Introduction

Gross domestic product (GDP) per capita and related aggregate income measures are widely used to assess the economic performance of countries. Economic growth that measures the rate of change in per capita real GDP has become a standard economic indicator. Despite the popularity of economic growth as a measure of success, there is increasing recognition that it is an inadequate measure of a population's well-being. Higher economic growth does not necessarily mean a higher level of well-being.

GDP, as conventionally measured, excludes many factors that contribute to well-being while incorporating other factors that have an adverse effect on it. For example, GDP does not include nonmarket production in the economy. The contribution made by housewives to output can be quite substantial, but is not included in measuring GDP. As growth leads to increased air and water pollution, people spend more money protecting themselves from these ill effects. These expenditures are included in GDP, but they do not add to well-being. Instead, pollution contributes to people's ill-being.

Economic growth is important for well-being. It provides people with a greater command over goods and services, which translates into greater utility. Economic growth gives people more choices. However, these do not necessarily or automatically translate to well-being.

Furthermore, the benefits of economic growth are seldom shared equally. Some people may enjoy a large share of benefits, while many others may be completely bypassed by growth. Thus, economic growth does not necessarily imply a higher level of well-being for everyone in the society.

Introduction

The challenge of innovation is clear – if businesses fail to change what they offer or the ways in which they create and deliver those offerings (product and process innovation), they risk being outpaced in an increasingly competitive global environment. Even those with the capacity to innovate their products and processes risk challenge from others with alternative business models or marketing propositions. So innovation is important – but the key issue is not in the innovation itself, but rather the capability within the organization to repeat the trick, to produce a continuing stream of innovation in a dynamic and shifting environment.

We have a growing understanding of the elements that make up such ‘innovation capability’ (IC) derived from extensive research on the innovation process. From a comparatively early stage interest grew in looking at innovation not simply in terms of its nature (i.e., radical or incremental) or the sources (i.e., knowledge push or demand pull), but rather how the process was organized and managed (Tidd et al. 2005). A variety of studies began to draw attention to the range of managerial and organizational factors that affected whether and how a firm innovated (Carter and Williams 1957; Langrish et al. 1972; Rothwell 1977; Cooper 2001).

Other strands of research have also contributed to our understanding; for example, development studies focused extensively on issues of learning and of technology transfer and helped us understand the nature of the capabilities needed to move from a position of technological dependence to one of strength (Lall 1992; Bell and Pavitt 1993; Figuereido 2001).

Introduction

The case for international specialization is firmly based on considerations of economic efficiency. The world is not rich enough, to be able to despise efficiency. The optimum pattern of specialization is governed by the principle of comparative advantage. This principle remains as valid today as it was in Ricardo's time. And yet there is some question whether it alone can give all the guidance needed by countries whose dominant and deliberate aim is “economic development” (i.e. increasing real income per head).

Trade between countries rests on the realization of mutual gains. Objection may be raised to the “uneven” division of these gains. Within the range of opportunities for gainful trade, it is true that one country may be able to improve its terms of trade at the expense of another. For a single country, therefore, the logic of the classical position does not necessarily lead to a free-trade recommendation, but only to one of some trade as opposed to no trade at all. Moreover, the effects of trade restriction on a country's barter terms are not necessarily offset by retaliation, since different countries have different demand and supply elasticities. It may be that primary producing countries are in a relatively favorable position for playing this kind of game. But even for them the possibilities suggested by the so-called “optimum tariff” argument are limited and in practice very unreliable.

Introduction

Innovation, and economic development for that matter, was born in small and, by today's standards, even in microstates like Renaissance city-states. Cities like Venice, Florence, Delft, and others were extraordinarily successful at innovation – using knowledge to create economic gains – and in out-competing nations much larger in geographic, demographic or almost any other measure of size (Hall 1999; Landes 1999, 45–59; Reinert 2007). In these cities, it can be argued that smallness was one of the key factors that contributed to an institutionally highly embedded and yet diversified economy – both then already seen as pivotal ingredients of sustained growth. Indeed, early key political economists such as Giovanni Botero (1590) and Antonio Serra (1613) juxtaposed small citystates with great economic and often military power to natural resource-rich large areas that were economically backward. Today's wisdom seems, instead, to regard smallness as a source of multiple constraints on innovation and economic development in general (e.g., Armstrong and Reid 2003; contrast with Easterly and Kraay 2000). These constraints can be summarized as follows (Walsh 1988; Freeman and Lundvall 1988; also earlier, Robinson 1963):

1. 1) Almost by definition, small states (particularly the less-developed ones) have small home markets that limit the possibilities for economies of scale and geographical agglomerations.

2. 2) Small home markets and dependence on exports threaten small states with overspecialization, lock-in, and low diversification of the economic structure.

3. 3) Small states do not have the financial capabilities or human resources to invest into cutting-edge science, research and development, which makes prioritization, selectivity and adaptability key in policy design.

