Research Topics

A New Framework for Envisioning and Evaluating a Mission-oriented Public Sector

Today, countries around the world are seeking “smart” innovation-led growth, and hoping that this growth is also more “inclusive” and “sustainable” than in the past. This paper argues that such a feat requires rethinking the role of government and public policy in the economy—not only funding the “rate” of innovation, but also envisioning its “direction.” It requires a new justification of government intervention that goes beyond the usual one of “fixing market failures.” It also requires the shaping and creating of markets. And to render such growth more “inclusive,” it requires attention to the ensuing distribution of “risks and rewards.”

To approach the innovation challenge of the future, we must redirect the discussion, away from the worry about “picking winners” and “crowding out” toward four key questions for the future:

1. Directions: how can public policy be understood in terms of setting the direction and route of change; that is, shaping and creating markets rather than just fixing them? What can be learned from the ways in which directions were set in the past, and how can we stimulate more democratic debate about such directionality?
2. Evaluation: how can an alternative conceptualization of the role of the public sector in the economy (alternative to MFT) translate into new indicators and assessment tools for evaluating public policies beyond the microeconomic cost/benefit analysis? How does this alter the crowding in/out narrative?
3. Organizational change: how should public organizations be structured so they accommodate the risk-taking and explorative capacity, and the capabilities needed to envision and manage contemporary challenges?
4. Risks and Rewards: how can this alternative conceptualization be implemented so that it frames investment tools so that they not only socialize risk, but also have the potential to socialize the rewards that enable “smart growth” to also be “inclusive growth”?

What’s New for Industrial Policy in the EU?

In this paper, we analyze and try to measure productive and technological asymmetries between central and peripheral economies in the eurozone. We assess the effects such asymmetries would likely bring about on center–periphery divergence/convergence patterns, and derive some implications as to the design of future industrial policy at the European level. We stress that future European Union (EU) industrial policy should be regionally focused and specifically target structural changes in the periphery as the main way to favor center–periphery convergence and avoid the reappearance of past external imbalances. To this end, a wide battery of industrial policy tools should be considered, ranging from subsidies and fiscal incentives to innovative firms, public financing of R & D efforts, sectoral policies, and public procurements for home-produced goods. All in all, future EU industrial policy should be much more interventionist than it currently is, and dispose of much larger funds with respect to the present setting in order to effectively pursue both short-run stabilization and long-run development goals.

What Does It Say About the Opportunities for Growth and Structural Transformation of Sub-Saharan Africa?

In this paper we look at the economic development of Sub-Saharan Africa (SSA) in the context of structural transformation. We use Hidalgo et al.’s (2007) concept of product space to show the evolution of the region’s productive structure, and discuss the opportunities for growth and diversification. The majority of SSA countries are trapped in the export of unsophisticated, highly standard products that are poorly connected in the product space; this makes the process of structural transformation of the region particularly difficult. The products that are nearby to those they already export have the same characteristics. Therefore, shifting to these products will do little to improve SSA’s growth prospects. To jump-start and sustain growth, governments must implement policies and provide public inputs that will encourage the private sector to invest in new and more sophisticated activities.

An extensive literature argues that India’s manufacturing sector has underperformed, and that the country has failed to industrialize; in particular, it has failed to take advantage of its labor-abundant comparative advantage. India’s manufacturing sector is smaller as a share of GDP than that of East Asian countries, even after controlling for GDP per capita. Hence, its contribution to overall GDP growth is modest. Without greater participation of the secondary sector, the argument goes, the country will not be able to develop and become a modern economy. Standard arguments blame the “license-permit raj,” the small-scale industrial policy, and the supposedly stringent laws. All these were part of the industrial policy regime instituted after independence, which favored the heavy-machinery subsector. We show that this policy bias negatively affected the development of India’s labor-intensive sector, as the country should export with comparative advantage a larger number of these products, given its income per capita. However, India’s manufacturing sector is relatively well diversified and sophisticated, given also the country’s income per capita. In particular, India’s inroads into machinery, metals, chemicals, and other capital- and skilled labor–intensive products has allowed the country to accumulate a large number of capabilities. This positions India well to expand its exports of other sophisticated products.

To save America—indeed, the global economy as a whole—the private/public sector balance has to shift, and the neoliberal economic model on which the country has been based for the past 25 years has to be modified. In this new working paper, Marshall Auerback details why the role of the state needs to be reemphasized.

The abandonment of a mixed economy and corresponding diminution of the role of government was hailed as the “rebirth of individualism,” yet it caused rising inequality and the decline of median wages, and led to the widespread neglect of public goods vital to its citizens’ welfare. Meanwhile, the country ran through the public investment it had made from the 1930s to the 1970s, with few serious challenges from policymakers or mainstream economists.

The neoliberal model was also aggressively exported: the “optimal” growth strategy for all emerging economies was supposedly one that emphasized limited government, corporate governance, rule of law, and higher levels of state-owned and -influenced enterprise—in spite of significant historical evidence to the contrary. Not even the economic wreckage in Mexico, Argentina, Thailand, Indonesia, and Russia seemed sufficient to challenge, let alone overturn, the prevailing paradigm.

That is, until now: in reaction to the financial crisis, many governments—led by the United States—are enacting massive economic stimulus packages and taking a central role in promoting economic growth strategies. This reemergence of state-driven capitalism constitutes a “back to the future” investment paradigm, one that is consistent with a long and successful pattern of economic development. But once we get beyond the pothole patching and school repairing, what industries can be pushed forward using public seed capital or through Sematech-like consortiums? What must be brought to the fore is the need for a new growth path for the United States, one in which the state has a significant role.  There are already indications that the private sector is beginning to adapt to this new, collaborative paradigm.