2018 Annual Review
by Robert Alan Feldman

Breaching barriers to technology diffusion begets income gains

To translate technology into broad-based income gains, three things must happen

Any policy that limits the free flow of technology across borders, whether national or otherwise, has the potential to cap growth by artificially limiting the potential for productivity gains.

The global economy is slowing. Both the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) predict a significant slowdown in growth over the next two years.

Sadly, income gaps around the world have led to populism and protectionism, which have slowed the response of governments on growth. The slower the response, the more the problems worsen. This is a vicious cycle. Shortsighted policy leads to bad outcomes, which only exacerbate shortsighted policies.

Escaping this cycle requires a solid understanding of where economic growth comes from, and what blocks it. The answer on growth is clear: Growth comes from diffusion of technology. So what is the fundamental process of technology diffusion, and how can we remove the blockages?

Countries must recognize that investment in education is critical to future competitiveness, and they should find ways to encourage more students to learn the skills that are critical to technology development.

The diffusion process links five nodes: science; engineering; innovation; entrepreneurship; and growth. However, the flow is not unidirectional. Indeed, all nodes must be connected to all other nodes. Imagine a pentagram inscribed in a pentagon. Each node must do its own job well, but must also talk with all other nodes. Feedback is crucial. Successful innovation centers, such as Silicon Valley, have deep and dense feedback networks among the five nodes. Moreover, with the sharp drop of telecom costs, connections among the nodes around the world have strengthened.

Economic growth has improved since the recent recession, but there was an important failure: Few countries distributed the fruits of the growth widely enough to improve income distribution or to halt the rise of populism. Looking forward, in order to translate technology into broad-based income gains, three things must happen: The barriers that separate the nodes must be reduced; feedback among the nodes must be enhanced; and the fruits of growth must be distributed more fairly.

Feedback among the nodes has been weakened by two types of protectionism: global and domestic. Global protectionism comes in tariffs and non-tariff barriers among nations. No country is innocent; unbeknownst to most Americans, the United States imposes high barriers on imports of sugar, dairy products, footwear and SUVs, for example. In Japan, where I have lived for 30 years, actual tariffs on almost all products (except some agricultural items) are extremely low, but complex import procedures and distribution rules can complicate market access.

In both countries, quite often, these barriers are the result of rent-seeking by domestic producers, and come at very high expense to the consumer—and by extension, to the industries where consumers cannot spend because of the costs of high trade barriers.

Domestic protectionism comes in the power of vested interests over policy. In both Japan and the US, construction, pharmaceutical, medical, agriculture and many other industries employ many lobbyists to make their cases to both national and local legislative bodies. Well-organized groups are overrepresented, while poorly organized groups are underrepresented, relative to the population. Among the results are reduced competition, excess profits and lower efficiency. Another result is often overlooked—slower development and diffusion of technology.

Why do these protectionisms slow technology progress? The answer is simple: Protected markets reduce the incentive for incumbents to invent, adopt and spread new technology. Moreover, the excess profits in the protected industries constrain funding available for technology development in other industries. Finally, by reducing growth, excess profits make individuals poorer, and thus less willing or able to seek new education and new skills that might use new technology. Weaker education, in turn, worsens income distribution and invites both populism and further protectionism.

The world is now intensely searching for ways to distribute the fruits of growth more fairly. Universal Basic Income is one very good idea, although hard to implement. Any such system must be devised with an eagle eye on incentives and costs. An easier way toward fairer income distribution would be to end the two protectionisms, and enhance competition, both at home and abroad.

The legal profession can be part of this initiative, through two proposals from the profession itself. One proposal would seek to clarify and simplify international trade law. The profession itself, which sometimes benefits from the protectionisms, must act. If the job were left to governments, all of the corporate, labor and political vested interests would likely block progress. The other proposal would seek to redesign antitrust and competition laws globally. A template could be the way that corporate governance codes around the world are converging on key principles. Such proposals could take years to complete. We must start yesterday.

Robert Alan Feldman was a keynote speaker for the White & Case event "Uneasy Alliances with 'America First' United States," held September 20, 2018 at the Shangri-La Hotel, Tokyo.

Robert Alan Feldman is a professor at Tokyo University of Science, senior advisor to Morgan Stanley MUFG Securities, and commissioner of the Japan-US Friendship Commission. Feldman is fond of maneki-neko—Japan's lucky "beckoning cat" figurines—which are often displayed in shop and restaurant windows and in homes as signs of hospitality and talismans of good fortune.


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