ISSN 1680-8754 PRODUCTION SERIES DEVELOPMENT Micro-macro interactions, growth and income distribution revisited Mario Cimoli Gabriel Porcile ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL 212 - Serie Xxxxx N° xxx N° Xxxxx Serie Título documento... documento... Título Micro-macro interactions, growth and income distribution revisited (Dejar 2 cm de separación mínima con nombre de serie a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar Mario Cimoli Gabriel Porcile 1 ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL - Se rie Xxxxx N° xxx N° Xxxxx rie Título documento... documento... Título This document has been prepared by Mario Cimoli, Chief of the Division of Production, Productivity and a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar Management of the Economic Commission for Latin America and the Caribbean (ECLAC), and Gabriel Porcile, Economic Affairs Officer from the same Division. We are very grateful to Danilo Spinola, Antonio Soares Neto, Tomas Saieg, Nunzia Saporito, Felipe Correa, Luis Cáceres, Martin Fernandez and Reto Bertoni, who made useful comments on previous versions of the paper. The views expressed in this document, which has been reproduced without formal editing, are those of the authors and do not necessarily reflect the views of the Organization. United Nations publication ISSN: 1680-8754 (Electronic version) ISSN: 1020-5179 (Print version) LC/TS.2017/55 Distribution: Limited Copyright © United Nations, June 2017. All rights reserved. Printed at United Nations, Santiago S.17-00522 Applications for authorization to reproduce this work in whole or in part should be sent to the Economic Commission for Latin America and the Caribbean (ECLAC), Publications and Web Services Division, [email protected]. Member States and their governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and to inform ECLAC of such reproduction. 2 ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL - Serie Xxxxx N° xxx N° Xxxxx Serie Título documento... documento... Título (Dejar 2 cm de separación mínima con nombre de serie a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar Contents Abstract ..................................................................................................................................................... 5 Introduction ............................................................................................................................................... 7 I. Rationality and institutions in an uncertain world .................................................................... 9 II. Learning and the co-evolution of capabilities and the production structure .......................... 15 III. Structural Inertia, Lock-in and Institutions .............................................................................. 19 IV. Institutions and power: Schumpeterian political economy ...................................................... 23 V. Combining the supply side and the demand side: a graphic interpretation ........................... 29 VI. Concluding remarks..................................................................................................................... 33 Bibliography ............................................................................................................................................ 35 Series Production Development: Issues published ............................................................................... 38 Figures Figure 1 Assembling supply efforts and demand-lead mechanism ..................................................... 30 Figure 2 Traverse and hysteresis ......................................................................................................... 32 Diagrams Diagram 1 The interplay between technological innovation, diffusion and selection in the global market ............................................................................................................... 17 Diagram 2 The political trilemma of the world economy. Globalization, nation states and democracy .................................................................................................. 26 Diagram 3 The development trilemma. Hyperglobalization, heterogeneity in capabilities and sustainable development ................................................................................................... 27 3 ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL - Serie Xxxxx N° xxx N° Xxxxx Serie Título documento... documento... Título (Dejar 2 cm de separación mínima con nombre de serie a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar 4 ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL - Serie Xxxxx N° xxx N° Xxxxx Serie Título documento... documento... Título Abstract a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar The international economy is marked by major asymmetries in technological capabilities and power, both at the domestic and international levels —a point emphasized by the structuralist tradition. These asymmetries strongly affect economic outcomes and place major constraints on economic policy. This working paper discusses how the microeconomics of learning interacts with structural change and the evolution of aggregate demand to generate either virtuous paths of economic development or vicious circles of underdevelopment and lagging behind. Some implications of these growth paths for the international and domestic political economy are discussed. 5 ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL - Serie Xxxxx N° xxx N° Xxxxx Serie Título documento... documento... Título (Dejar 2 cm de separación mínima con nombre de serie a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar 6 ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL - Serie Xxxxx N° xxx N° Xxxxx Serie Título documento... documento... Título Introduction a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar The international economy is marked by major asymmetries in technological capabilities and power, both at the domestic and international levels—a point emphasized by the structuralist tradition. These asymmetries strongly affect economic outcomes and place major constraints on economic policy. This working paper discusses how the microeconomics of learning interacts with structural change and the evolution of aggregate demand to generate either virtuous paths of economic development or vicious circles of underdevelopment and lagging behind. This working paper updates and extends a previous paper on the microfoundations of heterogeneity (Cimoli and Porcile, 2015). Chapter I focuses on the trinity formed by Keynes-Knight uncertainty, bounded rationality and decision-making based on rules or heuristics. Chapter II focuses on learning and its interaction with the technological intensity of the production structure. Chapter III discusses the forces that may lead a country to fall into a low-growth trap and the crucial role that institutions (and in particular the industrial and technological policies) can play in allowing it to escape from such a trap. Chapter IV acknowledges that institutions are shaped by power, and discusses how a less diversified, less technologically intensive production structure reinforces institutions that hinder productivity growth. This section also discusses the international political economy trilemma set forth by Rodrik in his analysis of globalization. Chapter V focuses on the interplay between micro x macro variables shaping the country’s growth path. Technological change and demand-driven growth are combined to give rise to either virtuous processes of productivity and employment growth or to “truncated” patterns that end up in a slow-growth trap. 7 CEPAL - Serie Xxxxx N° xxx Título documento... (Dejar 2 cm de separación mínima con nombre de serie a la izquierda) ... Micro-macro interactions, growth and income growth interactions, Micro-macro 8 ECLAC - Production Development Series No. 212 212 No. Series Development Production - ECLAC ECLAC - Production Development Series No. 212 Micro-macro interactions, growth and income... CEPAL - Serie Xxxxx N° xxx N° Xxxxx Serie Título documento... documento... Título I. Rationality and institutions a izquierda) la serie de nombre con mínima separación de cm 2 (Dejar in an uncertain world The microfoundations of economic models continue to be a highly debated topic in the economic literature. This topic focuses on the behavior of individual agents —firms, consumers or households— and their interactions in order to derive from them macroeconomic outcomes. Microfoundations (implicitly or explicitly) are concerned with at least four crucial questions: i) the nature of agents’ rationality, ii) how they form expectations and learn, iii) how capabilities are built, used and transformed over time (allowing for both adaptative and creative responses to a changing environment); and iv) role of the institutional setting in shaping decisions, technological change and market outcomes. The questions are interrelated. The way we respond to question (a) determines to a large extent the