Innovation and globalisation

OECD through its looking glass

Like Alice, the OECD appears to be bursting through to the other side of its looking glass. Change may be the order of the day, but as the organisation approaches 50, lessons from past work on innovation might speak to the current economic crisis.

If progress is at the heart of the OECD role, how can it be defined in the contemporary world of globalisation and rapid change? The historian Arnold Toynbee gives us the clue. The rise and fall of civilisations is explained by Toynbee as the capacity to harness the latest available techniques and distribute the benefits to the population at large. In the contemporary world, translate this into the problems of India and China, not to mention the access to nuclear technology for those seeking to catch the train of progress.

It is therefore encouraging that the OECD has placed “innovation” at the centre of its current preoccupations. In this connection it is relevant to recall the results of the major OECD study in 1968 of technological gaps between Europe and the United States, called for by ministers because of the political concerns arising from US dominance of the science-based sectors of industry.

While these gaps clearly existed, the study showed the speed with which leadership positions changed because of the free flow of scientific information, technology transfers between countries and international investment. In the end the technology gap was seen as a management gap. The rise of the Japanese economy was the classical exemplar of this analysis, and today India and China can be seen as moving up the same innovation ladder.

The clear lesson is that where open markets prevail, for capital, technology and human resources, the spread of economic progress will follow. As globalisation progresses, this is likely to be more true than before.

Technological interdependence

But there is a second lesson to be drawn from the study of technological gaps: if innovations are diffused so speedily through international trade, what is the nature of the process and how can it be managed? The life of an innovation, through the research and development process, to a marketable product, and onto the widespread diffusion across frontiers, is essentially international.

Once labour costs dominate the factors of production, it is logical that it will be produced in countries where labour is relatively cheap. This “product-cycle” theory of international trade, which emerged from the technological gaps study, demonstrates the interdependence of countries in bringing innovations from technical originality protected by patents, through to mass markets.

One consequence of the product-cycle is that technology can be sold and bought at various stages of the cycle and, in consequence, a given country has a technological “balance of payments.” All countries are involved in this process, and it is interesting to note that, as early as the 1970s, OECD had established pilot-teams in Mediterranean OECD countries, and in Latin America, to work out the strategy for the right balance between investment in research and development and buying in technology from other countries. Clearly, the advanced market economies have to be at the front edge of innovation and change. This is the only place for them in the emerging international division of labour. Job destruction and delocalisation cannot be avoided, and high rates of job creation are thus a sine qua non of success. This is the process of “creative destruction” of which Joseph Schumpeter was the prophet .

The snag is that OECD macroeconomists have historically tended to back Keynes and Friedman rather than Schumpeter. Their focus on static problems of resource allocation in perfectly competitive markets neglects innovation and the role of the entrepreneur. So could it be that OECD’s economic foot is still on the wrong side of the mirror?

The former Director of Economics and Statistics, John Fay (later to become the editor of the OECD Observer) used to say to me: “Ron, there’s no such thing as a structural problem.” What he meant was that in a perfect market imbalances would be smoothed out by the price mechanism. This impeccable piece of economic theory has played a dominant role in OECD thinking ever since the oil shocks. Even so-called “positive adjustment” and now “structural reform” were viewed mainly as a matter of getting rid of market imperfections—to the point where OECD was seen by some as somewhat doctrinaire.

Now, however, there are clear signs of OECD’s evolutionary capabilities. The reviews of national economic policies have shifted substantially towards structural problems. The OECD Jobs Study partly took on the issue of enterprise creation and job creation, a step at least towards Schumpeterian analysis. But the trump card is perhaps OECD’s work on long-term techno-economic waves, or K-waves, called after the Russian economist, Nicolai Kondratiev, waves which Schumpeter subscribed to, though which many classical economists reject.

