VARIETY, STRUCTURAL CHANGE AND ECONOMIC DEVELOPMENT: SECULAR TRENDS AND SYSTEMIC

FEATURES.Pier Paolo Saviotti, UMR GAEL, Grenoble, and CNRS GREDEG,

Sophia Antipolis, France.

Concepts of economic development Concept 1) Economic growth occurs due to

the growing efficiency in the production of a finite and constant set of outputs, leading to a growing output per person.

Concept 2) Economic development creates new entities, for example new goods and services, new activities, new institutions and organizations etc.

Economic development by the creation of new sectors The emergence of new sectors, created by

radical innovations, can sustain the long run process of economic development, even when each sector follows a life cycle leading from an initial phase of high growth rates of firms, output, demand and employment to more mature phases in which all these variables decline.

Efficiency and creativity As a consequence, economic development

inherently involves qualitative change and leads to a changing composition of the economic system.

Two complementary ‘forces’: (i) efficiency and (ii) creativity

(i) cost reduction (ii) variety/diversity growth

Variety/diversity Definition: number of actors, activities and

objects required to describe the economic system at a given time

Hypotheses Hypothesis 1: The growth in variety is a

necessary requirement for long-term economic development.

Hypothesis 2: Variety growth, leading to new sectors, and productivity growth in pre-existing sectors, are complementary and not independent aspects of economic development.

Trends and systems General trends 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

A model of economic development by the creation of new sectors Multi-sector economy, with endogenously

variable number of sectorsThe internal dynamics of each sector

induces the creation new sectors Sector created by entrepreneurs:Important innovation new output type

(product, service) highly differentiated

Competition (1) Innovation temporary monopoly

imitation rising intensity of competition declining inducement to enter creation of new niche elsewhere

Competition (2) Competition both intra- and inter- sectorSchumpeterian competition + classical

competition Schumpeterian competition:

Adjustment gapAdjustment gap = size of potential (empty)

market , to be closed (saturation) by creation of demand and of production capacity

Model (3)Search activities (fundamental and sectoral)

creation of new sectors , internal dynamics existing sectors

Competition both intra- and inter- sector Each sector follows a life cycle

Number of firms in sector

- 5

10 15 20 25 30 35 40 45 50

1 101 201 301 401

number of firms

Employment creation

- 10 20 30 40 50 60 70 80 90

100

1 101 201 301 401

Variety & economic development Growing productivity and saturating demand

would create a bottleneck (Pasinetti) (Marxian trap) but , emergence of new sectors provides compensation by re-employing the resources which could be displaced by the previous imbalance .

But, new economic species can only be created by means of search activities, which require resources, which can come from the growing efficiency of pre-exiting sectors.

Variety & economic development (2) So, variety growth, leading to new sectors,

and efficiency growth in pre-existing sectors are complementary processes.

Variety growth necessary but not sufficient condition for long term economic development

Variety & economic development Need to keep ratio national/world variety

at least constant in order to keep (relative) income per head approximately constant

Variety and employment

Stabilise employment in mature sectors = violation of complementarity variety efficiency (H2)- Static employment policy

Move employment out of mature sectors (increase productivity) and into search activities.

Incompatibility between micro- and macro-stability of employment

Variety & economic development

Need to keep ratio national/world variety at least constant in order to keep (relative) income per head approximately constant

Specialisation and development

If VjVw, and if Vw increases, then: a country, in order to keep its income

per head constant has to keep increasing its Vj together with Vw

Specialisation and development(2)

If a country wants to keep its income per head approximately constant or growing:

But:0

)(

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j

wiwiw

jijijV

iwiwi

V

ijiji

w

j

qpVqpV

qp

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w

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Specialisation and development(3)

Strategies for catch-up: 1) Vj/Vw and pi,jqi,j/pi,wqi,w (Variety

increase + increasing value and/or efficiency)(Creative de-specialisation)

2) Vj/Vw and pi,jqi,j/pi,wqi,w ( Virtous specialisation)

3) Vj/Vw and pi,jqi,j/pi,wqi,w (Vicious de-specialisation)

Catch-up strategiesVj/Vw

pijqij/piwqiw

Type ofstrategy

Furthersubdivisions

Conditions foreconomic progress

Comments/Problems

Creative de-specialsation,increasingvariety

Always No problems ifrequired resources,human capital andNSI available

Pij qij

, high-tech, up-marketgoods

Virtuousspecialisation

Pij qij ,efficiency,scaleeconomies

Increasing valueand efficiencyneed to more thancompensate forfall in variety

Can it bemaintainedindefinitely?

