is there a direction in economic development? pier paolo saviotti, inra gael, grenoble, and cnrs...
TRANSCRIPT
Is there a direction in economic development?
Pier Paolo Saviotti, INRA GAEL, Grenoble, and CNRS GREDEG I2C, Sophia Antipolis,
France.
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.
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
Development as system transformation
Structural change: change in the structure of the economic system (components + linkages/interactions).
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.
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/efficiency change at constant composition and qualitative change.
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
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)
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
Diversity for most
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.
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
Family expenditure Workers UK
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
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)
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
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)
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.
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
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
Intra and inter sector competition
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
Model equation
)3(**1 iiiii MAICAGFAk
dt
dN
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).
-
5
10
15
20
25
30
35
40
45
50
1 101 201 301 401
number of firms
Adjustment gap
ti
ti
ti DDAG m ax
1 101 201 301 401
demand o f sector i
t 1 101 201 301 401
maximum demand of sector i
t 1 101 201 301 401 t
adjustment gap of sector i
ti
it
it
iti
p
YYDD
0
Demand
ti
it
it
iti
p
YYDD
0
)ex p (1
1
1 51 4
0ti
iti
SEkkYY
)ex p (1
1
1 71 6
0ti
iit
SEkkYY
tii
ti ucpp 2.10
)ex p ()ex p ( 1 91 80 t
id y ip itiy ip i
tit
i
ti
ti
ti
iti YkYkSEkk
Q
rInvwLucuc
Search activities
)]ex p (1[ 540 t
iit
i DacckkSESE i
Competition
tto ta lII
ti
tto ta l
ti
ICti NRN
NNkIC
1
1
-
1.0
2.0
3.0
4.0
5.0
6.0
1 35 69 103 137 171 205 239 273 307 341 375 409 443 477
Employment
li = ki/Qia = ki/Qi/Ni = (ki*Ni)/Qi
li = Li/Qi
Aggregate employment
- 100
200 300 400
500 600 700
800 900
1 35 69 103 137 171 205 239 273 307 341 375 409 443 477
aggregate employment
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.
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
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
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
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
V j/V w
p ijq ij/p iw q iw
T yp e o f s tra te g y
F u rth e r su b d iv is io n s
C o n d itio n s fo r eco n o m ic p ro g ress
C o m m en ts /P ro b lem s
C rea tiv e d e -sp ec ia lsa tio n , in c reas in g v a rie ty
A lw a ys N o p ro b lem s if req u ired re so u rces , h u m an cap ita l an d N S I av a ilab le
V irtu o u s sp ec ia lisa tio n
P ij q ij , h igh -tech , u p -m ark e t g o o d s
In c re as in g v a lu e an d e ffic ien c y n eed to m o re th an co m p en sa te fo r fa ll in v a rie ty
C an it b e m a in ta in ed in d e fin ite ly?
P ij q ij , e ffic ien c y ,sca le eco n o m ies
V ic io u s d e -sp ec ia lisa tio n
P ij q ij , h igh -tech , u p - m ark e t g o o d s
In c re as in g v a rie ty n eed s to m o re th an co m p en sa te fo r fa ll in v a lu e an d e ffic ien c y
P ro b lem s w ith A ccu m u la tio n o f h u m an cap ita l
P ij q ij , e ffic ien c y ,sca le eco n o m ies
Catch-up strategies
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
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
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.