Caution is called for, however. In the first half of the 20th century structural change was largely the result of war and economic depression. Despite globalisation and technological change, the second half was much more stable, to the point where there was debate about the “death” of the economic cycle. Macro-economic policies, and in particular monetary policies à la Friedman, appeared to have been successful in smoothing out the economic cycle. But then came the 21st century, and the financial crisis of 2008 changed the ball-game and put Keynes and government back on the agenda. But beyond this old duel, we are nevertheless in for competition between different models of capitalism–Asian, Islamic, Western, etc–in the race to catch the next K-wave of innovations.

Perhaps the OECD is right in having a foot on both sides of the mirror after all.

“Think global, act local”

Another sign of OECD’s evolutionary capability is the shift towards territorially-based policies as a riposte under globalisation. Knowledge-based economies and information societies mean that creativity, innovation and entrepreneurship–going beyond “flexibility”–have to be spread throughout the population. Top-down macro-economic and structural policies need the backing of dynamic regional and local economic and job-creation policies. The mobilisation of endogenous human and cultural resources, rather than redistribution of income via subsidies, is the leitmotif of such policies. The economic culture then leans towards entrepreneurship and initiative, as opposed to assistance.

Powerful trends towards decentralisation, deconcentration and devolution, as exemplified by the slogan “Think global, act local,” are at play in the OECD area, and beyond. New forms of governance, based on partnership between central governments, local territorial authorities and civil society are thus emerging. At the territorial level, there are new opportunities for democratic participation, with the aim of maximising citizens’ access to information, economic opportunities, and decision-making, which the OECD is equipped to face, with its territorial and entrepreneurship departments.

But there is a rub. Globalisation and innovation produce more wealth, but they also tend to increase social inequalities. Margaret Thatcher’s assertion that the market economy could produce the good society has worn thin. So too has the Marxist vision that the economy could be planned to meet social and political goals. The advanced, democratic economies and societies of the OECD cannot avoid the reality that globalisation and innovation are having powerful social effects. But can the OECD, an apolitical “policy pathfinder” help to sort out the societal paradigm?

Indeed, successive secretary-generals have taken significant initiatives themselves. Thorkil Kristensen, the first secretary-general who was in post during the 1968 student revolt, took part in a dialogue with student leaders from all OECD countries, and later submitted ideas to OECD members on “The Problems of Contemporary Society” (see Alexander King’s Memoirs, p. 293). Mr Kristensen’s successor, Emile Van Lennep established a new department as the “social arm” of the organisation. Then came Jean- Claude Paye, who initiated debates on ‘The Active Society,” seen as a pathway through the crisis of unemployment and the welfare state. Donald Johnston launched his new paradigm to reconcile the economic, social and environmental parameters of “sustainable development.” Today’s secretary-general, Angel Gurría, has positioned the OECD as a hub for discussing globalisation challenges, including climate change.

Looking back, one is struck by OECD’s capacity to initiate new thrusts based on policy as opposed to party political ideas. Today innovation and globalisation have vast societal implications. We have gone from an “industrial” to a “post-industrial” society, and onto the “information” society. What’s next? The heart of the matter could be that the pace of continuing change, resulting from innovation and globalisation, calls for creative societies. Indeed, once the current crisis-stricken financial markets are re-shaped, the only path to higher growth and productivity in the real economy will be to continue riding up on the emerging wave of pervasive technologies–in energy, environmental and biological technologies, and communications. “Flexibility”, on the other hand, an OECD leitmotif, tends to view people as nothing more than a malleable factor of production. If Charlie Chaplin were to redo “Modern Times” today, he would have a heyday!

The OECD has rightly started a debate on the creative society. The educational sector should now take the lead, because education has always been the institution for preparing the future, as well as transmitting to young people the heritage of the past.

In so doing, it would really take the OECD through the mirror!

* Ron Gass is a retired OECD director, and had leading or founding roles in the Science, Industry and Technology as well as Education directorates, including the Centre for Educational Research and Innovation, departments, and more. The views expressed in this article are those of the author. See article on CERI.


©OECD Observer No 270/271 December 2008-January 2009

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