Introduction

The economic policy response to prevent the cycle of speculative attack-capital, flight-financial crisis, adopted by both crisis-affected and other non-affected emerging economies since Mexico's 1994–95 financial crisis, but particularly since the 1997–98 East Asian crisis, has been simply to increase liquidity through the accumulation of international reserves. Developing countries' international reserves ‘have risen from 6–8 per cent of GDP during the 1970s and 1980s to almost 30 per cent of GDP by 2004’ (Rodrik, 2006, 255). Furthermore, today, around two-thirds of international reserves are held by developing countries (Aizenman, 2007).

The dominant explanation for the build-up of reserves is that it simply represents precautionary behaviour designed to provide insurance against the high output and other costs associated with earlier crises. Countries following this strategy are evidently hoping to emulate those economies that escaped speculative attacks and/or capital flight (e.g., Chile, Columbia, China and India) and maintained policy autonomy, thereby providing ‘a way of reducing the risks of future crises and of minimizing the need to turn to the IMF if crises occurred’ (Bird and Mandilaras, 2005, 85). A second, alternative but not exclusive, explanation for reserves accumulation identifies it with an active policy of export-led industrialization characteristic of several countries in East Asia (especially China). This is the mercantilist interpretation of reserve accumulation, in which increased reserves are a by-product of maintaining a competitive exchange rate designed to expand tradeable production (see Aizenman and Riera-Critchton, 2006).

Introduction

In 1988 the UNP – which in 1948 had taken away the civic rights of the Tamils of Indian origin – somewhat ironically pronounced that the remaining 94,000 stateless persons would be granted unconditional rights to citizenship and franchise. Therefore, although citizenship is used as an inclusive and exclusive organizing principle in societies, Sri Lanka's experience illustrates the point that citizenship can also be a dynamic concept that with the appropriate action and given a suitable climate can include those whom it had excluded. Or in Lister's (1997, 5–6) conceptualization, the idea of human agency comes into the understanding of citizenship. Citizenship is not only an evolutionary process, as maintained by Marshall, in which the circle of those who received rights expanded historically, but also is a process that involves the struggle to gain new rights and to add meaning to existing ones. On November 9, 1988, when the Grant of Citizenship to the Stateless Bill was debated in parliament, the government proposed granting Sri Lankan citizenship to the shortfall of 94,000 persons who had not applied for Indian citizenship when the agreement had expired in 1981 (Hansard, November 9, 1988, 2114).

However, there is considerable lack of clarity in published sources on the actual number who would have been categorized as “stateless” and become eligible for Sri Lankan citizenship under this proposed bill, which was later made into an act of parliament (Sahadevan 1995, 229; Nadesan, 1993, 329).

Introduction

The economic collapse in 1983–1985 and periodic slowdowns and recessions thereafter led to the sharp decline in Philippine industry's share of gross domestic product (GDP) as well as that of investment from the early 1980s. The premature halt in the growth of the industrial and capital formation sector reduced the country's capacity to improve its technology and to scale up production, which would have brought the economy to much higher growth and development. As industry's share declined, services took over as the lead growth sector. This is unlike the experience of more developed countries such as Taipei, China, where the service sector and consumption share of GDP rose only after the highly industrialized stage and where industrial and manufacturing activities have reached maturity. Figure 5.1 shows the Philippines' drop and stagnation in the share of industry compared with that of its more successful East Asian neighbors.

Except for Taipei, China and the Philippines, all East Asian high-growth performers had increased their investment–GDP ratio until the 1997 Asian financial crisis (Figure 5.2). In fact, other Asian countries' investment–GDP ratios continued to exceed that of the Philippines by 2006 notwithstanding the decline in their investment–GDP ratios during the 1997 Asian financial crisis and thereafter. Investments in all countries in the figure, except Malaysia and the Philippines, had a mild recovery during 2000–2006.

While Philippine export and import shares in GDP rose sharply since the 1990s, the same was true for all countries due to globalization and the institution of World Trade Organization (WTO) and regional and bilateral trade agreements in the 1990s and 2000s.

Introduction

In his Introduction to Equilibrium and Growth in the World Economy: Economic Essays by Ragnar Nurkse, Gottfried Haberler concluded that:

We will never know how Nurkse's views of trade and development would have evolved, had he been able to observe the contrasting experiences of developing countries over subsequent years. However, with the benefit of hindsight, we can ask how well the policies and the performances of developing countries corresponded to the expectations that Nurkse laid out in his essay.

