Why Countries Are Poor

Working Paper Series Department of Business Studies No.
5, 2009
Institutions, Innovation and Development - Collected Contributions from Workshop
By Allan Dahl Andersen, Bjrn Johnson, Erik Reinert, Esben Sloth Andersen and Bengt-ke Lundvall
Institutions, Innovation and Development - Collected Contributions from Workshop
Allan Dahl Andersen Aalborg University E-mail: allanda@business.aau.dk Bjrn Johnson Aalborg University E-mail: bj@business.aau.dk Erik Reinert Esben Sloth Andersen Aalborg University E-mail: esa@business.aau.dk Bengt-ke Lundvall Aalborg University E-mail: bal@business.aau.dk
ISBN 9788791646348
Institutions, Innovation and Development
Workshop, Aalborg, May 2008
Preface Contributions 1. Institutions, Innovation and Development A Comment on Erik Reinerts Quality Index - Allan Dahl Andersen 2. A Note on Institutions as the Root Cause of Development Bjrn Johnson 3. Emulation vs. Comparative Advantage: Competing and Complementary Principles in the History of Economic Policy - Erik Reinert 4. A Note on Erik Reinerts SchumpeterianListian Development Economics - Esben Sloth Andersen 5. Toward Developmental University Systems - Bengt-ke Lundvall
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Preface
Is there some action a government of India could take that would lead the Indian economy to grow like Indonesias or Egypts? If so, what, exactly? If not, what is it about the nature of India that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else - Robert Lucas (Lucas 1988). In May 2008 we organized a workshop on Institutions, Innovation and Development at Aalborg University (see: http://www.business.aau.dk/wiid/). It was a successful event which resulted in fruitful and interesting interaction among participants. Another, and more tangible, output of the workshop is this collection of the working papers published in the working paper series of the Department of Business Studies, Aalborg University. The main motivation for the workshop is encapsulated in the quote from Robert Lucas above. Moreover, it is our conviction that research, within evolutionary economics, on innovation and technological change holds great potential for explaining and guiding economic development. The opening statement in the INNOGRIPS workshop on Innovation & Development which was held in Manchester in April 2008, nicely presents the argument: Innovation studies have mainly originated in, and focused on, industrialised economies. In some ways this is not surprising, since much of the investment and pace-setting in innovation has stemmed from these countries. Though it took a long time for many economists to realise it, technological innovation has been widely recognised as a major factor in the growth of these economies. There is now increasing awareness of, and interest in, the importance of innovation for the so-called less developed countries (INNO GRIPS, 2008). The workshop put attention to themes as learning, innovation and institutional economics. Our intention was to strengthen research on developmental issues within the IKE-group through the involvement of other research groups and independent researchers (from inside or outside Aalborg University) with similar interests. The idea was to stimulate a positive and open atmosphere of informal interaction and discussion rather than standard presentations. Such a format is moreover suitable for outlining and/or identifying new important research areas. The organizing group at Aalborg University consisted of Bengt-ke Lundvall, Birgitte Gregersen, Bjrn Johnson and myself I served as main coordinator of the event and as editor of this collection of papers. Participants in the workshop, besides the organizers, were Erik Reinert, Esben Sloth Andersen, Mammo Muchie, Erik Stubkjr and Jan Holm Ingemand plus a number of attendees. We are currently in the process of organizing the WIID 2009, which will take place in early May 2009, Aalborg. We hope to repeat last years success and keep focusing our attention at the some of the most relevant challenges for economic research. Allan Dahl Andersen Aalborg, February, 2009
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Contributions
Allan Dahl Andersen delivers a comment on Erik Reinerts quality index of economic activities which is a central element in his writing. The basic proposition is that some economic activities are more promising than others with respect to stimulating economic development. On the basis of this Reinert proposes a quality index of economic activities in the form of a hierarchy in terms of value creation. Allan Dahl Andersen reflects on the dynamism of this hierarchy and on how value is created within it. Activities of learning and innovation strongly influences the position of an economic activity, but wealth can also be derived from more static forms of monopoly. The key issue is whether the entry barrier to a given activity is based upon imitable or non-imitable factors and the difficulty in imitating a competitive advantage. Whether firms are able to imitate a given technology is affected by firm-external factors. Therefore an innovation system approach is proposed for understanding what determines capability to imitate in a systemic perspective. Within the latter framework industrial policy is proposed as one mean to change ones position within the hierarchy by stimulating learning activities. This contribution takes the form of an approach to understanding economic development based on the distinction between low-quality and highquality economic activities, but the author ends up questioning this distinction because it tends to a priori categorize a large part industrial activities as non-developmental. In his contribution Johnson enquires into whether institutions can be considered as the root cause of development. Institutions have received a lot of attention in the array of development economics during the last decade, but the most powerful discourse, one which Johnson terms new institutionalism, regarding institutional research carries within it serious limitations. Within the latter approach institutions are seen in a narrow sense which reflected by a strict focus on property rights, transaction cost and other good-governance indicators. The research is currently driven by recently constructed databases of these indicators that allow for quantitative studies of institutions. Johnson acknowledges that this research enriches development studies but also encourages cautiousness regarding the interpretation of it. The growth of other strands of literature (e.g. on common pool resources and social capital) indicates that factors other than good governance are important for development. Especially the lacking focus on how institutions and institutional change are geared towards processes of learning and innovation, troubles the author. The co-evolution of institutions and technology has been and is one key dimension for understanding economic development as long as this aspect is not incorporated in newinstitutional research, it can hardly supply us with a root cause of development. Reinerts contribution is not representative for but still presents part of his recent book (Reinert, 2007) wherein he outlines a skeleton of an alternative theory of development and international trade. In the following contribution Esben Sloth Andersen comments extensively on Reinert (2007; 2008) with the intention to light up the potential for (a revival of) Schumpeterian-Listian development economics. In his contribution Reinert illustrates how the adherence to different economic principles leads one to very different policy conclusions. Reinert analyzes two different strands of literature based on emulation and comparative advantage, respectively. In the analyzes he includes various examples of successful and unsuccessful development policies where the former has always been based on economics of emulation and the latter on comparative advantage. The economics of comparative advantage fail to both diagnose and treat problems of underdevelopment because it does not pay attention to the core drivers of capitalistic economies which are innovation and dynamic competition. Innovation in a broad sense is about qualitative change of economic activities which is and has been the essence of development. With regard to the polemics of protective trade policies, he argues that there is a good and a bad use of the infant industry argument
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protection is not bad per se, the world is more complex. Reinert argues that protective measures have been part of most successful development histories because it takes time to build industrial capability. On the other hand free trade has been used as an imperial tool to de-industrialise other countries. Sloth Andersen contributed with a document containing extensive comments on Reinerts general work (Reinert, 2007) in occasion of the workshop. Moreover, Sloth Andersen, who is an international expert on the work of Joseph Schumpeter, gives a convincing positioning of Reinerts work within both earlier and contemporary literature on development economics. The former category of research receives primary attention though, especially with respect to the work of Schumpeter and Friedrich List. Sloth Andersen identifies Reinerts errand as constructing a new vision for the high development economics (Krugman, 1994) which dominated the literature in the 1940s and 1950s. Still, Reinerts work (vision) currently suffers from similar weaknesses as it did the high development economics the main problem is the lack of formal and analytical modelling/simplicity, of which Schumpeter was an admirer. In Schumpeters spirit Sloth Andersen formulates a potential research agenda which, according to him, must be taken into account if this revival of high theory is not to suffer the same faith as it did earlier. At the core of the research agenda, as of the comments, one finds 2 important differences between the work of Reinert and Schumpeter. One, while Reinert insists on perceiving neo-classical economics and the other canon as incompatible, Schumpeter always pursued a synthesis between the framework of Walras and one of economic dynamics. According to Sloth Andersen, Schumpeter would recognise both approaches with a clear emphasis on the primary importance of dynamics. Two, while Reinerts methodology consists of a collection of historical case studies rich on details (in the tradition of the German historical school), Schumpeter had a preference for analytical simplicity preferably materialized in a (tractable) model. In the contribution from Bengt-ke Lundvall, he focuses on the role of universities in developing countries for economic development. His point of departure is the current international debate on the role of the university as an entrepreneurial university (the 3rd mission) according to which the university should be managed as a firm thus by use of the logic of the market. He argues that use of the logic of the market can create contradiction with what is known as the 1st and 2nd mission of the university education and research especially in developing countries. Instead he proposes another kind of logic one which is encapsulated in the concept of a developmental university. The developmental university is defined as being open and it interacts with different groups in society, including industry. Its primary aim is to contribute to social and economic development while at the same time safeguarding a certain level of autonomy (from political interests). Within this logic students are more likely to acquire knowledge that is relevant and applicable in the context wherein they live. Also, the research agenda in a developmental university will be geared towards solving local social problems. The role of universities must be seen within the context of a national innovation system. Hence, Lundvall proposes a developmental university system wherein a division of labour is required in order to achieve a better performance with scarce resources. The organization of such a system must take into account the given productive structure and existing demand since it is not obvious that university graduates will be the group most needed - wherefore the system should also include e.g. poly-technicians and other practical training. Lundvall suggests that the division of labour contains universities that, respectively, specialises inter alia in local problem-solving, training and
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connecting with the international research groups and the world research frontier in selected areas. Lundvall concludes with a reform proposal for universities in developing countries which gives a crude indication on how they may manage in the global learning economy.
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Institutions, Innovation and Development A Comment on Erik Reinerts Quality Index

I will discuss the relations between institutions, innovation and development with the publication of Erik Reinert (2007), Why Rich Countries Got Richand Why Poor Countries Stay Poor, as point of departure. The publication served as one motivating factor for arranging the workshop and has been a central element in my PhD work. Throughout this partly introductory chapter, I will refer to Reinerts work and to several of the other contributions to the workshop. Moreover, I give an outline of an approach to both economics and development based on my understanding of evolutionary economics with institutions, innovation and development as focal points. During the latest three decades there have been several discussions and discourses within the mainstream research on development economics. The strength of the neo-classical research paradigm was the driver behind a mantra that development was all about getting prices right in the 1980s which implied correcting market failures in order to make the optimal resource-allocating price mechanism do its job properly. Several disappointments in development programs in Latin America and Africa designed on the basis of getting prices right combined with the East-Asian growth miracles left this discourse in a dire state. Moreover, outside the mainstream school of research a group of heterodox scholars discussed getting the prices wrong and were unimpressed by the focus on new institutionalism (Amsden 1989; Wade 1990). Their argument was that the price mechanism may allocate resources smoothly according to a static perception of the economic system where the qualitative structures at every level remain the same. But, it would not induce a process of economic development since this implies completely changing the economic system. Additionally, manipulation with prices via industrial policy may be necessary to stimulate growth. The latter development affected the mainstream research agenda in the sense that institutions became the new buzz Getting institutions right was the mantra of the World Bank et. al. during the 1990s. Still, as Johnson (2008) points out, when one, as the World Bank, defines institutions as macro stability, private property rights, absence of corruption and violence, then it does not make much sense to claim that institutions are the source of economic development. Similar insights led the World Banks search process for the holy grail towards considering knowledge, innovation and technology as important factors for development. A recent contribution by Erik Reinert (Reinert 2007), which is in line with getting the prices wrong, suggests a new slogan for the troubled research agenda of development economics it is about getting economic activities right. His point is that some economic activities are better suited than others for stimulating economic development in a developing country. His points open a broader and well-known discussion about how industrial structure mix of economic activities relates to economic dynamics, performance and growth. Thus, the argument is that industrial structure is even more important than both allocative market efficiency and good institutions (as described above). With this as point of departure I describe a approach to economics which pivots around learning activities and innovation as the most fundamental factors in the process of economic development. How one defines objects and phenomena determines which kind of questions one asks and thus partly which kind of answers one will get. Therefore, it is appropriate to outline the ontology which underlies the theoretical framework. The theoretical approach can be characterized as old institutional economics (Hodgson 1998) or as evolutionary institutional economics (Andersen 2008). Here a market is a context-dependent institutional set-up, that cannot guarantee optimality.
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Social phenomena are studied as multilevel and multidimensional recursive systems where positive and negative feedback mechanisms between overlapping and interacting sub-systems are of great importance (Arthur, Durlauf et al. 1997). The difference from a mainstream approach to economics can to some extent be understood as a use of the language and metaphors of biology instead of those from classical physics. This implies that co-evolution between systems and between agents and structure is to be expected (Arthur 2000). Moreover, the perception of the individual agent as an omnipotent global maximizer, that inspires methodological individualism, is rejected. Instead the individual is seen as satisficing. Satisficing implies that individuals try to optimize relatively to their different local contexts (constrained both by limited information and by limited information processing capabilities), which produces the range of variety of people, ambitions, desires and actions that we observe in the real world (Simon 1983). The economic system is characterized by strong uncertainty which refers to a situation where possible outcomes and the possibility distributions attached to them are not known ex ante (Verspagen 2003). The basic dynamism of change in economic systems is thought to arise from processes of mutation, imitation and selection as proposed by Richard Nelson (Nelson 1995). Furthermore, in terms of vocabulary, institutions (formal and informal) refer to the rules of the game wile organizations (private, public, NGO) refer to the actors of the game (Edquist and Johnson 1997).
Learning, Innovation and Development

One might argue that a traditional production function, e.g. F(K,L,Land), is merely a static and descriptive piece of information which says little about how value is created. Instead one should focus on a function of F(energy, material, knowledge) processing material creates value but necessitates energy and the processing is planned according to available knowledge (Boulding 1992). There are feedback loops between the three (especially material processing and knowledge) which can be called learning. In this respect knowledge can be seen as the most important economic resource and learning the most important economic activity. Accepting the above proposition leads to an approach to economic development that pivots around learning activities (capability building in another terminology) at the level of the individual, the group, the organisation, the region and the country. The crucial importance of learning is derived from the insight that knowledge is often the most important resource in the economic system hence, learning is all about acquiring, applying and generating knowledge. Technology is a part of knowledge as a concept. When we understand technology in the broadest sense (e.g. social technology), it is nearly equivalent to knowledge. At the backbone of the history of economic wealth we find people that via the use of technology have managed to transform a natural resource into something else that holds a higher value than it did a value-adding activity. In order to succeed in a value-adding activity, knowledge about the process of transformation is decisive for the outcome. The latter is true for all aspects of learning and economic activities in fact, it is at the core of development issues. Improving the processing technology, products or the mode of production via learning can be understood as innovation. Innovation can, in a broad sense, be defined as doing things in new ways which often emanate from problem-solving activities. When conditions change and routines no longer work, humans experiment and learn. In a narrower sense, innovation means developing or adopting new ideas and transform them into new products or processes. Thus, innovation is the outcome of a process of learning1. Since learning is
Innovation is not always an outcome of an intentional learning process. It may be accidental, unintended or unforeseen.
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predominantly interactive and therefore a process that is socially embedded, it cannot be understood without considering the institutional and cultural context (Lundvall 1992). It should be noted that development is a rather imprecise term. Normally one relates development (in economics) to problems of poverty, macro imbalances, declining terms of trade, commodity specialization, short life expectancy, illiteracy and lacking human and political rights. The most common definition today for underdevelopment refers to a poverty line for individuals (less than $US 1 (or 2) per day) - at the national level, development is defined in terms of income per capita. Development, as used by Joseph Schumpeter, and in studies of industrial dynamics, refers to change in the economic structure which may lead to improvements or deteriorations of development indicators. In this spirit I argue that development as structural change is at the heart of problems of development that the qualitative characteristics of the economic structure of a given nation will determine the performance on development indicators. Qualitative change in economic structures - changing the composition of economic activities or/and their characteristics - is to a large extent the outcome of innovation2. The above argument can be linked to what has been called high development theory (Krugman 1997). High development theory, whose prime was in the 1950s, argued that structural change is the key parameter for explaining development and underdevelopment. Famous authors related to this trend were inter alia Raul Prebisch, Albert Hirschman, Celso Furtado and Hans Singer. They argued that economic activities are qualitatively different and have different impacts in terms of growth potential, employment generation, value added and ability to generate increasing returns to scale3. Related to the international trend regarding research on development economics, the highdevelopment-theory approach was forgotten inter alia due to the dominance of neo-classical economics in all spheres of economic research. Especially the aggregate production function approach to growth advocated by Robert Solow, in which sectoral differences and qualities do not matter, put this structuralist approach in the grave (Cimoli, Porcile et al. 2005). These ideas persisted though, in pockets of heterodox economics represented by economic historians and scholars of technological change. According to these scholars the wealth and poverty of nations has historically been determined by their capability to change and develop their industrial structure by use of new knowledge and technology (Rosenberg and Birdzell 1986; Landes 1998). On the basis of the above, it can be argued that development and underdevelopment to a large extent are caused by international differences in capability to learn, to innovate and to produce and apply new technology. The engine of development is changes in productive structures in the pursuit of value-adding activities. Still, this introductory framework description leaves much to be said e.g. which kind of structural change should be targeted? And how can one achieve such structural change?
Structural Change and Qualitatively Diverse Economic Activities

To come one step closer to understanding why and how some economic activities are more promising than others, it is helpful to follow Reinerts lead (2007) in seeing the economic system as
Qualitative change is a broader term that structural change since the latter mainly refers to the composition of an economy the components can change in terms of quality without the overall structure seems to change even though there will be causal links. I will mainly adhere to the use of the term qualitative change. 3 What these authors failed to acknowledge was that technical development does not happen automatically it seems that they did not pay sufficient attention to the learning divide (Cimoli, 2005).
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a hierarchical system4. Reinert proposes to make a distinction between high and low-quality economic activities. In a straight-forward manner economic activities with high productivity growth, high potential for further technological improvement, facing dynamic demand, characterised by imperfect competition and thus having high barriers to entry are high-quality economic activities. Low quality-economic activities are characterised by close-to perfect competition, low productivity growth, limited potential for further technological improvement, low demand elasticity, barriers to entry based on low wage rather than knowledge and little learning required, cf. figure 2 in Reinerts contribution, page 39. One of the main points made by Raul Prebisch and Hans Singer is that if a country specializes in producing low-quality products for export and imports high-quality products, it will see its relative welfare decrease continuously because of detoriating terms of trade. The primary reason is that the high-quality sectors productivity growth rates are much higher than those in the low-quality sectors. Therefore the country specialized in the latter will face a worsening of its exchange relation. Hence, productivity growth and levels hold the key in this case with respect to trade. High-quality activities produce wealth for several reasons (besides trade effects) which I seek to explain in the following. Moreover, I suggest a causal link between the concept of high-quality activities and economic growth at the level of the nation.
Static and Dynamic Rents

If we to begin with consider the hierarchy in a static perspective, then the high-quality activities are able to generate high incomes to the producers due to barriers to entry. Barriers to entry create rents that can be reaped by entrepreneurs (Kaplinsky 2005). One can distinguish between static rents and Schumpeterian (dynamic) rents where static rents build on e.g. natural monopoly and are unlikely to be eroded over time. Schumpeterian rents arise from a certain mode of production based on a special type of organizational structure, technology or institutional set-up. Schumpeterian rents are likely to erode over time due to the presence of imitators and arrival of new modes of production (Reinert, 2008). In short, some activities hold more value than others because they are difficult to imitate (given presence of demand). It is possible to divide the characteristics of economic activities, as proposed by Reinert, into three broad categories, as can be seen from the table 1. These categories naturally interact in various ways, cf. table 2. Their relative importance will depend on the given context. Therefore it is difficult to, a priori, evaluate which mix will be better at generating economic rents.
An international hierarchy can be described for economic activities and countries performing these activities, respectively. I will first focus on economic activities and later suggest a link to a hierarchy of countries.
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Characteristics
Supply-side, Static Rent -Natural monopoly not imitateable over time (e.g. oil, historical tourism, geography)
Features
Fixed in short run Market conditions Competition mode -Non-imitable
Entry Barriers
Supply-side, Dynamic Rent -Temporary monopoly -Learning -Technological progress -Institutional change -Organizational change -Productivity increases Endogenous comparative advantage seems to be the more important Positive feedbacks from learning -Knowledge
Demand Conditions Rent -Dynamic/growing demand -Large scale/niche market
Often constantly changing its interaction with creation of dynamic rents very important
Table 1: Categories of Economic Activities
Dynamic Static Static rents can be a result of earlier dynamics. They often co-exist. They can be complementary and coevolve. XXX
Demand Producers need access to demand concerning both commodities (large scale) and niche (high value) products. The quality of demand is important in developing new products and ideas. The presence of demand is crucial for launching and gradually enlarging production of new products.
Dynamic
Table 2: Interaction between the various dimensions
If we consider the hierarchy in a dynamic perspective, we will see that the economic activities at the top of the hierarchy are changing over time a life cycle of technologies, products and modes of production may be discerned. At first a new technology produces super profits due to imperfect competition, but the super profits are competed away as imitators enter the industry and the technology subsequently drops down in the hierarchy. The latter mechanism is at the core of Schumpeters understanding of how innovation affects industrial dynamics. Schumpeter himself described the hierarchy of the economic system as: the upper strata of society are like hotels which arealways full of people, but with people who are forever changing (Reinert, 2008). It is worth noting that most of the characteristics of a high-quality economic activity, mentioned above, are based on productivity improvements5. It is important to note that as a mode of production moves downward the quality index, the productivity of the production mode does not decrease rather it grows slower or it looses momentum6. When productivity growth declines, it will be relatively easier for imitators to catch-up (given that technology is the main entry barrier) which is equivalent to the insights from the technology life-cycle theory. Hence, often the source of Schumpeterian rents is productivity growth (given homogeneous goods) one needs to continuously improve productivity to avoid perfect competition which is also known as the red queen effect (Albuquerque, Ribeiro et al. 2006).
5 Dynamic demand is important for generating economies of scale which is defined as falling marginal cost and thus higher productivity; potential for further technological improvement refers to future improvements in productivity; the exception is imperfect competition which refers to market structures and position vis--vis competitors. 6 Reasons for the downward movement can be (1) imitators are successful and perfect competition market structure is the result or/and (2) a new and superior mode of production emerges.
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Making the link from productivity growth to value-adding activities things are a bit more complicated. Adding value is to process X7 with a technology that is hard to imitate, but it also requires that someone values the product the structure and characteristics of demand. The latter implies that a value-adding activity is not necessarily subject of significant productivity growth, but as a niche product it is highly valued (jewellery, special coffee, tourism in the Vatican). In the latter case a combination of low productivity growth, limited potential for further technological improvement and low demand elasticity can be characteristics of a value-adding activity if combined with unique barriers to entry (geography, history)8 (Perez 2008). Often economic activities are characterized by a mixture of the qualities of high and low-value products, respectively9. Hence, we have three dimensions for deciding the value of an economic activity which produces, at least, two obvious questions: (a) how does one achieve (continuous) productivity growth? (b) how does one enter a market with high-value adding? Regarding (a), first, one should notice that firms, and not countries, improve their productivity. It has been convincingly shown that innovation significantly improves firm performance (in terms of survival rates, turnover and profit) which is an indicator for productivity growth. As said earlier, innovation is the outcome of a learning process hence continuously stimulating learning activities in a firm is the only way to continuously improve productivity and to remain at the upper strata of the economic hierarchy. With respect to (b), when the degree of value-added is partly decided by the consumer/user, we enter the complex area of preferences, price, quality and substitutability. There are basically two mechanisms; (1) creating demand for ones product via marketing or (2) product innovation (which will need marketing and demand as well). With respect to (1) marketing is a highly creative process which involves organizational, institutional and product innovation. Hence, innovation and learning activities are very influential for entering/creating value-adding activities10. Above I gave, via the concepts of static and Schumpeterian rents, a tentative explanation of how one a priori can evaluate whether an economic activity is a high or low-value activity. It is a complex matter and certainly there are objections to be made. I made reference to the results showing that firm performance significantly improves if the firm innovates. Besides stressing the importance of learning activities (in a broad sense), I did not go into the underlying process of organizational management within the firm and I will not pursue this question further since it is not my aim here. Instead, I will now leave the firm level and proceed to discussing factors external to the firm and how they may affect productivity growth, innovation and learning activities in firms. Firm behaviour is strongly related to how activities are placed in the quality index . It is firms that perform these activities and subsequently improve and change them via innovation. Hence, how firms manage, improve and develop knowledge and technology in certain economic activities matters greatly for how these activities can be characterized in terms of productivity growth and
If X is scarce and only exists in certain areas (natural monopoly) then the processing does not need to be that complicated to be valuable. 8 But could be much more valuable with a strategic approach more on this later. 9 On a nation level the picture will be mixed. Activities that can be located at the bottom of the quality index may account for a large part of national employment and make up a significant part of national GDP such an insight weakens the strength of a unilateral focus on growth pole sectors, but does not entirely dismiss it. 10 It should be noted though, that firm performance necessarily is relative thus it depends on the capability of competitors and institutional set-up.
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contribution to GDP. Moreover, if one goes from discussing a hierarchy of economic activities to discussing an international development hierarchy of nations, it has several implications. Firstly, the underlying hypothesis is that the more firms (or share of production) in an economy that are located in high-quality economic activities, the more wealth (or development) it will tend to accumulate. This hypothesis is behind most work on technological up-grading and leapfrogging where the presence in high-tech sectors is seen as determinant for engaging in a process of economic development. Secondly, it has been stated that learning and innovation in firms affect their performance in terms of productivity in production and in terms of entering/creating value-adding activities. Since both learning and innovation are highly interactionist processes, there are several firm-external factors that must be taken into account if one seeks an explanation for the positioning of firms and economies in an economic hierarchy. I will try to do this in the following section.
Linkages, Innovation and Systemic Performance

