PotentialDriversofEconomicDevelopmentinthe21stCentury

ShermanRobinsonDepartmentofEconomicsandInstituteofDevelopmentStudies

UniversityofSussexNovember2006

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DriversofGrowthandDevelopment

ModernEconomicGrowth:History Distinguishinggrowthanddevelopment

Economicsociologyandnewinstitutionaleconomics

Theoriesofgrowthanddevelopment PostWWIIdevelopmentstrategies Developmentstrategiesforthe21stcentury

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EconomicEpochs

Longperiodcharacterizedbytheworkingoutofanepochalinnovation SimonKuznets,ModernEconomicGrowth

Commercialage:15001800 Epochalinnovation:transportandcommunications

Driver:developmentofefficient(economic)longdistancesailingship

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Kuznets:ModernEconomicGrowth

1800tothepresent,andstillrunning Epochalinnovation:theapplicationofsciencetotheproblemsofproduction. Noteemphasisonapplication.Engineeringisasimportantasscience.

Interactionbetweeneconomicrewardsandinducedtechnologicalchange

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ModernEconomicGrowth

Developmentofbasicscience Inventionandcommercialdevelopmentofnewmethodsofproduction:innovation

Developmentofinexpensivesourcesofenergyandtheirapplicationtoproduction Coal,petroleum,electricity

Creationofcapitalgoodsthatembodynewtechnologyandenergy

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ModernEconomicGrowth

Economiesofscalethroughspecializationanddivisionoflabour Smithianproductivitygains Forwardandbackwardlinkages

Marketintegration,nationalandinternational Divisionoflabourislimitedbytheextentofthemarket

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ModernEconomicGrowth

Structuralchangesinproduction Industrialisation:riseofindustryandrelativedeclineofagriculture

Rapidtechnicalchangeinbothagricultureandindustry Technicalchangeinagricultureisessential

Institutionalchangesinorganizationofproduction:factories,corporations,etc.

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ModernEconomicGrowth

Demographicchanges Rapidpopulationgrowth Urbanisation

Labourforce Ruralurbanmigration Educationandtraining Roleofwomen

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ModernEconomicGrowth

Massproductionofcommodities Makinggoodscheaperessentiallydefinestheprocess

Overemphasisontermsoftradeismisplaced Agriculture,energy,metals,chemicals,machinery,electronics Fromluxuriestomassproducedcommodities

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TheoriesofEconomicGrowth

Necessaryandsufficientconditions Eleganttheory,buthistoryisnoisy Substitutionamongnecessaryconditions

Minimumsetofsufficientconditions Conditionssuchthatifsomethingismissing,moderneconomicgrowthisnotachieved

Analytichistory:seektounderstandcausalchains

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Schumpeter:RoleofInnovation

Introductionofanewgood Introductionofanewmethodofproduction Openingofanewmarket Conquestofanewsourceofsupplyofrawmaterials

Carryingoutofneworganizationofanyindustry

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NecessaryConditions

Profitableopportunitiesmustexist Individualsorgroupswhowishtoexploittheprofitableopportunitiesmustexist Information:ignoranceandrisk Motivation:desiretoexploitopportunities

Investmentcapability Mustbeabletodivertadequateresourcestoexploitthepotentialprofitableopportunity

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DriversofGrowth Classificationofsocietalstructures,forces,andtrendsintermsoflinkstogrowth: Facilitators Inhibitors Concomitants

Identifynecessaryfacilitators Identifysufficientorkillerinhibitors Mixesofsufficientfacilitators/inhibitors

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NecessaryFacilitators

Kuznets:epochalinnovation Increasedinvestment

Infrastructuretofacilitatemarketintegration Physicalandhumancapital

Institutionalinnovations Privatepropertyandcommerciallegalsystem Financialsystem Roleofgovernment:developmentalstate

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InhibitorstoGrowth

Incompletemarkets:stifleprofitableopportunities

Poverty:viciouscirclespreventinvestment InappropriateCulture:lackofmotivation

Weberthesisonroleofreformation InappropriateInstitutions:stifleinnovation

Failedstates,Communiststates,kleptocracy

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ConcomitantstoGrowth

Demographicchanges Facilitators,concomitant,and/orinhibitor

Genderroles Importantroleofwomeninthelabourforce

Initiallyafacilitator Genderequalitywasaconcomitant,

Eventuallyinequalityisaninhibitor

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GrowthversusDevelopment

ModernEconomicislinkedtoprofoundchangesininstitutionalstructures. Economic,political,legal,social,andculturalsystems

Defineeconomicdevelopmentasmoderneconomicgrowthplusothersocietalchanges.

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ParsonsSmelser:EconomicSociology

Theoryofsocialsystemsandeconomicinstitutions. Economicdriversofsocietalchange.

DouglassNorth:Roleofinstitutions Newbook:Understandingtheprocessofeconomicchange.

