Tag Archives: competitiveness

The Development and Deployment of Technology

Dr. John Psarouthakis

Executive Editor

Technology development and deployment are important because manufacturing has become a technologically-driven endeavor. Our ability to compete in manufacturing is dependent upon the quality and the sophistication of our human resources, manufacturing facilities and equipment. In the recent past, we allowed our manufacturing equipment and facilities to deteriorate relative to our foreign competitors.

It is indeed a bitter pill to swallow that the U.S. was failing in the development and commercialization of new manufacturing technologies. As the recent Nobel Prize awards attest, our scientific base is still unparalleled in the world. We have the support of the Federal government and the strength and vitality of universities to thank for this state of affairs. We also have a strong and vital network of federal labs and a distinguished groups of not-for-profit R&D facilities contributing to the nations store of knowledge. Even with this scientific base, however, we have not learned to master yet the” art of knowledge utilization and technology transfer. In effect, the scientific knowledge produced by our universities and labs has benefited other nations, at least as much, and arguably more, than it has helped us in the recent past but it seems to be correcting.

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Some Things Are Not Reversible

Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, and Founder and former CEO, JP Industries, Inc., a Fortune 500 industrial corporation

Certain actions described in the laws of physics are not the only indelible forces in our world. Many powerful genies cannot be put back in the bottle. “Irreversible” is a descriptor of immense power, something I first pondered scientifically in an MIT physics class. It’s a concept—a fact—that lays the foundation for all economic, industrial, political, or social discussions. One could fairly say that my  book published 5 years ago, see reference at the end of this article, is about how best to cope with irreversible changes that we can’t put back in the bottle, even if we wish we could. In the end it is also about a grave danger I see for the free-market economy and innovative, self-reliant national mindset that has made the United States the world’s destination of choice.   In that light, we begin by discussing our era’s two great, and irreversible, socioeconomic drivers: technology and globalization.

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Asynchronous Cycles and European Convergence.

Perry Gogas 15xx (2)Dr. Periklis Gogas is a frequent contributor to The Business Thinker magazine. He is an Assistant Professor of Economic Analysis and international Economics, Department of International Economics and Development, Democritus University of Thrace, Greece


Ioannis Pragidis
Dr. Ioannis Pragidis is a co-author for the Business Thinker magazine.
He is a Lecturer of Economic Analysis at the  Department of Business Administration, Democritus University of Thrace, Greece


Towards Consolidation
After the crisis of 2008, governments and investors have been looking forward to the next day. After four years of fighting hard to restore liquidity in the global system, we face the difficulties arising from the slow growth of the real economy in almost all developed countries. The financial analysis of the Eurozone crisis gives way to the need to develop and implement a long-term economic policy. After 11 years of the euro crisis and with strong data in hand, we can factor in a satisfactory degree of certainty with some useful conclusions on the functioning of the euro area economy. In addition, the zone’s future now perhaps for the first time since the outbreak of the crisis is expected to be less dark and uncertain.

