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Potential Drivers of Economic Development in the 21 st Century
Sherman Robinson Department of Economics and Institute of Development Studies
University of Sussex November 2006
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Drivers of Growth and Development
• Modern Economic Growth: History • Distinguishing growth and development
– Economic sociology and new institutional economics
• Theories of growth and development • Post WWII development strategies • Development strategies for the 21 st century
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Economic “Epochs”
• Long period characterized by the working out of an “epochal innovation” – Simon Kuznets, Modern Economic Growth
• Commercial age: 15001800 – Epochal innovation: transport and communications
– Driver: development of efficient (economic) longdistance sailing ship
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Kuznets: Modern Economic Growth
• 1800 to the present, and still running • Epochal innovation: the application of science to the problems of production. – Note emphasis on “application.” Engineering is as important as science.
• Interaction between economic rewards and induced technological change
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Modern Economic Growth
• Development of basic science • Invention and commercial development of new methods of production: innovation
• Development of inexpensive sources of energy and their application to production – Coal, petroleum, electricity
• Creation of capital goods that embody new technology and energy
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Modern Economic Growth
• Economies of scale through specialization and division of labour – “Smithian” productivity gains – Forward and backward linkages
• Market integration, national and international – Division of labour is limited by the extent of the market
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Modern Economic Growth
• Structural changes in production – Industrialisation: rise of industry and relative decline of agriculture
• Rapid technical change in both agriculture and industry – Technical change in agriculture is essential
• Institutional changes in organization of production: factories, corporations, etc.
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Modern Economic Growth
• Demographic changes – Rapid population growth – Urbanisation
• Labour force – Ruralurban migration – Education and training – Role of women
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Modern Economic Growth
• Mass production of commodities – Making goods cheaper essentially defines the process
– Over emphasis on terms of trade is misplaced • Agriculture, energy, metals, chemicals, machinery, electronics – From luxuries to mass produced commodities
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Theories of Economic Growth
• Necessary and sufficient conditions – Elegant theory, but history is noisy – Substitution among necessary conditions
• Minimum set of sufficient conditions – Conditions such that if something is missing, modern economic growth is not achieved
– Analytic history: seek to understand causal chains
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Schumpeter: Role of Innovation
• Introduction of a new good • Introduction of a new method of production • Opening of a new market • Conquest of a new source of supply of raw materials
• Carrying out of new organization of any industry
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Necessary Conditions
• Profitable opportunities must exist • Individuals or groups who wish to exploit the profitable opportunities must exist – Information: ignorance and risk – Motivation: desire to exploit opportunities
• Investment capability – Must be able to divert adequate resources to exploit the potential profitable opportunity
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Drivers of Growth • Classification of societal structures, forces, and trends in terms of links to growth: – Facilitators – Inhibitors – Concomitants
• Identify necessary facilitators • Identify sufficient or “killer” inhibitors • Mixes of sufficient facilitators/inhibitors
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Necessary Facilitators
• Kuznets: epochal innovation • Increased investment
– Infrastructure to facilitate market integration – Physical and human capital
• Institutional innovations – Private property and commercial legal system – Financial system – Role of government: developmental state
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Inhibitors to Growth
• Incomplete markets: stifle profitable opportunities
• Poverty: vicious circles prevent investment • Inappropriate Culture: lack of motivation
– Weber thesis on role of reformation • Inappropriate Institutions: stifle innovation
– Failed states, Communist states, kleptocracy
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Concomitants to Growth
• Demographic changes – Facilitators, concomitant, and/or inhibitor
• Gender roles – Important role of women in the labour force
• Initially a facilitator – Gender equality was a concomitant,
• Eventually inequality is an inhibitor
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Growth versus Development
• Modern Economic is linked to profound changes in institutional structures. – Economic, political, legal, social, and cultural systems
• Define economic development as modern economic growth plus other societal changes.
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ParsonsSmelser: Economic Sociology
• Theory of “social systems” and economic institutions. – Economic “drivers” of societal change.
• Douglass North: Role of institutions – New book: Understanding the process of economic change.
