Restructuring – Productivity – Sustainable Development Of The Economy

Restructuring – Productivity – Sustainable Development of Economy (Theoretical and Application Aspects) Prof . Assen Kovatshev, D.Sc.

The article presents a systemic-structural approach adopted to elaborate a national strategy for development by restructuring the economy. The approach is founded theory of productive systems with reverse compensatory ties and ergodic process of development. The input-output table for the last year and original iterative procedure (a modification of method RAS) are used for inter-branch balancing of the initial exogenally prognostic volumes of realized and produced production for the next years. The iterative procedure is an alternative of simple method of linear programming for optimization solutions. It is applicable elaborate a strategy for the development of business organizations. Keywords: JEL:

The new economic realities and the big challenges they are related to has necessitated that a new meaning be given to the approaches, methods, models, managing policies and behavior applied in the most important part of society – the economy. Bulgaria’s current problems and the strategies to solve them are focused on the country’s successful integration in the EU Single Internal Market. The key problems are: a rapid increase of the competitive power of economy achieved by accelerated development of its productive potential to catch up with its high effective level of the member-countries of this union.

The definition of the contents and the aims of a modern paradigm referred to as ‘sustained development’ provides the fundamental values for successful strategies. Sustained development is a process of change, where resource exploitation, the channeling of investment, and bringing technologies and industrial changes in harmony so as to increase the current and the future potential providing human needs and strivings [1, p.4]. The objectives and goals of this development include: ‘Activating growth and changing its quality; meeting the essential needs on new job openings, new energy sources, water and public health services; supporting a stable number of population; widening and preserving resources; redirecting technology and risk management, and unifying environmental and economic considerations in decision-making’. [1, p.47, cursive AK]

1 The components uniting these definitions are: progress (in the broadest sense of this definition), and expedient knowledge-based institutional, management and behavioral changes. This is the essence of the EU Lisbon Declaration of 2001 – economic development based on knowledge.

1. STRATEGIES – MAIN MANAGEMENT INSTRUMENTS FOR SUCCESSFUL ECONOMIC DEVELOPMENT

From the point of view of management, the above-mentioned strategic goals may be achieved by the implementation of an adequate policy of strategic development and more particularly – by implementing medium-term and long-term strategies for sustainable development and growing integration in the European Union. In these strategies, the main special-purpose requirements boil down to the triad: highly effective restructuring (on the level of production and institutions) – rising productive potential – sustainable development of the economic system. Within such a systemic relationship, the types of effectiveness complement each other: effectiveness of allocation (allocational) (a consequence of efficient resource allocation), technical and technological (a consequence of economic use of these resources) and X-organizational (a consequence of improved integration and coordination). With regard to their design, these strategies and the goals outlined must be up to the standards of current processes of market integration, and the harmonization of individual, corporate and public interests. Within the framework of the dominant processes of market integration, the factor limiting development strategies is viewed from a different perspective – namely this is the provision of investments. The latter is provided for via redirecting capital according to market-orientating information of fluctuating indices on stock exchanges. ‘Not individual households, but business organizations implement the most important investment projects; these may be influenced by factors such as the market interest rate. One of the factors is the expected investment return – a result which is determined by the organizational skills of firms investing in technology development and productivity growth, rather than by the configuration of market prices, which firms take for granted’ [2, p.65]. In this respect, a typical example has recently been ‘the boom’ in construction and accelerated dynamics of financial indices on stock exchange pending the country’s accession to the EU Single Internal Market.