Asynchronous Cycles
The million dollar question is how will the countries of the South and North manage to cope together with the challenges in a common currency area. The common view is that the lack of national exchange rate policy will lead to a further recession for the countries of the South, since the main objective is the depreciation of the euro in order for these countries to regain their competitiveness. On the other hand, the hard core countries advocate a tougher euro so as not to disturb the market’s confidence for the common currency and to avoid the problem of imported inflation with negative consequences for the competitiveness in international markets. The production is mainly based on the usage of intermediate goods, the cost of which will increase as a consequence of a devaluation; this will drag up the cost of the production of other goods and services and thus lead the economies toward inflation and a loss of competitiveness. In International Monetary Theory, this is known as the problem of “asynchronous business cycles“. In this case, in the context of a monetary union such as the euro zone, a serious problem is being created regarding the effectiveness of monetary policy when some member states are being developed while others are in a recession. This is the reality being faced in recent years by the European Central Bank. In the northern countries, where competitiveness is high on the international level, the real economy is growing steadily. The main concern of monetary policy should be curbing inflationary pressures from the booming economy resulting in increased income and effective demand. In order for this to be achieved, a contractionary monetary policy should be implemented to limit the growth of the money supply. This is achieved by raising interest rates, reducing credit and the sale of debt through “open market operations“. However, for countries facing severe financial problems that are in a recession or crisis as a result of low productivity and hence low competitiveness, the appropriate monetary policy is to increase the money supply, reduce interest rates in order to stimulate new investment, and buy government bonds in open market operations in order to increase liquidity in the banking system; all of this will lead to credit expansion through the financing of new investment projects and through consumption, which is needed for the economy to be stimulated. It is obvious that in such a case there is not a monetary policy that is effective for all countries involved in this monetary union. In the case of Europe, it is logical that the European Central Bank designs and implements a monetary policy that is beneficial for countries whose GDP accounts for more than 70% of total output in the Eurozone. Thus, we experience the implementation of a strict monetary policy where inflation is the word missing from the vocabulary of the experts. Of course plays an important role here the mandate that aims to implement the ECB in contrast for example to the U.S. Federal Reserve. The ECB under the Statute has as its main objective the so called ‘monetary stability’, in other words avoiding inflation. The Fed on the other hand has two objectives: monetary stability and full employment. Naturally, these two objectives can often be conflicting. However, this difference gives significant leeway to the Fed as opposed to ECB. This discrepancy in economic priorities leads many economists and politicians to expect the breakup of the Eurozone. Careful observation of the data of the last decade may show a different reality which is much more optimistic.

Empirical Evidence Convergence
Economic data shows that there is a convergence of business cycles between the economies of the Eurozone. More specifically, a recent study to be published shortly in the journal of the OECD (Gogas 2013, Journal of Business Cycle Measurement and Analysis) shows that after the introduction of the common currency in 1999 (by pegging the national rates with the euro) Eurozone countries generally showed more synchronized cycles than the previous season. Certainly this synchronization as indicated in the study “should not be interpreted as an indication of general economic convergence. Although economic cycles appear more synchronized after the euro, the fundamentals of member countries such as productivity and competitiveness may not have converged. This can result in problems such as the recent debt crisis that threatens even the existence of the eurozone.” After the adoption of the euro, most of the peripheral economies faced cumulative competitiveness problems. Being in a monetary union and helpless to offset the high cost of labor and production, which is mainly a result of differences in labor productivity, with a devaluation they relied solely on deficits and increases in debt trying to finance their growth and their imbalances in current account transactions. The period before the crisis, i.e. before 2008, shows that apart from the convergence of business cycles in the Euro area countries, there was a convergence of nominal wages, as well as the price level in the unit labor costs. Inflation in the southern countries (Greece, Spain, Portugal, Italy) were consistently above the Eurozone average, which indicates convergence of the price levels of countries that had lower prices in the launch of the Euro. Moreover, it appears that the increase in prices was caused by higher prices of non-tradable goods and services, i.e. those not participating in the trade balance of countries. On the other hand, labor productivity tends not to be at the same levels between countries, especially those countries that had low labor productivity before their integration in the Euro area and that continued to move toward lower levels.