– Mancur Olson
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Structure of Society
Social Structures
Personality Structures
Institutional Structures
Economic Structures
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Personality Structures
• Education and “tastes” – Human capital
• Culture • Attitudes
– World view: what is possible – Societal performance criteria
• Market demand: “preference structures”
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Social Structures
• Societal norms and standards – Political rights – Economic rights: income distribution – Property rights
• Roles of individuals versus authority • Gender roles • Cultural values
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Institutional Structures • Government: democratic versus authoritarian
– Roles of civil society and political institutions – “Reach” of government: policy space – Ability to meet societal performance criteria
• Legal system: – Security and public safety – Political rights – Commercial law: property rights and markets
• Religious institutions • Educational system: human capital formation
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Economic Structures
• Economic systems (“isms”): capitalism, socialism, national socialism (fascism) – Policy environment: “developmental state”
• Markets: mixed systems – Regulation and property rights – Industrial organization: corporations, etc.
• Capital stock: human, industrial, infrastructure • Resource base • Technology: stock and growth
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Douglass North: New Institutional Economics
• Can view evolution of economic institutions as resulting from “tension” between what was possible, given new technology, and what was feasible, given existing institutions. – New institutions evolved to take advantage of new opportunities.
– History matters: institutional inertia.
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Growth: Tension and Resolution
• Tension: Present perceived potential profit arising either within the present economic structure or that structure changed in ways that are perceived to be feasible. – Perception is important: ignorance and risk – Potential profits arising from changes in institutions is a source of tension. • Extends Schumpeter
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Growth: Tension and Resolution
• Growth is the result of the successful resolution of tension. – Actors respond to the tension by investing, changing institutions, or engaging in Schumpeterian innovation.
• The process is messy – Schumpeter: creative destruction – Errors and failures are common
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Institutional Changes: Examples
• Creation of insurance industry in response to needs of traders in age of sail.
• Creation of limited liability companies to insulate owners from risk.
• Creation of joint stock companies to raise needed capital for large scale investment.
• Creation of financial institutions to organize exchange and investment.
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Process of Development
• Dynamic changes in economic and societal structures: – Winners and losers – High adjustment costs with complex incidence
• Development is a mysterious process – Much that we do not understand – Both robust and delicate
• Analogy to medicine
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Early Modern Economic Growth
• By World War I, capitalist system was in deep trouble – Periodic financial crises – Boomdepression cycles – Class warfare: income distribution
• Economic, political, and social crisis. – Two world wars – Great depression – Collapse of international trading system
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20 th Century: Clash of “isms”
• Resolution of the Marxian crisis – Changes in Parsonian societal systems
• Competing economic systems – Reformed capitalism (social democracy) – Fascism – Communism/state socialism (Lenin)
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Resolution of the Marxian Crisis
• Post WWII, societies developed a set of performance criteria for economic and political systems
• These criteria reflect: – Emerging societal values and norms – Knowledge of what modern economies can deliver to their populations
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Societal Performance Criteria • Continued modern economic growth based on technological change and economic innovation – Economic management: macro stability
• Significant degree of economic and political freedom
• Significant degree of economic and social mobility
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Societal Performance Criteria • Acceptable distributional outcomes
– Level of poverty – Adequate social safety net for the poor – Relative wealth and income distribution
• Management of risk – Incidence and insurance
• Formalized in the UN – Millennium Development Goals – Human Development Indicators
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Sustainable Development
• Meeting performance criteria – Government involvement
• “Shock absorbers”: – Ameliorate impact of societal changes
• Safety nets • Risk management
– Facilitators that smooth the process • Subsidize factor mobility • Manage incidence of transition costs
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Country Typologies
• Postindustrial mature economies • Industrializing countries in the process of modern economic growth (MEG)
• PreMEG countries in the process of achieving important facilitators and eliminating inhibitors
• Countries that are failing to achieve MEG because of killer inhibitors or lack of ability to encourage facilitators
• Rentier economies that will not evolve to MEG