The Conflict Between “Balanced Growth” and International Specialization

The idea of balanced growth is playing a prominent role in both the theory and policy of economic development. My purpose here is to consider whether this idea is compatible with the principle of international specialization or whether, on the contrary, it means throwing away the benefits which can be obtained through specialization. The dominant practical question in some of the less-developed countries is whether the available means, limited as they are, should be used to promote activities (a) specialized along lines of comparative advantage internationally or (b) diversified so as to provide markets for each other locally. In Western eyes the pursuit of balanced growth is causing only too often a pathetic misdirection of scarce resources. Some of the underdeveloped countries, on the other hand, feel that they cannot rely on an external demand for their primary products, a demand which is usually inelastic with respect to price. Is there any guarantee, they ask, that the overspill of prosperity from the advanced countries, through changes in the volume and terms of trade and possibly, in response thereto, through private foreign investment in primary production for export, will induce a satisfactory rate of development—satisfactory in relation, for instance, to population change? The clash of prescriptions on the policy plane reflects what looks like a deadlock on the theoretical level also.

This volume is one of two publications that celebrate the centenary of Ragnar Nurkse's birth. The other volume, also published by Anthem and titled Ragnar Nurkse (1907–2007): Classical Development Economics and its Relevance for Today, prints the result of a conference commemorating Nurkse.

Ragnar Nurkse was born in Estonia in 1907; he died unexpectedly in Geneva, Switzerland, in 1959. He is known today as a pioneer among early development economists, his works are as relevant today as they where during his lifetime.

This volume reprints all the key works of Ragnar Nurkse.

We would like to thank the Estonian Science Foundation (grant no 6703) for financial support in publishing the two volumes; and Bonn Juego and Ingbert Edenhofer for their editorial help.

The editors.

Introduction

Carlota Perez has reflected broadly about the diffusion of technological revolutions, the way in which technologies and technological capabilities determine the growth potential of countries, and the way in which the global technological context shifts windows of opportunity for the development of countries and regions. In this direction, the document titled ‘A vision for Latin America: a resource-based strategy for technological dynamism and social inclusion’, elaborated for CEPAL, reflects about Latin America's opportunities during the deployment stage of the Information and Communications Technology (ICT) paradigm, and the installation stage of a new paradigm, which seems to be oriented towards biotechnology, nanotechnology, new materials and new energy sources. It presents a proposal that suggests a dual development strategy for Latin American countries – ‘dual integrated model’ – based on science, technology and innovation (STI) for building robust resource based-processing industries and specializing on high-added-value products. Such a model integrates a top-down strategy of development, which aims at achieving competitiveness on world markets for specialized natural resources, with a bottom-up strategy, which seeks to identify and promote wealth-creation activities amongst localities.

As it has been broadly discussed in her work (Perez 1985, 2002 and 2008), each paradigm implies not only technological change but also new ways of thinking or a new common sense towards efficiency and innovation, new ways of acting and new institutions. In this sense, in order to establish a strategy that benefits from the deployment of a paradigm or takes advantage of the installation stage, it requires the emergence of new social norms and new forms of agents' behaviour.

Some International Aspects of the Problem of Economic Development

“A country is poor because it is poor.” This seems a trite proposition, but it does express the circular relationships that afflict both the demand and the supply side of the problem of capital formation in economically backward areas. This paper will discuss some international aspects of the difficulties on both sides. It will take up only a few points and cannot even attempt to give anything like a balanced picture.

The inducement to invest is limited by the size of the market. That is essentially what Allyn Young brought out in his reinterpretation of Adam Smith's famous thesis. What determines the size of the market? Not simply money demand, nor mere numbers of people, nor physical area. Transport facilities, which Adam Smith singled out for special emphasis, are important; reductions in transport costs (artificial as well as natural) do enlarge the market in the economic as well as the geographical sense. But reductions in any cost of production tend to have that effect. So the size of the market is determined by the general level of productivity. Capacity to buy means capacity to produce. In its turn, the level of productivity depends—not entirely by any means, but largely—on the use of capital in production. But the use of capital is inhibited, to start with, by the small size of the market.

Introduction

Though Rosenstein-Rodan's (1943) ‘Problems of Industrialisation of Eastern and South-Eastern Europe’ is often attributed as being the work that initiated the birth of development economics as a field, as argued by Chakravarty (1983), a broader reading of the relevant literature shows that the theoretical formation of development economics and the discussion on the pertinent ideas began much earlier as a thorough theoretical and history of thought analysis of Allyn Young's classical endogenous growth vision shows (see Perälä 2002, 2006). Interestingly, there are other earlier contributions in the field of economic development consistent with the classical endogenous growth process, most notably a number of contributions by Sun Yat-sen: San Min Chu I: The Three Principles of the People (1953a), The International Development of China (1922), and Fundamentals of National Reconstruction (1953b), some written over four decades and published nearly two decades before the heralded work by Rosenstein-Rodan, to which a mere mention or limited recognition exists in the contemporary economics literature. Given the breadth of his development analysis and writings, Sun Yat-sen, though largely neglected by the profession, can be considered to be one of the earliest pioneers of economic development.

Given that Sun Yat-sen was much more of a development practitioner than an academic economist, interesting aspects in his development perspective are apparent. Most notably, his analysis is not limited by the theoretical body of thought or motivated by the shortfalls of the neoclassical economics analysis that was gaining prominence within the academic economic circles at the time and has become dominant especially during the latter half of the twentieth century.