2 A supplemental form of the investment provision of strategies is the import of resources: raw, materials, energy, intermediate products, etc. This form becomes more competitive by increase of market integration and competition. Resource import becomes also more competitive within the framework of strategically expanding inter-company unions (alliances). Within such a context the strategies for an accelerated and highly efficient development of our country will act this market-oriented information for the development of the production potential and competitiveness of the businesses and their alliances. Strategies’ investment provision through the market and competition-based channeling of investment, however, should be supplemented by creating and maintaining a favorable business environment on the part of government, and on the one hand; on the other - by development of science, production infrastructure, education, which are adequate for performance of these strategies (and most of all – development of the national qualification capital – knowledge, expertise, professional skills), public health services, clean environment, etc, and especially – development of favorable institutional and governance environment, which will provide for market and competition-based self-regulation in the economic development. In this respect, an expedient investment of the large-scale pre-accession EU funds is central; it should be directed to activating and multiplying the differential national advantages. 2. THE SYSTEMIC-STRUCTURAL APPROACH AS A THEORETICAL- METHODOLOGICAL BASIS OF THE STRATEGIC MANAGEMENT OF ECONOMY Experience shows that knowledge as a main precondition for each purposeful activity is achieved in two ways mainly: a) By applying the analytical and descriptive approach This has an empirical and intuitive character and is largely subjective in nature. This mostly applies for the more elementary levels of the phenomena studied. An example of such research is the questionnaires frequently used among business representatives, targeted identifying the factors determining business behavior. The above-said mostly applies for the underdeveloped and poorly structured market systems. The qualitative methods applied with this approach are mainly of an inertia-extrapolation type and that is why the prognostic values obtained are often not reliable enough. Experimental sciences as physics, biology, chemistry, economy, etc. include analytical- descriptive methods and models in their research Tools; however these are complemented by

3 systemic-structural ones in more mature stages of their development. A synthesis is achieved, a mutual interdependence and integration of the results obtained by applying analytical and descriptive methods and models, presented in the form of wider multi-aspect theories. This is achieved within the framework of a system-structural approach for knowledge acquisition, including the systems with their structural elements, relationships and interactions – in the process of their development. Hence the systems’ self-regulating opportunities are made use of, and their self-organization respectively, which is achieved in the processes of their transition from one to another state of equilibrium. In this respect, it should be said that the probabilistic system theory is a useful theoretical construction located between chaos and organization. However, in achieving specific types of frequency distribution, the system is reduced from a probabilistic to a determined one in a sense. This is achieved by aggregating the elements, for instance those of production systems: products – types of production – sub- branches – branches. A comparison between analytical and descriptive approach and systemic-structural one is made by V. Leontiev [3, p.27] in the following way: ‘Within the framework of a clearly formulated theoretical scheme – the changes in economy may be explained as structural changes or as dynamic processes. In the first case, the changes in the dependent variable are simply related to the changes in some of the main data. In the second case, the law of variation is considered as a given one, i.e. inextricably bound up with the structure of the explaining scheme. The law of variation may change in the course of time. In this case, there are structural changes in the dynamic system.’ b) By a systemic-structural approach The complex systems, including the economy, are open systems. Part of their main characteristics used in the context of this article is contained in [4]; they have an axiomatic meaning in science. They are created by leading scientists in this sphere of the world science, such as: L. von Bertalanffy, K. Boulding, W. Ross Ashby, R. L. Ackoff, M. D. Mesarovic, O. Lange, etc. These characteristics are:  Wholeness – as a result of the relationships and the interaction of the elements forming the system;  Behavior of the system – It shows how a great number of specific states at the input of the elements of the systems transforms into a new great number of their states on their output. Here, the change of the system structure has a determinant role, i.e. the change of the network of input-output relations between the elements of the system.

