Diapositive 1

1
Is there a direction in economic development?
Pier Paolo Saviotti, INRA GAEL, Grenoble, and
CNRS GREDEG I2C, Sophia Antipolis, France.
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Econ Dev, Stylised facts

• STF1) Economic development is characterised by
  qualitative change.
• STF2) The efficiency of existing processes
  increases in the course of economic development.
• STF3) The diversity/variety of the economic
  system rises during the process of economic
  development.

3
Efficiency vs diversity

• Efficiency grows when a constant output is
  produced with (a) decreasing quantities of all
  inputs or (b) decreasing costs of all inputs
• Efficiency at constant quality
• Qualitative change emergence of new entities,
  qualitatively different (distinguishable) from
  the pre-existing ones.
• N distinguishable entities ? Diversity

4
Development as system transformation

• Structural change change in the structure of the
  economic system (components linkages/interaction
  s).
• Defined at the level of aggregation of
  industrial sectors. But structural change can
  occur at lower levels of aggregation.
• Structural change can occur for activities and
  actors as well as for outputs, thus also for
  knowledge, and institutions.

5
Importance of qualitative/structural change.

• They affect the composition of the economic
  system. They are determinants of system
  performance.
• Economic development is a process of
  transformation, involving both quantitative/effici
  ency change at constant composition and
  qualitative change.

6
Development vs Growth

• Need to measure need to transform qualitative
  differences into quantitative measurements
  (conventions, approximations)
• Changes in efficiency can be easily measured,
  qualitative changes are much more difficult to
  measure

7
Diversity/variety

• Definition(PPS) number of actors, activities and
  objects required to describe the economic system
  at a given time
• Variable to represent analytically changes in
  composition N distinguishable economic species
  in system
• But also (I) extent of diffusion of new entities
  in the economic system (balance), and (ii)
  intrinsic difference between economic species
  (Disparity) (Stirling)

8
Modern phenomena

• Most people could only purchase the bare
  essentials to survive until the end of the XIXth
  century, and many people still do today
• Diversity existed only for the rich
• But in the XXth century diversity became
  available for many people in developed societies

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Diversity for most
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Efficiency and Diversity

• Two complementary forces/trajectories
• growing efficiency
• growing diversity
• Hypothesis 1 The growth in diversity is a
  necessary requirement for long-term economic
  development.
• Hypothesis 2 Diversity growth, leading to new
  sectors, and efficiency growth in pre-existing
  sectors, are complementary and not independent
  aspects of economic development.

11
Compensation

• At constant output ? growing efficiency
  saturating demand ? possibility to produce all
  demanded output with declining fraction of
  resources (labour force) ? Marxian trap
• Emergence of new sectors compensates for the
  falling capacity of existing sectors to create
  employment
• Growing diversity avoids Marxian trap.
• Supply side surplus old sectors ? search
  activities ??new goods services creation of
  demand for new goods services needs income

12
Family expenditure Workers UK
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Necessities and higher goods/ services

• The efficiency in the production of necessities
  had to increase to leave room for the purchase of
  higher goods/services
• During the XIXth century the share of family
  expenditures allocated to necessities increased
  and it started to fall only at the beginning of
  the XXth century
• Necessary condition for social stability and for
  economic growth

14
Economic development by the creation of new
sectors

• A model in which the number of new sectors varies
  endogenously during economic development
• Sector created by an important innovation
  establishing an adjustment gap (size of the
  potential market)?

15
Intra sector dynamics

• First entrepreneur enters the market
  (expectation of a temporary monopoly) imitators
  enter ? rising intensity of competition ?
  inducement for further entry falls until exit
  starts dominating entry. Innovation has become
  part of the circular flow (Schumpeter,
  1912-1934)
• Sector ? oligopoly or monopoly

16
Demand dynamics

• Demand dynamics Adjustment gap (distance from
  saturation) is gradually closed leading to a
  saturated market, but the product/service is
  improved by means of search activities
• The joint dynamics of competition and of demand
  gives rise to an industry life cycle (ILC)?

17
Creation of new sectors

• The decline of mature sectors induces
  entrepreneurs to look for new opportunities of
  temporary monopoly, to be found by exploiting new
  important innovations leading to new niches and
  sectors.

