divergence between rational maximising behaviour on the part of the individual and that of the collective. It provides the justification for state involvement in the issues of redundancy and retraining. Again, the increased threat of technological unemployment in the last few years has seen increased provision in these areas in many European countries, and, to a degree, the acceptance through job creation programmes and the deliberate expansion of employment in (public) social and environment services of a role for the state in absorbing transitional unemployment. 23
Uncertainty
remains
but interdependence
increases
When NED0 first considered the long-term issues discussed in this article, it was hoped that the work would help to remove some of the “environmental uncertainties” which seemed to be paralysing investment decisions, and would thereby stimulate investment and growth. 24 What has emerged, however, has if anything emphasised the role of uncertainty and its inhibiting influence on decision taking. For the UK, the most urgent and important task is to find some method of coping with uncertainty: above all some way of preventing it from exaggerating and exacerbating the rigidities which already characterise the economy. If uncertainty is one dominant characteristic of the environment the UK economy faces, the other is interdependence. The Brandt report emphasised the increasing interdependence between industrialised and less developed countries, but for each country the degree of interdependence is also increasing. Whatever our predilections as a nation, we cannot ignore what is going on around us: to try to swim against the tide of technological change spells disaster. Nor is it to our advantage to stand alone against other trends, be it protectionism or intervention (although it is, of course , always open to us to seek multilateral action to limit both developments). Whether we like it or no, the world in which we operate is very much a second-best one. The policy challenge for the UK is to find some means of reconciling these two worlds. On the one hand our increasing interdependence with the world economy brings greater demands for change and adaptation. On the other, increasing uncertainty adds to doubts and fears about the future and inhibits rather than encourages change. What are needed are policies which encourage and promote adaptation but which at the same time are seen to help to minimise the costs that such adaptation imposes on society.
Notes
and references
1. The National Economic Development Office (NEDO) provides the professional staff for the National Economic Development Council (NEDC or Neddy), the Economic Development Committees (EDCs or Little Neddies) and the Sector Working Parties (SWPs). Neddy
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2.
3.
4.
5. 6.
7.
Technology and Growth
is the national forum for economic consultation between government, management, and unions. The committees bring together leading representatives of management, unions, and government who use this neutral meeting place to study the efficiency and prospects of individual industries. See M. Sharp, “The NED0 1990 project”, Futures, October 1979, 11(5), pages 454-455; also the report on the Futures symposium on futures research in government, November 1979, Futures, April 1980, 12(2), page 163. The publications referred to in this paragraph are listed by sponsoring organisation. Cabinet Office, Advisory Council for Applied Research and Development (ACARD), The Afiplications of Semiconductor Technology, September 1979; Industrial Innovation, December 1978; Joining and Assembly: The Impact of Robots and Automation, October 1979; Technological Change: Threats and Opportunities for the United Kingdom, December 1979; Computer Aided Design and Manufacture, January 1980; R and D for Public Purchasing, February 1980; Biotechnology, March 1980. All are published by HMSO, London. Confederation of British Industry, International Trade Policy and Industrial Change, CBI discussion document, November, 1979; Jobs-Facing the Future, CBI discussion document, January 1980. EEC, Project 1990 (internal discussion documents not generally available). Engineering our Future: Report of the Committee of Enquiry into the Engineering Profession, chairman Sir M. Finniston (London, HMSO, 1980). NEDO, Computer Manpower in the 1980s (London, HMSO, 1980). OECD, Facing the Future: hfastering the Probable and Managing the Unpredictable, the INTERFUTURES report (Paris, OECD, 1979). Jonathan Sleigh, Brian Boatwright, Peter Irwin, and Roger Stanyon, T/le ManPower Implications of Microelectronic Technology, the Sleigh report (London, HMSO, 1979). TUC, Employment and Technology, report by the TUC general council to the 1979 congress (London, TUC Publications, 1979). Precise forecasts of the degree of dependence vary, but ‘typical is the Stanford Research Institute forecast of oil constituting 35% of world energy supplies in the year 2000 (compared with 460/, today). Their model is contained in “Fuel and energy price forecasts: quantities and long term marginal prices”, EA 433, Electric Power Research Institute, Palo Alto, 1977. There is an additional unknown here-the extent to which the Soviet Union is likely to become a net importer of oil. Mexico looks like yielding a richer harvest. Production there is currently 2.25 million barrels per day and could rise to 4 million barrels a day and be maintained over a much longer period than North Sea production. But it should also be remembered that many ‘older’ oil-producing areas, eg in the USA, are approaching the end of their lives. Commission of the European Communities, Crucial Choices for the Energy Transition, EUR 6610(EN) (Brussels, EEC, 1980).