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
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
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
Real GDP growth rate vs Export variety, UN data data 1961-1999
-1 -2 -3 -4 -5Real GDP (log) -0.046*** -0.056*** -0.057*** -0.057*** -0.049*** -0.045***
[0.004] [0.005] [0.005] [0.005] [0.015] [0.005]Overall variety (logs) 0.008***
[0.002]Unrelated variety (logs) -0.019* -0.019** -0.032*** -0.025
[0.010] [0.010] [0.010] [0.016]Related variety (logs) 0.023*** 0.019** 0.028*** 0.036***
[0.008] [0.008] [0.008] [0.014]Openness 0.032*** 0.031*** 0.004
[0.004] [0.004] [0.008]Real GDP per worker -0.008 0.055***
[0.015] [0.017]Population (logs) -0.007 0.007
[0.016] [0.134]Constant 0.854*** 1.062*** 1.087*** 0.933*** 0.931*** 0.838***
[0.080] [0.094] [0.095] [0.096] [0.123] [0.086]Observations 4113 4113 4113 4113 3946 3815Number of Country 134 134 134 134 131 130R-squared 0.07 0.07 0.08 0.09 0.09 0.08
(5’ FDb)
Real GDP per capita growth rate vs Export variety, UN data data 1961-1999Real GDP per capita (log)-0.034*** -0.045*** -0.045*** -0.045*** -0.036** -0.035***
[0.004] [0.005] [0.005] [0.005] [0.015] [0.004]Overall variety (logs) 0.009***
[0.002]Unrelated variety (logs) -0.013 -0.013 -0.034*** -0.021
[0.010] [0.010] [0.010] [0.016]Related variety (logs) 0.018** 0.015* 0.031*** 0.033**
[0.008] [0.008] [0.008] [0.014]Openness 0.031*** 0.031*** 0.003
[0.004] [0.004] [0.007]Real GDP per worker -0.018 0.050***
[0.015] [0.016]Population (logs) -0.052*** -0.403***
[0.010] [0.133]Constant 0.304*** 0.436*** 0.447*** 0.298*** 0.871*** 0.305***
[0.035] [0.047] [0.048] [0.053] [0.122] [0.038]Observations 4113 4113 4113 4113 3946 3815Number of Country 134 134 134 134 131 130R-squared 0.06 0.06 0.07 0.08 0.08 0.07
Related vs unrelated variety, Short vs Long run
Real GDP (log) -0.088*** -0.087***[0.019] [0.019]
Openness 0.033*** 0.034***[0.005] [0.005]
Constant 1.295*** 1.286***[0.162] [0.162]
Unrel. VarietyRelated Variety Unrel. VarietyRelated Varietyt - 0 -0.053*** 0.066*** -0.055*** 0.063***
[0.020] [0.017] [0.019] [0.017]t – 1 0.016 -0.025 -0.039*** 0.032***
[0.024] [0.021] [0.009] [0.008]t – 2 0.019 -0.035* -0.017** 0.008
[0.024] [0.021] [0.007] [0.006]t – 3 -0.041* 0.040* 0.004 -0.008*
[0.024] [0.021] [0.006] [0.005]t – 4 0.039 -0.027 0.018** -0.015**
[0.024] [0.021] [0.008] [0.006]t – 5 0.000 -0.002 0.021** -0.013
[0.024] [0.020] [0.009] [0.008]t – 6 0.038 -0.027 0.006 0.000
[0.023] [0.020] [0.007] [0.006]t – 7 -0.050*** 0.041** -0.033** 0.025*
[0.019] [0.016] [0.015] [0.013]Long run elasticities -0.031* 0.029** -0.095*** 0.092***
[0.016] [0.013] [0.025] [0.023]Observations 3,17 3,17Adjusted R² 0.053 0.051
Unrestricted Model(31)
Restricted PDL(32)
Related vs unrelated variety, Short vs Long run (2)
-.05
0.0
5
0 2 4 6 8
Unrelated Variety Related Variety
Variety, Proximity-1 -2 -3 -4 -5
gdp_gr gdp_gr gdp_gr gdp_gr gdp_gr
lngdp -0.050*** -0.049*** -0.051*** -0.050*** -0.050***[0.015] [0.015] [0.015] [0.015] [0.015]
lnopenc 0.031*** 0.032*** 0.031*** 0.032*** 0.030***[0.004] [0.004] [0.004] [0.004] [0.004]
lnrgdpwok -0,01 -0,01 -0,01 -0,01 -0,01[0.015] [0.015] [0.015] [0.015] [0.015]
lnpop -0,01 0 0,01 0 0[0.016] [0.016] [0.016] [0.016] [0.016]
lunrelvar -0.030*** -0.030***[0.010] [0.011]
lrelvar 0.028*** 0.027***[0.008] [0.009]
rel_p 0.004** 0.005*** 0.005*** 0.004**[0.002] [0.002] [0.002] [0.002]
proximity 0.091**[0.041]
proximity_1dc 0.022** 0.023***[0.009] [0.009]
Constant 0.940*** 0.805*** 0.772*** 0.777*** 0.868***[0.123] [0.115] [0.116] [0.116] [0.125]
Observations 3945 3945 3945 3945 3945
Number of group(countryisocode) 131 131 131 131 131