The Euro
The effects of the introduction of the new currency was not uniform in all member countries. In Greece, for example, the adoption of the Euro has led to significant price increases that reduced competitiveness. In Greece, this sharp increase in prices was believed by consumers to be what economists call a “temporary shock“ (transitory) or a “transient effect on income.” So this was incorrectly treated as a temporary reduction in real income. According to the “permanent income hypothesis” of Milton Friedman, households and businesses react to such a temporary shock by trying to compensate its effect through lending. According to this theory, consumers do not like sudden short-term changes (and downwards and upwards) in consumption and try to compensate by dispersing the result of temporary changes throughout many periods in the future so that there is little change in consumer behavior. This is exactly what happened in Greece. Households began to accumulate debt hoping to repay it when economic conditions improved. The optimism of the participation of Greece in the Eurozone, the steady growth, and other purely emotional and psychological factors such as the assumption of the Athens Olympic Games in 2004, created a great feeling of confidence that things would get better. This situation was fueled mostly by the unprecedented credit expansion in early 2000. This credit growth was supported by the ease with which the Greek financial institutions had access to capital from a broader and more integrated European capital market. The banks thus exacerbated their balance sheets through financial leverage. This proved disastrous as we have recently seen. Greece, just like other peripheral economies of the Eurozone faced a productivity gap relative to the central economies. For a monetary union to be successful, the economic convergence was essential both to the state budget (deficit, debt) and to the economic performance of the private sector (productivity, innovation). The unjustified euphoria that followed the introduction of the euro with “easy money” (easy but borrowed) created an illusion of wealth that misled both the private sector and governments from focusing on growth and on the reduction of the productivity gap from our European partners. Even worse, the differences in productivity and asymmetric business cycles encountered no substantial and structural measures, only new borrowing. As mentioned above, the ECB’s monetary policy is necessarily designed to serve the “big” EU countries, as they produce the overwhelmingly majority of the European GDP. To the extent that some of the smaller economies face adverse movements in GDP, since they are not synchronized with the so-called “big” countries, the only tool you can use is fiscal policy. Greece, along with other small regional economies in the EU have tried to address these asymmetries by creating deficits and increasing public debt, thus causing the debt crisis facing the Eurozone.

The Trade Balance and Exchange Rate
The difference in real wages between countries , as shown by recent studies on the case of the Eurozone (IMF, 2012), are due largely to a productivity gap, rather than sizes belonging to the narrower term core of competitiveness such as price and unit labor costs. The general elements of the course of the Euro show a lack of convergence of the countries of the Euro area work efficiency as expressed through technological improvements, education, infrastructure, etc. It is also important to note that the Euro as a single currency is not largely responsible for the level of unemployment in the countries of the Euro area, since from the first year of its adoption and through 2007, there was a convergence of rates between Eurozone countries.
If we pay attention to the entire Eurozone, we see with few exceptions that trade surpluses were achieved in all years (of course with the bulk coming from exports of Germany). The Eurozone manages to compete in international markets. During the same period, the euro-US dollar was high for the Euro levels. That is, the stable Eurozone trade surplus was not due to a devalued Euro. Paradoxically, the same picture applies across countries in the Eurozone. The relative level of prices of tradable goods and services is not the main determinant of imbalances in trade balances. Moreover, the current account of the U.S. was firmly in deficit throughout the decades of the ’90s and ’00, while the dollar depreciated between 2004 and today against the major currencies. In other words, the reduction in the price of U.S. goods abroad has not helped to eliminate the deficit. The reason in the case of the U.S. is mainly due to the preference shown by most countries to invest in financial products from the U.S.; this is because the development of the financial sector in many developing countries are not strong enough (that also explains the low interest rates in the U.S.). Of course, some of this deficit is financed by investments of U.S. firms abroad, which has particularly increased in recent years.

The conclusion, however, is that the monetary aggregates (such as commodity prices, exchange rates, etc.) do not affect long-term developments in the real sector of the economy such as output and employment but are only affected in the short term. This principle is known as the “neutrality of money“. Based on this, the assumption seems to be gaining ground that trade deficits were created primarily because of low interest rates after the adoption of the Euro and by the expectation of convergence and not because of a lack of competitiveness of the countries of the region toward the the North.
Therefore, the challenge for the Eurozone is the next day: the development of the real economy and the reduction of unemployment through a reduction of trade deficits of weak states.
On this basis we conclude that a central economic policy which favors inflation with simultaneous investments in increasing labor productivity can be the driver to exit the crisis. Inflation seems to create far fewer problems than it solves, for example, the gradual reduction of the nominal debt, while not exacerbating the trade deficit to the extent that until today most economists believed. Of course, these measures cannot replace the need for federalism in Europe or the lack of sectoral policy among countries nor can it replace the rationalization of government spending and the creation of primary surpluses.