MancurOlson

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StructureofSociety

Social Structures

Personality Structures

Institutional Structures

Economic Structures

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PersonalityStructures

Educationandtastes Humancapital

Culture Attitudes

Worldview:whatispossible Societalperformancecriteria

Marketdemand:preferencestructures

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SocialStructures

Societalnormsandstandards Politicalrights Economicrights:incomedistribution Propertyrights

Rolesofindividualsversusauthority Genderroles Culturalvalues

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InstitutionalStructures Government:democraticversusauthoritarian

RolesofcivilsocietyandpoliticalinstitutionsReachofgovernment:policyspaceAbilitytomeetsocietalperformancecriteria

Legalsystem:SecurityandpublicsafetyPoliticalrightsCommerciallaw:propertyrightsandmarkets

Religiousinstitutions Educationalsystem:humancapitalformation

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EconomicStructures

Economicsystems(isms):capitalism,socialism,nationalsocialism(fascism)Policyenvironment:developmentalstate

Markets:mixedsystemsRegulationandpropertyrights Industrialorganization:corporations,etc.

Capitalstock:human,industrial,infrastructure Resourcebase Technology:stockandgrowth

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DouglassNorth:NewInstitutionalEconomics

Canviewevolutionofeconomicinstitutionsasresultingfromtensionbetweenwhatwaspossible,givennewtechnology,andwhatwasfeasible,givenexistinginstitutions. Newinstitutionsevolvedtotakeadvantageofnewopportunities.

Historymatters:institutionalinertia.

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Growth:TensionandResolution

Tension:Presentperceivedpotentialprofitarisingeitherwithinthepresenteconomicstructureorthatstructurechangedinwaysthatareperceivedtobefeasible. Perceptionisimportant:ignoranceandrisk Potentialprofitsarisingfromchangesininstitutionsisasourceoftension.ExtendsSchumpeter

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Growth:TensionandResolution

Growthistheresultofthesuccessfulresolutionoftension. Actorsrespondtothetensionbyinvesting,changinginstitutions,orengaginginSchumpeterianinnovation.

Theprocessismessy Schumpeter:creativedestruction Errorsandfailuresarecommon

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InstitutionalChanges:Examples

Creationofinsuranceindustryinresponsetoneedsoftradersinageofsail.

Creationoflimitedliabilitycompaniestoinsulateownersfromrisk.

Creationofjointstockcompaniestoraiseneededcapitalforlargescaleinvestment.

Creationoffinancialinstitutionstoorganizeexchangeandinvestment.

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ProcessofDevelopment

Dynamicchangesineconomicandsocietalstructures: Winnersandlosers Highadjustmentcostswithcomplexincidence

Developmentisamysteriousprocess Muchthatwedonotunderstand Bothrobustanddelicate

Analogytomedicine

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EarlyModernEconomicGrowth

ByWorldWarI,capitalistsystemwasindeeptroublePeriodicfinancialcrisesBoomdepressioncyclesClasswarfare:incomedistribution

Economic,political,andsocialcrisis.TwoworldwarsGreatdepressionCollapseofinternationaltradingsystem

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20thCentury:Clashofisms

ResolutionoftheMarxiancrisis ChangesinParsoniansocietalsystems

Competingeconomicsystems Reformedcapitalism(socialdemocracy) Fascism Communism/statesocialism(Lenin)

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ResolutionoftheMarxianCrisis

PostWWII,societiesdevelopedasetofperformancecriteriaforeconomicandpoliticalsystems

Thesecriteriareflect: Emergingsocietalvaluesandnorms Knowledgeofwhatmoderneconomiescandelivertotheirpopulations

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SocietalPerformanceCriteria Continuedmoderneconomicgrowthbasedontechnologicalchangeandeconomicinnovation Economicmanagement:macrostability

Significantdegreeofeconomicandpoliticalfreedom

Significantdegreeofeconomicandsocialmobility

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SocietalPerformanceCriteria Acceptabledistributionaloutcomes

Levelofpoverty Adequatesocialsafetynetforthepoor Relativewealthandincomedistribution

Managementofrisk Incidenceandinsurance

FormalizedintheUN MillenniumDevelopmentGoals HumanDevelopmentIndicators

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SustainableDevelopment

Meetingperformancecriteria Governmentinvolvement

Shockabsorbers: Ameliorateimpactofsocietalchanges

SafetynetsRiskmanagement

FacilitatorsthatsmooththeprocessSubsidizefactormobilityManageincidenceoftransitioncosts

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CountryTypologies

Postindustrialmatureeconomies Industrializingcountriesintheprocessofmoderneconomicgrowth(MEG)

PreMEGcountriesintheprocessofachievingimportantfacilitatorsandeliminatinginhibitors

CountriesthatarefailingtoachieveMEGbecauseofkillerinhibitorsorlackofabilitytoencouragefacilitators

RentiereconomiesthatwillnotevolvetoMEG

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DevelopmentStrategies Developmentstrategyisanintegratedpackageofpoliciesaimedatachievingdevelopmentinanevolvingglobaleconomy

Moderneconomicgrowthiscentral Productivitygrowth:

TechnologyandinvestmentSpeci