VARIETY, STRUCTURAL CHANGE AND ECONOMIC DEVELOPMENT: SECULAR TRENDS AND SYSTEMIC FEATURES. Pier Paolo Saviotti, UMR GAEL, Grenoble, and CNRS GREDEG, Sophia Antipolis, France.
Dec 16, 2015
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
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:
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ijiji
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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 strategies
Vj/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
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
EN
TR
OP
Y 3DIGITENTROPY
UNRELATED VARIETY
SEMI-RELATED VARIETY
RELATED VARIETY
ESP EXPORT
0
1
2
3
4
5
1950 1960 1970 1980 1990 2000 2010
YEAR
EN
TR
OP
Y 3DIGITENTROPY
UNRELATED VARIETY
SEMI-RELATED VARIETY
RELATED VARIETY
GRC EXPORT
0
1
2
3
4
5
1950 1960 1970 1980 1990 2000 2010
YEAR
EN
TR
OP
Y 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
EN
TR
OP
Y 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
EN
TR
OP
Y 3DIGITENTROPY
UNRELATED VARIETY
SEMI-RELATED VARIETY
RELATED VARIETY
NOR EXPORT
0
1
2
3
4
5
1950 1960 1970 1980 1990 2000 2010
YEAR
EN
TR
OP
Y 3DIGITENTROPY
UNRELATED VARIETY
SEMI-RELATED VARIETY
RELATED VARIETY
IRE EXPORT
0
1
2
3
4
5
1950 1960 1970 1980 1990 2000 2010
YEAR
EN
TR
OP
Y 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
EN
TR
OP
Y 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