Until now the arguments for ones (firm or nation) position in an international economic hierarchy related to Reinerts quality index have rested upon firm performance generated by factors internal to the firm, but there are other important factors that are external to the firm. In this section I will discuss how firm-external factors can affect innovation and learning in firms - hence, focus is on dynamic rents. Following the vocabulary in Reinert (2007), I will operate with the term increasing returns to scale when discussing firm-external factors11.
Increasing Returns and Industry Dynamics

At the firm-external level, increasing returns to scale implies that individual firms benefit from interacting with other actors (firms, universities, government)12. It has been shown that firms that collaborate with other firms and/or research institutes have a higher propensity to innovate (Lundvall 2001). Also, technologies can increase their productivity by interacting/integrating with other technologies. It is obvious that the definition of increasing returns to scale is hard to capture. Dosi (1988) refers to this phenomena as untraded interdependencies among sectors, technologies, and firms that take the form of technological complementarities, "synergies", flows of stimuli, and constraints that do not entirely correspond to commodity flows. For example, knowledge and expertise about continuous chemical processing may allow technological innovations in food processing even when the latter do not involve any chemical inputs. At nation-state level one can imagine that an economy containing several economic activities (sectors) that are able to feed upon the dynamics of one another, will be able to create synergy effects among them and promote economic development at the national level (Reinert, 2007)13.
11 Here I treat increasing returns to scale as a systemic phenomena, which implies that the whole is larger than the sum of its components that interaction between system components generates a performance that individual components would not be able to realize. 12 At the level of the individual firm, increasing returns to scale is defined as: increase all inputs with factor 1, if output increases more than a factor 1, production is subject to increasing returns to scale. It is thus a term used to capture productivity improvements (via change) in the firm generated by the systemic interaction between the components of the firm (employees, organizational structure, technology, knowledge and external conditions). 13 The sectors per se do not need to be characterized by increasing returns but it would most likely increase the strength of the dynamism. The strength and endurance of the process will also depend on linkages between sectors, technological complementarities and general level of capabilities.
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The latter idea corresponds to an approach that sees economic development as a chain of structural disequilibria (Hirschman 1958; Dahmn, Carlsson et al. 1991). This entails focusing on the transformation of economic structure, which means focusing on changes through time within and among micro entities. The basic idea is that complementarity exists among technological, economical and related factors. In a disequilibrium optic, these complementarities often produce bottlenecks or structural tensions. If e.g. a new field of technological opportunities arises which makes it profitable to restructure the economy/firm, then positive pressures will arise for new investments to be made (changed perception of future profit opportunities)14. Once these complementary investments are in place, the development potential is released. When the complementary investments in turn produces further structural tensions in other parts of the economy, then we have a development bloc. A development bloc refers to a sequence of complementarities which by way of a series of structural tensions (disequilibria), may result in a balanced situation or in a new structural tension (Dahmn 1994). The source of structural tension or disequilibrium is most often new knowledge and new opportunities innovation. It is obvious that linkages in terms of demand-pull and supply push, is a prerequisite for the above-described mechanism. The link to overall economic performance is evident, as Dosi (1988) puts it: Whenever these technological externalities - in the form of specific infrastructures, skill availability, competences embodied in local firms, easier information about new production inputs reproduce through time as a sort of dynamic increasing returns, they also help explain the differentiation in the technological capabilities, rates of innovation, and rates of diffusion among regions and countries. Hence, producing (dynamic) increasing returns (whose both initiating and momentum-keeping factor is innovation) in the economic system is an important aspect of economic growth and development. I argue that the above described systemic increasing returns can arise in any (social) system, be it a group of individuals, technologies or firms15 this positive interactionist or synergy (among components) effect arises from complementarity among these components16. One critical prerequisite for this synergy effect, is that components must not be identical hence, diversity is needed in order to generate the above described process.
Increasing Returns and Diversity

The dynamism of the development bloc described above is mediated through linkages between diverse actors in the economic system diverse actors. The diversity of economic actors further helps to explain the process of structural change via innovation and learning. The basic idea is that bringing together diverse17 elements will automatically generate new constellations (of knowledge)18. The latter, seems intuitively correct if one imagines gathering people from various parts of the world with different educational, religious, cultural, political and
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The strength of this pressure depends on the match (of the new opportunities) with prevailing institutional set-up and quality of entrepreneurs (Dahmn, 1991). 15 Thus including agriculture and resource-based activities. 16 Strength of complementarities, and thus potential for increasing returns, will partially decide the degree to which this dynamism can be produced. 17 Diversity: a range of many people or things that are very different from each other. Variety: several different sorts of the same thing. 18 Too diverse components may prove counter productive, though.
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social backgrounds in order to discuss the solution to a given problem the probability that this group of people would come up with a more creative/different solution than a homogeneous group is significant (DeBresson 1996). Thus, heterogeneity, more often than homogeneity, produces creative processes. The emphasis on heterogeneity inter alia comes from Joseph Schumpeters emphasis on innovation as a new (re)combination of known, but diverse components. Aggregated the insight brought about is that industrial/structural diversity is a good thing (for productivity improvements), because it increases the potential of an economic system to bring together diverse bodies of knowledge, which is likely to produce new solutions and ideas (potential innovations). Given that structural diversity exist in an economic system, then linkages between bodies of knowledge are a prerequisite for allowing them to interact and produce synergy effects. Thus, one can argue that the more linkages a firm has to other organizations (across and within sectors), the better access this firm has to diverse bodies of knowledge and hence a higher probability of innovating (given firm capability). Lundvall (1985) distinguishes between tangible and non-tangible flows of products between firms (user and producer vertical linkages) and argues that an important aspect of the innovative process is the exchange of disembodied information between the producer and the user via information channels. This is another way to state the close relation between innovation and production. Thus, input-output relations (tangible and intangible) between the actors of the economic system (firms, universities and government bodies) and their untraded interdependencies lie at the centre of the argument of firm externalities19. The importance of linkages at governing knowledge flows between actors (and thus increasing their probability to innovation) is an additional valuable point to the argument of the development bloc as a sequence of economic disequilibria. When a structural tension created by e.g. an innovation, which lead to the perception of new opportunities for firms, is released (via investments), then it will produce further structural tensions. This process will must likely change the relations between firms some old contacts will wither, and new ones will arise (with new or incumbent firms). It is thus reasonable to think that the firms involved in this process, will face radical change in their linkage structure regarding both goods and knowledge20. These new structures will supply firms with access to new diverse bodies of knowledge, and are thus likely to generate a stream of innovations that will give further momentum to the development bloc dynamism21. I will mention one more aspect of diversity in relation to economic development. A vast empirical literature finds that firms are not a homogeneous group they are intrinsically different (Dosi, 1988). Referring to the latter paragraph one can argue that diversity is a prerequisite for innovation, but it is also (i) the result of innovation and (ii) a driver of imitation and diffusion of innovation. Ad. (i); successful innovation of every sort is by nature asymmetry generating (diversity/variety) on the firm level. The innovating firm gains an advantage vis--vis its competitors. Ad. (ii); the competitors will need to imitate the innovating firm to compete, which entails a diffusion process of the innovation. Thus, the innovation creates divergence among firms, which in turn, via competitive forces, becomes a process of convergence on the industry level (given firm capability). In this sense processes of innovation, diversity creation and changes in economic structures are mainly endogenous phenomena that of course interact with and are affected by external factors. .
19
Information channels and goods channels are not identical, but tends to overlap the overlap reflects user-producer interaction and interaction between innovation system and production systems. 20 This dynamism would not be possible with identical firms. 21 Continuing the argument, supplying firms with access to new knowledge is a significant concern for industrial policy.
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Linkages between heterogeneous economic actors are thus very important for producing and sustaining virtuous circles of qualitative change and economic development. Still, this is be no means a natural phenomena in the sense that such linkages (not to mention their quality and content) and derived dynamics occur automatically. They often need to be nurtured and stimulated through policy in the following section I propose an innovation-system approach as a framework for understanding and not least managing these industrial dynamics.
System of Innovation
The development of linkages, innovation, investments and dynamic structural change is not necessarily an automatic or natural process instead such processes should and can be managed to some extent. The logic underlying a system of innovation (SI) incorporates the elements discussed above and provides a framework for perceiving the complexity of economic systems it serves as a focusing device for identifying problems at all levels22 which is one of its major strengths. According to a SI approach one must include the micro level (firm performance and capability), the meso level (sectors, linkages and dynamics), the macro level (stability, finance, demand, etc.) and the (relevant) institutional set-up at all levels. The main actors in an SI are firms or entrepreneurs who are able to generate, adopt and apply new knowledge. They are complemented by government policy and other actors to various extents. In less developed countries the government is more likely to act as entrepreneur due to lacking/perverse private investment opportunities (Sloth Andersen, 2008). The main actors in a SI are firms who are complemented by government policy and other actors to various extents. Based on the perception that economic performance largely arise from innovation and learning activities plus the process of innovation has systemic features and is interactionist by nature (Lundvall, 1992) some of the most important areas of investigation are generation, imitation, application and diffusion of new (and economically useful) knowledge and technology. The IS framework is developed to study and understand these exact mechanisms. The emphasis given to the interaction between the system of innovation and the system of production reflects that innovation often takes place via the feedback mechanisms between research and development and actual production while the initiative could come from both places one can distinguish between supply (R&D) and demand/need (production) that interact with one another and with the surrounding institutional set-up. The SI approach provides an analytic framework for understanding economic systems and hence learning how to identify, diagnose and proscribe medicine for economic development.
Strategy for Structural Change Industrial Policy

How does one change place in the hierarchy? This is of course the million-dollar question in research on development economics. There are no easy answers but as Reinert (2007) puts it, if one wishes to understand the determinants of development and underdevelopment one should start with looking at the successful examples in history. As indicated above, these stories of development are
22
The SI approach has been applied at cluster, local, regional, sectoral, national and global levels due to the nature of complex systems (recursive) it is not possible ex ante to decide on which level is optimal, it must depend on the subject-matter of the research.
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stories of structural change in the broadest sense. Since the window of opportunity (Perez and Soete 1987) for changing ones position in the hierarchy is constantly changing then there can be no straight answer to how such a change can come about. Still, a tool can be devised for how to maximize ones probability for moving upwards in the hierarchy. The tool in question can be termed industrial policy in its broadest sense which implies that nearly all other spheres of policy should be guided by a national development (emulation) strategy. Within the toolbox of industrial policy I see a distinction between two interrelated strategies. One strategy is focused on technological catch-up in a concrete sense, as taking advantage of what is and is concerned with a short-medium term time horizon (narrow). It is similar to a firm strategy in the sense that a goal could be to conquer market shares, upgrade within the known technology cycle, upgrade within a value chain, decrease dependency or vulnerability with known technology. This approach focuses more on imitation and diffusion of knowledge rather than production of new knowledge and radical innovation, but still (radical) institutional innovation is crucial for successful imitation and diffusion of technology. In this case a relatively clear plan can be formulated. The second strategy focuses on long-term adaptation to the production mode of the learning economy and on being prepared for or generating what will be. The latter entails constant focus on stimulating learning and innovative activities in the realm of economic activities. The long-term aspect implies that it is difficult to identify strategic areas of interest to pick winners wherefore a broader approach to innovation is necessary. An approach that is more geared towards the production of new knowledge in areas whose commercial potential is not yet known. Since no clear a priori or generalisable strategy can be formulated in this case, an important point is to recognize that a strategy is a trial and error process. Hence, one of the more important things, is to have in place institutions that foster search, trial-and-error and learning processes - also when it goes wrong, because it inevitable will go wrong to some extent since this is the nature of the game. Each window of opportunity demands its special institutional set-up, but one aspect that can be generalised is that learning processes must be stimulated and be at the core of a development strategy (Mathews 2005). The link between the two different strategies is encapsulated in the idea of the cumulativeness of knowledge (Dosi, 1982; 1988). That knowledge is cumulative implies that (1) generating knowledge via learning takes time (hence, different from information); (2) knowledge is not easily transferred (absorptive capacity is needed); (3) qua an economic activity one accumulates specialized knowledge. Point 3, reflects that one is most likely to innovate in the area of ones productive specialization hence the interaction between the system of production and the system of innovation. Due to the latter insight it is common to talk of the path-dependency, technological trajectory and development path of a country, region or firm. Thus, it is likely that what is will influence (though not determine) what will be. Regardless of strategy and the development path targeted, the performance the national SI will be of vast importance for whether such a strategy will be achievable. Hence, innovation (and thus learning) is at the heart of economic development.
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Institutions and Innovation

Institutions, as in evolutionary institutionalism (Johnson 1992; Hodgson 1998), are of outmost importance in relation to innovation on several accounts. The institutional set-up of an economy makes up the rules of the game, which can be understood as the incentive structure facing an individual agent. Institutions are much more than an individuals pay-off matrix, though. They make up a complex network of formal, informal, social, economic, cultural, political and international practices and routines that affect and are affected by the actions of organizations and individuals (co-evolution) what we call society. Thus, institutions not only constitute the rules of the game, but also whether these rules are enforced, respected or ignored how the game is played. Also, since institutions, as defined here, are endogenous to the economic system, the change, formation and consolidation of a given institutional set-up is an outcome of the history of an institutional context. Institutions affect the innovative performance of a given region in specific manners. For example, learning, which is a prerequisite for innovation, is predominantly an interactive process and therefore a process that is socially embedded and cannot be understood without considering the institutional context. Moreover, institutions channel resources to innovative activities, they support technological advances, education, resource allocation, the efficiency of the economy as well as they influence and define the way actors accomplish their tasks and resolve conflicts (Edquist and Johnson 1997). According to the above institutions geared towards a innovative mode of production seem to be primary vis--vis innovation and technical change per se, but causality has gone and goes in both directions. An institutional set-up co-evolves with technological change and both setups interact with the actions of independent (non-deterministic structure) agents. According to Nelson (1995) economic development involves a process of technical change and institutional and organizational innovation this is the foundation of development. There are several examples in history where institutional change preceded technical change and directly stimulated economic development. On how the United States and Germany catched-up with England in the 19th century Fagerberg and Godinho (Fagerberg and Godinho 2005) argue they did not achieve this growth by merely imitating the more advanced technologies already in use in the leading country, but rather did so by developing new ways of organizing production and distribution, e.g. by innovating. More recently the catch up of Japan to western productivity levels during the first half of the twentieth century was associated with a number of very important organizational innovations that, among other things, totally transformed the global car industry.
Concluding Remarks
Starting from the premise that economic activities are qualitatively different, it was illustrated that economic development is a process of qualitative change in economic structures. Changes are brought about via innovations that are the outcome of learning processes wherein knowledge is absorbed, modified, generated and accumulated. The learning potential of an economic activity is critical for its position in the quality index since it reflects room for improvement (via innovation) which may create temporary entry barriers and thus profits (Schumpeterian rents). Activities subject to Schumpeterian rents tend to be highly complex in terms of knowledge content and as time passes, firms in these activities accumulates knowledge that further manifests their leading position. The latter process continues until the growth rate of the mode of production or technology slows or stops such that imitators can enter the game. A lesson
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from the latter insight is that nations should support their industries in these endeavours and aim for diversity of high-value activities that may produce synergy (also supporting linkage mechanisms). Hence, according to this logic countries in development should try to get into high-value activities. Does this logic likewise imply that low-quality activities should be entirely dismissed? That they are a hindrance for climbing the international hierarchy? Or could they serve as stepping stones for the first steps on the ladder of development? How does a country in development manage such a task best? What would the policy advice be? Build research centres of excellence for nanotechnology? An evolutionary approach to economics would due to the strength of path dependence, point to the favourability of incremental change or continuity (Schienstock 2007). The latter implies two lessons for development planning, (i) utilize the already existing knowledge as a base for entering or developing new high-quality activities and (ii) that it takes time to develop technological capabilities in economic activities wherein one does not have experience (the Finnish success story was partly the outcome of 15 years of industrial policy). In both (i) and (ii) stimulating learning is of massive importance. According to proposition (i) developing countries may operationalize their own knowledge base instead of focusing, 100%, on imitating the developed countries. Since the majority of developing countries have a specialization in (or an economy characterized by) agriculture and primary production, this hints at the plausibility of what can be called a resource-based development path (Ramos 1998; Lorentzen 2006; Perez 2008).
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Literature
Albuquerque, E. d. M. e., L. C. Ribeiro, et al. (2006). The Curse of the Red Queen Effect. Belo Horizonte, UFMG/Cedeplar. Amsden, A. (1989). Asias Next Giant. Andersen, E. S. (2008). A note on Erik Reinerts SchumpeterianListian development economics. Workshop on Institutions, Innovation and Development Department of Business Studies, Aalborg University. Arthur, W. B. (2000). Complexity and the Economy. The complexity Vision and the Teaching of Economics. D. Colander, Cheltenham: Elgar. Arthur, W. B., S. N. Durlauf, et al. (1997). Introduction. The Economy as an Evolving Complex System II. W. B. Arthur, S. N. Durlauf and D. Lane. Boulding, K. E. (1992). Towards a New Economics, Edward Elgar. Cimoli, M., G. Porcile, et al. (2005). Cambio Estructural, Heterogeneidad Productiva y Tecnologa en Amrica Latina, CEPAL. Dahmn, E. (1994). Dynamics of Entrepreneurship, Technology and Institutions. The Dynamics of Entrepreneurship. E. Dahmn, L. Hannah and I. M. Kirznwe. Lund, Institute of Economic Research. Dahmn, E., B. Carlsson, et al. (1991). Developments blocks and industrial transformation : the Dahmnian approach to economic development The Industrial Institute for Economic and Social Research. DeBresson, C. (1996). Economic Interdependence and Innovative Activity: An InputOutput Analysis. Aldershot, Elgar. Edquist, C. and B. Johnson (1997). Institutions and Organizations in Systems of Innovation. Systems of Innovation. Fagerberg, J. and M. M. Godinho (2005). Innovation and Catching-up. The Oxford Handbook of Innovation. J. Fagerberg, D. C. Mowery and R. Nelson. Oxford, OUP Hirschman, A. (1958). The Strategy of Economic Development. New Haven, Conn., Yale University press. Hodgson, G. M. (1998). "The Approach of Institutional Economics." Journal of Economic Literature 36(1). Johnson, B. (1992). Institutional Learning. National Innovation Systems: Towards A Theory of Innovation and Interactive Learning. B. . Lundvall. London, Pinter. Kaplinsky, R. (2005). Globalization, Poverty and Inequality. Krugman, P. (1997). Development, Geography, and Economic Theory, MIT Press Landes, D. (1998). The Wealth and Poverty of Nations. Lorentzen, J. (2006). Lateral Migration in Resource-intensive Economies: Technological Learning and Industrial Policy. J. Lorentzen, Human Sciences Research Council. Lucas, R. (1988). "On the Mechanics of Economic Development." Journal of Monetary Economics 22. Lundvall, B. . (1992). National systems of innovation : toward a theory of innovation and interactive learning, London : Pinter. Lundvall, B. . (2001). Innovation, Growth and Social Cohesion: The Danish Model. London, Edward Elgar. Mathews, J. A. (2005). "The intellectual roots of latecomer industrial development." International Journal of Technology and Globalisation 1. Nelson, R. (1995). "Recent Evolutionary Theorizing About Economic Change." Journal of Economic Literature 38: 48-90.
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Perez, C. (2008). A Vision for Latin America: A resource-based strategy for technological dynamism and social inclusion. Perez, C. and L. Soete (1987). Catching up in technology: entry barriers and windows of opportunity The economics of technical change and international trade. G. Dosi, L. Soete and K. Pavitt. New York Harvester Wheatsheaf: 303. Ramos, J. (1998). "A Development Strategy founded on Natural Resource-based Poduction Clusters." CEPAL Review 66. Reinert, E. (2007). How Rich Countries Got Rich ... and Why Poor Countries Stay Poor, PublicAffairs. Rosenberg, N. and L. E. Birdzell (1986). How the West grew Rich : the Economic Transformation of the Industrial World London, Tauris. Schienstock, G. (2007). "From Path Dependency to Path Creation: Finland on its Way to the Knowledge-based Economy." Current Sociology 55(1): 18. Simon, H. A. (1983). Reason in Human Affairs. Verspagen, B. (2003). Innovation and Economic Growth. TEARI working paper Wade, R. (1990). Governing the Market: Economic Theory and the Role of the Government in East Asian Industrialization.
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A note on institutions as the root cause of development Bjrn Johnson23

Over the last 10-20 years institutions have been promoted to a kind of deep cause of development. Institutions are now widely believed to form the preconditions for economic growth and development - positively and negatively. The argument is that even if there is a broad consensus that improvement in the quality of labor, capital accumulation and technical change are crucial drivers of economic growth and development they are only proximate causes. The deeper question is why some countries are better than other in improving the quality of labor and stimulating accumulation and innovation. Older answers to this question concentrate on geography (including natural resources and ecological factors) and trade. In a recent version of this old argument Jeffrey Sachs and some of his colleagues have maintained that development is strongly correlated with geographical and ecological variables such as climate, disease ecology and distance from the coast (Sachs and Mallaney 2002). Other economists argue that these effects operate predominantly through the institutional set-up. Geography and ecology may influence the development of institutions, which, then, affect development. These indirect effects can be both positive and negative.24 There are, they ague, only very small direct effects from geography to development. In this way they single out institutions as the most important (in fact the only really important) root factor of development (Rodrik et al, 2004). Institutions are thought to be the vital rules for economic behavior, which enable or disenable all other development factors. Many factors, for example trade, finance, aid, migration, ideas and knowledge, may be important but they only work indirectly through the institutions of society. To fully recognize institutions as an important development factor represents, in my opinion, an improvement in development theory. This is, however, often done in a narrow and biased way. Only a very limited set of institutions are really taken into account and very important ones (maybe even the most important ones) are neglected. Furthermore, the insistence that institutions are the key factor in growth and development fails to take on board the argument that institutional and technological change feed upon each other and that the deep cause of development doesnt reside in one single key factor but in the interactions and contradictions between several factors.
Institutions in a narrow sense

The institutional factors, which this new institutional approach to development theory single out as the most important ones, have to do with property rights and transaction costs. Current development policy discussions as well as empirical work on institutional indicators seem to be dominated by this approach.
23
This is a revised version of a paper discussed in a workshop on Institutions, Innovation and Development hold at the Department of Business Studies, Aalborg university in May 2008. 24 A well-known negative effect is the so-called resource curse: natural resources generate rents, rent-seeking behavior and corruption with adverse effects on development (Sala-i-Maritn and Subramanian 2003). Sachs has answered that that malaria transmission is directly affected by ecological conditions also after the quality of institutions is taken into consideration (Sachs 2003).
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The article Order in the Jungle in The Economist (15. March 2008) is a good example of the mainstreaming of an institutional approach to development. The article discusses how the rule of law has become a big idea in economics: During the Washington consensus in the 1980s it was widely believed that policies for macroeconomic balance (which, oddly enough, did not seem to include full employment) were the core of a potent strategy for development. Balancing state budgets, using restrictive monetary and fiscal policies to curb inflation and adjusting exchange rates to reduce current account deficits were referred to as getting policies right. Confidence in the Washington consensus was, however, gradually eroded during 1990s, when it turned out that it didnt work in many places of the World. It finally crumbled in the wake of the Asian crisis in the end of the 1990s. It was subsequently and gradually replaced by a new kind of Washington consensus, which holds that in addition to (the still important) macroeconomic balance, countries need to get their institutions right. It is, however, not absolutely clear what this implies. Institutions is a rather broad and somewhat vague concept, which most often refer either to stable and durable patterns of economic behavior or, more restrictively, to the rules of the game in the economy. As The Economist observes, the rule of law is an important subset of the institutional set-up. It soon came to be regarded as the perhaps most important part of the rising new star amongst development factors good governance. In addition to the rule of law this very often used but still somewhat fussy concept usually includes political accountability, transparency in policy-making and quality of bureaucracy (Kaufmann and Kraay). It didnt take long, of course, before economists started to numerically measure the importance of the rule of law and a rather clear relation between this and the level of income was demonstrated: The better the rule of law, the richer the country and the other way around. This supported an increasing reliance on good governance and the rule of law as effective development factors amongst development aid donors and in the World Bank. There has, naturally, been a lot of criticism against regarding especially the simplest versions of the rule of law as the basic precondition for economic development: First, it is far from easy to define the rule of law clearly. There are different legal traditions in different countries; for example common law countries and civil law countries. The meaning of political accountability, transparency and quality in bureaucracy also vary noticeably from country to country depending on traditions and the existence of complimentary institutions. Furthermore, there are both thin and thick definitions of the rule of law. Thin definitions, concentrate on efficient property rights and institutional traits that reduce transaction costs as the aspects of the rule of law that stimulate economic growth. Transparent political processes and efficient administration are often also regarded as part of a thin rule of law. This is a definition, which seems to fit better with static efficiency than with long run development. But there is a dynamic dimension there too. For example, Douglass North, who is often (wrongly?) connected to a thin definition, focuses on how institutions shape incentives. Efficient property rights, then, form individual incentives, which induce people to make growth-inducing decisions. It pays off for people to save and invest in production, education and so on. In contrast, inefficient property rights
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induce rent-seeking25 behavior or even directly economically harmful activities like piracy, violent crime and warfare. Thick definitions of the rule of law focus on the institutions, which enhance the capabilities of people to act in ways that improve their own as well as societys wellbeing. According to Amartya Sen (1999) these capabilities include political freedoms, economic facilities, social opportunities, transparency guarantees and protective security. It is an important aspect of this way of thinking about capabilities and the rule of law that they also have a value of their own. They are desirable for their own sake and not only as instruments for economic growth and development. It should be observed, however, that such a thick definition really goes quite a bit beyond the core meaning the rule of law and might be better described as a broad institutional approach to development. The distinction between thin and thick definitions of the rule of law is similar to the distinction, which has been made between weak and strong institutionalism or between new and old institutionalism (Coriat and Dosi 1998, Hodgson 1998). New institutionalism is sometimes referred to as transaction costs economics. It investigates, generally, the relation between institutions and transaction costs26 and, specifically, how institutions may be designed to reduce transaction costs. Second, there is a criticism regarding the unclear empirical results of the rule of law. The picture is far from conclusive. Some countries have had impressing growth records without being unambiguous examples of what usually is meant by the rule of law, for instance, the Soviet Union until the beginning of the 1970, and China during the last decades. Then again some countries with fairly strong rule of law traditions have experienced rather long periods with low growth rates. In fact, this was the case for most OECD countries during the 1970s and 1980s. There have been long noteworthy swings in growth rates, which cant be connected to the property rights situation at all. In addition to this there is the question of cause and effect: Does the rule of law give us high incomes or do high incomes bring the rule of law or does it work both ways? The rule of law seems to be neither a necessary nor a sufficient prerequisite for growth and even less so for development.
Indicators and indicator biases.

