Interpretation of Comparative Advantages and Risks in Economic Development

EFOP-3.6.2-16-2017-00007 "Az intelligens, fenntarthat s inkluz v t rsadalom t rsadalmi, technol giai, foglalkoztat sban s a digit lis gazdas gban. fejleszt s nek innov ci s aspektusai: h l zatok a THE SEARCH FOR NEW COMPARATIVE ADVANTAGES BRATISLAVA 27 OCTOBER 2017

Interpretation of comparative advantages A KOMPARAT V EL NY K RTELMEZ S R L

CASE A: THE CLASSICAL RICARDIAN INTERPRETATION England produces textiles. Portugal produces wine. Facilities to produce textiles are better in England than in Portugal, while facilities to produce wine are better in Portugal than in England. It is comparatively advantageous to produce textiles in England and wine in Portugal. Comparative advantages remain if England is more developed than Portugal, and they will also remain if Portugal becomes more developed than England. In this case, the difference in the developmental levels of the two producers is not important.

CASE B: THE DIFFERENT DEVELOPMENTAL LEVELS OF THE TWO PRODUCERS ARE IMPORTANT. Sue is more educated than Jim; therefore, she is a better manager and a better cook than Jim. Sue can earn more money by management than by cooking. So, she employs Jim to cook for her while she does management. Here, the difference in the knowledge levels of Sue and Jim is an important element in the comparative advantages. Jim will earn money because for Sue it is not worthwhile to cook.

RISKS IN THE SYSTEM OF COMPARATIVE ADVANTAGES England and Portugal run fewer risks. Facilities to produce wine in England are not likely to evolve. Neither will those of textile production in Portugal. Sue, however, can find a cook who is cheaper or better than Jim, and so she can replace him. (Jim is not irreplaceable.) Jim depends on Sue and runs a greater risk, while Sue is less dependent on Jim and has less risk. The main reason for this is the difference between their knowledge levels. Jim can reduce his risks by raising his knowledge level in management or in cooking to that of Sue. Sue s risk will not grow if her knowledge levels increase or remain the same.

WHAT DOES JIM NEED TO DO? Justin Yifu Lin: Upgrade, upgrade, upgrade! If Jim never tries to eliminate the differences in knowledge levels, then he will either stagnate or grow farther behind Sue. In addition, technological developments work against Jim. He will be increasingly replaceable if food can be prepared by machines. So Jim has to develop some knowledge by which he can produce either wine or textiles . The tool is upgrading: to use the largest possible part of realizable free cash flow for self development.

DME status A KOMPARAT V EL NY K RTELMEZ S R L

THE PAST 25 YEARS HAS CREATED A DEPENDENT SITUATION IN THE V4 COUNTRIES Researchers who deal with varieties of capitalism (Soskice, Hall, N lke, Vliegenhardt, ) have identified four groups of countries: o LME Liberal Market Economies (USA, England, Japan, ) o CME Corporate Market Economies (Germany, Austria, ) o SME State-controlled Market Economies (China, India, Brasil, ...) o DME Dependent Market Economies (V4 countries) We shall now focus only on to the DME countries. To do it properly I had some consultations with TREXIMA experts, who corroborated, that Slovakia and Hungary are in similar position.

THE PRICE OF SIGNIFICANT GDP GROWTH IN DMES 1. Dependence on the most important investment resource Decisions defining economic growth are made at those headquarters where the FDI is coming from: Western Europe and the USA. Pressure to follow the operation model of the biggest investors This significantly affects domestically-owned small and medium-sized companies, because they are basically dependent. Dividing effect on the cooperation of social partners The system of social expenditures is not the result of unfolding social struggles involving the masses, but of the appeasement of employees of multinational companies. Primitivization effect on education and training systems The trans-national companies require a relatively cheap, moderately flexible labour force with intermediate-level technical skills. Effects on innovation processes To the DME countries, the MNE delegates the role of assembler based on the innovations developed at home. Effects on society: growing dualism, income disparities, political populism, and social tensions While the DME model is very coherent and has proven very successful in certain sectors, it has clearly failed in raising the standard of living of the general population. Instead, we observe a growing dualism in these societies, with widening income disparities between those who are part of the export-oriented sectors and those who are excluded. This uneven development has led to increasing political populism and social tensions in Central and Eastern Europe. 2. 3. 4. 5. 6.

Before such paradigm change once stood Eastern Europe A KOMPARAT V EL NY K RTELMEZ S R L

THE EUROPEAN DIVISION OF LABOUR THAT EVOLVED IN THE 16TH CENTURY IS FIERCELY DISCUSSED EVEN TODAY The most discussed topic is the concept of second serfdom (zweite Leibeigenschaft) created by Engels and newly interpreted by Acemoglu and Robinson. At that time, Eastern Europe received an offer: We develop our cities and industry, and for our industrial products we buy your agricultural products. The Eastern European Jims got the offer and rejected upgrading. Why upgrade? The business is running well enough as it is. The result: Eastern Europe lagged behind. As an example, serfdom ceased in Western Europe but remained in Eastern Europe. In Hungary it was abolished by the Austrians in 1853. The Russians abolished theirs in 1861. The V4 countries were not the winners in these developments. They were taken off the map.

THE CENTRAL ELEMENT OF A VERY COMPLEX SOLUTION IS INVESTMENT IN HUMAN CAPITAL Its content: Developing o abstraction skills and o social skills Mathematical skills, complex literary skills, skills of generalization. Skills to participate in teams, skills to harmonise goals and interests, skills to accept and understand differences. to prepare the greatest possible number of people for jobs that require o system creation, o creative intelligence,and o social intelligence. Jobs that transform unstructured environment into a structured one. Creation of new ideas, arts, masteries. Entrepreneurial jobs, interest harmonization activities, persuasion, social care, etc.

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