Traditional Economy: Innovations, Efficiency and Globalization
Traditional Economy: Innovations, Efficiency and Globalization
Oksana Ishchenko-Padukova,
Monika Grabowska
RECENT ISSUES IN ECONOMIC DEVELOPMENT
Mamedov, O., Movchan, I., Ishchenko-Padukova, O., Grabowska, M. (2016),
Traditional Economy: Innovations, Efficiency and Globalization, Economics and
Sociology, Vol. 9, No 2, pp. 61-72. DOI: 10.14254/2071-789X.2016/9-2/4
DOI: 10.14254/2071-
789X.2016/9-2/4
Introduction
When analysing traditional economies with regard to their innovation, efficiency and
modernization, the researchers can hardly find more diverse and interesting example then the
North Caucasus region (Barrett, 1995; Kolesnikova and Malovichko, 2004; Mamedov, 2004;
Gerasimov et al., 2014; or Kolesnikov, 2014). Sandwiched between Europe and Asia, the
regions boast both wild and breath-taking sceneries, a blend of modern civilizations and
In this section, we will test the provisions of the Okun’s law for the North Caucasus
regional economy. Okun’s law represents a macroeconomic relationship that describes the
interdependence between output and unemployment. In other words, it measures the level of
activity in the market for goods and services to the level of activity in the labour market in the
time frame over the business cycle. Over the last decades, this relationship proved to yield an
empirical regularity in various countries around the globe (Silvapulle et al., 2004; Mamedov
et al., 2015).
Okun’s law remains popular amongst the labour economists of all genres and schools
of economic thought due to its robust empirical regularity as well as due to its importance as a
macroeconomic tool that finds its implementation in various fields. It can be shown that when
the Okun’s law is combined with Phillips curve, one obtains the aggregate supply curve.
Furthermore, Okun’s law has strong implications for macroeconomic policy, in particular
with regard to calculating the optimal rate of economic growth. This gains particular
importance with regard to the scope of our paper that sets a goal of understanding the
processes and the mechanisms of modernizing the “traditional” regional economy.
Further down this section, we will estimate the empirical value of Okun’s coefficient
which represents an indicator of the responsiveness of unemployment to output growth which
is crucial in understanding and yielding the cost of unemployment in terms of output (Abrhám
et al., 2015; Lelek, 2014; Jasinskas et al., 2015).
It can be shown that the empirical estimates of Okun’s coefficient are sensitive to the
selection and the specifications of the model (either a static or a dynamic model). Model
specification might also include the first-difference model or the gap model. If the first-
difference model is chosen, the output and unemployment variables are then yielded as the
growth rate. However, if the gap model is selected, the variables are expressed as the cyclical
components or deviations from long-term trends (Ball et al., 2015).
Our empirical model can be formulated as follows:
And
where u represents the rate of unemployment, g – is the regional product, b – is the Okun’s
coefficient and a, λ, and ρ represents the coefficients.
The model specified in (1) and (2) can be further modified and transformed into the
model with both endogenous interaction effects and interaction effects among the error terms
(SAC):
Table 1 that follows reports the results from the models specified in (1)-(3) using the
regional data on the North-Caucasus regions obtained from the Federal Statistical Service
(2015). The results are presented in the table using four main specifications of the model
including SAC.
Specifications
FE SAR SEM SAC
-0.102*** -0.016*** -0.015*** -0.015***
b
(0.008) (0.004) (0.007) (0.002)
-0.102*** -0.020*** -0.015** -0.016
Direct effect
(0.008) (0.004) (0.007) (0.004)
-0.055*** -0.077***
Indirect effect
(0.014) (0.025)
-0.102*** -0.078*** -0.015** -0.098***
Common effect
(0.008) (0.015) (0.007) (0.025)
0.354*** 0.435***
ρ
(0.018) (0.015)
0.354*** -0.302
λ
(0.015) (0.080)
R2 0.121 0.168 0.101 0.165
Log-likelihood 1775 2345 2148 2335
Note: *** – significant at 1% level, ** – significant at 5% level.
Source: Own results.
Our results show that the economic development of the region is mainly determined
by regional competitive advantages including such factors as the allocation of natural
resources, geographical location, agglomeration effects, and human capital. When it comes to
the competitive advantages, it becomes apparent that less independent and influential regions
might be the losers in this economic gain and modernization and innovations are not likely to
contribute to their development and economic growth.
Moreover, there appears to be no asymmetric adjustment to the increase of regional
growth rates dependent on the spatial interactions in the model (a regional buffer effect). Due
to the regional disparities there are regions with high unemployment slow dynamics of
economic growth. Our empirical analysis shows that these regions are dealing with the crisis
and economic turmoil due to the presence of spatial interactions.
In general, it seems that the modern society complies with and pursues three
fundamental trends: sustainable economic development, innovative behavior mechanisms,
and globalization of national economies. All other trends can be classified and pushed into
these three basic trends described and classified above.
The most amazing analysis that economic history can offer its researches is to consider
how a traditional economy makes steps towards its future (“innovative-industrial”,
“effectively liberalized”, and “globally supranational”) economic arrangements. Our paper
does it in the context and using the example of the North Caucasus, a region that is seemingly
“custom made”. Our results prove the objective trajectory for economic development of all
countries and to demonstrate the intellectual and forecasting power of economic science.
Traditional economy is the first and the last epoch when traditions have an overriding
priority in everything. Therefore, development of traditional economies is reduced to
developing traditions, and is represented in such development. Knowledge of this mechanism
of “renewing traditional society” enables to control and manage it, launching and
implementing new traditions.
Traditional economy is characterized by the primitive social and administrative
organization. This is the situation and the case when the social layer is formed with a
“modernized” mentality that becomes instrumental for “modernizing” a traditional economy.
One can conclude by saying that traditional economy poses traditional advantages and
shortcomings as well as traditional contradictions. Those include contradictions between
society and nature which puts the whole arrangement in contrast with the modern economy.
When it comes to modern economy, it becomes apparent that all contradictions that it
demonstrates typically become purely social between various groups of economic agents, or
participants engaged in production and distribution.
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