Governance is in itself a complex concept and the available sets of empirical data are rapidly growing. This can for example be demonstrated by a visit to the World Banks compilation of governance datasets available at www.worldbank.org/wbi/governance/data. Here governance indicators are available for over 200 countries. The indicators are divided into six groups: Voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. The increasing availability of empirical indicators leads to a new situation in institutional analysis. An inherent reluctance amongst the classical institutional scholars to think about institutions in purely quantitative terms has lead to a concentration on historical descriptions of the development
25
In this context rent-seeking is defined as the pursuit of uncompensated value from other economic agents, in contrast with profit-seeking, where entitites seek to create value through mutually beneficial economic activity (IMF 2005). This distinction may be useful but should not be taken to imply that rent-seeking has been absent from the process of development of the high income countries of today. On the contrary, rent seeking has played a crucial role in most cases of successful development. See Reinert (2007) for a discussion. 26 According to Coase (1988) institutions have no role to play in a world without transaction costs.
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of institutions as the proper way to handle the confrontation between theories and empirical facts. It has not been difficult to imagine that the level of income may increase as the result of a doubling of the input of natural resources, physical capital and even technology, but it has been quite hard to imagine the effects, or even the meaning, of quantitative variations of institutions. This has, as a side effect, hampered the development of empirical institutional analysis and formalized institutional theory. Now, however, there are, rather suddenly, a whole lot of quantitative indicators waiting to be utilized. This is obviously in itself a positive development. However, there are a couple of reasons to be careful. First, there are still some problems of definition. There are many overlaps, dependencies and ambiguities in the indicators. For example, there are rule based (de jure) indicators as well as result (or outcome) based (de facto) indicators and there may be difficulties in interpreting them, and the differences between them, in a clear way. One set of rules about for instance democratic elections or disclosure of information in the public sector may give very different results in different countries because of different cultural norms, traditions, historical experiences, etc. One sub-set of the institutional system affects the outcomes of another subset. A researcher with a limited knowledge about how the institutions of governance of a specific country fit into the larger institutional systems and interacts with other institutional rules may not be able to draw the correct conclusions from an empirical investigation of the effects of some specific property rights. If institutions are defined and measured without taking their systemic character into accounts the results of empirical investigation may be very hard to interpret. In institutional analysis context always matter. Second, it seems clear that the selection of indicators and the definition of which data to collect have been guided more by new than old institutional theory. Thin rather than thick definitions have been used and the implicit development strategy is reduction of transaction costs. This means that in spite of the increasing empirical affluence there is still narrowness in the selection of indicators. The focus is on the things, which is supposed to enable governments to increase the efficiency of markets. Furthermore, when collecting data for the indicators you rely heavily on experts i.e. scientists, think-tanks, commercial risk rating agencies and other business-oriented sources of data, NGOs and public sector organizations. Due to the present pro-market stance amongst almost all these sources there is a bias. Critical economists or even economists belonging to the classical or broad institutional tradition, labor unions or left wing political parties are not asked very often. In addition to these expert based indicators there are also survey based ones in which firms and individuals are asked about how they as the final users of good or bad governance look upon the matter. This only partially avoids the expert bias since experts are still responsible for the design of the surveys. In addition to this the fact that firms and households formulate their opinions from the point of vies of their own situation and their own values introduces other kinds of subjectivities and biases as well. In sum, both the question of what to measure and the question of whose views to rely on reflect a thin and narrow definition of governance, which is biased in favor of a minimize transaction costs development strategy. As long as the discussion is confined to just governance this would perhaps be satisfactory. The problem is that the term governance is implicitly taken to cover the whole set of relevant institutions. The dictum institutions rule is in fact replaced by governance rules. In a recent report on the present state of art of governance indicators the terms governance, institutional quality
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and institutions are used interchangeably (Kaufmann and Kraay). This represents a tendency towards a narrow conceptualization of institutions. In the World Bank vocabulary governance is primarily about the authority of governments. It is defined as: the manner in which public officials and institutions acquire and exercise the authority to shape public policy and provide public goods and services (World Bank 2007). This has been made more precise in the report by Kaufmann and Kraay: ... the traditions and institutions by which authority in a country is exercised. This includes the process by which governments are selected, monitored and replaced; the capacity of the government to effectively formulate and implement sound policies; and the respect of citizens and the state for the institutions that govern economic and social interactions among them There is a focus here on a capable state operating under the rule of law. But how should other authorities be treated? In every country there are also the collective or common authority of different kinds of communities, which are not part of the state or the government. There is a whole institutional literature about this, especially in relation to so-called common pool resources. (Hanna, Folke and Mler 1996, Cristensen and Christensen 2007). Also the lively discussion of the role of social capital in development testifies to the existence and importance of non-government authority. The existence and character of trust and social networks may be a very important part of the institutions by which authority in a country is exercised. Furthermore there are ngos and private national and trans-national firms and organizations, which may operate under influence of some forms of social responsibility. To equate authority with how governments behave is rather myopic even in the limited context of governance.
The institutions of the learning economy

Every institutional way of thinking about development has to focus more on some institutions than on others. There are so many different institutions, which affect so many different things that this is unavoidable. The problem with much of the new theoretical and empirical interest for institutions is not that it doesnt draw all types of institutions into the analysis. Neither it is a problem that good governance and low transaction costs are regarded as important. Everyone agrees on that. The problem is that if you are looking at institutions at the root cause of development, it is a bit absurd not to pay serious attention to how institutions and institutional change are geared to the processes of learning and innovation. This is the main bias in the new mainstream institutional thinking about development. Some scholars from the transaction cost tradition have also noted the importance of learning. Mantzavinos, North and Shariq (2004) regard institutions as shared solutions recurrent problems of social interaction and they express the important of learning in the following way: The greatest challenge for social sciences is to explain change or more specifically social, political, economic, and organizational change. The starting point must be an account of human learning, which is the fundamental prerequisite for explaining such change. The ability to learn is
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the main reason for the observed plasticity of human behavior, and the interaction of learning individuals gives rise to change in society, polity, economy and organizations. A possible starting point in thinking about the role of institutions in development could be the notion of institutional learning when it is taken to include both how learning affects the formation and change of institutions and how institutions affect different kinds of individual and collective learning (Johnson 1992). This is in accordance with the tradition to look upon the capitalist market economy as a process of long-term growth with periods of fast as well as slow growth, which are connected to structural change. Terms like pre-industrial, industrial and post-industrial capitalism, the first, the second and the third industrial revolution (Bruland and Mowery, 2005), long waves or Kondratieff cycles (Kondratieff, 1926), long swings in growth rates (Kuznets, 1971) and technoeconomic paradigms (Freeman, 1992) have been used both by Marxist and non-Marxist scholars in order to identify periods with different structural characteristics and different modes of development. A common assumption behind most of these notions of periods in capitalist development is that interrelations between technical and institutional change play a crucial role. New technologies increase the forces of production i.e. the power to produce, and thereby the economic possibilities in society. The institutions, i.e. the durable patterns of interaction between people, determine how these possibilities are used, including how new technologies are developed. When institutional and technological change match each other economic growth is fast and the economy appears successful. When institutional change comes into conflict with the development of technologies, economic growth becomes sluggish, unemployment increases and the economy appears as prone to crisis and sharpened conflicts. Economic development includes periods of both high and low growth and each new high-growth period demonstrates the powers of a new constellation of technologies and institutions. It has become quite common to characterize contemporary economies in the North as knowledge economies or learning economies indicating a new and more important role in growth and development of knowledge and learning. It can be discussed if knowledge and learning have increased in importance over time or if they have always been key development factors. Regardless of that it is clear that we have to indulge in studies of its historical specificities as a learning economy if we want to understand the capitalist dynamics in the present period. We have to study the details of the technical, organizational and institutional learning, which are at the root of growth and development in our era. Furthermore, it is clear that the countries in the South are becoming more and more connected to the North through the process of globalization. Knowledge transfer from the North as well as endogenous knowledge creation becomes more and more essential in the South. Globalization increases the importance of learning in development in several ways as for example trade, direct investment, finance, intellectual property rights, migration, global public goods, international organizations and global governance (Goldin and Reinert 2007). The question is which institutions and what kinds of institution building can create and support the necessary individual and organizational learning capabilities in the present context of globalization. Many different institutions are important here: The institutions of the education system, the R&D system, the technological service system, and the business service system are concrete and evident examples. The political institutions, which influence job security, unemployment benefits and social security, may have profound indirect effect on learning capabilities. The institutions, for example cultural norms, that affect trust,
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networking capabilities and conflict resolution are less visible but equally important. The list can certainly be made much longer. Where does good governance figure in this connection? How important for the building of learning capabilities are the institutions, which according to mainstream institutional thinking form the root factor in development? Nobody really knows. Not much research has been directed towards this question. It is probably safe to say that they play a complimentary and supporting role and are not enough in themselves. Learning capabilities and good governance have to be seen in connection with each other. To some extent they have elements in common. The institutions, which form trust, cooperation and conflict resolution, are crucial parts of both learning capabilities and good governance.
Concluding remarks
This short note started with the question: Are institutions the root cause of development? The conclusion is that if institutions are defined as good governance, which new institutional economics tend to do, the answer has to be negative. If the notion of institutions are taken to include the institutions that form learning capabilities of the individuals and organizations in society the conclusion is that the question is to broad and vague to be answerable. Institutions matter and they are important but to call them the root cause of development is too vague to be of much help and also exaggerates the present state of knowledge about development. To focus almost exclusively on how institutions affect transactions costs while regarding reduction of these kinds of costs as the main development strategy leads one to neglect the interactions and contradictions between institutions, institutional change and learning which have been emphasized in the institutional tradition as the main driving force in development.
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Literature
Bruland, K., Mowery, D., C., 2005, Innovation through Time, in Fagerberg, J. , Mowery,D. and Nelson R. (eds) The Oxford Handbook of Innovation, Oxford University Press. Coase, R. 1988, The Firm, the Market and the Law, The university of Chicago Press. Coriat, B. and Dosi, G., 1998, The Institutional Embeddedness of Economic Change, in Nielsen, K. and Johnson, B. (eds) Institutions and Economic Change, New Perspectives on Markets, Firms and technology, Edward elgar. Cristensen,E. and Christensen, P. 2007, Flleder i forandring, Aalborg Universitetsforlag Freeman, C., 1992, The Economics of Hope, Pinter Publishers, London and New York. Goldin, I. and Reinert, K. 2007, Globalization for Development, Palgrave McMillan and the World Bank. Hanna, S., Folke, C and Mler, K.G. 1996, Rights to Nature. Ecological, Economic, Cultural, and Political Principles of Institutions for the Environment, Island Press Hodgson, G. M. 1998, The Approaches of Institutioal economics, Journal of Economic Litterature, , Vol. XXXVI Johnson, B. 1992, Institutional learning, in Bengt-ke Lundvall (ed.), National Innovation Systems: Towards a Theory of Innovation and Interactive Learning, London: Pinter Publishers. Kaufmann, D. and Kraay, A., Governance Indicators: Where Are We, Where Should We Be Going?, Policy Research Working Paper 4370. The World Bank. Kondratieff, N.,1926, Die langen Wellen der Konjunktur, Archiv fr Sozialwissenschaft und Sozialpolitik, Dec. 1926. Kuznets, S.,1971, Economic Growth of Nations. Total Output and Production Structure, The Belknap Press of Harvard University Press, Cambridge Massachusetts, London. Mantzavinos, C., Douglass North and Syed Shariq, 2004, Learning, Institutions, and Economic performance, Perspectives on Politics, Vol. 2, No 1 Reinert, E. 2007, How rich countries got rich and why poor countries stay poor, Constable and Robinson, London. Rodrik, D., Subramanian, A. and Francesco Trebbi 2004, Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development, Journal of economic growth vol 9, nr 2.
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Sachs, J. D. 2003: Institutions Dont Rule: Direct effects of Geography on per Capita Income, National Bureau of Economic Research, Working Paper 9490 Sachs, J.D., Malaney, P. 2002, The Economic and Social Burden of Malaria, Nature Insight, Vol. 415, no. 6872 Sala-i-Martin, X. and Subramanian, A., 2003, Addressing the Natural Resource Curse: An Illustration from Nigeria, National Bureau of Economic research, Working Paper 9804. Sen, A 1999, Development as Freedom, Oxford University Press. IMF 2005, World Economic Outlook. Building Institutions.
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Emulation vs. Comparative Advantage: Competing and Complementary Principles in the History of Economic Policy Erik Reinert
Erik S. Reinert, The Other Canon Foundation, Norway & Tallinn University of Technology, Estonia27. This objective of this chapter is to show how economic policies based on completely different principles one described as emulation and the other as comparative advantage have been strategically employed in order to achieve economic development when nations have made the transition from poor to wealthy. It also briefly describes key aspects of the process by which Europe, through emulation, developed from a collection of fiefdoms ruled by war lords into city states and later to nation-states. It is argued that the timing of the strategic shift from emulation to comparative advantage is of utmost importance to a nation. Making this policy shift too early will hamper development much as a late shift will do. It is argued that these principles, although sometimes under different names, were well known and employed by European nations from the 17th century onwards, in the United States all the way to the end of the 19th century, and that the Marshall Plan implemented 60 years ago this year, owed its success to putting the principle of emulation chronologically ahead of comparative advantage. The Oxford English Dictionary defines emulation as the endeavour to equal or surpass others in any achievement or quality; also the desire or ambition to equal or to excel. In 18th century political and economic discourse, emulation was essentially a positive and active effort, to be contrasted with envy or jealousy (Hont 2005). In modern terms emulation finds its approximate counterparts in the terminology of US economist Moses Abramowitz, whose ideas of catching-up, forging ahead, and falling behind resonate with the same understanding of dynamic competition. In his 1693 work English economist Joshua Child made the emulative nature of English catching up very clear: If we intend to have the Trade of the World, we must imitate the Dutch, who make the worst as well as the best of all manufactures, that we may be in a capacity of serving all Markets, and all Humors By focusing on barter alone, leaving out the dynamics of innovation and competition, Ricardian trade theory leaves out a core element in what capitalism is all about. There is no forging ahead, nor is there any falling behind, in Ricardian economics, nor in any other type of economics based on metaphors of equilibrium. In a Schumpeterian framework, the rents created by innovation and later eroded by competitors emulating that innovation, represents the core of what capitalism is all about: relentless innovation in order to create innovation rents, followed by relentless emulation that dilutes and reduces the same rents. The precondition for Thorstein Veblens pecuniary emulation is a Schumpeterian technological emulation. This chapter aims to establish a skeleton for a Schumpeterian theory of international trade as it relates to uneven economic growth. A frequent 19th century continental European and US criticism of Ricardian economics is that it operated with units void of any qualitative characteristics (qualittslose Grssen). This chapter argues that Ricardian trade theory by visualizing the world economy as the bartering of labour
27
Much of the discussion on emulation in this paper is owed to my son, Sophus Reinert. His input is most valued, as are comments from Christopher Freeman, Bonn Juego and Rainer Kattel. The usual disclaimer applies.
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hours void of any qualitative factors (importantly also knowledge) abstracts from and leave out the qualitative changes development that take place in human society over time. The qualitative difference between one labour hour in Silicon Valley and one in African subsistence agriculture may in fact account for the failure of free trade to even out factor prices of labour in the two areas. I argue that in contrast to the Ricardian view, economic theory in Germany and the US until World War II tended to see economic development as a process of qualitative change. Going back to this type of theory, it is argued that Ricardian trade theory and todays standard textbook economics fail to include these qualitative changes, essentially because they belong to a research paradigm where the necessary tools are missing. By employing the standard definition of capitalism used before World War II, rather than the traditional Marxist or the modern neoclassical definitions, an attempt is made to illustrate situations where and why emulation rather than comparative advantage is recommendable. Finally the paper discusses the important timing aspect of the transition from emulation to free trade. Clearly both free trade and industrialisation will have their special interest groups, and promoters of both can revert to cronyism and corruption to get their favourite policies accepted. The US Civil War represents a classic case of infighting between a comparative advantage South insisting on immediate free trade and an emulative North insisting on following Englands path to industrialisation. It is argued that the negative effects from an overdose of emulation are considerably less than an overdose of premature free trade, a nation will be better off in the long run if the North rather than the South wins its civil war.
Emulation and management by gut feeling.