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Development Strategies • Development strategy is an integrated package of policies aimed at achieving development in an evolving global economy
• Modern economic growth is central – Productivity growth:
• Technology and investment • Specialisation and economies of scale
– Long term poverty reduction • Structural change: industrialisation and urbanisation
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Post War Development Strategies
• Debates in the 1950s and 1960s – Socialist versus market strategies – Import substitution versus open strategies
• Role of the Cold War – Clash of ideologies – Aid policy linked to global politics
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Socialist Strategy
• Provided a viable alternative for much of the century – Successful in mobilizing resources – Avoided crises and boombust cycles. – Shock absorbers and equal income distribution
• Failed to achieve continued productivity growth and modern economic growth – Bureaucracy and perverse incentives – Stifled all economic innovation: North analysis
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Import Substitution Industrialisation
• ISI strategy. Pursued in most countries in 1950s1960s and Latin America through 1970s. – Linked to ideology: socialism and planning
• Achieved significant industrialisation and aggregate growth
• Pursued too long, led to increasing inefficiency and stifled innovation
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Failure of Socialist and ISI Strategies
• End of History: Fukuyama – Washington consensus
• Impact of failure of these strategies – Narrowing of policy space
• Continuing debate on role of government – Depoliticisation of strategy debate
• Focus on micro: households, poverty • Focus on safety nets rather than drivers of growth
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Open Development Strategy
• Successful “export led growth” in E&SE Asia starting in mid1960s – Japan, Korea, Taiwan, Hong Kong, Singapore
• Attention to role of international trade and the evolution of global markets – Stages of comparative advantage (Balassa) – Diffusion of technology
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Trade and Growth: Drivers • Increased trade is associated with:
– Growth and structural change – Poverty reduction
• Links: – Trade → productivity → growth – Trade → investment → growth
• Economic integration – Shallow and deep
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Trade Blocs: 1990s World Countries and Regions
Europe + (42) N America + (31) E&SE Asia (43) MERCOSUR (6) Rest (61) Andean (4) S Africa + (4)
1990s
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Implications of Trends
• The formation of blocs predated any explicit regional trade agreement (RTA) – Institutions follow economic trends
• Three kinds of RTAs: – Bloc creation: EU, NAFTA, Mercosur – Bloc expansion: EU expansion, CAFTA – Market access: EPAs, AGOA, FTAA, bilateral agreements
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Role of Trade
• Increased trade as share of GDP – Largest increase in trade among OECD countries – Emergence of new trade blocs
• Increased trade in intermediate inputs – Import content of exports increased – International segmentation of production: value chains
• Increased trade in new products • Trends challenge standard trade theory and analysis of gains from trade
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Deep integration? rising intraregional trade
5.4
1
18.7
6.5
0 2 4 6 8 10 12 14 16 18 20
Per C
ent
1975 2001
East Asian share of world trade
of which intra regional trade
Source: Ng, F. and Yeats, A., 2003, 'Major Trade Trends in East Asia: What Are their Implications for Regional Cooperation and Growth?' World Bank Policy Research Working Paper 3084, Washington DC, World, p.3
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Intraregional trade/GDP, 2002
0
5
10
15
20
25
30
Per c
ent
East Asia Pacific
Latin America and Carribean South Asia
SubSaharan Africa
Source: World Bank, Global Economic Prospects 2005, p. 43
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Share of parts and components in machinery trade (%)
30
40
50
60
70
80
China
Indonesia
Korea
Malaysia
Philippines
Thailand
Japan
1990 2000
Ando, M., 2005, 'Fragmentation and Vertical Intraindustry Trade in East Asia', paper presented to "Claremont Regional Integration Workshop with Particular Reference to Asia, " Claremont McKenna College, U.S.A, February, available http://lowe.claremontmckenna.edu/events/pdf/AndoPaper022505.pdf (accessed December 2005), p 34
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Drivers of Integration: Why now?
• Lower transactions costs – Transport and communications
• Technology of standards – Computer: processing and storage – Measurement and precision instruments
• Past trade liberalisation: GATT rounds – Better integrated global commodity markets through elimination of trade barriers.
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• New trade theory – Mechanisms linking trade and growth – Deep integration versus shallow integration
• Institutional adaptation to potential gains from integration – Private, national, global
• Implications for development strategies
New Trade Theory
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New Regionalism • Increased geographical dispersion of production (value chains) through trade that supports – (1) exploitation of different factor proportions for parts of the production process (comparative advantage efficiency gains) and/or
– (2) local economies of scale through finer specialization and division of labour in production (“Smithian” efficiency gains);
• Externalities arising from institutional changes and linkages that lead to a wide increase in productivity – Major source of productivity growth: “driver” of growth.
