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

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Presentation on theme: "VARIETY, STRUCTURAL CHANGE AND ECONOMIC DEVELOPMENT: SECULAR TRENDS AND SYSTEMIC FEATURES. Pier Paolo Saviotti, UMR GAEL, Grenoble, and CNRS GREDEG, Sophia."— Presentation transcript:

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 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.

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 endogenously variable 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 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.

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 V j V w, and if V w increases, then:  a country, in order to keep its income per head constant has to keep increasing its V j together with V w

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) V j /V w  and p i,j q i,j /p i,w q i,w  (Variety increase + increasing value and/or efficiency)(Creative de-specialisation)  2) V j /V w  and p i,j q i,j /p i,w q i,w  ( Virtous specialisation)  3) V j /V w  and p i,j q i,j /p i,w q i,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 p ij q ij increases more rapidly than p iw q iw  but unlikely without incorporating new sectors (rather worsening terms of trade) only  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),  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 E i = event and p i = 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 ( ) 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) CoefficientsStandard error Constant.291*.026 Unrelated variety Semi-related variety Related variety.645*.295 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


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