A key argument in this paper is that in many situations emulation is the intuitive gut reaction to a problem. Therefore emulation also when it blatantly contradicts ruling trade theory will tend to be used in intuitively in situations close to home, whereas comparative advantage tends to be imposed scientifically on nations far away. The oxymoronic managed free trade is the result of this tension between home turf intuition (e.g. Europes conviction today that they also need a manufacturer of large commercial airplanes to compete with Boeing) and a simultaneous scientific conviction in Europe that African countries are better off sticking to their comparative advantage in agriculture. I further argue that the principle first emulation, then comparative advantage has been the strategy followed by all presently wealthy nations, with the possible exception of naturally wealthy nations that were void of raw materials and were therefore the first to industrialise. The Dutch Republic and Venice would be the prime examples of nations that were naturally wealthy (Reinert 2007a and 2008). The following two examples illustrate cases of when choice between comparative advantage and emulation enters into conflict with our intuitive understanding of how the world works. They echo the 19th century central European and US criticism of sometimes making recommendations contrary to what in German philosophy is called der gesunde Menchenverstand or common sense. Example 1. The economic choice of a Stone Age tribe. If the tribe across the river from your own has taken the step from Stone Age to Bronze Age, it would be in the interest of your own tribe to emulate the neighbouring tribe into the Bronze Age rather than stick to its comparative advantage in the Stone Age.
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Example 2. The 1957 economic choice of President Eisenhower. On October 4, 1957 the Soviet Union sent a man-made satellite into orbit around the world, creating what was to be called the Sputnik Shock in the Western World: the discovery of the technological superiority of the Soviet Union in this field. At the same time the Soviet Union had severe problems in agriculture, in fact 1957 was a year of major drought in the Southern Soviet Union. In October 1957, the Soviet Union, armed with Ricardian trade theory, could have argued scientifically that the comparative advantage of the United States was in agriculture, not in space technology. The USA should therefore produce food, while the Soviet Union should engage in space technology. But in this case President Eisenhower chose emulation rather than comparative advantage. The establishment of NASA in 1958 was a policy measure in the best spirit of the Enlightenment it was an institution created in order to emulate the Soviet Union but quite contrary to the spirit of Ricardo. This chapter explains and justifies the mechanisms that explain why the anti-Ricardian intuition in these two examples is correct, by codifying and explain the dynamic elements of technological change and progress that create the tacit and intuitive logic of emulation. In both these examples Ricardian static specialization according to the principles of comparative advantage trade logic becomes counterintuitive, just as counterintuitive as when the Doha Round assumes that free trade will benefit African self sufficient farmers just as much as Silicon Valley. In my opinion our lack of understanding of the principles behind the logic of emulation is largely responsible for the development problems in the world periphery, particularly in sub-Saharan Africa. Here the principle of comparative advantage which no doubt is the best principle among nations on an equal level of development is implemented prematurely. Emulation generally requires initial tariffs, what John Stuart Mill called infant industry protection. No businessperson expects an industrial company to make money from day one, he or she is willing to sustain losses for several years until the company starts making money. The similar logic was used for centuries as regards industrial systems. A new industry could not be expected to be profitable immediately. Indeed England protected her manufacturing industry heavily for more than 350 years, the United States only for about 100 years and Korea only for 40 years. However, the timing of this protection was crucial: the same institution that in one context would cause increased welfare would, in another context, decrease welfare. Once a certain domestic industrial capacity has been reached, however, competitiveness can only be maintained through access to larger markets. If industrial dynamics are to decide, as they did in the United States towards the end of the 19th century, beyond a certain point the not-so-infant industry because a) new technology tends to come with larger capacity and b) because of domestic competitive pressure will be interested in freer trade in order to stay competitive. If industrialisation is successful, then, and protection keeps companies on their toes, the same type of industrial vested interests that once favoured protection, now will favour freer trade in order to conquer foreign markets. The vested interests behind new and expanding technologies and a large scale of production will tend to crowd out the less dynamic ones favouring continued protection, all leading to a natural transition from protection to free trade. However, when bad protection (as defined later) dominates, a nation may get stuck with a sub-scale and technologically mature manufacturing sector. The general rule is, as was observed by an anonymous Italian political economist travelling in Holland in the 18th century, Tariffs are as useful for introducing the arts in a country, as they are damaging once these are established (Anonymous 1786: 31). This observer in fact constructed a core principle of a Schumpeterian trade theory based on an underlying assumption on industrial dynamics.
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Comparing two sets of countries over a period of fifty years, Figure 1 illustrates the activity-specific nature of economic growth. Korea was for a long time poorer than Somalia, but was allowed to shift its comparative advantage away from a natural comparative advantage in diminishing returns activities to a man-made comparative advantage in increasing return activities. Singapore was for a long time poorer than Peru, but takes off in the 1970s. The curve also shows how an inefficient and overly protected manufacturing sector in Peru produced a higher standard of living than a deindustrialised Peru. Both cases illustrates the problem of creating middle income countries: countries seem to cluster in a successful group and a race to the bottom group. This paper suggests approaches to creating such middle income countries.
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Figure 1. Emulation vs. wrong comparative advantage.
Korea-Som alia, GDP per Capita 1950-2001 Korea (Rep.) 16000 14000 12000 10000 8000 6000 4000 2000 0
Sour ce: or iginal data extr acted f r omAngus Maddi son, The Wor ld Economy, Hi stor i cal Stati sti cs, OECD, Par is, 2003
Somalia
Peru-Singapore, GDP per Capita 1950-2001 Peru 22000 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0
1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Singapore
Source: original data extracted from Angus Maddison, The World Economy, Historical Statistics, OECD, Paris, 2003
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Source: .Reinert, Erik S., Yves Ekou Amazo & Rainer Kattel, The Economics of Failed, Failing and Fragile States: Productive Structure as the Missing Link, The Other Canon/Tallinn University of Technology Working Paper Series, 2007, No. 15.
Renaissance: The Birth of the Politics and Economics of Emulation and Economic Growth
Its commonly said that capitalism arrived in the United States with the first boats to land on North American shores. We can even more confidently say that industrial policy arrived with the same boats to Europe as did the Renaissance. Instrumental in creating the Renaissance literally re-birth were philosophers from the Byzantine Empire who brought both the texts of classical Greek philosophy, particularly adding Plato to Aristotle who had been known earlier, and a new religious interpretation of Man as a creative being to Italy (Reinert & Daastl 1997). The most influential of these philosophers from Byzantium was Georgios Gemistos Plethon (ca. 1360-1452) whose lectures in Florence inspired Cosimo Medici to establish a Renaissance milestone: the Platonic Academy. Plethon, the contemporary living individual who more than anyone else influenced Renaissance philosophy, also brought with him a view on economic policy: Plethon praised protectionist policy as a means to stimulate a Byzantine economy suffering from the competition of Italian industry and trade.28 In a somewhat macabre way, Plethons economic policy and the plight of his dead body together illustrate the most important principle of Europes successful economic policy during the last 500 years: the policy of emulation (Hont 2005, Reinert 2007a). The propensity for emulation.is of ancient growth and is a pervading trait of human nature, said Thorstein Veblen in his Theory of the Leisure Class (Veblen 1899, chapter 5). In 20th century economics emulation tended to be limited to Veblens pecuniary emulation on an individual level, to keeping up with the Joneses in terms of consumption. Starting in the Renaissance, and even more self-consciously during the Enlightenment, from the point of view of a city-state or nation-state, emulation on the production side was a perquisite for emulation of consumption. In his 1913 works on Luxury and Capitalism and War and Capitalism Werner Sombart (1913a and 1913b) outlines the role of emulation both through luxury, where art was an important element, and by the way of warfare for the development of capitalism29. Just as trade later was seen as war by other means, also emulation in luxury and in war were intertwined. There is no reason to believe that Leonardo da Vinci (1452-1519) who was born near Florence the year Plethon died was less proud of his ingenious war machines than of his wonderful art. In fact the rulers patronage of art was part of a competition between states not unlike war. Artists were patronised by rulers for similar reasons as were mercenaries, as tools for catching-up and forging ahead to use the language of Moses Abramowitz. Sigismondo Malatesta (1417-1468), the ruler of Rimini, was one of the worst and most violent tyrants of the Renaissance. At the same time, he shared and promoted the Renaissance cult of art and letters (Hutton 1926). Sheltering many humanists and poets at his court, Malatesta epitomizes the Renaissance when it can be argued that economic emulation and capitalism consciously was promoted in order to channel human passions and activities away from violence into more
28 29
The Oxford Dictionary of Byzantium, Vol. 1, page 673. Sombart 1928 gives the complete story. See Mitchell 1929 for an English rsum.
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constructive activities. This point is made brilliantly by Albert Hirschman in his book The Passions and the Interests (1977) In 1438, the same year Plethon lectured in Florence, Sigismondo Malatesta was engaged in a serious game of emulation with Florence. That year Malatesta brought Filippo Brunelleschi, the father of Renaissance architecture, to Rimini. Two years earlier Brunelleschi had finished the Florence cathedral. Subsequently, the greatest architectural theorist of the age, Leon Battista Alberti, led a team of distinguished designers in remodelling an ancient Franciscan basilica into a church-monument to Sigismondo and his ancestors, transforming it into an edifice without parallel in the peninsula. In this temple, now known as the Tempio Malatestiano, famous artist Piero della Francesca adorned the interior with a fresco and a painting of Sigismondo (now in the Louvre) , and Florence most admired sculptor Agostino di Duccio embellished the building with the most important work of his career. Sigismondo Malatesta epitomizes at the same time on the one hand the most barbaric violence and the most refined art of the Renaissance. Later in life, after most Italian states including the Papal State had turned violently against him, Sigismondo Malatesta sought new fortune as general for Venice in its war against the Ottoman Empire, as a field commander in Peloponnesus (1464-1466). On his way home, Malatesta engaged in what was by then a traditional European act of emulation: adding to the prestige of a city through acquiring body parts of saints. The most spectacular and at the same time most successful act of emulation through dead bodies took place in the year 828 when Venetian sailors stole the body of St. Mark from Alexandria. St. Mark was later made the patron saint of the city, where the cathedral built above his crypt still dominates the city today. It was typical of Sigismondo Malatesta and his time that when he returned from Peloponnesus in 1465, he brought as a souvenir back to Rimini not the traditional hallowed remains of some Eastern Christian Saint but, as one text says induced by the mighty love with which he burned for men of learning, he brought back to Europe the bones of Georgios Gemistos Plethon; the man who with Plato also brought industrial policy to Europe. The last primitive war lord in Europe had the remains of Plethon buried in the Tempio Malatestiano in Rimini. Sigismondo Malatesta The Mastiff of Rimini testifies to the role of emulation in three key areas in creating and shaping modern capitalism: the emulation in war and in luxury (as shown by Sombart), and the emulation in learning (in what Veblen called idle curiosity). And, we might add, as a Veblenian example of the conspicuous consumption that came to characterize capitalism, Malatesta exhibited Plethons stone coffin outside the main church in Rimini. There it is still to be found today.
Novelty, Diversity, Scale, Synergy: Bringing non-Ricardian elements back in.

When Adam Smith bent the tree that became economics, several economic factors that had been prominent until then became peripheral. These were the most important insights of Renaissance and Enlightenment economics: novelty (innovation), diversity (heterogeneity), scale (increasing returns), and synergy. Although the labour theory of value can be traced back all the way to Arab historian and economist Ibn Khaldoun (1331-1406), compared to his predecessors Adam Smiths greatest innovation was reducing production and trade into one single unit of measurement: labour. A higher theoretical level of abstraction was achieved by abstracting from the complications and vicissitudes inherent to production. Based on Smith, a generation later David Ricardo constructed
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his theory of international trade and comparative advantage with the bartering of labour hours of identical quality as the key feature of the world economy. In order to appreciate the history of economic policy, it is necessary to re-create a theoretical structure putting back in the key elements left out by Ricardo, or perhaps more accurately stated, by his followers. Pre-Smithian economics would not have accepted that the international economy could possibly be represented as a system centred around the barter of labour hours. Pre-Ricardian logic had an underlying understanding that what a country produces would determine how wealthy it was: if all stockbrokers are wealthier than all the personnel cleaning their offices, a nation of stockbrokers will be considerably wealthier than a nation of cleaning personnel. Any static Ricardian gain from specialisation will in this case be totally dwarfed by the qualitative and activity-specific differences between the profession of being a stockbroker and cleaning floors. I suggest the elements that Ricardian economics left out of the profession can be captured under the headings of Novelty, Diversity (heterogeneity), Scale, and Synergy and the interaction between these factors. Novelty, or innovation, is at any point in time focused in few activities, in the stone industry in the Stone Age and in cotton spinning during the First Industrial revolution. This creates Diversity or heterogeneity as a key feature of economic life (Audretch 2004), and as we shall discuss below technological change and increasing returns although very different phenomena in practice novelty and scale often come packaged as Siamese twins. In a world with oligopolistic competition some economic activities may catapult the real wages of a nation relative to others (Ireland is a recent example, see Reinert 2007a, see also the examples of Korea and Singapore in Figure 1), while other nations specialise in activities bereft of innovation and novelty, seriously limiting the possibilities for growth (classical maquila industries). When judged with the standard canon perfect-competition model, successful development projects are indeed gigantic market failures (compare Cimoli, Dosi, Nelson & Stiglitz 2006: 2). The models of the standard canon, assuming diminishing returns and perfect competition, in fact describe the situation in raw material producing poor countries much more accurately than they describe the situation in the rich world. Pre-Smithian economics saw economic growth and welfare as a synergy-based phenomenon, and that the existence and strength of such synergy is determined by the presence or not of novelty and diversity. This perspective is still exceedingly relevant in order to understand the world distribution of wealth and poverty. We shall return to this when discussing Johann Heinrich von Thnens economic theories. Facing diversity and heterogeneity forces choices upon the researcher. Between a position where all human beings are alike as economic agents (perfect information) and dealing with 6 billion unique individuals, finding an appropriate level of abstraction for analysis is difficult. This presents the economics profession with a trade off between relevancy and accuracy, as Schumpeter says the general reader will have to make up his mind, whether he wants simple answers to his questions or useful ones in this as in other economic matters he cannot have both (Schumpeter in Zeuthen 1932). In the spirit of Schumpeters first book (Schumpeter 1908) one should first put a question and then enter into theory at a level of abstraction where one is likely to find an answer to the question. If the question we want explained is one of diversity in development experience between countries, a theory that as Ricardian trade theory a priori excludes all diversity is unlikely to be of much help. By reducing the world economy to the bartering of labour hours of identical quality, Ricardian trade theory excluded the diversities and hierarchies that are an inherent part of any productive system. In fact it may be argued that the conclusion of standard trade theory, economic
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harmony and factor price equalisation, is in fact already built into the assumptions on which this theory rests. A theory that starts out with no diversity is not likely to have diversity as an outcome. Another problem related to this emerges from what Abramowitz calls the factor-bias of economic development. Different economic activities also have different factor-biases. Oil refining has a much stronger bias towards the use of capital and knowledge than does the production of slippers. Likewise, the indivisibility and scale-bias of an oil refinery also pulls in the same direction: barriers to entry (Baine 1956) in petroleum refining are likely to establish much higher wages there than in the slipper factory, regardless of skill level. As a Ugandan politician once told me, the barriers to entry and monopolistic competition in the production of beer in Uganda produce wage levels among brewery cleaning personnel approaching that of high government officials. And nepotism flourishes.
Diversity: Economies as Hierarchies.

Adding a dynamic dimension to this we can use Nathan Rosenbergs observation that technological change at any point in time tends to be focused in certain areas (Perez 2002, 2004). Figure 2 establishes a Quality Index of Economic Activities that attempts to bring together the qualitative elements, static and dynamic, from which Ricardian trade theory abstracts. The Quality Index pulls together the factors that explain why the worlds most efficient producers of a low-tech product as baseballs in Haiti or Honduras has a real wage that is only a fraction of the wage of the worlds largest producer of golf balls. A tiny static gain from trade through specialisation may indeed be completely overshadowed by the loss one nation suffers from specialising at the bottom of the hierarchy of skills. This is an attempt to codify the Myrdalian notion that increased specialisation and trade may indeed increase rather than decrease international wage differentials.
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Figure 2 The Quality Index of Economic Activities

innovations new technologies Dynamic imperfect competition (high-quality activity)
Characteristics of high-quality activities

new knowledge with high market value steep learning curves high growth in output rapid technological progress high R&D-content necessitates and generates learning-bydoing imperfect information
Shoes (1850-1900)
investments come in large chunks/are divisible (drugs) imperfect, but dynamic, competition high wage level possibilities for important economies of scale and scope high industry concentration
Golf balls
Automotive paint
high stakes: high barriers to entry and exit branded product produce linkages and synergies product innovations standard neoclassical assumptions irrelevant
Characteristics of low-quality activites

old knowledge with low market value flat learning curves low growth in output little technological progress low R&D-content little personal or institutional learning required
House paint Shoes (2000)
perfect information divisible investment (tools for a baseball factory) perfect competition low wage level
Baseballs
little or no economic of scale /risk of diminishing returns fragmented industry low stakes: low barriers to entry and exit commodity produce few linkages and synergies process innovations, if any neoclassical assumptions are reasonsable proxy
Perfect competition (low-quality activity)
This hierarchy argument comes in two parts, one essentially static one and a dynamic and developmental one. First the static argument: By failing to differentiate qualitatively between
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different units of labour hours, standard trade theory fails to account for the qualitative differences between economic activities. We fail to grasp the fact that the real world consists of hierarchies of different sorts, within companies and institutions and between them. These processes that go on inside and between firms are themselves driven by emulation, internally through competitive educational systems and hiring policies based on merit and externally through market competition. Consider the following example to illustrate the relationship between hierarchies and standard of living. We abstract from geography and assume a world economy consisting only of hospital services, we could create a world economy where all the specialised medical staff lived in one country, all the registered nurses in another, and all the cleaning personnel in a third. Seeing this economy in purely Ricardian terms as labour hours void of any qualities makes us believe that free trade will tend to equalize incomes between cleaning personnel and medical doctors. In fact the opposite factor price polarization is likely to be the case. Cleaning personnel would utilise technologies that are simple compared to those higher in the hospital hierarchy, and their incomes would of course be much lower. Dividing doctors, nurses, and cleaning staff equally between the nations of the world would be the best strategy to even out world income. Putting the children of the cleaning personnel in the same schools as those of the medical doctors would maximise social mobility. If they are placed in different countries, the socially mobile children of cleaning personnel who manage to get an education as a doctor will migrate to the rich countries in order to maximise his or her income. As Gunnar Myrdal predicted, frequently the market in this way tends to enlarge already existing differences in income rather than to narrow them. The logic that a nation could upgrade in a hierarchy of skills in the same way that a person could is found in US economist Daniel Raymond, whose 1820 book heavily influenced the establishing of the protectionist American System of Manufactures. Through the early decades of the 19th century England was the only country with a comparative advantage in manufacturing, and it was fairly obvious that she used Ricardos logic in an attempt to prevent other countries from industrializing. The frequent response from other countries that followed her path to industrialisation, was a biblical quote, Joshua 9: 23, pointing precisely to the fact that the world economy corresponded to a hierarchical structure: .. and now, cursed are ye, and none of you is cut off from being a servant, even hewers of wood and drawers of water, for the house of my God.' Todays wealthy nations followed England into industrialisation, against the recommendations of Ricardos trade theory, because they did not wish to be at the bottom of the worlds economic hierarchy as hewers of wood and drawers of water. It is now time to introduce dynamics into the hierarchy, as illustrated by the dynamics inside figure 2. From both sides of the political spectrum, Karl Marx and Joseph Schumpeter agree on the sterility of capital alone as a source of wealth. Innovations, rather than savings and capital per se, drive welfare forwards. The world economy functions similarly to Alice in Wonderland, where one of the strange figures tells Alice: this is how fast you have to run here in order to stand still: only constant innovations sustain welfare. Once the builders of sailing ships topped the world hierarchy of ship builders, but they were pushed down after the steam engine and the diesel engines were invented. The worlds best producer of kerosene lamps would soon become poor with the advent of electricity. Status quo leads inevitably to poverty as technical change pushes old technologies, and those who stick to them, further down in the economic hierarchy. This is of course precisely what makes the capitalist system so dynamic, but this mechanism also contributes to creating such differences between rich and poor countries. By introducing emulation as an alternative to comparative advantage it is possible to introduce these dynamics into trade theory.
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Schumpeter used a metaphor to describe society as a dynamic hierarchy: the upper strata of society are like hotels which are ... always full of people, but people who are forever changing (Schumpeter 1934: 156). The dynamics of radical technological change give rise to great fortunes and a new circulation of elites. Henry Ford brings in new technology and new management and creates a financial fortune. A new set of people joins the upper strata as production capital matures into financial capital while entrepreneurial management at Fords yield to professional management. A couple of generations later, a similar development takes place at Microsoft. Edwin Gay, the founder and first Dean of Harvard Business School, developed a dynamic vision of economic history based on these cycles: it was, he concluded, a record of swings of the pendulum between periods when social controls dominated, and periods dominated by the actions of aggressive individuals. The former periods were static, characterized by security and stability. The latter periods, ushered in by the introduction of new tools, weapons, or other forces, were controlled by the powerful individuals who introduced these forces (Cruikshank 1987: 29). In fact the Schumpeterian cycles suggested by Gay clearly correspond to the patterns of technoeconomic paradigms of Carlota Perez (Perez 2002). In Perez scheme, economic development consists of what in my terminology are productivity explosions, technological breakthroughs that produce explosive increases in labour productivity. Figure 3 shows the productivity explosion of the First Industrial Revolution, that of cotton spinning.
Figure 3
A quantum jump in productivity

The mechanization of cotton spinning in the first paradigm
Ave annual increase in productivity
30,0
25,0
20,0
15,0
10,0
5,0
0,0 1750
Source: Carlota Perez
Novelty and Scale: Accounting for Qualitative Change.

During the two periods of most dramatic qualitative change in economic history both during the First and the Second Industrial Revolution the economics profession developed ways of describing the change that was taking place. They created theories of stages of qualitatively
EJD318-LWT-G
1800
1850
1900
1950
2000
2050
Years
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different historical periods. Such stage theories have been used in most of the social sciences (Reinert 2000). In my view, if they do not become mechanical exercises they are useful tools for understanding technological and institutional change. In the history profession the material from which Mans tools were made (e.g. stone or bronze) has become universally accepted as the basis for establishing early historical periods: the Stone Age (Mesolithic, Neolithic), the Bronze Age. The extreme focus on trade rather than production in Ricardian theory excludes this perspective. A lay-person, having been explained the idea of factor-price equalisation, being asked whether or not free trade between a Stone Age tribe and Silicon Valley was likely to cause factor-price equalisation is likely to predict that it would not. Human intuition overrules Ricardian theory, and correctly so. The stage theories born during the First Industrial Revolution those of the early Adam Smith teaching in the 1750s follow Man first as a hunter and gatherer, then as a shepherd of domesticated animals, then as a farmer, finally to reach the stage of commerce. Most significantly, English classical economists tended from the late 18th century on to concentrate their analysis on the last stage of evolution, on commerce on supply and demand and on prices ra ther than on production. During the 19th century, German and US economists insisted on a very different interpretation of the development stages. To them the previous stages were all built on ways of producing goods, and they saw it as a grave mistake to classify the next stage of development in terms of commerce rather than in terms of production. This theoretical difference of opinion essentially laid the foundation for how 19th century German and US economic policy came to differ from that prescribed by English theory. Ronald Meek (1976: 219) argues that there was a certain sensein which the great eighteenthcentury systems of classical political economy in fact arose out of the four stage theories.30 In spite of this, today any idea of economic stages is peripheral, almost alien, to much of the economics profession. Seen from this perspective, the requirements of each new stage of development each new mode of production will require different mentalities and different institutions. I have argued that the protracted discussion on the role of institutions largely has failed to recognize the importance of the arrows of causality moving from the mode of production to the institutions. In other words, as is consistent with Veblens view on institutions but contrary to that of the Washington Institutions the fact that industrialisation requires and causes institutional change is much more important than that institutional change causes industrialisation (Reinert 2007b). The two types of stage theories above Adam Smiths vs. the German and US theories produce vastly different economic policies. It is intuitively obvious that a hunting and gathering tribe will not be able to compete successfully with an industrial society, therefore emulation into the same technological age as the worlds leading nation was a prerequisite before free trade comparative advantage may take over as a guiding principle. The logic accompanying such theories of qualitative economic change is that free trade is always beneficial between nations at the same level (stage) of development. Bringing back an old UNCTAD term, we could say that exchanging industrial goods for other industrial goods (both produced under increasing returns) represents symmetrical trade which is beneficial to both parties, while exchanging raw materials (produced under diminishing returns) for industrial goods (produced under increasing returns) represents asymmetrical trade and is only beneficial to the
30
Emphasis in original.
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industrialised partner. We have argued elsewhere that the theories of good and bad trade that represented the mainstream of Enlightenment economics were based precisely on this same principle (Reinert & Reinert 2005).
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Table 1. The Economic Stages seen after the Second Industrial Revolution (Ely 1903).
From the Standpoint of Production 1. Hunting and Fishing 2. Pastoral
From Bchers Standpoint
From From the Hildebrands Labor Standpoint Standpoint Slaughter of Enemies, Womans Labor, and Beginning of Slavery Slavery and Serfdom Money Economy Free Labor governed by Custom Individual Contract with Increasing Regulation by Statute Group Contract and Regulation by Statute
From Giddingss Standpoint Luck Magic Sacrificial
Independent Domestic Economy
Truck Economy
3. Agricultural 4. Handicraft Town Economy 5. Industrial (1) Universal Competition as an ideal (2) Concentration (3) Integration National Economy Credit Economy (World Economy)
Slave Labor Trade
Capitalistic
Source: Ely (1903), reproduced in Reinert(2000). Ely himself adds World Economy to Bchers system.
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In his four-volume work on the history of economic thought in the United States, Joseph Dorfman describes this very well when accounting for the attitude towards free trade in the Unites States around 1830: Of course, free trade is the ideal, and the United States will proclaim the true cosmopolitan principles when the time is ripe. This will be when the United States has a hundred million people and the seas are covered with her ships; when American industry attains the greatest perfection, and New York is the greatest commercial emporium and Philadelphia the greatest manufacturing city in the world; and when no earthly power can longer resist the American Stars. Then our childrens children will proclaim freedom of trade throughout the world, by land and sea. (Dorfman, Vol. II, p. 581)31 Dorfman here explains the principle that I argue has been the path taken by all industrialised nations: an initial state of protective emulation has been a mandatory passage point for all presently in industrial nations. With the possible exception of the early naturally rich countries (Venice and the Dutch Republic) all presently rich nations have been through a period of protection. The sequencing has always been emulation before comparative advantage (Reinert 2007a & 2008). Integrating nations at different stages of development creates a form of integration that we could call asymmetrical (see Reinert & Kattel 2004 for a taxonomy of types of integration). When this form of integration is done rapidly through shocks, an apparent but important anomaly may be observed. However, the relatively low intensity of communication between Ricardian trade theory and microeconomic bookkeeping creates blind spots for such phenomena, although the macroeconomic impact may be huge. When two nations at widely different technological levels integrate, the first casualty is the most advanced economic activity in the least advanced nation. I have refereed to this as the Vanek-Reinert effect, and argued that it represents one of the mechanisms of primitivisation that accompany premature globalization. This Vanek-Reinert effect in turn contributes to falling employment for skilled people, to factor price polarization and migration of skilled labor. The effect can be observed already with the unification of Italy during the late 19th century. The mechanisms behind this effect are relatively straightforward. Abruptly freeing imports creates a shock in terms of reduced demand for national production. The companies with the highest relative fixed costs compared to variable costs are the hardest hit by this on their profit and loss statement. The companies that still have a high amount of machinery and equipment to be amortized are hit long before mature industries with depreciated machinery. Young industries that are cash-starved are hit long before mature cash-cows. All of this contributes to the opposite effect of what one would want: a too rapid economic integration leads to the loss of precisely those industries one would wish to promote, modern industries employing new technologies. The last economic activity to be hit from a free trade shock is subsistence agriculture where people simply withdraw from market activities back into self-sufficiency.
31
We should note that the cosmopolitan principles was the term used to refer to Ricardian economics, against which Friedrich List coined the term National Economics (which still is the term for economics in Sweden). The other protest term against the cosmopolitan principles was Social Economics (as economics was referred to in Norwegian until very recently) because the cosmopolitan principles, just like today, tended to disregard serious social consequences.
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Diversity and Synergy: Heinrich von Thnens Stages Simultaneously Spread Across Geography.
In the process of re-introducing geography into economics (as in the works of Paul Krugman) German economist Heinrich von Thnen is the main protagonist. Thnen (17831850) drew a map of civilized society, with four concentric circles around a core of increasing returns activities the city32. Moving outwards from the city core, the use of capital gradually decreased and the use of nature gradually increased. Near the city the most perishable products are produced; dairy products, vegetables and fruit, and grain for bread is produced further out, and in the periphery there is hunting in the wilderness. Economists today have rediscovered Thnens approach to economic geography, but many totally miss the crucial point he stresses, that the increasing returns city activities needed tariff protection in order to get the entire system to function. Thnen understood that the development machine at the core of the concentric circles the urban increasing returns industries (manufacturing) needed, for a time, both targeting, nurturing and protection. In other words, the presence of an emulating city would determine the standard of living also in the rest of the country, in the outer circles. Thnen drew the stage theories we have already discussed on to a map where the most modern sector, manufacturing, formed the city core, and the most backward sector, hunting and gathering, furthest from the city, formed the periphery; moving away from the city, the use of nature increases and the use of capital decreases. Only the city has authentic increasing returns, free from Natures flimsy supply of resources of different qualities. As one moves outwards from the city, man-made comparative advantage (subject to increasing returns) gradually diminishes and nature-made comparative advantage (subject to diminishing returns) increases. As we move outwards in the circles, the carrying capacity of the land in terms of population also diminishes. The population density in the city is infinitely greater than that of the hunting and gathering areas. The importance of the linkages and synergies for agricultural development, seeing the benefits accruing to agriculture from the proximity of manufacturing, was perhaps the most important new insight in economics during the early 1700s. Husbandry is never more effectually encouraged than by the increase of manufactures says David Hume in his History of England (1767, vol. III). Thnens model pictures all the stages of development inside one nation state, one labour market, one school and university system, one social security system. The synergies that David Hume points to are partly the result of an equal access to basic institutions and government services accruing to the hunters in the outermost circle as well as to the city dweller. The local city market does to national agriculture what an international market can never do. Proximity to a city in the same labour market, rather than abroad, assures employment for the second and third son on the farm. The wage pressure from the city activities makes labour more expensive in the countryside, allowing for technological change that would never be profitable with low wage rates. The proximity to the city gives access to advanced technology and expertise that a rural-only nation would never achieve. All in all von Thnens model provides a useful picture for development as a
32
The inventor of the concentric circles to explain to the role of cities was Johann Heinrich Gottlob von Justi, in his Gesammelte Politische und Finanzschriften ber wichtige Gegenstnde der Staatskunst, der Kriegswissenschaften und des Cameral- und Finanzwesens, 1761-64, vol 3, p. 449 and following.
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synergy between town and countryside. Further in this chapter we shall show that this insight was a key argument for the launching of the 1947 Marshall Plan.
Novelty and Scale: Understanding Capitalism and the Absence of Economic Development
In the post-Cold War setting we are increasingly made aware of nation-states with radically different political structures than Western democracies, fragile, failed, or failing states ruled by war lords such as Somalia or Afghanistan. Going back to pre-Cold war German and American theories of capitalism, it was generally considered that such political structures were products of particular modes of production (a term in no way exclusive to Marxism). As we shall see below, such states were defined as not being part of capitalism. During the 20th century Fordist mass production was the dominant mode of production in Europe and what the League of Nations called areas of recent settlement (United States, Canada, Australia, New Zealand), but not in the colonies. I argue in this section that neo-classical economics describe the world economy in a way that misses out key aspects of capitalism as a system of production. An important transition in human economic history was the gradual one from a clan economy (Sippenwirtschaft) based on self sufficiency to a barter economy where handicraft production (production made to order) replaced self-sufficiency (production made for own use according to need). This town-based handicraft production, as its name implies, was based on small scale, and any success in rent-seeking came more as the result of guild collusion than from natural market power. In this situation it could be argued, as Adam Smith did, that freer markets would result if collusion could be kept under control. Perfect competition was to a considerable extent feasible. The first industrial revolution that took place while Adam Smith was writing changed that. The industrial revolution brought with it a gradual transition from handicraft (implying production made to order) to industrial production (implying production for an unknown group of consumers).33 This development implied use of technologies where economies of scale (in order words: fixed costs) increased heavily over time. These huge fixed costs created barriers to entry (a discussion started by Bain 1956) that made perfect competition no longer feasible. The transition from town economies to national economies was made possible by a larger division of labour potentially favourable both to producer and consumer because of the lower costs originating in technical change and increasing returns. A greater degree of impersonality no longer knowing the person who produced your shoes was the price society and the individual had to pay for getting cheaper shoes. On the production side capitalism was a system driven by technological change and increasing returns. While perfectly distinguishable in theory, as they tend to develop over time increasing returns and technical change are in fact so intertwined that they are often inseparable. The technology Ford used to produce cars was never available for a car producer who wanted to produce profitably at a household or village level. Schumpeter therefore coined a term which is extremely useful for the study or economic history: historical increasing returns (a combination of both) This combined technology/scale phenomenon hit different economic activities at different points in time, but when it hits it hits in an explosive way. Figure 3 shows the productivity explosion in
33
Werner Sombart here builds on the analysis of Karl Bcher.
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cotton spinning during the First Industrial Revolution. In the industries that had been hit by this combined scale/technological change phenomenon, no return to perfect competition would be possible. The minimum efficient size of operations (to use Alfred Chandlers term) would create a pattern of competition where scale of operations created barriers to entry and consequently a type of competition that was by definition oligopolistic. The successful result of taming the imperfect competition between these huge players would, as John Kenneth Galbraith always pointed out, be a societal balance of countervailing powers between big business, big labour and big government. The transition from handicraft (implying production made to order) to industrial production (implying production for an unknown group of consumers) also implied a transition from production in order to make a living to production for profit. Competition became a relentless game of oligopolistic innovation and emulation, seeking the rents that could be harvested from successfully getting a share of the oligopoly. As long as the rents are Schumpeterian rents that are slowly eroded rather than static rents, this rent-seeking is in fact a core mechanism explaining capitalist dynamics. Of course, as the airline industry has shown in recent years, such oligopolistic games can also cause entire industries to run at a loss for years. The same fixed costs that create barriers to entries also create barriers to exit.
Werner Sombarts Definition of Colonies not being Part of Capitalism.