8. European cars, having faced historically much higher fuel costs, tend to be more efficient than American counterparts, if only because they have been smaller and lighter. But they are driven very much faster. Enforced motorway speed limits would bring energy savings of the same order-eg a car being driven at 85 miles per hour is likely to use 50% more fuel than one being driven at 65 miles per hour. 9. Set, “Heat
plus power switch”, Financial Times, 6 May
1980, page 6.
10. It is, of course, easy to deflate world energy demand by deflating world growth estimates. The main reason why some of the international oil majors are now predicting “no energy gap” is because they have revised their estimates of world growth rates radically downwards. But growth and energy are interdependent-it is not clear which is cause and which is effect. 11. Robert Mabro, fellow of St Anthony’s seminar, London, 20 February 1979.
College,
Oxford,
12. Independent Commission on International Development for Survival, the Brandt report (New York, UN, 1980).
at a Department
of Energy
Issues, North-South : a Programme
13. As far as the UK is concerned the newly industrialising countries spend more than their earnings : loo,/, of UK imports of manufactures come from such countries but they take
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Technology
14.
15. 16.
17. 18. 19.
20.
21. 22.
23.
24.
and Growth
385
countries and the 30% of our exports of manufactures. See, “The newly industrialising adjustment problem”, Government Economic Service working paper 18, HM Treasury, London, 1978. “The expansion of manufactured exports in developing J. B. Donges and J. Reidel, countries : an empirical assessment of supply and demand issues”, Weltwirtschaftliches Archiv, 1977; Kiel Institute, “Analysis of the determinants and consequences of a selective compared to an unselective research and development strategy”, mimeo, 1978; G. White, “UK international competitiveness and the role of R & D”, mimeo, Department of Industry, comparative advantage in UK manufactured products”, 1978; C. Bowe, “Revealed mimeo, Department of Industry/Department of Trade, 1977; G. K. Helleiner, “Industry characteristics and competitiveness of manufactures in less developed countries”, Weltwirtschaftliches Archiv, 1976. S. Hirsch, Rich Man’s, Poor Man’s and Everyman’s Goods: Asfiects of Zndustrialisation (Tubingen, J. C. B. Mohr, 1977). G. Fels, “The choice of industry mix in the division of labour between developed and underdeveloped countries”, Weltwirtschaftliches Archiv, 1972. For a fuller development of this theme see D. K. Stout, “The impact of technology on economic growth in the 198Os”, Daedalus, winter 1980. For a discussion of the growing importance of technical innovation to international competitiveness see Keith Pavitt, ed, Technical Innovation and British Economic Performance (London, Macmillan for the Science Policy Research Unit, 1980), chapters 2 and 3. See paper prepared by NED0 for June 1980 NEDC on European adjustment policies (available from NED0 press office). For example, Prognos Euro-Report 1979, published by Prognos AG, Basle, Switzerland. Experiments with word processors indicate substantial improvements in labour productivity. But the greatest danger with the information revolution lies in the suffocation of decision taking by the availability of too much information. For example, has photocopying increased productivity through the cheap and speedy dissemination of information, or has it caused unnecessary and time consuming proliferation of reading matter and encouraged the formation of large committees and advisory bodies? There is evidence in the USA, Japan, and Europe of a surprising buoyancy in capital goods industries, particularly machine tools and electronic hardware. See “American industry rediscovers innovation”, The Economist, 5 July 1980, page 79. Chris Freeman, director of SPRU, in his Bernal memorial lecture, “Government policies Science Policy Research Unit, Sussex University, July 1978. for industrial innovation”, Externalities is a term used when there are divergences between social and private costs and benefits. For example, driving to work in rush hours imposes costs which go beyond (ie are external to) the individual who initiates the action and affects a much wider group within society. Their existence stems from the fact that we do not exist as independent entities in society but that we are (perhaps increasingly) interdependent on one another. This job creation role, however, is also closely tied up with the birth-rate bulge of the early 1960s and the very large number of young people coming on to the labour market during the period 1977-1982. The fear that this group will, if they experience long-term unemployment at the beginning of their working life, remain an alienated and disaffected group within society has, as in the UK, stimulated many youth employment programmes. The term “environmental uncertainties” derives from its use by J. E. Meade, The Theory of Indicative Planning (Manchester, Manchester University Press, 1970).
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