R-squared 0,09 0,09 0,09 0,09 0,09Standard errors in brackets* significant at 10%; ** significant at 5%; *** significant at 1%
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)
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
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)
Export variety of Latin American countries
0.0
5.1
.15
1960 1970 1980 1990 2000
M EX
0.0
2.0
4.0
6
1960 1970 1980 1990 2000
A RG
0.0
2.0
4.0
6.0
8
1960 1970 1980 1990 2000
B RA
0.0
05
.01
.01
5.0
2.0
25
1960 1970 1980 1990 2000
CHL
O ve rall V ar.(red d ash ) - U nr. V a r. (solid b lu e) - R el. V ar. (g ree n lo ng d ash )
The Dynamics of Export Variety (Latin American Countries)
Export variety of Asian countries0
.05
.1.1
5
1960 1970 1980 1990 2000
TW N
0.0
2.0
4.0
6.0
8.1
1960 1970 1980 1990 2000
S GP
0.0
5.1
.15
1960 1970 1980 1990 2000
K OR
0.1
.2.3
1960 1970 1980 1990 2000
CHN
O ve rall V ar.(red d ash ) - U nr. V a r. (solid b lu e) - R el. V ar. (g ree n lo ng d ash )
The Dynamics of Export Variety (Asian Countries)
Export variety of small or expanding countries
0.0
2.0
4.0
6.0
8
1960 1970 1980 1990 2000
IRL
0.0
5.1
.15
1960 1970 1980 1990 2000
E SP
0.0
2.0
4.0
6.0
8
1960 1970 1980 1990 2000
DNK
.05
.1.1
5.2
.25
1960 1970 1980 1990 2000
NLD
O ve rall V ar.(red d ash ) - U nr. V a r. (solid b lu e) - R el. V ar. (g ree n lo ng d ash )
The Dynamics of Export Variety (Small or Expanding Countries)
Export variety of developed market economies
.2.4
.6.8
1960 1970 1980 1990 2000
US A
.1.2
.3.4
.5
1960 1970 1980 1990 2000
GB R
.05
.1.1
5.2
.25
.3
1960 1970 1980 1990 2000
ITA
.1.1
5.2
.25
.3.3
5
1960 1970 1980 1990 2000
FRA
O ve rall V ar.(red d ash ) - U nr. V a r. (solid b lu e) - R el. V ar. (g ree n lo ng d ash )
The D ynamics of Export Variety (D eveloped Market Economies)
Development periods
VARIABLES WHOLE SAMPLE WHOLE SAMPLEWHOLE SAMPLE 62-80 81-99 low GDP per capita middle GDP per capitahigh GDP per capita
-0.0502 -0.0493 -0.0500 0.0225 -0.128 -0.0841 -0.0687 -0.00659[0.0153]*** [0.0151]*** [0.0153]*** [0.0432] [0.0274]*** [0.0356]** [0.0296]** [0.0234]0.0310 0.0330 0.0310 0.0431 0.0232 0.0235 0.0400 0.0310[0.00432]*** [0.00415]*** [0.00432]*** [0.00762]*** [0.00683]***[0.00812]*** [0.00823]*** [0.00782]***-0.00710 -0.00339 -0.00766 -0.147 -8.24e-05 0.0151 -0.0145 -0.0621[0.0151] [0.0151] [0.0151] [0.0445]*** [0.0247] [0.0339] [0.0289] [0.0222]***-0.00613 -0.00278 -0.00482 -0.0249 -0.00926 -0.0780 0.0188 -0.0482[0.0158] [0.0156] [0.0158] [0.0414] [0.0375] [0.0586] [0.0354] [0.0266]*-0.0300 -0.0337 0.00269 -0.0629 -0.0332 0.0279 -0.0323[0.0102]*** [0.0104]*** [0.0203] [0.0180]*** [0.0206] [0.0203] [0.0160]**0.0276 0.0301 0.00289 0.0543 0.0282 -0.0179 0.0313[0.00837]*** [0.00846]*** [0.0173] [0.0142]*** [0.0174] [0.0161] [0.0121]***
proximity_1dc 0.0141 0.0173 0.0292 0.0179 0.0308 0.0152 0.0205[0.00834]* [0.00850]** [0.0144]** [0.0147] [0.0174]* [0.0170] [0.0122]*
Constant 0.940 0.819 0.919 01/01/53 01/02/71 01/01/97 01/01/71 01/01/18[0.123]*** [0.115]*** [0.123]*** [0.293]*** [0.293]*** [0.467]*** [0.295]*** [0.184]***
Observations 3945 3945 3945 1945 2000 1347 1292 1306R-squared 0.088 0.085 0.089 0.115 0.094 0.085 0.122 0.208
131 131 131 106 131 55 73 58*** p<0.01, ** p<0.05, * p<0.1Standard errors in brackets
lngdp
lnopenc
lnrgdpwok
lnpop
lunrelvar
lrelvar
Number of cid
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
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
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
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
Secular trends & National variations(2)
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
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