During the Cold War two different definitions of capitalism crystallized. First: in the free world, capitalism gradually came to be defined as a system of private ownership of the means of production, where all coordination outside of firms is left to the market. This developed into a definition that excludes any reference to production: as long as they bartered without central planning one would almost assume that a Stone Age tribe could be considered capitalist. Second: in Marxism capitalism was mainly defined as system defined by a relationship between two classes in society, the owners of the means of production and the workers. However, a third definition of capitalism exists, a definition that dominated until the Cold War, a definition that was crowded out because it could not be neatly placed along the right-left-axis. If we follow German economist Werner Sombarts definition of capitalism, instead of that of the Cold War, we get an understanding of why capitalism as it is defined today is a system where it is possible to specialise in being rich, or in being poor. Werner Sombart considers capitalism as a kind of historic coincidence, a coincidence brought together by a whole range of circumstances. Still, he is quite clear that economic wealth is a result of its being willed, a result of a conscious policy. The driving forces of capitalism, which create both the foundation and the conditions for the system, are, according to Sombart (1928): 1. The entrepreneur, who represents what Nietzsche calls the capital of human wit and will, the human agent who takes the initiative to have something produced or traded. 2. The modern state, which creates the institutions enabling improvements in production and distribution, that creates the incentives that make the vested interest of the entrepreneur coincide with the vested interests of society at large. Institutions encompass everything from legislation to infrastructure, patents to protect new ideas, schools, universities, and standardization e.g. of units of measurements.
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3. The machine process, i.e. what was long called industrialism: mechanisation of production creating higher productivity and technological change with innovations under economies of scale and synergies. This concept is very close to what we today call the national innovation system (associated with Christopher Freeman, Bengt-ke Lundvall, and Richard Nelson). In Sombarts definition of capitalism, the rich countries were those who emulated the leaders into the industrial age. With capitalism defined in this way, it is actually correct to say that the rich countries are the ones that joined the mode of production called capitalism. When these elements are in place, in order to function, capitalism demands still according to Sombart the following ancillary elements to be able to develop fully: 1. Capital 2. Labour 3. Markets These three elements the very core of standard economic theory are, according to Sombart, not at all the driving forces of capitalism, they are just auxiliary factors to the main driving forces. Without the driving forces, the ancillary elements capital, labour, and markets are sterile. Both Marx and Schumpeter agree that capital in itself, without innovations and without entrepreneurship, is sterile. The most interesting aspect of this pre Cold War definition of capitalism is that with this approach capitalism had not reached the colonies. At its core colonialism was a technology policy: A key aspect of colonial policy was to prohibit manufacturing there. The following quote from English economist Joshua Gee, from his 1729 work, Trade and Navigation of Great Britain Considered, is typical of colonial economic policy: That all Negroes shall be prohibited from weaving either Linnen or Woollen, or spinning or combing of Wooll, or working at any Manufacture of Iron, further than making it into Pig or Bar iron: That they be also prohibited from manufacturing of Hats, Stockings, or Leather of any Kind Indeed, if they set up Manufactures, and the Government afterwards shall be under a Necessity of stopping their Progress, we must not expect that it will be done with the same Ease that now it may. The rebellion against these anti-emulation policies which are less racist than they sound because they were also applied against the predominantly white settlements in North America at the time has in all cases been accompanied by a strategy of emulation into manufacturing industries. Decolonisation meant embarking on a programme of industrialisation. Not all of these attempts were equally successful, but if human welfare rather than free trade per se is our goal we have to face the fact that in a majority of countries real wages were considerably higher when an inefficient manufacturing sector was present than when it was not. Not all protectionism is equally efficient. How Rich Countries got Rich... and How Poor Countries Stay Poor (Reinert 2007a, appendix IV) establishes two ideal types of protectionism, good (East
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Asian) protectionism and bad (Latin American) protectionism34. In many poor countries protectionist policies were clearly of the bad kind, but this bad protectionism produced real wages about twice as high the wage level after structural adjustments and deindustrialization. Data reproduced in Reinert (2007a) makes it evident that maximising world trade clearly is not the same as maximising world real wages. The Washington Consensus system of conditionalities created an anti-emulation effect. Also within Europe anti-emulation policies were very frequent. Venice prohibited the migration of her skilled glass workers from finding work abroad with the penalty of death, while England for many years prohibited the export of machinery. If we see the debate on when to stop protection when to switch from emulation to comparative advantage as perhaps the most important economic debates in the times to come, the English machine case provides an interesting insight: England only stopped the export prohibition of machinery when the English machine producers themselves successfully argued that if they were restricted from competing on the world markets they would lose ground to foreign machine producers. In other words, if the kind of protection employed is what we define as good protection policies, market forces can to some extent be relied on for signalling a to free trade and comparative advantage. Successful emulation provides the seeds of its own destruction, and the key underlying mechanism is Schumpeters historical increasing returns (the combination of technological change and increasing returns). I have argued (Reinert 2007a) that the only time Adam Smith uses the term invisible hand in the Wealth of Nations it is precisely when describing such a transition from emulation to comparative advantage. Smith praised the Navigation Acts protecting English manufacturing and shipping against Holland, arguing they are as wise as if they had all been dictated by the most deliberate wisdom and holding them to be perhaps, the wisest of all the commercial regulations of England. The term invisible hand is used only when it supports the key import substitution goal of mercantilist policies, when after successful emulation the English consumer preferred domestic industry to foreign industry. This could only happen when the market had taken over the role previously played by protective measures, and national manufacturing no longer needed such protection. Because Adam Smith tends to be used more these days to provide ideology than to provide theoretical solutions to contemporary problems, we have not seen that he can be legitimately also seen is a mercantilist who truly understood the transition from emulation to comparative advantage. Successful emulation through protection has been a mandatory passage point in all capitalist countries, but it must at one point yield to free trade. The economist who more than anyone else had the transition from protectionism and free trade at the very core of his theoretical edifice was Friedrich List. He was the visionary of a united Europe, when emulation through protection had successfully reached all nations of Europe. The 1846 Repeal of the Corn Laws was at the time understood as an attempt by the English to convince the rest of the world that their free trade in agricultural products meant that the rest of the world should adopt immediate free trade in manufacturing. In fact List had always argued for free trade in corn (Reinert 1998).35
34
35
See also Dosi, Freeman & Fabiani (1993) for a similar concept. Modern agricultural protectionism originates only towards the very end of the 19th century, and is not an emulation project. At the early stages of industrialization it was generally argued that the farmers were much better off than the industrial workers because they had enough food. When workers rights and the embryonic welfare state had been established, it was discovered that now the city was in exploiting the poor farmers who had to be protected from the even poorer farmers abroad. It is extremely important to understand the very different motivations behind the two types
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The Marshall Plan (1947) as the Last Successful Project of Emulation.

In June 1947, in a speech delivered at Harvard, US Secretary of State George Marshall announced a re-industrialization plan for a war-torn Europe - later called the Marshall Plan. This plan represents the logic of emulation at its most creative: compared to the United States, Europe did not have a comparative advantage in industrial production. In spite of this and totally contrary to Ricardian principles a generous infusion of capital as well as tolerance of needed developmental policies ensured the rebirth of modern Europe as an industrial state. In the next couple of decades, as the same type of economic development policy spread in Asia following the Korean War, the Marshall Plan developed into what is probably the most successful economic development assistance project in human history. Politically, it created a cordon sanitaire of wealthy countries from Western Europe to Northeast Asia, successfully containing the spread of communism, while ensuring rapid growth throughout the world during what has been termed the post-war Golden Age. Apart from its historical importance, it is worth taking a fresh look at the Marshall Plan because it delivers valuable insights to the logic of emulation that have relevance today. First, it is important to recall that the Marshall Plan represented a complete reversal of the preceding Morgenthau Plan, named after Treasury Secretary Henry Morgenthau Jr. Germany had started two world wars, and in his 1945 book, Germany is Our Problem, Morgenthau had announced a de-industrialization plan converting Germany into a country principally agricultural and pastoral to make sure it could never again go to war. By late 1946, however, economic hardship and unemployment in Germany were worrying the allies, and former President Herbert Hoover was sent there on a fact-finding mission. Hoovers third report of March 18, 1947 noted: There is the illusion that the New Germany left after the annexations can be reduced to a pastoral state. It cannot be done unless we exterminate or move 25,000,000 people out of it. He well understood that a purely agricultural country would only be able to sustain a much smaller population than a mixed agrarian and industrial nation. Faced with the real possibility of an excess of people in need of work that a loss of industry would bring, the only option was to re-industrialize, which is what the Marshall Plan facilitated. Less than three months later, Marshalls early June speech reversed policy. Germany and the rest of Europe were to be re-industrialized with policies that, in practice, included heavy-handed economic interventions such as high duties, quotas, and import prohibitions. Free trade was there, but it was envisaged as viable only after reconstruction and international competitiveness had been achieved. George Marshalls short speech made four other important points. In describing how Germanys economy had ground to a halt, Marshall noted the breakdown of trade between city and countryside: The farmer has always produced the foodstuffs to exchange with the city dweller for the other necessities of life, stressing This division of labor is the basis of modern civilization. With this, Marshall recalled centuries-old European economic insight: the only wealthy nations were those with cities that held a manufacturing sector. The remedy lies in breaking the vicious circle and
of protectionism. I have previously referred emulative manufacturing protection as aggressive protectionism and to agricultural protectionism as protective protectionism.
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restoring the confidence of the European people. Marshalls use of the expression vicious circle was to become the vogue in development economics in the 1950s and 1960s. Our policy is directed not against any country or doctrine but against hunger, poverty, desperation, and chaos. Its purpose should be the revival of a working economy in the world so as to permit the emergence of political and social conditions in which free institutions can exist, said Marshall. Contrary to todays conventional wisdom, Marshall argued that free institutions emanate from certain productive arrangements, not the other way around. Marshall was also very insightful about how to ensure that aid would be truly developmental. Such assistance, I am convinced, must not be on a piecemeal basis as various crises develop. Any assistance that this Government may render in the future should provide a cure rather than a mere palliative. Unfortunately, much of todays ostensible development initiatives are palliative, ignoring Marshalls caveat. During recent decades, structural adjustment and forced trade liberalization have created effects similar to that of the Morgenthau Plan in many countries. While some large nations like China and India that had protected their industries for half a century and had given high level education to significant portions of their populations have benefited from globalization, most of the other developing countries saw their real wages virtually halved by de-industrialization and unfettered global competition. Incipient industrialization in many parts of Africa regressed. During the last 20 years, premature and sudden exposure to world markets has brought about a steady loss of industry, decline in agriculture and de-population in many regions now subject to immiserizing vicious circles. We must rediscover the ancient art of emulation that died out some time in the 1970s. More attention must be paid to rebuilding the productive structure of poor nations. This process requires a simultaneous build-up of the supply and demand sides of productive capacity and purchasing power as the European economies did during the crucial decades following Marshalls speech in June 1947. This seemingly roundabout development road is, in fact, the only one that can create a lasting peace. The very last traces of Marshall-plan logic was the integration of Spain into the European Union during the 1980s, gradually lowering tariffs and making sure that the Spanish automotive industry with its layers of suppliers survived. When the former centrally planned economies were integrated into Europe some two decades later, the medicine was shock therapy which left large parts of Eastern Europe virtually de-industrialised. The economies of the European periphery, in countries like Moldova, have many similarities to Third World peripheries (Reinert & Kattel 2004).
Conclusion: Industrial Policy and Poverty

Based on an analysis of the last 500 years of the history of economic policy, this chapter argues that all countries that have moved from poor to wealthy has done so by going through a period of emulation of infant industry protection in order to get into the areas where technological progress is concentrated at the time. This has been a mandatory passage point in human history. This emulative stage reduces the asymmetry in knowledge and technologies between rich and poor countries. The lack of skills and the lack of markets combine to make any technology transfer
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simply not profitable without these added incentives (vicious circles). Only after this step has been achieved, it will be in the interest of the catching up country to specialise symmetrically according to its comparative advantage within the leading paradigms. I have compared attempts to achieve this transition without artificial incentives to a business person expecting a new industrial company to make money from day one of operations. Something that only happens in theory. Amazon.coms many years in red ink may be compared to a nation weaning itself from industrial start-up costs. Starting with the economic theory of Antonio Serra in 1613 economic development has been associated with economic activities subject to increasing returns and a large division of labour (Reinert & Reinert 2005). I have labelled these Schumpeterian activities, contrasting them with Malthusian activities that only produce poverty. Characteristics of Schumpeterian Activities (= good export activities) Increasing Returns Dynamic imperfect competition Stable prices Generally skilled labour Creates a middle class Irreversible wages (stickiness of wages) Technical change leads too higher wages to the producer (Fordist wage regime) Creates large synergies (linkages, clusters) Characteristics of Malthusian Activities. (= bad export activities if no Schumpeterian sector present) Diminishing Returns Perfect competition (commodity competition) Extreme price fluctuations Generally unskilled labour Creates feudalist class structure Reversible wages Technical change tends to lower price to consumer Creates few synergies
This chapter argues that neo-classical economics and Ricardian trade theory fundamentally misrepresent the very nature of capitalism. Ricardian barter of qualitatively identical labour hours the very core of the present international economic order fails to identify the process of relentless rent-seeking through innovation and emulation that is economic development. Trade theory fails to
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differentiate between dynamic societies where such change is imbedded both in the products and in the labour of nations and static ones, and therefore arrives at counterintuitive proposals. Perfect competition ceased to be a feasible proposition already during the First Industrial Revolution. A combination of technical change and increasing returns (Schumpeters historical increasing returns) increased minimum efficient size of operations and consequently barriers to entry and exit, making oligopolistic competition the name of the game in manufacturing industries. Rent-seeking in a sea of oligopolistic competition is consequently what capitalism is all about. As labour also became oligopolistic through unionisation, the stage was set for a system of big business, big labour, and big government (Galbraith 1956 & 1983). Regulations aiming at a just degree of imperfect competition turned this system into one of triple rent seeking: capital, labour and government colluded to share the oligopolistic rents. Minimum wages are important tools for insuring such a collusive distribution of the rents from innovations. The presently wealthy nations have all been through a stage where they employed a strategy of emulation into the paradigm-carrying activities of the day. The Marshall Plan the giant plan for reindustrialising Europe after World War II was the last big emulation plan that opened up for successful free trade later. Presently the United States and European economies are emulating each other in creating gigantic rent-seeking machines based on very oligopolistic competition like Boeing and Airbus. As a rapidly increasing part of world trade takes place in patented goods i.e. legalised rent-seeking it is almost indecent of First World economists to suggest that Third World countries should not be allowed to engage in industrial policies that produce rent-seeking. This is a blatant example of double standards: the strategy perfect competition for you and imperfect competition for us was the core of an industrial policy called colonialism. The Third World will increasingly see the present stance as neo-colonialism. Both vested industrial interests and plain institutional inertia will easily lead to keeping the strategy of emulation in place longer than warranted before comparative advantage takes over. India and China are probably both examples of that. However, if we compare the situation of India and China on the one hand and Somalia and Tanzania both nations richer that Korea and Singapore 50 years ago on the other, the cost of keeping the strategy of emulation in place too long is infinitely smaller than that of never embarking on it. Capitalism is rent-seeking. Choosing between the option of keeping a system of industrial rent-seeking that is too static, thus creating an economic system that is less than optimally dynamic, is infinitely better than failing on the opposite side with no emulation, but unemployment, hunger and disease as is the case of fragile, failing and failed states in Africa and elsewhere. Failing on the side of keeping the protective barriers too long leads us to live pleasantly in a country like Argentina in 1995. Failing to embark on emulation at all leads us to live in a country like Somalia in 1995. The choice is not really difficult. I have argued that by establishing free trade uncompromisingly as the linchpin of the World Economic Order we have closed our eyes to many of the trade-offs that actually face us when we make economic decisions. As the absoluteness of the Gold Standard blocked Keynesian reforms for many years in the 1930s, the absoluteness of Free Trade plays a similar role today. I have argued that while emulation is the logical intuitive choice in many situations, the counterintuitive choice of comparative advantage is more than often imposed on countries far away. To use the term coined by US economist Thorstein Veblen, Ricardian economics may contaminate our instincts. Not only that, in my view Ricardian trade theory is also about to contaminate our ethics. By seeing
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rent-seeking through import restrictions as something close to the cardinal economic sin, we may actually indirectly favour other forms of rent-seeking that may be even less palatable. During the US Civil War the South would be our ethical choice because they were in favour of free trade. Rent-seeking in the South was based on something else, on slavery. The North on the other hand based their economic policy on rent seeking through import substitution. Who would we favour today, rent seeking through import substitution or through low-wage slavery? As did the United States after the defeat of the South in the Civil War, after World War II many countries raised their standards of living through an active industrial policy of the Schumpeterian kind described in this paper. When protection was abruptly radically reduced or removed with the structural adjustment programmes of the Washington Consensus, in some countries starting already in the 1970s, real wages fell precipitously in a large number of countries from Peru to Africa, Moldova and Mongolia (Reinert 2007a). Clearly in many countries industrial policies were inefficient, but historically the only reasonable reaction to having an inefficient manufacturing sector is to make it more efficient, through the promotion of more competition internally or from countries at similar levels of development. And, centuries of experience (Steuart 1776, List 1841) insist that whatever changes are made to industrial policy should be made slowly not through shock therapy in order to allow companies to adjust their productive structures.
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Literature
Anonymous, Relazione di una scorsa per varie provincie dEuropa del M. M.... a Madama G.. in Parigi. Pavia, Nella Stamperia del Monastero di S. Salvatore, 1786. Audretsch, David, Diversity: implications for income distribution, in Reinert, Erik S. (ed.), Globalization, Economic Development and Inequality: An Alternative Perspective), Cheltenham, Edward Elgar, 2004, pp. 288-309. Bain, Joe, Barriers to New Competition, Cambridge, Mass., Harvard University Press, 1956. Dosi, Giovanni, Christopher Freeman and Silvia Fabiani, The Process of Economic Development. Introducing some stylized Facts and Theories on Technologies, Firms and Institutions, in Industrial and Corporate Change, Vol. 3, pp. 1-45, 1994. Cimoli, Mario, Giovanni Dosi, Richard Nelson and Joseph Stiglitz, Institutions and Policies Shaping Industrial Development: An Introductory Note, Working Paper, Initiative for Policy Dialogue, Colombia University, 2006 Ely, Richard, Evolution of Industrial Society, New York, The Chautauqua Press, 1903 Galbraith, John Kenneth, American Capitalism. The Concept of Countervailing Power, Boston, Houghton Mifflin, 1956. Galbraith, John Kenneth, The Anatomy of Power, Boston, Houghton Mifflin, 1983. Gee, Joshua, Trade and Navigation of Great Britain Considered. London, Bettesworth & Hitch, 1729. Hirschman, Albert O., The Passions and the Interests. Political Arguments for Capitalism before Its Triumph, Princeton, Princeton University Press, 1977. Hirschman, Albert, A Generalized Linkage Approach to Development, with Special Reference to Staples, Economic Development and Cultural Change. 25 (Supplement), 1977. Hont, Istvan, Jealousy of Trade: International Competition and the Nation-State in Historical Perspective, Cambridge, Mass., Harvard University Press, 2005. Hutton, Edward, The Mastiff of Rimini. Chronicles of the House of Malatesta, London, Methuen, 1926. Hume, David, The History of England from the Invasion of Julius Caesar to the Revolution in 1688, London, A. Millar, 6 volumes, 1767. Jomo, K. S. & Erik S. Reinert, The Origins of Development Economics, How Schools of Economic Thought have Addressed Development, edited with London, Zed Publications/New Delhi, Tulika Books, 2005.
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Justi, Johann Heinrich Gottlob von, Gesammelte Politische und Finanzschriften ber wichtige Gegenstnde der Staatskunst, der Kriegswissenschaften und des Cameral- und Finanzwesens, 3 volumes, Copenhagen & Leipzig, Rothenschen Buchhandlung, 1761-64. List, Friedrich, Das Nationale System der Politischen konomie. Stuttgart, Cotta, 1841. Meek, Ronald, Social Science and the Ignoble Savage, Cambridge, Cambridge University Press, 1976. Mitchell, Wesley C., Sombarts Hochkapitalismus in The Quarterly Journal of Economics, Vol 43, No. 2, February 1929, pp. 303-323. Nelson, Richard R., Economic Development from the Perspective of Evolutionary Economic Theory in The Other Canon Foundation and Tallinn University of Technology Working Papers in Technology Governance and Economic Dynamics, No. 2, 2006; downloadable at http://hum.ttu.ee/tg/ The Oxford Dictionary of Byzantium, New York, Oxford University Press, 1991. Perez, Carlota, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages. Cheltenham, Edward Elgar, 2002. Reinert, Erik, Raw Materials in the History of Economic Policy; or, Why List (the Protectionist) and Cobden (the Free Trader) Both Agreed on Free Trade in Corn., in Cook, Gary (ed), Freedom and Trade. 1846-1996. London, Routledge, pp. 275-300, 1998. Reinert, Erik S., How Rich Countries Got Rich and Why Poor Countries Stay Poor, London, Constable/New York, Carroll & Graf, 2007a. Reinert, Erik S., Institutionalism ancient, old and new: a historical perspective on institutions and uneven development, in Chang, Ha-Joon, (ed.), Institutional Change and Economic Development, New York, United Nations University Press/London, Anthem, 2007b. Reinert, Erik S., Emulating Success: The Dutch Republic (1500-1750) as seen by Contemporary European Economists forthcoming in Gelderblom, Oscar (editor), The Political Economy of the Dutch Republic, Aldershot, Ashgate, 2008. Reinert, Erik S. & Arno Daastl, Exploring the Genesis of Economic Innovations: The religious gestalt-switch and the duty to invent as preconditions for economic growth, European Journal of Law and Economics, Vol 4, No. 2/3, 1997 Reinert, Erik S. & Rainer Kattel, The Qualitative Shift in European Integration: Towards Permanent Wage Pressures and a Latin-Americanization of Europe?, Praxis Working Paper no. 17, Praxis Foundation, Estonia. http://www.praxis.ee/data/WP_17_2004.pdf Reinert, Erik S. & Sophus Reinert, Mercantilism and Economic Development: Schumpeterian Dynamics, Institution Building and International Benchmarking, in Jomo, K. S. and Erik S. Reinert
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(eds.) Origins of Economic Development, London, Zed Publications/New Delhi, Tulika Books, 2005, pp. 1-23. Ricardo, David, The Principles of Political Economy and Taxation, London, Dent, Dutton, 1974 [1817]. Schumpeter, Joseph Alois Theory of Economic Development, Cambridge, Harvard University Press, Cambridge, Mass., 1934. Singer, Hans W. The Distribution of Gains between Investing and Borrowing Countries in American Economic Review, 40, pp. 473-485, 1950 Sombart, Werner Krieg und Kapitalismus, Duncker & Humblot, Munich & Leipzig, 1913 Sombart, Werner Luxus und Kapitalismus, Duncker & Humblot, Munich & Leipzig, 1913 Sombart, Werner Der moderne Kapitalismus, 6 volumes, Duncker & Humblot, Munich & Leipzig, 1928. Partial French translation L'Apoge du Capitalisme, 2 volumes, Payot, Paris, 1932. Partial Spanish translation El Apogeo del Capitalismo, 2 volumes, Fondo de Cultura Economica, Mexico, 1946. Partial Italian translation Il Capitalismo Moderno, Unione Tipografico-editrice Torinese, Torino, 1967. Steuart, James, An Inquiry into the Principles of Political Economy: being an Essay on the Science of Domestic Policy in Free Nations. In which are particularly considered population, agriculture, trade, industry, money, coin, interest, circulation, banks, exchange, public credit, and taxes. London, A. Millar & T.Cadell. 2 Volumes, 1776. Thnen, Johann Heinrich von, Der isolierte Staat in Beziehung auf Landwirtschaft und Nationalkonomie, oder Untersuchungen ber den Einfluss, den die Getreidepreise, der Reichtum des Bodens und die Abgaben auf den Ackerbau ausben, Penthes, Hamburg, 1826. Veblen, Thorstein, The Theory of the Leisure Class, New York, Macmillan, 1899. Zeuthen, Fredrik, Problems of Monopoly and Economic Welfare, London, Routledge, 1830.
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A note on Erik Reinerts SchumpeterianListian Development Economics

