Directed Technological Change In a resource abundant economy

1. Directed Technological Change In a resource abundant economy Student: Ekaterina Dukhanina M2R ETE Supervisors: Dmitry Veselov Antoine d'Autume Thank Philippe Aghion for useful comments

2. Why is this subject so interesting for me? • Natural resource abundance  resource curse. Russia and many countries. Empirical findings. Can we escape from this biased production structure? And how? No theoretical modeling provided. • We need to develop non-oil sectors  technological progress. • Possible way to solve this puzzle – directed technical change (DTC)  possibility to manage which sectors to develop. • How to manage - to direct investments from oil sector to high technology sector.

3. Evidence of the resource curse • Economies abundant in natural resources tend to grow slower than economies without this endowment. (Sachs, Warner, 1997, 2001) Easy to get resource rent. Distortions in production structure of the country. – export orientation Slow growth. • Resource abundance – resource curse bad institutions • Good example (Norway) • 1) establishment of the institutions 2) discovering of resources • Bad example (Soviet Union, Brazil) • 1) discovering of the resources 2) unsuccessful attempt to improve the institutions • Being at the second case, can we escape resource curse?

4. Why is technological progress so important? • TFP differences matter for cross country income differences and convergence (Hall, Jones, 1999) • Positive empirical correlation between factor endowments (K, h) and productivity (A) • DTC concept allows to manage productivities across sectors. The goal – to make sectors more productive • Although, It is not enough to solve the problem of the resource curse. This approach also faces some problems at the stage of impulse to “catching up” process • Sources of productivity differences: • Mismatch between technologies and factor endowment (Acemoglu, Zilibotti, 2001) • Political barriers against technology adoption and inappropriate competition policy (Acemoglu, Aghion, Zilibotti, 2006)

5. Directed technical change in more details • (Acemoglu, 2002) To distinguish factor biased and factor augmenting technical progress. • Two major forces affecting equilibrium technology bias: • Price effect (encourages innovation directed at scarce factors) • Market size effect (increases productivity of more abundant factors) • The force of each effect depends on elasticity of substitution between factors.

6. How it works • Endogenous growth model with directed technological change (Gancia, Zilibotti, 2008) • Closed economy • 2 sectors High-skilled (Ah), Low-skilled (AL) • Intermediate production (expending-variety) • Externality – degree of increasing returns in production function of intermediate goods (consistent with the existence of a BGP) • Costs of innovations – new variety requires a fixed cost of μ units of final good. • Endogenous directed technological change – skilled-biased technical progress (BGP) • Innovation vs technology adoption

7. DTC + technology adoption • (Gancia, Zilibotti, 2008) Toexplain the causes of productivity differences across countries • Inappropriate technologies • Existence of the barriers to technology adoption • Within-country misallocations across sectors due to policy distortions • To determine optimal competition policy for an increase in economic growth

8. Growth policy • Relationship between market power and innovation Monopoly rent or competition will stimulates innovations? • Initially – growth rate is maximized by granting monopolists the maximum power. Growth-maximizing policy – optimal policy, provides technological convergence. (When human capital is unimportant or scarce) • Further – The more relevant human capital in production the lower must be monopoly power to achieve maximal growth rate. As human capital accumulates – high monopoly rents can become a barrier to growth.

9. DTC to increase productivity • Mismatch between technologies and factor endowment in poor countries is a source of productivity differences: implication of inappropriate technology  low productivity • Political barriers against technology adoption and inappropriate competition policies can contribute to persistent productivity differences: different market powers across sectors  resource misallocation  distortions in direction of technological change  low productivity • We apply this concept to resource abundant economy - extracting sector instead of low skilled, and high technology sector instead of high-skilled to look the optimal ‘technological bias’ and an appropriate industrial policy.

10. DTC + natural resources • (Acemoglu, Aghion, Bursztyn, Hemous, 2010) DTC with environmental constraints • Characterization of dynamic tax policies for sustainable growth and maximization of social welfare • Only temporary taxation of ‘dirty’ production • Optimal policy includes ‘carbon tax’ as well as a research subsidy • -Quicker the policy reaction – shorter the slow growth transition phase

11. Modeling resource curse • Why do we anchor to resource intensive production? i.e. direct investments towards extracting sector • We can not develop high technology sector because of low relative productivity (AABH – assumption) • (Benhima, 2010) due to imperfections on the financial market. • Credit constraint for high technology firms. • The main idea is to explain the resource curse phenomenon and to find a way to escape it.

12. How it works. Intuition • Solution to the problem of resource curse – DTC, moving investments from extracting sector towards high-technology one • We can consider an aggregate productivity level where investments to these sectors can be substitutable. By increasing H investments we reduce R investments. • By direction of technical progress to H sector we can make it more productive and therefore more profitable. So we can change the production structure of an economy and escape the resource curse. • But.... • The main problem – to provide an insentive for investment movements. • 1) Liquidation of the credit constraint for H firms by providing subsidies for them. • 2) Reduction of the profits of R firms by taxation • 3) Regulation of monopoly power at the R sector by legislation (Ah=Ar) • 4) Bribes for R monopolists

13. How it works. The model • Introduction of natural resources into endogenous growth model (shumpeterian type) •  BGP exists if we reduce in time the amount of natural resources used in production. • Introduction DTC, Two sectors economy

14. The model. framework Continuous time, closed economy, 2 sectors.

15. The model. Preliminary results • The corner solution is only possible (because the production function at one of two sectors contains exhaustible resources) • immediate convergence (because of substitutability of investments taking into account the aggregate level of the innovations)

16. The model. extensions • To consider this framework with elements of political economy (Acemoglu, Aghion, Zilibotti, 2006)

17. Conclusions • In an economy with natural resources maintaining of both sectors is impossible • We can escape resource curse by changing investment direction • In resource abundant countries holders of resources don’t want to move out of this sector • But we can compute the minimal bribe necessary for development high-tech sector Thank you for attention!