The Hindu Business Line : `Technological change is instrument of competition'

MR Richard C. Levin, Professor of Economics, has been the President of Yale University for more than ten years now. He has specialised in economics of technological change and is considered an authority on intellectual property rights.

He is now on a visit to India along with a delegation from Yale University. Prof Levin took some time off during his visit to Chennai and shared his views on the effects of technological change. Excerpts from the interview.

How has the politics of technological change affected economic growth especially in emerging markets?

There has always been political resistance to technological change even if you went back to the industrial revolution. If you think about the US, since inception, there has been promotion of technological change through government support for research. There has not been much political resistance for technological change.

Things have been much different in developing countries. Many countries have experienced resistance to changes in agricultural productivity since it involves moving people off the land. It is hard to generalise.

A McKinsey study suggests that in the US only a few industries benefited from a productivity revolution. Your comments.

The work of few other people has shown something quite different. There have been significant gains very pervasively throughout the service and the manufacturing sector as a consequence of IT. Aggregate productivity performance of the American economy over the past 15 years would be hard to explain without that. Without that, how do you explain we are a whole percentage point above long-term trend? There is something going on.

The McKinsey study suggests that it is not productivity gains, but over investment in technology...

The gains from IT are not uniformly distributed across industries. But there have been gains for almost every industry. Many industries are above what they would be without IT investments.

If you talk about cycles, yes there was huge over-investment in especially telecommunication in the nineties.

What would be your comment on Hernando De Soto's observation that ownership of land is the reason why capitalism has thrived in countries such as the US but is not doing so well in developing countries?

That is a big factor in America. De Soto's arguments pertain more directly to America than to emerging markets that have been effectively socialised. They don't pertain to Russia or China or India even.

The mal-distribution of wealth principally, as a consequence of concentrated land holdings, is truly applicable to Latin America more than the other parts of the world... more than Asia.

What do you think needs to be done to make technological change deliver value to all stakeholders?

Technological change is disruptive. It inevitably destroys as it creates. It destroys old structures, old ways of doing things. That means there will always be winners and losers.

Now, the question is, how can governments move in and mitigate the adverse effects of technology. You are not likely to have technology change that does not dislocate people. It will increase returns in capital in some areas and reduce returns to capital in other areas.

If, however, productivity improves with technological change, then the net effect on society will be positive. The question is how the Government can siphon some of the gains to mitigate the adverse consequences on losers from the technological change.

The outsourcing controversy that brought up barriers seemed to mirror what would happen in many economies... .

The outsourcing debate in the US pretty much seemed to die down after the primaries, in part because many people wrote about the fact that the consequences as a whole for the US is positive and not negative. They also wrote that the magnitude of what is happening in the service sector is extremely small compared to what has been happening in the manufacturing sector for the past 40 years.

Since 2000, we have lost three million jobs in the manufacturing sector. The highest estimate for outsourcing will not exceed 4,00,000 jobs. A more realistic estimate would be 2,00,000 jobs. It is not a big deal.

The number of jobs that is being talked about is 3.3 million jobs by 2015... .

The number is still not big. We may have lost 30 million jobs in manufacturing over the past 30 years. That is a lot of manufacturing jobs. The percentage of workforce in manufacturing has dropped from 45 per cent to about 17 per cent. We go through these transitions. This is what happens when technology changes. America is going to specialise in high-end services and those services that are required to run a local economy.

Do you think technological change is inherently anti-competitive requiring the need for regulation?

No. In the short-term, technological change can lead to a temporary monopoly over some new idea. That looks anti-competitive. The real competition is not competition within the market but competition for the market. The competition that matters is the competition for the new market.

The monopoly does not last very long. Other people coming in with new and better improvements erode the constant creation of temporary market power. Technological change is actually an instrument of competition.

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