Esben Sloth Andersen DRUID and IKE, Aalborg University
The engine of economic development

The title of Erik Reinerts (Reinert2007) recent bookHow Rich Countries Got Rich and Why Poor Countries Stay Poornicely summarises the twin problems of what has been called development economics. His answers to the problems are largely found in what may be called a SchumpeterianListian approach to development economics. In a simplified version of this approach, development (or evolution) has always involved the attempts of fiscal states to improve the position of their national economies in the world economy. The tool for this improvement is the increasing returns sector, i.e., the dynamical part of the economy consisting of a changing part of manufacturing as well as an increasing part of services. If a national economy contains such a sector, it can integrate in the world economy based on the principles of comparative advantage. However, if the sector is weak or does not exist in an economy, the very same principles lead to a vicious cycle of underdevelopment and poverty. Reinerts idea of the increasing returns sector as the engine of development is not easy to grasp. With his early background in the Boston Consulting Group, he is thinking in terms of historical learning curves of industrial production or what Schumpeter called historical increasing returns returns. His thinking also has some similarity with that of post-Keynesian accounts for the engine of growth. It might have been easier to grasp his basic idea if he had made reference to, for instance, Nicolas Kaldors enormous emphasis on increasing returns in his later works would have been enlightening (see King, King1994); but references could also have been made to works of Pasinetti, Thirlwall, or Cornwall. Without this broader context, Reinerts quality index of economic activities might be very difficult to grasp for many of his readers. Nevertheless, a deeper understanding of the apparently idiosyncratic Figure 1 is crucial for evaluating his book. The argument is that each industry has a period in which its location in a country or region promotes growth and development. For the shoe industry, this period was the last half of the nineteenth century (Reinert, Reinert2007, 13740). The fact that poor countries took over shoe production later is an indication that there was nothing more to learn and that no further development could emerge from shoes. Today, the production of golf balls might promote development while the production of baseballs is a sign of underdevelopment.
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Figure 1: Reinerts quality index of economic activities. Source: Reinert (Reinert2007, 317). Copyright: Erik S. Reinert.
The nursing and protection of an increasing returns sector was for centuries a core aim of mercantilist policies of states that aimed at improving their position in the international economic system. However, although development-promoting mercantilism is a central theme of the book, Reinert does not try to glorify the actions of the fiscal states. The policies of successful states were often, at least in the past, intended to increase the tax base for hegemonic policies that included expansion by war. However, the national policies were even more often characterised by a shorttermism that created serious financial troubles and very little development. Earlier states with such short-termism were likely to be conquered by more developed countries, but presently economic trouble leads to the intervention of the World Bank and the World Trade Organisation. According to Reinert, these Washington institutions do not promote long-term development. Instead, the Washington Consensus has led to a destruction of the weak results of developmental efforts. Reinert (Reinert2007, 295) characterised this a crime against of a considerable percentage of humanity that consists in the perhaps irreversible deindustrialization the killing of the increasing returns sectorof the periphery. The formula for killing weak and immature industries that are still based on protection and subsidies is simple: quick liberalisation. However, the enormous waste of skills and organisational structures can only be understood on the basis of a historically oriented theory that emphasises industrial activity as the key factor needed in the process of development. We can obtain a quick summary of Reinerts book by considering the title of one of the related books by Ha-Joon Chang (Chang2003). The title of this book is Kicking Away the Ladder: Development Strategy in Historical Perspective. Reinerts book could have had
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the same title. He argues that the poor countries are today deprived of the ladder by which the rich countries previously grew rich. Reinert suggests that the short-termism and lack of historical sense that characterises the Washington Consensus has been part and parcel of major parts of the economics discipline ever since the French physiocrats and Adam Smith. The lacking recognition of the developmental importance of the increasing returns sector is especially clear in the Ricardos theory of international specialisation and in Samuelsons (Samuelson1948a; Samuelson1949) theory of factor price equalisation through international trade in the HeckscherOhlin model. The way these theories have been used for policy advice is an example of what Schumpeter called the Ricardian Vice. This Vice is not the application of simple models but the application of inadequate models. Shortly before he died, Schumpeter (Schumpeter1954, 472) argued that the practice of using inadequate models by his students at Harvard University reflected that they lack the historical sense. Since they lacked the faculty (sense) of perceiving history, their models also lacked historical meaning (sense). In contrast, the leading contributors to the development economics of the 1940s and 1950s had the historical sense. Reinerts book is designed to resurrect this sense by means of polemics against anti-historic approaches and by positive contributions. The latter includes an attempt to reconstruct the Other Canon that has related to the developmental strategies of fiscal states since the early start in Renaissance Italy. To reconstruct this canon, Reinert moves back in the history of thought from early development economics via Schumpeter and List to the Enlightenment and the Renaissance. At the same time, he collects a series of case stories of Schumpeterian Mercantilism that can be used to promote the historical sense of theorists and policy makers. However, he does not systematically explore the huge task of developing the often very loose contributions of the Other Canon to a cumulatively developing toolbox of scientific analysis. The reason is probably that his aim is to promote the vision that can guide subsequent research.
Reinert and Schumpeter on the history of economics

After the English manufacturing industry had emerged as the world leader, the English state could largely drop the protectionism that had promoted this position and enjoy the benefits of free trade as well as the theories that supported it. In contrast, laggards like Germany and the USA developed the industrial policies of the mercantilist tradition. Furthermore, some of their economists, not least Friedrich List (List1983; List1909), refined the related theories like the infant industry argument for educational protectionism in relation to manufacturing industry and made polemics against British classical economics. Lists alternative principles are emphasised by Reinert. These principles might be summarised in the following way: 1. The preconditions for wealth, democracy and political freedom are all the same: a diversified manufacturing sector subject to increasing returns. 2. Economic growth and welfare is the result of dynamical and competence-promoting synergies within a nation state 3. The synergies are found within the manufacturing sector as well as between it and the sectors of agriculture, transport, trade, and government. 4. The synergies are dynamical external economies and can only be captured by long-term nation building (nationalism) 5. Symmetrical international integration: A nation first industrialises under some state protection and is then gradually fully integrated with nations at the same level of development. Reinert study of this type of thinking was apparently his starting point for an extensive study of the Other Canon within the history of economics (see Figure 1). He convincingly demonstrates
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that that this type of knowledge- and production-oriented thinking had deep roots and that it existed long enough to influence the emergence of development economics in the 1940s and 1950s. An early peak performance was provided by the Italian economist Antonio Serra, that in some respects is clearer than later contributions by, e.g., List and Myrdal. Actually, Serra presented in the early seventeenth century a pioneering account for systemic economic underdevelopment and development based on the dismal economic performance of his native Naples and the success story of Venice (Reinert, Reinert1999, 291294). There are many more contributions to the Other Canon, and Reinert (Reinert2007, 10) has bought most of them for his extensive research library as they have become availablepartly by the selling-out from the unique Baker Library of Harvard University that he explored while studying at Harvard Business School. Thereby, he may be said to have made the same type of study that Schumpeter had performed in the Baker Library when producing his monumental History of Economic Analysis. There is, however, a major difference between Schumpeters and Reinerts study of the history of economics. Reinert (Reinert2007, 4) is trained in the case study method that is intensively applied at Harvard Business School (and explicitly introduced as a way of exploiting the methodology of the German Historical School). He seems not least interested in providing a collection of case studies of broadly conceived mercantilist policy and the related theorising. This account focusses on the work of Friedrich List but it ranges from Italian Renaissance to the Bismarckian policies of the late nineteenth century.
Figure 2: Reinerts genealogy of the knowledge- and production-based Other Canon of Economics. Source: Reinert (Reinert2007, 33). Copyright: Erik S. Reinert.
In contrast, Schumpeters History focussed on the analytical progress of theoretical economics and only used policy debates to provide information on the background for theoretical work.
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Although he is one of the few leading economists who took mercantilism seriously and considered it a major contributor to the emergence of the science of economics (together with a broadly conceived scholasticism), he did not make a dichotomy similar to Reinerts standard economics and reality economics. Instead Schumpeter distinguished between (1) the economics serving the study of the functioning and administration of a largely given economic system and (2) the economics that focussed on the mechanisms of irreversible transformation of economic systems. While the former activity had to some extent developed into a science that cumulatively improves theoretical tools, the latter has hardly showed any analytical progress since Antonio Serra and similar early contributors from the European Continent (which Schumpeter praises highly). Since he produced a history of the cumulative improvement of tools of economic analysis, he has surprisingly little to tell about later developments of the Other Canon of transformation economics. Schumpeters readers should not consider the gradual disappearance of the Other Canon from the exposition of History as based on a value judgement. He obviously considered the problems of transformationor development or evolutionas by far the most important ones, and he emphasised the very limited range of the results of neoclassical economics. However, what had basically been obtained by Gustav von Schmoller and his followers in the German historical school was also rather pedestrian from the viewpoint of a born theorist: the hugely increased quantity and quality of economically and politically relevant data. What had not been obtainedeven by Sombart, Spiethoff, and Max Weberwas cumulatively improvable theoretical tools. Werner Sombart (Sombart1902) tried to combine Marxs evolutionary logic with historical fact in the two large volumes on Modern Capitalism, of which the latter volume was called Theorie der kapitalistischen Entwicklung. Sombarts book presented an idiosyncratic mix of theoretical sketches and historical facts that, according to Schumpeter (Schumpeter1954, 816817n), even out-Schmollered Schmoller. Although this book shocked professional historians by its often unsubstantial brilliance it was in a sense a peak achievement of the historical school, and highly stimulating even in its errors. Sombarts idiosyncratic book seems to have provided one of the challenges for the early Schumpeter (Schumpeter1912): he wanted to create a systematic theory of capitalist economic evolution, a theory that was intended to be cumulatively improvable (and to some extent extensible to evolutionary sociology and evolutionary political science). Although these goals have only recently been fulfilled and only in a partial way (see, e.g., Hanusch and Pyka, Hanusch2007), Schumpeter spent a lifetime on the project and much interesting materialeven on Schumpeterian Mercantilismcan be found scattered in his works. Although Schumpeterin contrast to Reinertemphasised the importance of neoclassical economics, he did not reject the historical, statistical and sociological contributions of the historical school. Actually, when Schumpeter summed up the fundamental fields of economics in his History of Economic Analysis, he selected one field related to neoclassical economics (basic economic theory) and three fields related to the historical school (history, statistics, and economic sociology). Furthermore, his overall model of the scientific process emphasised the role of vision of the type that not only characterised his own work but also that of List (see Figure 3; adapted from Andersen, Andersen2007e).
Reinert and Schumpeterian Mercantilism

Reinerts starting point for entering development economics is to a large extent the study of the history of industrially oriented trade policy and the related trade theory. This study has an emphasis on the theory of practice of what has been called mercantilism. Ever since Adam Smith, mercantilism has been ridiculed by most leading economists as the alchemy of the balance of
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payments. However, Reinert follows the lead of Schumpeter by trying to rescue the insights of the economists of the mercantilist traditions and reducing Smith to the role a somewhat dubious system-builder.
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Figure 3: The scientific process according to Schumpeter (Schumpeter1954, Part I; Schumpeter1989b).
This is partly done by demonstrating that [p]romoting new knowledge was a fundamental driving force for the economic policies of the Renaissanceand later of all realkonomisch mercantilism, cameralism and Colbertism (Reinert, Reinert1999, 276). He characterises this aspect of the states promotion of economic growth as Schumpeterian mercantilism. It is obvious that this dynamic and knowledge-producing rent-seekingor Schumpeterian Mercantilismhad in many cases degenerated into static rent-seeking. (p. 301). However, it seems clear that the mercantilist traditionfrom the Italian city states of the Renaissance and onwardsfocussed on the causes of the relative economic strength of the European states. The key cause for the increase in knowledge, skills and competitiveness was the creation of a strong and developing manufacturing sector. According to most mercantilists, the manufacturing sector was not only supposed to create exports and substitute imports. It also served as an engine of growth through its internal development and its influence on the productivity of the sectors of agriculture and transport: For centuries manufacturing was synonymous with the combination of technological change, increasing returns and imperfect competition (Reinert, Reinert2007, 6). Furthermore, the direct military relevance of parts of the manufacturing sector was obvious to everyone and the indirect consequence of underdevelopment was normally submission under a more developed country. Reinert (p. 77) emphasises one of the consequences of submission: Colonies were regions where synergetic interaction was not intended to take place The prohibition of manufacturing industrieswhether explicit or de factois the key element in any colonial and neo-colonial policy. Since Ricardos theory of international specialisation told that manufacturing does not matter, it served to make this policy morally defensible. However, it was definitely not used if it prescribed England to deindustrialise in important areas.
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A major task for Reinert is to collect the tools that promote the analysis of the described phenomena. With respect to the elements of this toolbox he to some extent agrees with, for instance, John Mathews (Mathews2005), whose list of classics includes the economic historian Gerschenkron (latecomer industrial dynamics), the political economist Akamatsu (the flying geese patterns of industry transfer from country to country), and not least Hirschman and other development economists (increasing returns, forward and backward linkages, etc.). However, although Reinert obviously likes a mixed analytical toolbox, he also wants to create some coherence. Here Schumpeters work and the post-Schumpeterian literature are major sources of inspiration. If Schumpeter had been confronted with the label Schumpeterian Mercantilism and if he had been able to overcome his rejection of both terms as being imprecise, then he might have said that [w]e are [here] dealing with a particular range of problems and our schema [Schumpeters basic model] has been devised to serve it (Schumpeter, Schumpeter1939a, 235). In the Schumpeterian model of economic evolution, the state can either act as entrepreneur or as provider of some of the parameters [data] for entrepreneurial action. Thus he does not need to a separate category of statecraftmercantilist or other. It is already included, but it is included at a highly abstract level. A more concrete analysis might be developed by taking the starting point in Schumpeters (1991a) The Crisis of the Tax State and other of his papers on economic sociology (like Schumpeter, 1991c). However, such an effort is definitely not a simple one. Schumpeters sociological papers were written for the occasion and we need to reconstruct their basic logic. For instance, the tax state is described as parasitic and it only gradually becomes understandable why the relationship between the state and the economy also be a symbiotic one of the type described by Reinert. Here we are, however, helped by scattered and historically oriented remarks. Schumpeter (Schumpeter1939a, 234) criticism of the concept of mercantilism is summarised in the following remark: we have constructed a historical entity called Mercantilism and endowed it with a set of consistent principles, but this historical entity does not embody any set of definite economic aims or principles. Although no unified mercantilist set of policies existed, it is clear that, especially in Germany, the prince and his bureaucracy became for centuries the dominant factor in economic life (Schumpeter, Schumpeter1939a, 234). In the German situation, it can be said that it was the state rather then the entrepreneur which initiated modern industry (p. 235). Apart from the many cases in which the state directly filled the entrepreneurial function, it conditioned enterprise by reshaping the institutional framework and by fostering it in various ways, some of which in fact come within what we usually understand by mercantilist policy. In France, Colbertism meant that the bourgeoisie was scientifically exploited and protected like game in a well-ordered parkin such a way as to serve the splendor of the prince, the court, and the army. Since a maximum of surplus [was] being sucked up to finance the great center of expenditure (p. 235), the scientific promotion of exploitable manufacturing capabilities was subject to strong limitations. However, the state functioned differently during the last of Schumpeters Kondratieff waves The Neo-Mercantilist Kondratieffwhich he dates from 1897. Here we see the problematic nature of the aggressive, colonising, and war-preparing Neo-Mercantilism of the European states of his youth (Schumpeter, Schumpeter1991b, 199208). However, we also find the less aggressive strategy for industrial development of the relatively underdeveloped Austrian-Hungarian Empire, which was designed by the Koerber government in the beginning of the twentieth century. I have found no evidence that Schumpeter followed his teacher Bhm-Bawerk, who had been a member of the Koerber government, in rejecting this strategy that was never fully implemented (Gerschenkron, Gerschenkron1977).
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Schumpeter would probably largely have classified the relatively concrete treatment of mercantilist statecraft as economic sociology. However, although he made significant contributions to this field (Schumpeter, Schumpeter1991), he never treated the problems of underdevelopment and state-promoted industrial evolution systematically. Presently, Reinerts (Reinert2007) book seems to be the closest approximation to what Schumpeter might have written as a follow-up of Antonio Serras analysisof we ignore much of the books policy-oriented polemics and put its scientific polemics in a more guarded format.
Bringing Schumpeter to development economics

