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The
Natural Advantage of Nations (Vol. I): Business Opportunities,
Innovation and Governance in the 21st Century
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 This
book is about innovation, solutions, competitiveness
and profitability. It is also about building environmental
integrity and sustainability now and for future generations.
It draws a bold vision for the future and tells us
how to get there by building on the lessons of competitive
advantage theory and the latest in sustainability,
economics, innovation, business and governance theory
and practice. The authors incorporate innovative technical,
structural and social advances, and explore the role
that governance can play in both leading and underpinning
business and communities in the shift towards a sustainable
future. The result is nothing less than the most authoritative
and comprehensive guide to building the new ecologically
sustainable economy. (more...)
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Chapter
11 (Part 8) - Managing Industry Transitions through
Waves of Innovation
Philip
Sutton
[This
piece was contributed by Philip Sutton, Director
of Green Innovations Inc, moderator of the greenleap
e-list, Australia’s largest sustainability
e-list, and President of the Australia New Zealand
Society for Ecological Economics.]
Nations
are not helpless victims in the winds of global
competition. As the World Bank wrote regarding industry
policy[92]
in 1997, ‘When markets are underdeveloped,
the state can sometimes reduce coordination problems
and gaps in information and encourage market
development. Many of today’s oldest industrial
economies used various mechanisms to spur the growth
of markets in their early stages of development.
More recently, Japan, the Republic of Korea and
other countries in East Asia have used a variety
of mechanisms for market enhancement, in addition
to securing the economic, social and institutional
fundamentals. Sometimes these interventions were
quite elaborate: the highly strategic use of subsidies,
for example. At other times they were less intrusive,
taking the form of export promotion and special
infrastructure incentives. But the ability to choose
wisely among these interventions and use them effectively
is critical; ill-considered trade, credit, and industrial
policies can and have cost countries dearly.’
A brief explanation of the industry policy toolkit
is provided in the following. Industry policy is
a toolkit that governments use to manage these economic
transitions to ensure that they are as painless
as possible. Effective industry policy for policy-makers
and governments would ensure that people are re-trained
for the next areas of jobs growth. Numerous Asian
countries, including Japan, South Korea and Singapore,
have successfully used Industry Policy to rapidly
catch up to the technological frontier over the
last 40 years. This, plus the experience of the
first industrial revolution, makes industry policy
a very rich field of tested theories. Such knowledge
is therefore very important if nations are to effectively
assist their firms, cities and communities to make
the transition to a truly sustainable economy. Countries
also need to learn from what the best Asian economies
have done over the past 40 years to escape the ‘resource
curse’. The toolkit to help nations make a
transition away from significant dependence on natural
resource export income, which was used by Japan,
South Korea and the other Asian Tigers, is known
as industry policy. It needs to work with and complement
a nation’s innovation policy and its national
system of innovation policy.
Table 11.15 Green jobs around the
world
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| Country/region |
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| Global |
11
million pollution-control jobs worldwide at
present. One of the fastest growing labour
market sectors. |
Australia |
Green
jobs growth of 38% between 1988 and 1993,
one of highest growth sectors over that period.
Growth strongest in waste management and clean
production. Sustainable energy NSW: direct
jobs growth of 9% per annum 1996–1998.
Growth of 19% expected in 1999–2000.
Other (unsustainable) energy industries had
substantial job losses in the 1990s. |
| European
Union |
1 million direct jobs supplying environmental
goods and services, 3.75 million direct and
indirect jobs (in 1994). 190,000–320,000
new jobs in wind energy expected by 2010.
Up to 294,000 direct jobs in photovoltaics
by 2010. |
| France |
418,000 jobs in environmentally related activities
(in 1992). |
| Germany |
956,000
jobs in environmentally related activities
(in 1994). Growth of 520,000 jobs between
1984 and 1994. |
| US |
480,000
direct jobs in remanufacturing (in 1998).
Expected growth of 350,000 net jobs in sustainable
energy by 2010. |
Sources: ACF/ACTU (1994), Brown et al (2000),
Ellis and Associates (1999)
Both
macro- and micro-economics tend to focus on money
flows, for example prices, the level of investment,
taxes and subsidies. However, the impact of prices
in the market can only be understood in the light
of the elasticity or responsiveness of the market
to those prices. For example, if products in the
market are essential staples (i.e. the products
are needed, the quantity needed is relatively fixed
and no ready substitutes
are available), the market will be highly inelastic:
that is, highly unresponsive to either raised or
lowered prices. At the other extreme, a luxury good,
nowhere near its point of demand saturation, will
be highly elastic. Demand will contract sharply
if prices go up and increase sharply if prices fall.
Table 11.16 Levels of economics
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| Domain |
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| Macro-economics |
National
accounts, monetary policy, interest rates,
the level and structure of taxation, exchange
rates, wages policy, unemployment, etc. |
Meso-economics |
Industry
policy, regional economic development, and
now also ‘supply-chain transformation’. |
| Micro-economics |
The
use of targeted economic instruments to achieve
issue specific changes in economic behaviour,
the theory of the firm, firm level competitiveness,
consumer behaviour, etc. |
Source: Phillip Sutton, Green Innovations
Inc
Therefore, if there is a need to make significant
changes to the structure and behaviour of an economy,
attention needs to be paid to:
•
nudging the economy in the desired directions using
prices;
• facilitating change and increasing the responsiveness
(elasticity) of the economy through any other channel
for influencing the economy (other than via price
or the quantity of monetary investment flows), for
example by changing the technical, organizational
and informational structure of the economy;
• increasing the key stakeholders in the market
to be able to respond to a price signal;
• increasing people, especially people on
lower incomes to be able to respond to a price signal
through various measures.