18
Competition

• Competition both intra- and inter-sector
• Intra- sector ? density of product/output
  population.
• Entrepreneur induced by expectation of temporary
  monopoly to enter. If innovation successful ?
  imitation ? increasing intensity of competition ?
  decreasing inducement to enter ? exit

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Inter-sector competition

• Inter- sector different sectors can provide
  comparable services.
• Important component of contestable markets
• Total intensity of competition perceived within
  each sector intra inter
• Limits the extent of oligopoly/monopoly that
  could be achieved within individual isolated
  sectors

20
Search activities

• Activities by means of which one scans the
  external environment looking for alternatives to
  existing routines (Nelson, Winter, 1982)
• Generalized analogue of Research and Development
  
• All economic activities can be divided into
  routines and search activities

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Model equation
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Number of firms

• Life cycle in each sector Ni first increases
  rapidly, reaches a maximum, and then falls
  (oligopoly, monopoly)?
• But, life cycle driven purely by dynamics of
  competition and demand (See ILC models).
• Shape of life cycle affected by several variables
  (AGi, Di etc).

23
Adjustment gap
24
Demand
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Search activities
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Competition
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Employment

• li ki/Qia ki/Qi/Ni (kiNi)/Qi
• li Li/Qi

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Aggregate employment
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Demand function
Di0 initial demand for the output of the new
sector I Ddisp,i the disposable income for new
good or service I Yi and ?yi level of services
supplied by the new product/service and degree of
product differentiation, pi the price of the
new product/service
Ddisp,i can be calculated by subtracting from
total income the expenditures on all previous
goods or services. Evolution of demand
constrained by the creation of disposable income
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Demand, disposable income
Demand, new function (left) Demand, old function
(right)
31
Effects of (low-high) product quality
Effect of product quality on sectoral demand, low
(pink) and high (blue) case
Product quality in the low (pink) and high (blue)
case
Effect of product quality on output, low (pink)
and high (blue) case
Effect of product quality on wages, low (pink)
and high (blue) case
32
Effects of (low-high) product quality (2)
Quantity of Human capital
Human capital/output ratio
Quality of human capital
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Effects of (low-high) product quality (3)
Disposable income (high product quality)
Disposable income (low product quality)
Aggregate income (low product quality, pink, high
product quality blue)
Aggregate employment (low product quality, pink,
high product quality blue)
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Model summary

• The model shows that if diversity/variety grows
  economic development can continue in the long run
  
• Many experiments can be carried out with the
  model by assessing the effect of varying its
  parameters on system behaviour and performance
• Experiments micro-macro dynamics, competition
  and growth, industry life cycles, Emergence of
  bubbles, etc.

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Direction of development Reversal?

• Growing efficiency and growing diversity/variety
• If the efficiency of basic functions (e.g. Food,
  housing etc.) were to fall the resources of the
  system could be concentrated on these functions
  thus reducing diversity
• Possible examples (I) fall of earth temperature
  of 50 degrees (ii) increased environmental
  fluctuations
• We live in a fairly benign environment

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Implications for development

• Countries at different levels of economic
  development. Catching up.
• How? If world diversity/variety grows then
  national diversity/variety should grow in
  parallel ? keep (national/world)
  diversity/variety ratio approximately constant
• But, short run exceptions specialization
  strategies compensating narrow range with
  increased competitiveness within range, but only
  viable in short run

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Trends and systems

• General trends (e.g. towards growing diversity)
  not followed in exactly the same way by all
  countries, but interpreted.
• Two types of persistent asymmetries
• In output structure
• In institutional and organisational
  configurations
• National Innovation Systems

38
Heterogeneity vs homogenization

• Innovations created at particular places and
  times ? asymmetric distribution of in world
  economic system? raise heterogeneity
• Diffusive forces (trade, technology transfer
  etc) tend to homogenize technologies,
  capabilities etc.
• Dynamic steady state where complete homogeneity
  unthinkable

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Catch-up strategies
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Variety based interpretation of past policies

• Two extreme choices a) only natural resource
  based sectors b) add manufacturing (ISI)?
• a) leads to relative decline in national variety,
  b) can lead to increasing or constant share of
  world variety

41
Empirical studies

• Test calculate output variety/diversity in the
  course of time for different countries and
  compare with GDP Growth, labour productivity
  growth, etc.
• But comparable and disaggregated output
  statistics generally not available
• Netherlands study (Frenken et al, 2007) output
  variety of regions determinant of labour
  productivity growth of output growth

42
Variety and the entropy function

• Entropy can measure variety because the greater
  the number of distinguishable entities there are
  in the system, the greater the amount of
  information required to describe it.
• Decomposable nature of entropy variety at
  several digit levels can enter a regression
  analysis without necessarily causing
  collinearity.