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TradeProductivity Links
• Value chains: mechanisms differ from earlier tradeindustrialisation links – Scale economies: Smithian gains
• Applies to many sectors and more economic activity – Agriculture – Services – Industry
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Shallow and Deep Integration
• Early trade agreements and GATT rounds facilitated shallow integration: – Reduction of border trade barriers – Negative integration: reduce barriers
• New regionalism involves elements of “deep integration” – Positive integration: institutional adaptation to facilitate trade
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Deep Integration • Factor mobility: capital and labour • National Institutions: trade facilitation
– Legal: property rights, commercial law – Regulatory: standards and rules, industrial policy – Harmonize macro policies/financial regulation
• International institutions – Regional/preferential trade agreements – Global: GATT/WTO
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Institutional Adaptation
• Enterprise/plant management adapts to support geographic dispersion of production – Command and control system
• Integration/disintegration of enterprises – Intellectual property – Coordination of production processes
• Role of government in trade facilitation
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Lessons from the 20 th Century
• Socialist and ISI strategies failed. • Exportled growth worked, but has evolved into new forms of integration of global production and trade patterns.
• ISI and ELG strategy based on “old” industrialisation is no longer feasible or desirable.
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Latin America: 19501980
• ISI development strategy – Developed industrial sectors and mastered technologies
– Achieved industrialisation and growth • Inhibitors
– Periodic macro crises – Increasing inefficiencies in production – Strains on institutional and political systems
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Latin America: 1980s and 1990s
• 1980s: Debt, macro, and political crises. • Period of adjustment
– Shift in development strategy from ISI to open development strategies • Adoption of “Washington Consensus” • Some success in achieving macro stability
– Major changes in political systems. • Economic performance was disappointing
– Failed to achieve earlier ISI growth rates
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Latin America: 21 st Century
• Latin America failed to take part in new trade patterns arising in E&SE Asia – Focus on “old” industrial growth rather than “new” engagement in global value chains.
– Missed opportunities because of focus on painful macro and structural adjustments
• Global economy changed – Potential “first mover” advantages
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Latin America: 21 st Century
• Policy responses: New strategies • Tentative hypotheses:
– 1990s strategy of “freeing” economies and then standing aside to let market work its magic was not sufficient.
– Need for government involvement in defining new strategies to participate in new global economy and manage threats.
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Old Versus New Strategies
• Asian success stories: lessons? – Roles of institutions and deep integration
• The world has changed. The old strategies are no longer relevant. – Cannot replicate history, and should not try – Policy space should reflect new realities
• Evolving global system needs managing – Must understand forces to manage them
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Typologies and Strategies • Classify countries
– Who can play in the new game? • How soon and at what cost? Policy strategy • within regional trade, who gains and who loses (the twospeed Asian model)?
• Classify trade agreements – How well do nonAsian trade blocs function? – What are the elements in trade agreements that most promote deep integration?
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Getting into the Game
• Implications for countries who cannot play the game, but have to compete with those that do (e.g., Africa). – Nature of impediments – Longterm versus short term strategies – Standing on the sidelines is not an option
• Given the new players, do the global rules need changing? How?
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New Institutional Economics • Performance criteria and system evaluation by polity – Efficiency and growth versus distribution
• Social and economic mobility – Who bears adjustment cost? – Who bears risk?
• Role of policy: who is responsible? – Local, national, international
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Tradeoffs
• Facilitators versus shock absorbers – Competition for scarce resources – Some are complementary
• Transfer programs conditional on school attendance • India: Public works antifamine programs
– Need to consider microbased shock absorbers within an economywide strategy • Narrowly micro focused, propoor development strategies may do neither
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New Trends: Growing Inequality
• Global trend of increasing inequality – Worsening relative distribution of income within and across countries
– Rise of hyperrich in many countries • Response of poverty reduction to growth is lower than in past. – Growth is still important, but redistribution is also needed
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New Trends: Global Public Goods
• New development strategies have to operate in a more interdependent world
• Global public goods and market failures – Global warming – Public health: aids, Avian flu, etc. – Pollution
• Requires international response
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Conclusions
• Continuing modern economic growth – Investment: national and global – Rapid technological change and productivity growth
– Globalization and international trade • International division of labor
• Evolution of Parsonian “structures” – Personal, social, institutional, and economic
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Conclusions
• History has not ended yet – Continued evolution of economic systems. Mixed “isms”.
– Continued problems: • Financial crises • Many failures: process is mysterious and delicate • Global externalities (e.g., climate change)
• Much research still to do