4  System working – It determines the law of its development.  Feedbacks under the main diagonal of the matrix of inter-branch relations. They determine the system stability, as they balance the difference between the former and the present state, i.e. they have a compensatory character.  Ergodic development process – They apply when the changes in the state of the system elements become independent of their initial states. The compensatory feedbacks figure as means of self-control (self-regulation) in the system at its transition to a new equilibrium state. Development processes – transitions to new systemic equilibrium are possible within limited boundaries, within the framework of their changeable productivity. For an economic system, these boundaries are determined by the change in the productivity of the elements that form it (products, types of production, sub-branches, and branches) and particularly – by the difference between the value transferred and added (in favor of the latter) per unit of production. The mentioned main characteristics of open complex systems determine the non-static nature of their development and the synergetic, multiplicative and accelerative effects that determine it. These effects are a result of changes in the network of relationships and interactions established among the system elements. With the analytical and descriptive approach, the development is considered static, i.e. the above-mentioned effects are not taken into account, and neither are the qualitative changes providing increased system productivity. The main assumption under the static form of development is unrealistic. ‘The main assumptions for development processes of a production system are: the composition of development factors is predetermined, each one is internally homogenous; the technical progress is considered as an obvious time-related function – a simple reproducibility of structural-technological interrelations in this system, as well as the complete commensurability of the factors, respectively of the costs and the results from production and economic activity over different, too distant periods, without the qualitative changes being taken in account [5, p.499]. The system’s increasing productivity determines its sustainability over time, and the speed at which it passes from one to another state of dynamically changing equilibrium – to ‘maturity’ or to ‘senescence’. That takes place depending on the intensification and the lessening effect of the compensatory feedbacks. These features of system development are determined by the changes in the quantitative interrelations of the elements forming them – as a result of qualitative productive changes in them, as well as of their functional role in different stages of development. The synthesizing expression of the increased system productivity, as a result of

5 structural changes on a micro-structural level of aggregation, is determined by the changeable interrelation between the primary, the secondary and the tertiary economic sectors. In the context of these fundamental and scientific characteristics of open (complex) systems, adequate pattern-type instrument should be applied in applying the systemic-structural approach for the elaboration of economic development strategies. 3. ITERATIVE PROCEDURE FOR WORKING-OUT OF A HIGH-EFFECTIVE STRATEGY FOR A SUSTAINABLE ECONOMIC DEVELOPMENT

The methods of the iterative procedure worked-out (and applied) have a consistent systemic- structural character. The outgoing methodic and information instruments are performance balance of inter-branches connections for the initial year, as well as exogenously given (expected) increases – decreases of ΔX sub-branches production realized in comparison with their numerical values achieved in the initial year. The inter-branch balancing between the production realized and produced is determined generally for the economy and for each of its sub-branch by iterative procedure applying. This procedure is a considerably modified version of the RAS method created by Nobel laureate Richard Stone. The initial matrix is iteratively rebalanced into a new inter-branches balanced matrix by this method. It is achieved through the line of production produced – by exogenously given changes in vector S and the realization of this production – by vector R. A is the matrix of direct material costs. The main change in the iterative procedure in comparison with the RAS method is that it excludes the diagonal matrix with exogenously given elements of vector S as multipliers of the columns of matrix A. In it only the diagonal matrix with exogenously given elements of vector R remain as multipliers of the rows of the same matrix, i.e. of the production realized. (For more stability of the calculations in the iterative procedure, the matrix of inter-branches flows X ij, because A ij = X ij / X j) is used. This modification of the RAS method is well- grounded:

1) Multiplication of matrix A by diagonal matrix Rj, by constant multipliers for each row for passing from one iteration into another one, is justifiable because we have in mind realization.

Contrariwise, applying constant multipliers by diagonal matrix Sj is thoughtless because each element of this column has different material contents, thus – a different price alteration. At the iterative procedure, the leading role is performed by the initial elements and the iteratively elements of diagonal matrix changing from one iteration into another iteration Ri. The latter are determined as indices between the achieved numerical values of the vector of the production realized at the given iteration and those at the previous one. (In the beginning of

6 the iterative procedure, these indices are determined by exogenously given volumes of the

w ж production volumes realized in the future year Xi (Xi ) and the volumes factually achieved in

f the initial year Xi , where w (ж) are those wished for the future year, and f – the volumes factually realized in the initial year.) In this way, the dominant principal at economic restructuring and development is production realization as a main postulate in modern market economy.