For instance, simply increasing energy prices to
‘encourage the conservation of energy and
reduce greenhouse gases’ will achieve little
and potentially harm the poor if not combined with
a much broader strategy to help business, families,
schools, hospitals and universities improve energy
efficiency in the first place. It is wise for governments
as part of their industry policy to run a 2–5-year
national energy efficiency strategy with government
assistance and equity considerations built into
it (the carrot). And then combine that with phasing
in a market signal into the economy over 5 years,
starting 2–3 years after the energy efficiency
programme had started. If governments wait 2–3
years to use a market signal on energy prices this
period should be long enough for the payback periods
on energy efficiency initiatives to have largely
paid for themselves and hence firms’ energy
costs should have been reduced substantially by
this time. Governments should also address all the
barriers for wiser energy and resource usage to
improve the ability of the market to respond to
a market signal. How to do this in the energy sector
is well covered in papers like Climate: Making
Sense and Making Money by Amory and Hunter
Lovins (1997). In Section 4 these issues are discussed
in detail.
Meso-economics is the field of economics that focuses
on these critical non-price channels of influence.
It is the branch of economics that deals the most
directly with ways to change the elasticity or responsiveness
of the economy and it is thus an essential complement
to macro- and micro-economics. Traditionally, industry
policy has been driven by the desire of governments
and industry groups to foster economic development
for the benefit of the community or firms. Now that
we live in a massive interwoven global economy,
the value chains or value webs that link each stage
in the production
of a product, whether service or physical good,
are so complex that the starting point for analysis
and action is usually geographically limited industry
sectors.
First, imagine the sort of value chain or ‘tree’
that is created to show the transformation of raw
materials through to a final product (as was shown
in Figure 6.4). For just one product the related
tree will be immensely complicated. Then imagine
thousands of products, each with their own ‘tree’.
This starts to get very complicated and so, in a
more simplified process, all the separate trees
are tipped over, laid upon each other and compressed.
From this we create a data set that can be more
easily understood as a series of interlinked industry
sectors, for example resource extraction, resource
processing, elaborately transformed manufactures,
infrastructure services, construction services,
business services, information services, personal
services, etc. This industry sector view is the
foundation of industry economics or industry policy.
Most industry policy proponents (e.g., government
departments for industry development, industry associations,
etc.) also have a geographical mandate, covering
a nation or province or region, and so industry
policy is often modified to introduce a regional
economic development orientation. On the other hand,
local governments and local economic development
associations start from the regional development
focus and then try to develop strategies for their
region to tap into growth strategies that originate
in the industry policy arena.
Traditional industry policy and regional economic
development policy commence with the following assumptions:
• There are complex and widespread value chains
to be tapped into (often global in extent).
• Industry sectors (that amalgamate these
value chains) can be small or large, and declining,
stable or growing.
•
Local areas should try to harness or build local
competences that make the area a desirable participant
in the industry sectors (with preference often
given to large and or growing sectors so as to
maximize the local economic growth potential).
•
Harnessing or building local competences requires
not only general policies and investments that
would help all types of business, but also more
closely targeted actions that are built on detailed
knowledge of the industry sectors and the local
strengths and weaknesses.
•
Both general and targeted assistance should focus
on the creation of positive externalities, that
is, positive side-effects where the benefits extend
beyond the firm to whole networks of firms and,
ideally, to the community at large.
•
Assistance is most often important early in the
development of a value chain, industry sector or
local competence (the ‘infant industry’
argument). Therefore, firms should not capture programmes
intended to assist them, in the early build-up phase,
as a never-ending source of assistance. The same
argument applies to structural adjustment assistance.
For example, assistance for firms to transfer from
one value chain to another, or to assist communities
to wind down non-viable activities where there would
otherwise be major social costs arising from the
change.
Industry policy and regional economic development
programmes, which affect both the supply and demand
sides of the economy, can involve investment in
or activity to foster:
• research and development;
• specialized infrastructure;
• specialized eduction and training;
• network and collaborative project facilitation,
cluster development and partnership promotion;
• more sensitive and appropriate taxes and
subsidies (including situation specific bundles
such as ‘feebates’);[93]
•
improved capital availability; and
•
regulation via legal and economic instruments.
Because
industry policy and regional economic development
are founded on the specifics of products, firms,
localities and communities, there is a wide range
of policy tools available. As with anything, the
devil is in the detail in terms of whether firms
and nations will achieve the shift to sustainability.
The field of meso-economics offers governments subtle
tools and detailed strategies to more effectively
and appropriately
play its part in assisting an industry transition
to a sustainable economy.
There still are some who believe that this should
all be left to the market. They argue that the invisible
hand of the market is the best way to ensure scarce
resources are allocated efficiently. As we stated
before, over the last 30 years in economics a far
more sophisticated understanding of markets and
market failure has evolved that can be used by governments
to determine when it may be appropriate to act,
and how. These developments in economics are somewhat
theoretical, but they are foundational for all this
discussion about the role of government. The economists
who developed this new field of the economics of
information were awarded the Nobel Prize for Economics
in 2001 for this work. Hence, these exciting developments
in economics are summarized in the next chapter.
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References
92.
World Bank (1997) World Bank Development Report
1997: The State in a Changing World, Oxford University
Press, Oxford. (Back)
93.
A feebate package involves the imposition of charges
(fees) on old technology (e.g., low efficiency cars)
and the use of the fee revenue to fund subsidies for
adopters of new highly efficient technology. It is anticipated,
for example, that the introduction of a feebate package
would dramatically speed up the transition to hybrid
vehicles. (Back)
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