Schumpeters (Schumpeter1989a, 328) apparently naive remedy for most economistss lack of historical sense was the production of a large collection of industrial and locational monographs that emphasised innovation and entrepreneurship. If economists sensed the stylised facts revealed by such detailed historical case studies (p. 325), they would ultimately produce models that were radically different from those that they actually developed. Here Schumpeter thought of models of business cycles and growth, but his views also applies to the development economics that emerged immediately after World War II. It was history-related theories that quickly became the trade mark of much of development economics. Actually, all the producers of what Paul Krugman (Krugman1994a) has called the high development theory of the 1940s and 1950s had the historical sense. The reason is not least that many of themlike Hans Singer, Albert O. Hirschman, Paul Rosenstein-Rodan, Gunnar Myrdal, Franois Perroux, Paul Streeten, and Alexander Gerschenkronwere brought up with the long-term economic problems of Continental Europe and often combined a background in neoclassical economics with one in the German historical school. Let us take Singer as example. He had studied at the University of Bonn with both Schumpeter and the leading historical economist Spiethoff before studying with Keynes in Cambridge and gained experience as a development consultant. This mixed background helped Singer (Singer1950) to produce the theory of the declining terms of trade and factor prices of underdeveloped countries specialising in standard commodities. The historical consequence is an unequal distribution of the gains of trade and thevery difficultsolution is to change the specialisation of poor countries. However, his mixed background as well as his emphasis on the complexity of the problems of underdevelopment mean that he cannot be categorised as member of Neoclassical Economics or the Historical School or Keynesian Economics or some type of Schumpeterian Economics. Thus his work shows surprisingly little direct influence of Schumpeter and Keynes (Toye, Toye2006). Furthermore, Singer emphasised the need of transcending even his own viewsas did Hirschman (Rodwin and Schn, Rodwin1994) and Myrdal (Steeeten, Streeten1998). The praiseworthy pluralismsome would say eclecticismof the founding fathers did not promote development economics as a discipline. Their pupils needed simplification and lacked the historical sense. This meant that the field of development economics tended to disintegrate because of a lack of a common core; and this disintegration was promoted by the lack of success stories from the prime regions of interest (Latin America and Sub-Saharan Africa) and by the shrinkage of the funding of development research. Hirschman (Hirschman1981) wrote an essay on The Rise and Fall of Development Economics with a complex argument. In contrast, Krugman (Krugman1994a) gave a simple explanation and suggested the opposite movement: The Fall and Rise of Development Economics. His explanation of the fall is the lack of disciplined modelling and a new rise presupposes clear foundations of development economics by means of formalised reconstructions of some of the results of the founding fathers. Then it will become clear to which extent the more complex
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explanations are needed and to which extent the simpler accounts by textbook economics are sufficient. Reinert has an additional explanation for the decline of development economics and the conditions for its revival. According to him, the problem is that the intellectual climate of the Cold War implied that reality-based economicsthe historical schools of Europe and the institutional school in the United Stateswere crowded out and virtually disappeared (Reinert, Reinert2007, 34); and it was replaced by the canonical sequence of Smith, Ricardo, Marx, etc. [that] still constitutes the skeleton for most teaching and scholarly discussion (p. 300). The solution is to bring the Other Canon of Reality Economics back to economics (p. 33). Thereby Reinert seems to support Hodgsons (Hodgson2001a) attempt of to bring history back to economics, but it should be emphasised that the predominant static institutionalism is part of the problem while it is only dynamic and evolutionary institutionalism that might provide a solution to the crisis of development economics. Furthermore, Krugmans remedy should not be forgotten. At the meeting of the American Economic Association that took place a few days before Schumpeters death early in 1950, he discussed development economics with Hans Singer (Singer1989). Schumpeter had earlier told his former student that the problems of underdevelopment were purely political and not the topic of economic theory. However, now that he saw Singers (Singer1950) preliminary results, he wished him luck with the endeavour. Nevertheless, the early Singer did not think it possible to apply Schumpeters (Schumpeter1934) Theory of Economic Development. Instead, Singer (Singer1953, 1920) used this book to define development economics both negatively and positively (relating to the 1952 version of Wallich, Wallich1958): 1. Singer emphasises that while the agents of economic development in Schumpeters theory are innovating and pioneering private entrepreneurs, government is the most likely agency of economic development in many underdeveloped countries. 2. While Schumpeter assumes changes in production functions due to new products or processes, Singer emphasises that economic development through the introduction and adaptation of products and methods. 3. The generating force of Schumpeters economic development is found in the supply side of the market while Singers generating force in the desire for increased consumption. Singers ways of formulating the difference between Schumpeterian theory and the problems of development economics were unfortunate because they ignored the necessary mix between private and governmental entrepreneurship, the innovation characteristics of the much of the introduction of technologies from abroad, and the need of a relative independence of the supply side in order to serve the ultimate goal of increased consumption. The linkage theory of Hirschman (Hirschman1958) was also made ineffective by translating it from its original Schumpeter-like perspective of facilitating interdependent entrepreneurship to a matter of maximising linkages in the sense of inputoutput tables of developed countries. Such shifts away from a Schumpeterian world created an enormous confusion in the development economics community (Brookfield1975). On this background, one of the recipes for a resurrection of development economics seems to be an increasedand carefully thought outdose of Schumpeterian perspectives. This also seems to have been the conclusion of later Singer, who about Schumpeters book stated stated that I realise now more clearly than in earlier years how deeply relevant many of its [TEDs] themes are to the development of poor countries and the problems of underdeveloped countries. He especially pointed at three themes that had originally been de-emphasised but that now seem to me the key to the problems of development in poor countries (Singer, Singer1997a, 131):
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1. Schumpeter brought out the great importance of technology, innovation, access to innovation and ability and the means of linking innovation with the production process in the form of new products or new processes or the development of new markets. 2. In Schumpeter, the emphasis placed on the fact that development represents a disruption of familiar and traditional processes of stationary circulation, arousing resistances and hurting established interests. 3. Schumpeter tried to depict the self-transformation of the economic system by entrepreneurial initiative and Singer relates this to notions of self-reliance, self-sustaining growth, dependency, backwash effects and all that! The great thing about Reinerts (Reinert2007) contribution is that it serves to bring attention to these three Schumpeterian themes of development economics while at the same time keeping his emphasis on the state and its promotion of a wealth-creating sector characterised by increasing returns. The similarity between the approaches of Reinert and Schumpeter is obvious from Figure 4 (adapted from Andersen, Andersen2007e). Although Reinert emphasises the inspiration from the German historical school and other types of history-friendly social science, he acknowledges the Marxian challenge. Furthermore, he puts much emphasis on what is presently called Elite Theory to promote an activist and creative image of human behaviour while at the same time including the role of routine behaviour and vested interests. However, Reinert seems to have replaced neoclassical economics by Industrial Policy. As we shall see in the next section, policy issues have a place in the Schumpeterian account for the scientific process. With respect to neoclassical economics, the difference is largely a matter of style. Actually, Schumpeter (Schumpeter194242, Part II) used the same style in Capitalism, Socialism and Democracy. However, I guess that he in more scholarly works would, for instance, have praised the factor price equalisation theorem of his student and friend Paul Samuelsonand then use it as limiting case that beautifully serves as the starting point for summarising main mechanisms the often radically different realities.
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Figure 4: Schumpeters evolutionary pivot as well as the main sources and components of his analytical work Schumpeters design of his theory of capitalist economic evolution might to some extent be seen as following Krugmans (Krugman1994a) recipe for overcoming the fall of development economics. He tried to overcome the weaknesses of the German historical school by developing a relatively simple model by means of the formal tools available for him. These were not least the tools provided by Lon Walras and the rest of neoclassical economics (Figure 1). However, he reinterpreted these tools in the light of the stylised vision of economic history wanted to implement, a vision that to some extent was based on the facts collected by the historical school. For instance, he did not apply Reinerts strategy of rejecting equilibrium analysis. Instead, he reinterpreted general economic equilibrium as reflecting a lock-in to a certain stage of growth and development. It is in this setting that the Schumpeterian entrepreneur enters the model. The interests of ordinary economic agents are in many ways locked to the existing circular flow of economic life while the profit expectations of the entrepreneur is connected to the troublesome period of transformation of the circular flow. When the basic resistance has been overcome by the pioneering entrepreneur, the bandwagon of imitators and bankers turn to expectation-based behaviour, and finally ordinary economic agents are forced to follow the lead. This process leads to a picture of economic evolution, or economic development, as taking the form of innovative revolutions punctuated by quasi-equilibrium episodes. This story presupposes a heterogeneity of economic agents that has been abstracted away by both classical economics and neoclassical economics. Therefore, it was crucial for Schumpeter to apply to his evolutionary economics the elusive elite theory that ranges from Nietzsche to Sombart and Pareto. Here he found a dichotomy between routine behaviour and creative behaviour as well as ideas of human motivation that explained extraordinary effort of an apparently risk-seeking type. Schumpeter also used elite theory as a way of breeding life into Marxian vision of the selftransformation of economic and social lifea vision whose implementation had largely been strangled by Marxs dependence on the tools of Ricardian economics. Although it can be argued that the Schumpeterian vision was similarly strangled by its dependence of the tools of Walrasian economics, his dependence on elite theory helps us to recognise clearly his attempts to change the available analytical tools.
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List or Schumpeter: the choice of a label

Reinert relates his work to high development theory but he fails to emphasise that the followers of that line of thought fell into the trap of too easy structuralism and institutionalism. This difficulty of development economics is to some extent similar to a major difficulty of innovation systems studies. The literature on national systems of innovation (Lundvall, Lundvall2007) tends to be too systemic, too structuralist, and too institutionalist. Although this tendency might have been necessary to get such studies started, there is a serious need of adding a more historical approach emphasising the creation and recreation of national systems of innovation. Schumpeterian One strategy for reaching this historical activism is to perform the difficult intellectual task of combining theories of entrepreneur-driven development with the more or less systemic theories (Radosevic, Radosevic2007). This strategy might be called Schumpeterian, a label that covers much more than Joseph Schumpeter (Schumpeter1934). Listian An apparently different strategy is to study the creation and recreation of innovation systems as reflecting state actions for national development. This strategy is followed by Reinert (Reinert2007) and Chang (Chang2007; Chang2007a). Although such authors might be characterised as techno-mercantilists or techno-protectionists, these policy-oriented labels bring more heat than light since the approach is not tightly bound to any particular policy. It is more fruitful to characterise the approach as Listian, although Reinerts notion of the Other Canon emphasised that the label is not constrained to Friedrich List (List1909). SchumpeterianListian However, the Listian label is not really sufficient to cover the efforts of Reinert and Chang since the inspiration from the tradition to which List belongs has also led to studies characterised by static institutionalism. Therefore, their approach that tries to capture the history of, and present possibilities for, the creation of dynamic industrial capabilities by relatively weak states might better be characterised as SchumpeterianListian Development Economics. Schumpeterian as covering Listian When considering the scale and scope of both Schumpeters work and the subsequent neo-Schumpeterian, or post-Schumpeterian, literature, it might even be possible to simply talk about their contributions as promoting a jump forward of Schumpeterian Development Economics. When trying to name the analytical game, we remark that Schumpeterian development economics might seem as a contradiction in terms since Schumpeter apparently concentrated on advanced capitalism. In contrast, Listian development economics might seem appropriate since List concentrated on the developmental ladder. Nevertheless, the name SchumpeterianListian development economics overcomes the problem that List has often been used in a primitive structuralist and institutionalist way that needs to be overcome. The simplest solution, however, is to consider Schumpeterian development economics as containing Listian principles. This name emphasises that Listian principles must be reconsidered in a coherent framework that might be delivered by a combination of evolutionary economics, evolutionary sociology, and evolutionary political science.
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Literature
Andersen, Esben Sloth (2007): Schumpeters evolution: Emergence and extension of a dramatic theory of economic and social evolution as reflected in his major books, Research report, 309 pages, Department of Business Studies, Aalborg University. Brookfield, Harold (1975): Interdependent Development, London: Methuen. Chang, Ha-Joon (2003): Kicking Away the Ladder: Development Strategy in Historical Perspective, London: Anthem. Chang, Ha-Joon (2007a): Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, New York: Bloomsbury. Chang, Ha-Joon (ed.) (2007b): Institutional Change and Economic Development, Tokyo: United Nations University Press. Gerschenkron, Alexander (1977): An Economic Spurt That Failed: Four Lectures in Austrian History, Princeton, N.J.: Princeton University Press. Hanusch, Horst and Pyka, Andreas (eds) (2007): Elgar Companion to Neo-Schumpeterian Economics, Cheltenham and Northampton, Mass.: Elgar. Hirschman, Albert O. (1958): The Strategy of Economic Development, New Haven, Conn.: Yale University Press. Hirschman, Albert O. (1981): The rise and fall of development economics, in Essays in Trespassing: Economics to Politics and Beyond, New York: Cambridge University Press, pp. 124. Hodgson, Geoffrey M. (2001): How Economics Forgot History: The Problem of Historical Specificity in Social Science, London and New York: Routledge. King, John E. (ed.) (1994): Economic Growth in Theory and Practice: A Kaldorian Perspective, Aldershot: Elgar. Krugman, Paul (1994): The fall and rise of development economics, in Error! Reference source not found. (1994), pp. 3958. List, Friedrich (1885): The National System of Political Economy, London: Longman. Reprint New York: Kelley, 1966, www.efm.bris.ac.uk/het/list/national.htm List, Friedrich (1983): The Natural System of Political Economy, London: Frank Cass. Lundvall, Bengt-ke (2007): National innovation systems: From List to Freeman, in Error! Reference source not found. (2007), pp. 87281. Mathews, John A. (2005): The intellectual roots of latecomer industrial development, International Journal of Technology and Globalisation, 1: 433450. Radosevic, Slavo (2007): National Systems of Innovation and Entrepreneurship: In Search of a Missing Link, Working Papers No. 73, Centre for the Study of Economic and Social Change in Europe, University College London. Reinert, Erik S. (1999): The role of the state in economic growth, Journal of Economic Studies, 26: 268326. Reinert, Erik S. (2007): How Rich Countries Got Rich and Why Poor Countries Stay Poor, London: Constable and Robinson. Rodwin, Lloyd and Schn, Donald A. (eds) (1994): Rethinking the Development Experience: Essays Provoked by the Work of Albert O. Hirschman, Washington, D.C.: Brookings Institution Press. Samuelson, Paul A. (1948): International trade and the equalisation of factor prices, Economic Journal, 58: 163184. Samuelson, Paul A. (1949): International factor-price equalisation once again, Economic Journal, 59: 181197.
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Schumpeter, Joseph A. (1912): Theorie der wirtschaftlichen Entwicklung, Leipzig: Duncker & Humblot. Schumpeter, Joseph A. (1934): The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle, London: Oxford University Press. Schumpeter, Joseph A. (1939): Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, New York and London: McGrawHill. Schumpeter, Joseph A. (1942): Capitalism, Socialism and Democracy, London: Unwin. Schumpeter, Joseph A. (1954): History of Economic Analysis, London: Allen and Unwin. Schumpeter, Joseph A. (1989a): Essays: On Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism, New Brunswick, N.J. and London: Transaction. Schumpeter, Joseph A. (1989b): The historical approach to the analysis of business cycles, in Error! Reference source not found. (1989a), pp. 322329. Schumpeter, Joseph A. (1989c): Science and ideology, in Error! Reference source not found. (1989a), pp. 272286. Schumpeter, Joseph A. (1991a): The crisis of the tax state, in Error! Reference source not found. (1991b), pp. 99140. Schumpeter, Joseph A. (1991b): The Economics and Sociology of Capitalism, Princeton, N.J.: Princeton University Press. Schumpeter, Joseph A. (1991c): The sociology of imperialisms, in Error! Reference source not found. (1991b), pp. 141219. Singer, Hans W. (1950): The distribution of gains between investing and borrowing countries, American Economic Review: Papers and Proceedings, 40: 473485. Singer, Hans W. (1953): Obstacles to economic development, Social Research, 20: 1931. Singer, Hans W. (1989): Personal communication, Interview by E. S. Andersen in Singers office at the Institute of Development Studies, University of Sussex, January 1989. Singer, Hans W. (1997): The influence of Schumpeter and Keynes on the development of a development economist, in Hagemann, Harald (ed.), Zur deutschsprachigen wirtschaftswissenschaftlichen Emigration nach 1933, Marburg: Metropolis, pp. 127150. Sombart, Werner (1902): Der moderne Kapitalismus, Munich and Leipzig: Duncker & Humblot. Streeten, Paul P. (1998): The cheerful pessimist: Gunnar Myrdal the dissenter (18981987), World Development, 26: 539550. Toye, John (2006): Hans Singers debts to Schumpeter and Keynes, Cambridge Journal of Economics, 30: 819833. Wallich, Henry C. (1958): Some notes towards a theory of derived development, in Agarwala, Amar N. and Singh, Sampat R. (eds), The Economics of Underdevelopment, Bombay: Oxford University Press, pp. 189204.
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Toward Developmental University Systems

Paper presented at IKE-Workshop on Institutions, Innovation and Development Aalborg University May 6 2008
Bengt-ke Lundvall Department of Business Studies Aalborg University, Denmark E-mail address: bal@business.aau.dk
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Preface
This paper represents work in progress. It refers to different institutional set ups linking universities to the economy and to society. In this version there is too little on how universities function in less developed countries and I have mobilised Judith Sutz and Claes Brundenius to join as co-authors for the next version in order to repair on this weakness. It should end as a contribution to an Elgar handbook on innovation and economic development.
Introduction
Over the last 20 years growing attention has been given to how universities may increase their contribution to economic growth and international competitiveness (OECD 1984; Rosenberg and Nelson 1994; Yusuf and Nabeshima 2007). This emphasis on the economic impact of universities reflects a change in the interpretation of what drives economic development and growth, often with reference to the concept the knowledge-based economy. It raises important questions for how to design university systems especially in developing countries where universities tend to gather within and around them scarce knowledge and skills with a potential to contribute to economic development. Most of the recent debate has focused of on the third mission of universities.36 While the traditional functions of research and training are taken for granted the idea that university research should engage in direct interaction with external groups and interests has dominated the recent debate. When combined with the strong emphasis on the economic dimension the main attention has ended up to be on the university-industry interface and on commercialisation of knowledge created within universities. In this chapter we argue that the debate is not well founded in stylized facts and that it is characterised by contradictions and lack of clarity. For instance commercialisation is sometimes assumed to be synonymous with increased openness of universities while it may actually lead to the opposite of openness. We also see the current neglect of the two original missions in the current debate as highly problematic. Educated graduates remain the major channel through which knowledge is diffused to the rest of society and the way education is organised is of critical importance for how students contribute to the third mission. A broad research base is necessary in order to make sure that what students learn gets continuously updated. In the developed part of the world there has been a growing attention to the entrepreneurial university that is engaged in national and local problem solving - sometimes the focus is narrowly on market-oriented interaction with industry. In this paper we will build upon the alternative idea of establishing the developmental university a term that we borrow from Rodrigo Arocena and Judith Sutz (2005). The developmental university, as we define it, is open and interacts with different groups in society, including industrialists but it is not operating according to the logic of making profit. Its major aim is to contribute to social and economic development while at the same time safeguarding a certain degree of autonomy. While globalisation processes make universities more universal they become more involved in global networks and exposed to global performance criteria such as frequency of international publications - the pressure on them to contribute to the society that feeds them is also growing. It is therefore important to consider what kind of tasks that universities in developing countries should fulfill. To answer this question we need to see universities as parts of the over all innovation system. Seen in this light it becomes clear that a differentiation of functions at different levels of the system may be the most adequate response to the challenges that universities in developing
36
In the recent book with the title How universities promote economic growth edited by World Bank economists none of the 17 chapters is focused on Higher Education (Yusuf and Nabeshima 2007).
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countries face. There is a need to differentiate functions between universities and other knowledge institutions, as well as between and within universities. This is the only way to respond to the contradictory requirements that universities are confronted with in the current era. In the developmental university system some universities may become hubs in a global knowledge network while others might become hubs in national and regional developmental networks with a stronger emphasis on problem orientation both in research and education. To organise universities, including their mutual networking and interaction, according to this logic so that they contribute to economic and social development is a difficult task and it will often call for radical reform in the basic functions of education and research as well as in the interface with external users of knowledge. Therefore the current debate, where the focus is almost exclusively upon reforms aiming at the commercialisation of new discoveries, is misleading.
Factors behind the commercialisation drive

There are several reasons why universities have come under strong pressure to become more market oriented. One is related to public finance. As academic programs have expanded to become mass education the share of total government expenditure that goes to universities tends to grow. Since other posts on the public budget have stronger advocates in the electorates the idea that universities could become self-financing through student fees and through selling intellectual property has become increasingly attractive for governments. International organisations such as the World Bank and OECD have pushed in the same direction on the basis of their general pro-market bias. An alternative route to reduce expenditures at the federal/central level has been to decentralise some of the expenditure to regional or local authorities. This will often be combined with requirements for universities to legitimise their activities and demonstrate that they contribute to regional or local economic developments. These trends have led universities not to rethink their research and education program but rather to set up new specific administrative functions aiming at marketing intellectual property, at commercialising education through new MBA-programs and at networking with regional actors. A new generation of ambitious administrators have entered into these new administrative functions and they have become a significant pressure group at regional, national and international level for expanding their own fields of responsibility. Leaders within universities have realised that such activities may give more good will among politicians and raise less resistance than attempts to reform the ordinary research and education programs.
New conceptualisations of the knowledge based economy

A different set of drivers that coincides in tiem with the increasing financial pressure has to do with the new discourses related to the knowledge-based economy. The mode 2 production of knowledge perspective assumes that universities increasingly compete with other knowledge creating organisations and that the traditional academic ways of producing and assessing the value of knowledge have become obsolete. Triple-helix perspectives present the commercialisation of universities and the intensified university-industry interaction as something that neither can or should be avoided. As we shall show in a later section, misleading versions of innovation system analysis that emphasise science as only source of innovation have also resulted in exaggerated expectations of what universities are able to contribute to the innovation process. These new sets of ideas have given legitimacy to governments that want to reduce their contribution to the finance of universities and they have provided local university leadership with new ideologies supporting their attempts to make their universities both more entrepreneurial and more commercial. The examplary reality behind these generalisations is a combination of new developments in biomedical research and the Bayh Dole-act of 1980 in the US. In the biomedical field the distance from research taking place within the university laboratory to a patent that can be sold with
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substantial profit to a pharmaceutical company is very short. The Bayh Dole act gave new opportunities for universities to make money on the knowledge they created in house through patenting and the US relative success in developing the university-industry relationships has been ascribed to this new legal framework. While the new perspectives thus have a certain foundation in recent trends in the economy they also tend to give a crude and one-sided picture of how the relationships between knowledge, innovation and economic growth have changed. Outside biomedical research it is still exceptional that scientific breakthroughs have a direct application in the form of profitable patents and it is worth noting that even in the case of biomedical research the impact on economic growth from the advance of knowledge remains limited and uncertain (Mowery et al 2005; Nelson 2006; Pisano 2006). The most thorough analysis of the impact of the Bayh Dole act does not support the idea that the successful university-industry relationships originated from this act (Mowery 2007). In the next sections I will present a different interpretation of major changes in the innovation process and discuss implications for university systems in developing countries.
The Learning Economy

In the public debate knowledge is increasingly presented as the crucial factor in the development of both society and the economy. In a growing number of publications from the European Commission and OECD it is emphasised that we currently operate in a knowledge-based economy. For several reasons the term the learning economy is more adequate when it comes to characterise the current phase of socio-economic development (Lundvall and Johnson 1994). The basic assumption behind this concept is very simple. It is that, working together, technological developments, globalisation and political processes of deregulation have led to an acceleration of the speed of technical and economic change. Consequently, access to any given knowledge base is less important for the economic success of firms and individuals, than their ability to rapidly acquire new competences as they get confronted with new types of problems. New knowledge is created at an increasing rate, but the quantity of economically relevant knowledge is also being reduced as knowledge becomes obsolete at a faster pace than before. This acceleration in economic change is reflected in different indicators. The life cycle of new products becomes shorter. New production processes are diffused more rapidly than before. For employees, work tasks change character, and many will have to change employer more often than before. In a report from the Danish Ministry of Education, a German study is cited, maintaining that just one year after the exam, half of what a computer engineer has learnt has become obsolete. The halving time of what has been learnt in the education system is longer for other specific professions but on average, it is argued, it is about 8 years (Ministry of Education 1998, p. 56f.). This speed up of the rate of change is strongly connected both to the emergence of new forms of organisation and to changes in the demand for skills. Organisational forms that make it possible to reduce the time lag from the birth of an idea to its realisation tend to be more widely adopted and make firms more performant. The most important new organisational traits that promote innovation, sometimes referred to as characterising the learning organisation, reduce the number of levels in the hierarchy, enhance horizontal communication inside and outside the organisation and decentralise decisions to lower levels in the organisation. For these traits to become effective in speeding up innovation and coping with rapid change, the employees need new combinations of professional and personal skills. Innovation research in the 1980s was helpful in clarifying the limitations of a linear model of innovation by introducing a systemic perspective where the demand side was given a much more prominent and appropriate role (Lundvall 1985; Kline and Rosenberg 1986). The third generation innovation model needs to give more attention to the organisational dimension (Caraca et al,
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forthcoming). The innovative performance of firms is increasingly depending upon the design of internal organisation and networking with external parties. An early study foreboding such a perspective was the Sappho study (Rothwell 1972; Rothwell 1977). The triple helix and mode 2 knowledge production perspectives tend to focus on the direct knowledge flow from university to industry and in their analyses there is a tendency that the organisational dimension of industry remains hidden in a black box. We will argue that the new context and the impact it has on the business sector have major implications for what kind of inputs that industry requires from universities and other knowledge institutions.
Why we need a broad definition of the innovation system

There has been a distortion of the innovation system concept as compared to the original versions as developed by Christopher Freeman and the IKE-group in Aalborg. Policy makers and scholars have applied a narrow understanding of the concept and this has given rise to so-called innovation paradoxes which leave significant elements of innovation-based economic performance unexplained.37 Such a bias is reflected in studies of innovation that focus only on science-based innovation and on the formal technological infrastructure and in policies aiming almost exclusively at stimulating R&D efforts in high-technology sectors (Lundvall 2007b). Without a broad definition of the national innovation system encompassing individual, organizational and inter-organizational learning, it is impossible to establish the link from innovation to economic growth. A double focus is needed where attention is given not only to the science infrastructure, but also to how business is organised and to institutions/organisations that support competence building in labour markets, education and working life. This is especially important in the current era of the globalizing learning economy (Archibugi and Lundvall 2001). We see one major reason for this distortion in the uncomfortable co-existence in international organisations such as OECD and the EC of the innovation system approach and the much more narrow understanding of innovation emanating from standard economics (Eparvier 2005). Evolutionary processes of learning where agents are transformed and become more diverse in terms of what they know and what they know how to do are not reconciliable with the rational representative agents that populate the neoclassical world (Dosi 1999). Actually, we regard the neglect of learning as competence-building as the principal weakness of standard economics and the narrow definitions of innovation systems reflect a negative spill-over from this misdirected abstraction. Both Mode 2 knowledge production (Gibbons et al 1994) and the Triple Helix approach focus on science and the role of universities in innovation. When they present themselves or are applied by policy makers, not as analysing a subsystem within, but as full-blown alternatives to the innovation system approach (Etzkowitz and Leydesdorff 1995; Etzkowitz and Leydesdorff 2000), these approaches contribute to the distortion. These perspectives capture processes linking science and technology to innovation below we refer to these processes as STI-learning. The fact that science and codified knowledge become increasingly important for more and more firms in different industries including so-called low-technology ones does not imply that experience-based learning and tacit knowledge have become less important for innovation. To bring innovations, including science-based innovations, to the market organisational learning, industrial networks as
37
Over the last century there has been focus on the European Paradox referring to the fact that Europe is strong in science but weak in innovation and economic growth. Similar paradoxes have been argued to exist in countries such as The Netherlands, Finland and Sweden. In a recent OECD-report a general result is that for the countries included in the study it can be shown that those that perform well in terms of STI-indicators do not perform well in terms of innovation (OECD 2005, p. 29). This indicates that what is registered is not a paradox but a systematic weakness in the theoretical analysis and the indicators upon which it is built (Lundvall 2007).
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well as employee participation and competence building are more important than ever. We refer to these processes as DUI-learning.
Innovation requires a combination of science-based and experience-based learning