2) The transition from one iteration into another iteration is ‘loaded’ by consecutively forming new diagonal matrices Ri1, Ri2,…Rim, where m is the last iteration, when the production realized and produced are balanced. Their serial numerical values are determined by the corrected volumes of the production realized. The correction reflects the differences (with their plus mark at odd numbers and minus at even numbers) between the sums in the columns of the respective one on row i – column j, i.e. the given iteration in comparison with the transition one.

3) The iterative process of inter-branch balancing of production, i.e. of the elements of vector

Xi – of the production realized, finishes when Rim / Rim-1 reaches one (near by one), respectively – when the differences between the amount of the production realized (in columns) Sn – Sn-1 reach zero (become near by zero).

The procedure presented in detail shows a similarity mathematically proved – in accordance with the condition in item 3. This similarity is fast. The fifth iteration is accurate to one decimal place, the fifteenth – to two decimal places, the twenty-fifth – to three decimal places [6].

The iterative procedure presented serves for determination of national economic inter-branch balanced development. There is program security at about 90 branches and sub-branches and it’s repeatedly used by the author, both at prognostication and at a retrospective analysis of its restructuring and development. The results from this applying are described in publications 7 and 8.

First. A purposeful (desired) combination of the changes on the system income is provided – by ΔX increases-decreases of the production realized by indices Ri for the future year in comparison with the initial one. In the progress of the iterative inter-branch balancing of the

7 desired production output realized and produced in the future year, the multiplicative and accelerative interactions between the income-outcome relations take part and thus, they are achieved at minimum supplementary costs (production produced additionally). When determining of the desirable changes for the future year; the structure-determinative (functional) role of the sub-branches, and particularly – the key ones – with many feedbacks, i.e. with a high compensatory effect in the transition to the new economic equilibrium in question is also taken into account. Key branches are the chemical, petroleum processing and rubber industry; metallurgy, machine building, electrical engineering; transport, communications and trade, finances, credit and insurances. They form 42% of the overall structural differences between 1988 and 1992 and 64% between 1991 and 1992 [7]. Trends in restructuring of economies of advanced countries at a given wished combination of changes in the future year are also taken into consideration.

Secondly. Unlike the cybernetic principle of the ‘black box’, where the internal system structure and the relationships between its elements are assessed indirectly – according to the changes between its income and outcome (input and output), the transformer of these changes is not such in the iterative procedure – it is rather ‘transparent’. The latter is represented by the formula E – A (within the framework of the balance between the inter-branches relations), where E is a single matrix. The difference between both matrices in this formula, multiplied by the realized production volume, determines the final production volume, which is an isomorphic expression of the value added.

Thirdly. In the iterative process, the system-structural interactions between the Xij elements are expressed, which interactions are caused by the changes of Ri. This process overcomes the unrealistic prerequisite used in practice, in different mathematical and statistical methods: ‘all other things being equal’ (Ceteris paribus), applicable with the static-intentional form of economic system development. With this form, the dynamics of the different elements is determined if all other are considered invariable. In the iterative procedure, the changes have a non-linear (recurrent) character in the system-structural interaction of the elements, i.e. between the production realized and produced. Thus, within the framework of this interaction, the changes of the production realized and produced are determined as a complex function of interactions between the input-output relations of matrix Xij.

8 Fourthly. The iterative procedure has methodical advantages over an alternative in comparison with the linear programming tasks, by whose decisions the production volume is optimized. These advantages are the following ones: a) Upon the transition from to iteration, the produced production volumes together with the realized production volumes are determined, as the produced production volumes are equalized for the economy as a whole. This equalization is achieved by matrix Xijm of inter- branches relations, where m is the last iteration. The iterative changes correct the desired

w ж realized production volumes for the future year Xj (Xj ) exogenously given in the beginning, by endogenously changing matrix of inter-branches relations for the future year. The principle of ‘all other things being equal’ at use of linear programming and especially – at system linear equation decision (which happens by consecutively exclusion of the first unknown quantity from the first equation, then of the second unknown quantity from the second equation, etc.) is strictly observed, because the other equations are recalculated according to the recalculation of the previous equations. In this situation, unlike the iterative procedure, the recurrent non- linear relation between the production realized and produced is missing, when the problem solved is in the economic sphere. b) In terms of the criterion of optimization: with the linear programming problem, this criterion is contained in its purposeful function, for example gaining maximum profit. However, its numerical values do not change upon the transition from one to another iteration. From an economic point of view, this situation is not grounded because both the numerical volumes in the purposeful function and those in the right sides of the equation should be considered as a complex function of the changes of all numerical values in solving economic.