43
Related vs unrelated variety.

• Related variety (RV) measured at a lower level
  of aggregation where any two sectors are likely
  to show greater similarity (intra-group
  variety)?
• Unrelated variety(UV) measured at a higher level
  of aggregation where two sectors are very
  different (inter-group variety)
• Given the properties of the informational entropy
  function RV and UV can be combined in the same
  econometric equation

44
Variety growth and trade

• Netherlands, only related variety is a
  determinant of employment growth in the regions
  of the Netherlands in the period considered
• Meaning in order to grow you have to diversify
  your economy but remaining in the vicinity of
  your previous production structure

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Variety growth trade (2)?

• OECD countries (1963-2003) related export
  variety( 3 digits) short run determinant of
  economic growth, unrelated variety(1 digit) and
  semi related variety(2 digits) not short run
  determinant of economic growth
• unrelated variety(1 digit) long run determinant
  of economic growth

46
Real GDP growth rate vs Export variety, UN data
data 1961-1999
47
Real GDP per capita growth rate vs Export
variety, UN data data 1961-1999
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Related vs unrelated variety, Short vs Long run
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Related vs unrelated variety, Short vs Long run
(2)
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Variety, Proximity
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Results

• Related export variety determinant of the growth
  of GDP and of GDP per head in the short run
• Unrelated export variety determinant of the
  growth of GDP and of GDP per head in the long(er)
  run
• Confirmation of previous study of OECD countries
  (Saviotti, Frenken, JEE 2008)

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Interpretation

• Countries need to diversify their exports to keep
  growing, but in the short run they need to do it
  in the vicinity (similarity), in knowledge and
  product space, of their previous outputs.(See
  also Hidalgo et al 2007)
• But, diminishing returns to related variety and
  need to start preparing more radically different
  types of exports to keep growing in the long(er)
  run

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Trajectories and interpretations

• In general we can say that related export variety
  is a determinant of economic growth
• However, within this general trend there can be
  many interpretations or deviations
• The strategies of individual countries are not
  identical (see previous strategies for catching
  up)

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Export variety of Latin American countries
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Export variety of Asian countries
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Export variety of small or expanding countries
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Export variety of developed market economies
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Development periods
59
Role of export variety

• In general we can say that related export variety
  is a short run determinant of economic growth
  (requires further testing)
• Unrelated and semi-related export variety are not
  short run determinants of growth
• Unrelated export variety long run determinant of
  economic growth

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Diminishing returns - Emergence of new
technologies

• However, local or incremental modifications
  leading to an increase in related variety are
  likely to lead to diminishing returns. Creation
  of unrelated variety required for long run but
• The period preceding economic returns for
  unrelated variety is a long term investment but
  without it economic growth would slow down or
  cease

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Secular trends National variations

• Two long term, secular, trends (laws, forces,
  trajectories) in economic development (i) growing
  efficiency (ii) growing diversity
• However, within the general trend described above
  there can be many national (local)
  interpretations or deviations

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Secular trends National variations(2)?

• The strategies of individual countries are not
  identical (see previous strategies for catching
  up)?
• Prevalence of related export variety (short run)
  ? path dependence (the near future of an economic
  system depends on what it has done in the recent
  past)?
• Long run change must be prepared

63
Changing development mechanisms

• In P1(1962-1980) related export variety is not a
  significant determinant of growth but it becomes
  a determinant in P2 (1981- 1989)?
• Related export variety is not a significant
  determinant of growth in the transition from low
  to middle income but it is in the transition from
  middle to high income
• Mechanisms of economic development and of
  catching up changed from P1 to P2 for different
  income ranges

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Changing development mechanisms (2)

• In P1 it was possible to catch up by simple
  imitation, in P2 the countries which caught up
  managed to construct their national innovation
  system
• Different mechanisms required for the transitions
  low to middle and middle to high income per
  capita