The need to make use of a broad definition of the innovation system can be illustrated by an analysis based upon data on innovation performance at the firm level see table 1. The analysis makes use of a unique combination of survey and register data for Danish firms and it demonstrates that firms that engage in R&D without establishing organizational forms that promote learning and customer interaction are much less innovative than firms that are strong both in terms of STI- and DUI-learning (Jensen et al 2007). Table 1 is the outcome of an analysis of survey and register data for almost 700 Danish firms and it presents different variables related to the propensity to introduce new products or services. We use sector, size and form of ownership as control variables but the focus is upon a variable indicating the mode of innovation in the firm. We distinguish between firms that are strong in science-based learning, firms strong in organizational learning, firms that are strong in both respects and we use those firms that are weak in both respects as the benchmark category. To construct this variable we pursue a cluster analysis grouping the firms in the four categories.
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Table 2: The probability that firms develop a new product or a new service
Variables
STI Cluster DUI Cluster DUI/STI Cluster Business services Construction Manuf. (high tech) Odds ratio estimate 3.529 2.487 7.843 Coefficient estimate 1.2611** 0.9109** 2.0596** Odds estimate 2.355 2.218 5.064 1.433 0.491 1.805 ratio Coefficient estimate 0.8564** 0.7967** 1.6222** 0.3599 -0.7120* 0.5905* ** = signifi cant at the .01 level *= signifi cant at the .05 level
As indic ators Manuf.(low and med. tech) 1.250 0.2229 of tech) stron Other services 0.747 -0.2923 g scien 100 and more employees 1.757 0.5635* cebase 50-99 employees 0.862 -0.1481 d learn Danish group 0.859 -0.1524 ing Single firm 0.521 -0.6526* we use Customised product 1.378 0.3203 R&D Pseudo R2 0.1247 0.1247 0.1775 0.1775 expe nditu N 692 692 692 692 re, prese nce of employees with academic degree in natural science or technology and collaboration with scientists in universities or other science organizations. As indicators of experience-based learning we take the use of certain organizational practices normally connected with learning organizations such as interdisciplinary workgroups and integration of functions together with closer interaction with customers to signal learning by interacting and a focus on user needs. We use firms that only make weak efforts to support science-based and experience-based learning as our benchmark cluster and the odds ratio estimate indicates how much higher the propensity to innovate is among firms strong in respectively one or both of the modes of learning. The results reported in table 2 show that firms that combine the two modes are much more prone to innovate than the rest. It shows that the effect remains strong also after introducing control variables related to size and sector. The analysis illustrates why narrow definitions of national innovation systems that focus only upon science-based innovation are of little relevance when it comes to understand the performance of firms and national innovation systems. This is not least important when it comes to analyse the barriers and opportunities for economic development in poor countries (Arocena and Sutz 2000b; Cassiolato, Lastres and Maciel 2003). A Master thesis (Garcia-Zarco 2007) presented recently at
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Aalborg university shows that the combination of DUI and STI-learning is critical in Bolivia one of the poorest of the Latin American countries. On the basis of interviews with more than 60 firms he concludes the analysis: In short I can conclude that this study confirms that in Bolivia, it is the firm that combines a strong version of the STI-mode with a strong version of the DUI-mode that excels in innovation; in product innovation to certain extent but especially in process of production innovation. (op cit p. 89). Those arguing strongly for linking university activities to innovation through markets tend to build upon a narrow understanding of the innovation process as basically linked to science. This is true both for triple helix and for mode 2 adherents. The fact that experience-based learning based on doing, using and interacting (DUI) and tacit knowledge remains fundamental for innovation is neglected. The one-side focus on the STI-chain (moving from science to technology and to innovation) is misleading when it comes to design innovation policy. Also it gives rise to undue expectations on what universities could and should contribute to the innovation process. The focus on universities as sources of codified knowledge gives a biased perspective on how universities may best contribute to the innovation process. The experience-based tacit know-how that graduates obtain while working with problem solving and research is best transferred through firms hiring university graduates not through university patents. Finally, as we shall see below, in order to prepare students for their participation in the DUI-mode universities should organise education programs so that they contribute not only to professional skills but also to the formation of so-called personal skills.
How to organise universities in a less developed economy?

There are many problems for the policy maker responsible for higher education. Some problems have to do with funding, efficient administration and the quality of teachers and graduates. Here we will focus on one specific set of problems related to the high degree of separation of the higher education from the rest of society. We believe that shortening this distance is a key to getting positive results from investment in higher education in less developed economies. One of the most important insights from innovation research is that the innovation process is interactive (Christensen and Lundvall 2005). Transforming a new idea into a marketable product involves teamwork and inter-organisational interaction with customers and knowledge institutions. In a context of accelerating change, general skills that support learning become increasingly important. What matters for the performance of a graduate is a combination of professional and specialised knowledge acquired through reading books and following lectures and a set of so called general skills and especially the capacity to communicate, cooperate and interact with others. In a less developed economy such skills involve the ability to interact efficiently in a cultural environment quite different from the academic context. General competences are sometimes referred to as personal and sometimes as workplace skills. This terminology is problematic since it gives the impression that they are something separate to be added on after the university training has been concluded. One way to make the transition to working life less painful for graduates is for universities to take more responsibility for the formation of general skills. As can be seen from Table 2, Danish survey data illustrates that there is a close connection between firms engaging in organisational change and their demand for social skills. When managers in firms engaged in organisational change are asked about what kind of competences they require they tend to give much more weight to social skills than managers in firms that do not engage in organisational change.
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Table 2 shows that while there is stronger demand for professional skills in firms establishing new forms of organisation the gap is much less in this category than it is in the category general skills. Firms that engage in organisational change, emphasize the requirement that employees can communicate and collaborate internally and externally.
Table 2: Changes in task content for employees in the period 1993-95 for firms that have made organisational changes (outside the parentheses), compared with firms that have not made organisational changes (in parentheses).
a. Independence of work More 72,6 (37,1) Less 4,2 (2,7) Unchanged 21,2 (56,3) No answer 2,0 (3,8)
b. Professional qualifications 56,4 (36,3) 7,5 (5,3) 33,3 (53,8) 2,8 (4,4) c. Routine character of tasks 5,6 (8,2) 41,8 (15,5) 45,0 (67,1) 7,7 (9,1) d. Co-operation with colleagues 59,1 (27,1) 5,8 (4,5) 31,8 (63,3) 3,2 (5,0) e. Co-operation with management 64,9 (28,6) 5,9 (4,2) 26,1 (62,2) 3,1 (4,9) Source: Lundvall (2002a) This implies that the teaching at the universities needs to be adjusted in order to prepare the students for communication and co-operation with other categories of workers and experts. The way students study and learn at university affects their social skills when they exit as graduates and so does the broader cultural context of the university. In the modern literature on learning this relates to the idea of learning as moving from the periphery to the centre of communities of practise (Wenger 1998). The idea of education as a process where you fill empty bottles, the form of which is determined elsewhere, is as widely shared as it is inadequate (Guile 2003). University education everywhere has inherited old forms of transmitting knowledge to students such as series of lectures, often in big crowded rooms, referring to standard textbooks, often based upon the reality of the US or the UK. We would argue that this method of learning is highly inefficient. One problem is the lack of relevance of the substance seen in relation to the concrete context and this problem is of course most dramatic in less developed countries. Research focused on domestic problems attempting to adopt research methods and tools to the local context may be helpful to develop more relevant teaching material. The second problem is that this traditional learning form does not prepare students to use the theory and methods in a real life context and neither does it replicate the kind of learning that is required in a future professional life. In professional life most learning takes place through problem solving, often in a context of collaboration with others with a different background. More widespread use of problem-based learning and combining theoretical work with periods of practical work are obvious responses to these problems. We believe that this consideration is especially important in less developed countries where universities tend to select a small group of the population among the elite to become the new elite. Elite education in narrowly defined disciplines may be detrimental to innovation even if it takes place at centres of excellence. Both the socialisation and the selection functions are important for what kind of scientists and engineers that are produced by the national system of higher education. The way students learn to become proficient in a specific discipline or profession is thus crucial for how they will function in their future functions. This also implies that we need a concept and indicators of quality with several dimensions when we evaluate education outcomes. PISA-tests in mathematics, physics and language capabilities need to be combined with tests of interactive capabilities. A high level of the first type of
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capability is of limited value for innovation if the level for the second type is low. A principal task for higher education is to contribute to collective entrepreneurship i.e. to general skills supporting an interaction with others resulting in innovation.
University industry collaboration

As part of a strategy characterised by openness to society University- Industry collaboration may offer both economic advantages and advantages for the research. Contract research for firms, informal consulting for firms and many other forms of collaboration connecting research to industry may take place without seriously undermining the autonomy of the university. But the collaboration needs to take place on the basis of some degree of autonomy for universities. It should be accepted that the mode of knowledge production is different in the world of academia and the world of industry. In Academia the major incentive is global fame and/or social commitment and the outcome is knowledge to be shared worldwide. In the world of industry the major incentive is profit and economic expansion and the outcome is knowledge to be protected so that competitors do not get access to it.38 It might be true, as argued by the Mode 2 perspective, that there has been a certain weakening of the academic mode. But it is obvious that in the case where it was completely eroded and became identical with the business mode the impact on the creation of knowledge, the diffusion of knowledge and the quality control of knowledge would be disastrous. There are three major negative consequences of taking the market orientation of universities too far. First, installing intellectual property rights on outcomes of academic research cannot avoid having a negative effect on knowledge sharing within and outside the university and it undermines the academic ideal of open access to knowledge. In Garnsey (2007) representatives of major US corporations operating outside the biomedical field are cited for their worries that the new strong emphasis on intellectual property rights tends to undermine the access to knowledge embodied in universities. Second, in the knowledge-based economy, it is critically important for the function of the economy and society to have access to an institution that is credible when it comes to critically assess and validate what is reasonably reliable knowledge. There are, as I see it, no serious alternatives to universities when it comes to fulfil this function and subordinating to economic or to political interests makes them less reliable as judges and referees. This is why we argue that entrepreneurial and developmental universities need to be left some degree of autonomy. The balance between integrating activities in society and retaining some autonomy is difficult and we see a parallel to how Woolcock (1998) outlines a similar balance for the developmental state. Third, as universities become simultaneously more international in their scope and more market oriented they will come under the scrutiny of WTO and European competition regulators. The longterm outcome of this might be that, since fundamental research and normal higher education cannot be clearly separated from their commercialised activities, public funding for these core activities may become classified as illegal subsidies of business activities. This would undermine the very foundation of the knowledge-based society.
The third mission and higher education

It is far from obvious that the best way to form the competence of students is to isolate them on campus for three to five years and exclusively expose them to academic teaching for this period. Laboratory work and construed case material do not establish sufficient links between theory and
38
In a recent interview Gary Pisano gives a succinct statement on major differences Science and business work differently. They have different cultures, values, and norms. For instance, science holds methods sacred; business cherishes results. Science should be about openness; business is about secrecy. Science demands validity; business requires utility. So, the tensions are deep.
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practise. In most disciplines and professions students can enhance their learning by being confronted to problems outside university. Periods of fieldwork or practical work periods related to the object of study are useful in preparing students for a future career. Educational programs may be organised in such a way that students contribute to the third mission of the university and at the same time profit from the experience in terms of learning. Long educations may be split up into parts with periods of practical activity in between. It is often neglected that the success of third mission programs will reflect not only the supply side but also the demand side. For instance, firms without personnel with a higher education will not be prepared to/capable to interact with universities. Educating graduates in such a way that they find employment in industry is therefore a key also to strengthen university-industry collaboration. Danish data show that firms with higher education employees are more prone to collaborate with universities and other knowledge institutions than firms without. For small firms the probability of intensifying the co-operation with a science institution is significantly higher (Lundvall 2002a). One important way to increase the interest of firms to hire academic personnel and on this basis to collaborate with universities is to establish exchange already during the study period. A complementary policy response could be time-limited, marginal employment subsidies to private firms that hire their first employee with a higher education. Actually the very idea of presenting the bridging to the environment as a separate third mission might have had a negative impact on the renewal of universities. The developmental university may be seen as one where the original missions have been transformed in such a way that there is not need for a separate third mission.
Reforming teaching and learning at the developmental university

To realise the developmental university several reforms might be called for in relation to education. Changes in the finance of universities that give students government state guaranteed loans that they will have to pay back only when they begin to earn a stable income have been introduced with success in Tanzania. The result would be less unequal social access to university studies. Study programs of high quality are needed not only for engineers and scientists. In the developing economy well-trained public administrators with a certain professional pride are important. It is important that graduates in these fields leave university with a commitment to promote social and economic development. It should also be realised that the university should not be the only institution offering advanced training. Colleges for vocational training at the secondary and tertiary level may be as important for economic development as universities. Universities may contribute by training competent teachers for the over all school system. The organisation of the study program may combine traditional teaching through lectures and seminars with problem based learning. Information technology may be used to support the learning taking place but full scale distant learning may not be realistic. Students can get insight in mathematics, language and information technology by reading textbooks and following lectures and seminars. To learn to use them such forms of teaching should be combined with problembased learning. Stimulating students to work with problems in society and business is helpful in establishing links between the university and the environment. It also serves as a way to diminish the cultural gap between academia and the reality that students will meet when they finish their studies and look for a job. Integrating in study programs periods of internships in relevant organisations outside campus has similar functions.
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Reforming research at the developmental university

It is neither realistic nor useful to establish a one to one relationship between the research agenda of the university and the local needs of society. There are fields of research that need to be promoted in order to upgrade the content of education in the same fields. There is also a need for basic research to support applied research. On the demand side there are many users who do not need the kind of knowledge that is developed at a university. And sometimes the only relevant users will have to be found abroad. It might be more effective to establish non-academic technical institutes with a responsibility for diffusing specific technologies to small and medium sized firms than it would be to link such firms directly with university research. Such institutes may have links to technical faculties at the university. Nonetheless there is ample room for universities to exploit the advantages that closer interaction with research users offer. In order to orient national research toward solving a specific set of problems (medical, environmental, working conditions, infrastructural etc.) specific public funds for research may be earmarked to promote collaborations between universities and user communities in the respective field. To work with a mission may stimulate and raise the quality of the research teams. It is sometimes forgotten that the US-government through its defence and health budgets have subsidised knowledge creation more massively than any other country in the world. A general willingness among scholars to take on the problems of the real world and to contribute to the solution of social and economic problems need to be supported by an adequate incentive structure. Limiting the evaluation of research to counting international publications has as advantage simplicity and transparency. But it does not stimulate scholars to engage in activities that cannot immediately be transformed into such publications. For scientific journals analysis of local problems unique for less developed countries are of little interest. Creativity research has shown that extrinsic incentives tend to crowd out intrinsic motivation and thereby undermine creativity. Therefore universities should consider other means of reward for scholars than income differentiation. Access to research funds and time to do research are often more stimulating as rewards for good performance than a wage increase. To focus research more on missions relevant for national and regional development does not make the need to engage in global networking less urgent. In order to be at the front of scientific knowledge it is absolutely fundamental to be connected to international networking. If resources allow it there should be at least one national research team that operates in international networks in each major field of knowledge. Ideally there should be two since competition is an effective driver also when it comes to promote good research
How to stimulate a reform movement

In this paper we have indicated that the recent wave of establishing a specific third mission at the university has substituted for necessary reform of education and research that open them up in relation to the rest of society. One way to stimulate on-going reform would be through the use of the budget mechanism. Each university that wants its share of public finance might be required regularly to present a development plan for instance a five-year plan (Lundvall 2002b): Such a development plan would typically take into account and plan for: Making explicit the basic values of the university and explain how values are reflected in the organisation of scientific work, teaching and learning. Specifying how core activities contribute to social and economic development. Setting up operational targets to be realised over the coming period.
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Positioning the basic functions of teaching and doing research in relation to other national and foreign universities.
Specifying the division of labour and alliances in relation to other national knowledge institutions.
Defining core functions combined with out-sourcing of peripheral activities - particularly activities that have a negative impact on the main tasks of the universities.
Specifying incentives and evaluation principles that ensure the balance between teaching involvement, scientific work and interaction with the outside world.
Pedagogic renewal in order to prepare the students for the learning economy, where interdisciplinary, problem solving, co-operation and communication is emphasised.
Development of a system for life-long learning for own graduates and for others groups in the population who need an upgrading of their competences.
The ideal process of establishing such a plan would be one that involves all those that are active at the university and build upon the insights and experiences of students, professors and administrators. It would also be one developed in a dialogue with a wide set of users. Such individual development plans offer universities and the teams and departments that constitute them a chance to define what they see as their own objectives for the coming period. Objectives and targets will certainly give some weight to international publishing but there will be room for variation between research teams, department and universities when it comes to balance the contributions to the international publication versus contributions to solving regional or national development problems. This is important because diversity in the knowledge infrastructure is a major source of innovation and adaptation.
Institutional diversity as solution to dilemmas

Universities are facing a difficult dilemma in the learning economy. On the one hand, the speed up of change and the growing pressure to move quickly from new scientific results to innovation in certain fields such as biotechnology calls for a more agile and flexible organisation of university activities. Traditional modes of organisation, characterised by sharp and rigid borders between disciplines and isolation from society at large are being challenged and alternatives have to be developed. There is a real need for strengthening the interaction with the rest of society. On the other hand there is a need to ensure some degree of autonomy and especially to protect the principle of open science. This Gordian knot may be cut with institutional differentiation between, and within, institutions concerned with knowledge production and knowledge diffusion (Lundvall 2002b). In a well functioning university system the strategic unit is the team defined by a common field of research and sometimes by shared responsibilities for teaching and sometimes with its own set of
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external users. Differentiation might mean flexibility in the use of time for the individual team member, over the career, where there are periods of slow, in depth, research as well as periods of education and periods of intense interaction with external users of research. Within the team a flexible division of labour may be established giving excellent researchers more time for research and excellent teachers more time to teach.
Reconciling research on local problem and global networking

In the developing countries another dilemma that may call for diversity is the conflict between a focus on local development and on being active in global research networks. In many developing countries the prevailing university models are the world leading US-universities in the Boston and the San Francisco area, or possibly the universities in Cambridge or Oxford. The idea that each single university should become a world centre of excellence is attractive in the sense that it gives strong emphasis to quality and meritocracy in contrast to corrupt practises and mediocrity. But it is not all for the good. A very bad replica of the star universities may be detrimental to economic development. We believe that there is another US-model that could give more useful inspiration and this is the land university with its extension services. The first of these regional universities were established around 1860 with the direct purpose to contribute to regional development and they were supported by regional civil society and by the federal as well as state and local authorities. In the 20th century they started to combine research and higher education with an active extension system for distributing useful knowledge to the region. The extension service was not only aimed at the business sector, including farmers, it also aimed at giving education to housewives and adults in general. We think that universities of this kind may produce graduates better equipped to contribute to problem solving and innovation in less developed regions and countries than the standard research university. It may be combined with establishing one or more national universities that consciously try to link up with global networks of excellence. But it is obvious that establishing such elite universities always will result in brain drain at least as long as the domestic demand for advanced knowledge remains limited. For such universities it is therefore important to socialise students in such a way that they graduate with a certain pride of country and university brand to give them some roots in their home country. The national universities may be linked through collaborative network agreements to the regional universities and job descriptions for professors may include that they should serve at both in order to give regional universities updated knowledge about frontier research. Regional universities should be stimulated to develop advanced research in niches where they reveal strength or in areas where regional demand is strong. Such local forms of excellence should be rewarded on line with the excellence of the national university.
Conclusions
The concept of university is a European invention. Originally it referred to institutions in charge of education linked to the Catholic Church. The university concept changed form and content several times since the Middle Age and the modern university have inherited characteristics both from Poly-technical Universities established under the Napoleon era and from the Humboldt University where education and research for the first time were systematically combined. The form and function of universities in developing countries differs depending on their history but for almost all of them the university arrived as an institutional import from the West (Altbach 1989). In spite of common roots national university systems are dramatically different in important respects. This is true also for Europe where attempts are made to harmonise the systems and to build a European Research Area. It is even more so for countries in the South.
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To illustrate there are specific issues and problems on the agenda of university reform in China, India, Brasil, Russia and South Africa. Each of these big emerging economies have ended up with university systems with unique characteristics regarding the interaction between university and industry as well as regarding the commitment of universities to economic development. We believe that they can learn from each other in terms of their respective experiences and this is the major objective of the socalled BRICS-project coordinated by Jos Cassiolato (Cassiolato 2007). The break down of Soviet Union left the university system in Russia in a crises that lasted ten years and is not yet resolved. Lack of funding led to a siphoning of human resources away from the university system and it is only recently that there has been some revival in this respect. Many of the remaining problems are inherited from the Soviet era. Academies of Science have an unclear status and there is a need so reform the organisation of the science system. There is a separation between education taking place at universities and research taking place in separate institutions and organisations. The demand for scientific knowledge from the enterprise sector is very low. One barrier for efficient interaction between universities and society is that there is little trust in society as a whole. In China since1985 reforms of research organisations gave universities a stronger position in research and to some degree they have taken over the responsibilities and resources from Government Research Institutes. The reforms stimulated universities first to link up with industry as customer. Gradually as this proved difficult they were allowed to engage in entrepreneurial activities and universities began to start and manage their own enterprises. Universities may get funding for basic science from mission-oriented programs in Health, Energy etc. Public procurement is becoming increasingly important. The major concern now is how to enhance the creativity science and business and to promote endogenous innovation. China has introduced laws of the Bayh Dohle type giving universities the right to intellectual property. Also in India the role of universities has changed over the last decades. Until 1980 there was a tendency to copy the soviet model with big central institutes and the objective to be self reliant in big science areas such as nuclear power. But in parallel there has always been a discourse regarding the need to promote research that contributed to the well-being of the majority of the population who live in villages. Since 1990s research activities at universities have been strengthened. Both in China and in India foreign direct investment is attracted by the growing number of high quality workers with higher education. There are almost 200 public higher education institutions in Brazil and some of state universities are dominating research and graduates in terms of output and quality. In general the links between universities and industry are limited but in certain high technology cluster such as the one in Campinas intense co-operation and networking is taking place. There are many new central and regional policy initiatives aiming at strengthening the interaction between universities and industry. In connection with the liberation South Africa assigned a broad agenda of tasks in their universities. Universities should contribute not only to the building of scientific capabilities but also to the solution of fundamental problems in society. This is made more complex in an economy where a big proportion of the population are engaged in activities outside the formal economy. On major problem is that higher education has to be paid for by students and that it is especially expensive in engineering training programs. While there are major differences across the Brics-countries there are also some similarities. In all these countries there is currently a major concern to link universities more closely to industry. But in all cases the most important barrier for establishing such a link seems to be the lack of demand. China has been most successful in transforming their university system and here it was done through allowing and even stimulating universities to create in house demand through starting up
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their own enterprises. Today there is growing agreement that this should be seen as a second-best solution. Public investment in science and education will offer a social rate of return as far as there is a positive spillover from the use of educated workers and from knowledge created at universities. The spillover will only be realised if there is a demand for graduates and for advanced knowledge. Therefore it is interesting to note that a country such as China now in its effort to stimulate endogenous innovation is putting more emphasis on public procurement and on technology programs that address societal needs. If such programs were combined with reforms of university that link them more closely to social and economic development we think that it would stimulate both the process of knowledge creation and the development process.
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Why Countries Are Poor

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Working Paper Series Department of Business Studies No.

Institutions, Innovation and Development - Collected Contributions from Workshop

Institutions, Innovation and Development - Collected Contributions from Workshop

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development A Comment on Erik Reinerts Quality Index

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Learning, Innovation and Development

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Structural Change and Qualitatively Diverse Economic Activities

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Static and Dynamic Rents

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Fixed in short run Market conditions Competition mode -Non-imitable

Demand Conditions Rent -Dynamic/growing demand -Large scale/niche market

Table 1: Categories of Economic Activities

Table 2: Interaction between the various dimensions

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Linkages, Innovation and Systemic Performance

Increasing Returns and Industry Dynamics

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Increasing Returns and Diversity

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Strategy for Structural Change Industrial Policy

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions and Innovation

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

A note on institutions as the root cause of development Bjrn Johnson23

Institutions in a narrow sense

Institutions, Innovation and Development

Workshop, Aalborg, May 2008

Institutions, Innovation and Development

Workshop, Aalborg, May 2008