With the iterative procedure, there isn’t an explicitly formulated purposeful function for determination of the most effective economic development strategy. However, with it, this

w ж criterion is set in the realized production volumes desired for the future year Xi (Xi ) in comparison with the initial one, as well as in the economic productivity between the matrices E – A. Therefore, in the iterative approaches, the realized production volumes are changed, which are given in advance as a result of the recurrent interrelations with the changes in the production produced.

The question arises how the most effective strategy for restructuring and sustainable economic development within the framework of the iterative procedure may be determined.

9 The latter may be achieved by using different scenarios for the desired realized production volumes, which are given in advance for the future year. However, this scenario should be placed within the specific boundaries of the economic system’s productivity. An indicator for their breach is the appearance of negative numerical values of the realized production volumes upon the transition from one to another iteration.

When the production realized and produced for each of the given scenarios of development are balanced, then the most effective strategy may be determined by comparing their volumes of production for consumptive (E – A) X = Y.

The scenario with the biggest production volume (Y) is the most effective strategy for economic development.

Fifth. The multiplicative effects and their derivative accelerative ones are a result of self- regulative possibilities of the complex economic system and most of all – of its compensatory feedbacks. If we would like to explain these effects with the forms of expression of the traditional political economics, this presupposes an inter-branches allocation and reallocation of capital and of entrepreneur’s intentions to provide additional production, in order to be supported the equilibrium between the production realized and produced. However, unlike the strategic prognoses in the traditional practice, this is made post factum, i.e. when there is a renewed market demand for such production, business actions for its providing, including import are undertaken.

What is the statistic meaning of the additional necessary production of a compensatory character upon the increase of the production volume realized in the future year compared to the initial one? The answer is to determine the actions in the future year. However, it is wrongly determined by the classical statistical methods – by the index of change production with a constant composition of the structures from the base period, because they are based on static formulation of development and they lead to a strongly decrease of the share [7, chapter II and III]. This share, changed by the iterative procedure at 90 branches and sub-branches, is 25% between 1972 and 1976, including 45% trade and material-technical supply, 38% transport, and it’s over 50% for 18 key branches and sub-branches [8, p.116].

10 In this context, the values of economic dynamics and its effectiveness arrived at by applying extrapolation methods, as well as other statically based methods, are incorrect and informatively unreliable for the purposes of strategic management.

Sixth. The methodological tools presented for applying of a systemic-structural approach, made more specific by the iterative procedure, may also be used when developing branch strategies for the development of different economic branches, as well as strategies for business organizations and their subsidiary companies. For that purpose, the sums in the respective matrix A – by columns of the direct material expenses per unit of production produced, have to total less than a unit, i.e. they should be productive.

Seventh. In an informative aspect, the criterion of information activity effectiveness is realized: maximum generative-production endogenous information at minimum exogenously given information is gained.

As it becomes obvious from the text, the iterative procedure is methodologically substantiated for developing a national economic development strategy for the separate branches and firms – as constructive information-management instruments of the systemic-structural approach; this procedure is it is proved in practice. By it, the internally inherent possibilities of economic system development are taken advantage of, and the logic triad is followed: progressive restructuring, growing productivity – sustainable development (directed to dynamic equilibrium) of the economic system’s productive potential and its competitiveness.

Management should mainly strive avoid breaches of systems’ work, rather than try to cope with their costly consequences, within the framework of applying the systemic-structural approach and the described iterative specification, and implementing high-effective development strategies respectively.

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