1. As population grows old, elderly people may have to retire. If elderly people becomes pensioners under a pay as you go scheme, population aging not only reduces the supply of working age population but also increases the costs. Meanwhile, developing countries increase supply of cheap and healthy workers by producing traded final goods. The domestic industries in general as well as those intensively using youth labor may lose competitiveness.
An advanced economy may choose deepening sophistication of the economy in two dimensions - time and space. Some countries like the U.S.A. and the U.K. may pursue spatial expansion of their corporations. It is because they have the global language - English - as their native tongs and the fully convertible key currencies - the US dollar and British pound, respectively - as their own currencies.
The advantages in language and currency enable domestic firms to exploit the opportunities opened by the supply of cheap labor in emerging market countries. They can also exploit the opportunities provided by automation technology. Consequently, domestic workers with less sophisticated skills tend to be driven out of the traded goods sector in the world. The country need to handle another problem - i.e., industrial hollowing out.
Other countries like Germany and Japan do not have advantages in language, which implies higher costs for internationalizing their services.
Dornbusch, Fischer, and Samuelson (1977) shed lights on the way forwards for the latter type of countries with aging population to remain competent in the global traded goods sector. The key is to improve productivity of firms in intermediate goods sector. It is a way of moving up the global value chain. Maintaining comparative advantages in producing intermediate goods is important because it helps prevent the firms from being crowded out by the emergence of new industrial powers.
Firms of emerging countries start with final goods production, which requires less sophisticated technological capabilities. As they accumulate experiences in producing final goods, their 'national learning productivity (Goodfriend and McDermott GM 1998)' improves. The improved national learning productivity enables them to internalize positive spillovers from imported specialized intermediate goods. This means that in order for the advanced country to retain competitiveness its firms producing intermediate goods need to forge ahead through making innovations - i.e., by improving products or processes.
An advanced economy may choose deepening sophistication of the economy in two dimensions - time and space. Some countries like the U.S.A. and the U.K. may pursue spatial expansion of their corporations. It is because they have the global language - English - as their native tongs and the fully convertible key currencies - the US dollar and British pound, respectively - as their own currencies.
The advantages in language and currency enable domestic firms to exploit the opportunities opened by the supply of cheap labor in emerging market countries. They can also exploit the opportunities provided by automation technology. Consequently, domestic workers with less sophisticated skills tend to be driven out of the traded goods sector in the world. The country need to handle another problem - i.e., industrial hollowing out.
Other countries like Germany and Japan do not have advantages in language, which implies higher costs for internationalizing their services.
Dornbusch, Fischer, and Samuelson (1977) shed lights on the way forwards for the latter type of countries with aging population to remain competent in the global traded goods sector. The key is to improve productivity of firms in intermediate goods sector. It is a way of moving up the global value chain. Maintaining comparative advantages in producing intermediate goods is important because it helps prevent the firms from being crowded out by the emergence of new industrial powers.
Firms of emerging countries start with final goods production, which requires less sophisticated technological capabilities. As they accumulate experiences in producing final goods, their 'national learning productivity (Goodfriend and McDermott GM 1998)' improves. The improved national learning productivity enables them to internalize positive spillovers from imported specialized intermediate goods. This means that in order for the advanced country to retain competitiveness its firms producing intermediate goods need to forge ahead through making innovations - i.e., by improving products or processes.
2. Remaining competent in intermediate goods sector entails decentralization in the federalist form of organization. The type of decentralization is necessary for and conducive to an economy's making innovations in intermediate goods. It is made possible by and enhances social cohesion.
Decentralized banking system makes long-term loans to local customer firms' financing investments and innovations. By doing this, it helps owner-managers of the local firms to have long-term perspective in making performances. By lengthening time horizon of local firms as investors, it enables the firms to have long-term normal contracts with employees for employments. With jobs being secured, workers make commitments to their own jobs and thereby to making innovations.
A national development bank can help small regional retail banks in a network banking system finance their long-term loans. It can issue foreign currency-denominated bonds in offshore markets and swap the proceeds into local currency to make on-lending to retail banks in long-term loans. In order to enable the sovereign agency to swap the foreign currency-denominated long-term funds into local currency, the country needs to let the currency fully convertible and freely float as argued by Kim (2017).
3. Germany seems to have succeeded in keeping intermediate goods industries home. Their success is founded upon 'coordinated market economy' inhabited by decentralized banking systems with the federalist form of organization.
4. The United States has come to have 'rust valleys' because its firms expanded businesses globally and became multinational corporations while maintaining centralized or hierarchical form of organization based on shareholder value orientation.
