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Review of "National Competitiveness and Economic Growth"
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19 Oct. 2006 - 2:22:00 PM

Review of “National Competitiveness and Economic Growth, The Changing Determinants of Economic Performance in the World Economy” - Timo J Hämäläin

Pub. 2003 Edward Elgar, Cheltenham, England and Northampton, Massachusetts

This book is, in my opinion, is one of the most important economic books published in the last few years.   The title fails to hint at the explosive contents of the book and its price unfortunately puts it out of the reach of the clausal reader, but if you have access to an academic library, please read it.   I hope that an affordable paperback edition, updated as necessary, is soon made available to the general public.

The stated objective of the author,   “is to develop a systemic and dynamic theoretical framework for the analysis of national competitiveness and economic growth in the modern world economy.”   However Hämäläin believes that the world economy is in the process of transition from one economic era to another, a process which is known as a step function change in complexity theory.   Or as Hämäläin expresses it, “The world economy is currently going through a major technological and structural change which amounts to a fundamental ‘technoeconomic paradigm shift’.”   In fact Hämäläin’s real focus is on producing a model which will demonstrate which national economies are best-placed today to succeed in the emergent era.   What I believe Hämäläin does convincingly is to the make the case for a global system change, but like the rest of us he finds it difficult to foresee the future, as Bohm said [quote from Merryn’s Website].   At best we see the age which is emerging “though a glass, darkly.”

What I believe Hämäläin should have called this book, is “Paradigm Shift, The Birth of a New Age.”   He succeeds brilliantly in explaining the nature of the transition we are now entering and in conveying his understanding of how this paradigm shift will turn the world upside down, forcing changes to our values, fundamentally altering our institutions and rearranging the order of the nations.   Hämäläin reviews the literature on long cycle economic change, including Kondratiev’s wave theory,   well also highlighting the contributions of economists like Schumpeter, and explaining technoeconomic changes in the context of Kuhn’s work on scientific revolutions, and stressing that a new economic paradigm creates the need for far-reaching organizational and social adjustments.   He notes that, “the mental frameworks of societies reflect the dominant technoeconomic paradigm,”   and warns of the resulting ‘cognitive dissonance’ in society during a major paradigm shift.

In short Hämäläin identifies the key factors of the period of transition which we are entering, as the industrial age draws to a close, and as a new era emerges.   He says that, “the long transition phase between the old and new socio-institutional paradigms tends to be a turbulent period of increasing social tensions.”   He points out that in order to survive and be successful in the new era societies need to be able to adjust rapidly to change and adjust their mental frameworks.   Hämäläin also points out that those societies which were best adjusted to the old paradigm are likely to have the greatest adjustment problems in dealing with new paradigms.

In addition to identifying those factors associated with the transition from one era to another Hämäläin also looks at the process of economic transition, for example at the likelihood that the world will soon experience a major depression, and at the innovations and economic developments which will enable new industries to lead the recovery.

The second half of this book is primarily concerned with the development of Hämäläin’s framework for the analysis of national competitiveness.   There is an excellent review of the literature on national economic competitiveness and a stress of the importance of technical innovations on economic growth and competitiveness.   In addition Hämäläin also reviews the importance of organizational efficiency, and of knowledge exchange.   He also considers the role of international businesses in promoting organizational efficiency and improvements in resource utilization.

Chapter 12 “Institutional Framework” is particularly important as Hämäläin considers the interaction between institutions, culture and economic competitiveness.   His subsequent chapter on the role of government is also very interesting, as he stresses that government’s role should be appropriate and efficient, he says that governments have an essential role and that, “it is the holistic macro-organizational approach that offers the best prospects for advancing the competitiveness and growth of modern economies.” In addition he states that, “The government is the only agent in society that has a real interest and the required capabilities to oversee the efficiency of the whole economic system.”

Hämäläin sees the relationships between different institutions, such as business corporations and government, as being of necessity fluid and changeable, not fixed because of history or ideology.   He identifies the dangers of the influence, during this period of change, of the very powerful lobbies whose interests are strongly tied to the continued success of the old technoeconomic paradigm; groups such as car manufacturers and the oil industry.  

Hämäläin also highlights the knowledge-intensity of the new production paradigm, and the network economies’, which favour standardized interfaces between interdependent technologies.   He also notes that “in the new knowledge-based production paradigm, scope economies seem to have taken a similar key role as scale economies had in the previous mass production paradigm.”

Having considered where the global economy is heading and how institutions need to adjust to the changes he foresees Hämäläin states that “economies that are best adjusted to the new socio-economic environment should outperform those that are further behind in the adjustment process.”   This is a key element in his argument and the basis of his research into relative national economic performance.

Hämäläin uses seven competitiveness indices “which measure the adjustment of the industrial societies to the new socio-economic paradigm.”   The countries which performed well included UK, Ireland, Australia, Denmark and Finland and he concludes that “these countries have a good chance of being among the leading countries of the next century.”

Although this is the ultimate focus of the book this reviewer felt that interesting though this research was it was overshadowed by what is a fascinating study of the process of change and the economic paradigm shift we are entering.    Hämäläin makes clear that the world will be fundamentally different in the new paradigm, that this is not merely a change in production technology, as happened when the 19^th century coal-based economy was superseded by the oil and chemical-based economy of the 20^th century, but a long-wave event of the type that only occurs every 500 years or so.    In finishing the book I felt that Hämäläin’s research had demonstrated a far more dramatic change than he had originally expected and that it is therefore impossible to determine which countries will come out of the extraordinary changes we now face.   During the next decade we now face a Tsunami of economic change, so powerful that it can sweep away established institutions, industries, ways of working and even values, in a way than no one alive can have seen, we stand at the point of dramatic change, like the holiday makers on the coast of Thailand in December 2004, watching the great wave towering over them, knowing that there is nothing that can be done to avoid it.

This book is a warning to us, and I believe that it is impossible to determine who will succeed.   Hämäläin’s framework and guidance on meeting change flexibility will prove invaluable, but great leadership and creativity will be demanded of everyone in positions of influence.

As you may have gathered this is an important book.