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

1. VARIETY, STRUCTURAL CHANGE AND ECONOMIC DEVELOPMENT: SECULAR TRENDS AND SYSTEMIC FEATURES. Pier Paolo Saviotti, UMR GAEL, Grenoble, and CNRS GREDEG, Sophia Antipolis, France.

2. Concepts of economic development • Concept 1) Economic growth occurs due to the growing efficiencyin 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.

3. 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.

4. 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

5. Variety/diversity • Definition: number of actors, activities and objects required to describe the economic system at a given time

6. 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.

7. 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

8. 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

9. A model of economic development by the creation of new sectors Multi-sector economy, with endogenouslyvariable number of sectors The internal dynamics of each sector induces the creation new sectors Sector created by entrepreneurs: Important innovation  new output type (product, service) highly differentiated

10. Competition (1) Innovation  temporary monopoly imitation rising intensity of competition declining inducement to enter  creation of new niche elsewhere

11. Competition (2) Competition both intra- and inter- sector Schumpeterian competition + classical competition Schumpeterian competition:

12. Adjustment gap Adjustment gap = size of potential (empty) market , to be closed (saturation) by creation of demand and of production capacity

13. 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

14. Number of firms in sector

15. Employment creation

16. Variety & economic development • Growing productivity and saturating demand would create a bottleneck (Pasinetti) (Marxian trap) but , emergence of new sectors provides compensationby 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.

17. 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

18. Variety & economic development • Need to keep ratio national/world variety at least constant in order to keep (relative) income per head approximately constant

19. 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

20. Variety & economic development • Need to keep ratio national/world variety at least constant in order to keep (relative) income per head approximately constant

21. Specialisation and development • If VjVw, 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

22. Specialisation and development(2) • If a country wants to keep its income per head approximately constant or growing: • But:

23. 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)

24. Catch-up strategies

25. 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

26. 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) only for countries having little or no manufacturing.

27. 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

28. 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

29. 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)

30. Measurements • Informational entropy function, H. • Introduced by Shannon (1949). • If Ei = event and pi = probability of event

31. 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.

32. 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

33. Employment growth

34. 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

35. 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)

36. Export variety (1)

37. Export variety (2)

38. Export variety (3) Dependent variable: labour productivity growth (N=78)

39. 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)

40. 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?

41. 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?

42. 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