Pij qij

, high-tech, up-market goods

Vicious de-specialisation

Pij qij ,efficiency,scaleeconomies

Increasing varietyneeds to more thancompensate forfall in value andefficiency

Problems withAccumulation ofhuman capital

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

Variety based interpretation of past policies (2)

a) can be successful only if pijqij increases more rapidly than piwqiw

but unlikely without incorporating new sectors (rather worsening terms of trade)

Structural change represented by the adoption of manufacturing = engine of growth (Cornwall) onlyonly for countries having little or no manufacturing.

Empirical testing of role of variety

How can we test empirically hypotheses on variety?

Measurements possible in a number of ways

Two examples Regional growth in the Netherlands Trade variety and economic performance

Regional growth in the Netherlands Output figures available for Netherlands

regions with maximum of 7 digits Study by Frenken, van Oort,Verburg,

Boschma (2004), http://econ.geog.uu.nl The measurements of variety with

different levels of aggregation allows the distinction between related and unrelated variety

Related and unrelated variety

Related variety: originated by the diversification within a product group with similar characteristics (measured at low level of aggregation - many digits)

Unrelated variety: due to the addition to a given economic system of new goods or services completely unrelated to the previous ones (measured at high level of aggregation – few digits)

Measurements Informational entropy

function, H. Introduced by

Shannon (1949).

If Ei = event and pi = probability of event

ii pph 1log)( 2

i

n

ii ppH 1log

1

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: marginal increase when

moving from two digit to five digit entropy. Indicator of Jacobs externalities.

Unrelated variety: two digit level entropy

Employment growth

Related variety Only related variety is a determinant of

employment growth in the Netherlands in the period considered

Meaning: in order to grow you have to diversify your economy but remaining in the vicinity your previous production structure

Variety growth & trade Difficult to measure variety by production

statistics (too aggregate, not comparable) trade statistics better.

Trade OECD countries (1963-2003) available up to five digits

Export variety for OECD countries measured by the informational entropy function with 1 digit (unrelated variety), 2 digits (semi related variety), 3 digits (related variety)

Export variety (1) FIN EXPORT (1961, 1962, 1963 MISSING)

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

ESP EXPORT

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

GRC EXPORT

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

NZL EXPORT (1961, 1962, 1963 MISSING)

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

Export variety (2) DEU EXPORT

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

NOR EXPORT

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

IRE EXPORT

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

JPN EXPORT (1961 MISSING)

0

1

2

3

4

5

1950 1960 1970 1980 1990 2000 2010

YEAR

ENTR

OPY

3DIGITENTROPY

UNRELATED VARIETY

SEMI-RELATED VARIETY

RELATED VARIETY

Export variety (3) Coefficients Standard

error Constant .291* .026

Unrelated variety

.079 .203

Semi-related variety

-0.83 .241

Related variety .645* .295

Dependent variable: labour productivity growth (N=78)

Role of export variety In general we can say that export variety

is a determinant of economic growth (requires further testing)

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)

Path dependence If related variety is important then each

country proceeds from where* it is to a new position*

(* in goods or characteristics space) Path dependence even in presence of

common trends Support of national innovation systems But is unrelated variety not required?

National specificity and choice of new outputs

Arbitrary? HAUSMANN R, HWANG J, RODRIK D, (2005) ‘What you export matters’.

Or starting from some national specificity and displaying path dependence? See related export variety as determinant of labour productivity growth.

Differentiate from present base in short run but start preparing long run differentiation (unrelated variety)

But institutions?

Summary We cannot yet say whether output variety

is required for economic development (not enough data)

We can say (pending final confirmation) that export variety is a determinant of economic growth

This implies that there are both a common trend and national specificities/national innovation systems affecting economic development