Economic Complexity and Human Development

How Economic Diversification and Social Networks Affect Human Agency and Welfare

Dominik Hartmann

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781135118945
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book combines the human development approach and innovation economics in order to explore the effects that structural economic change has on human development.

While economic diversification can provide valuable new social choices and capabilities, it also tends to lead to more complex decision processes and changes to the set of capabilities required by people to self-determine their future. Within this process of structural transformation, social networks are crucial for accessing information and social support, but networks can also be a root cause of exclusion and inequality reproduction. This implies the need to encourage innovation and economic diversification beyond production expansion, focusing on the promotion of human agency and social inclusion.

This book provides such a modern perspective on development economics, emphasizing the role of social networks, economic diversity and entrepreneurship for social welfare. The author discusses how innovation, social networks, economic dynamics and human development are interlinked, and provides several practical examples of social and micro-entrepreneurship in contexts as diverse as Peruvian rural villages and Brazil's urban areas.

The interdisciplinary perspective put forward in this book illustrates theoretical and methodological methods of exploring the complexity of development in a practical and relevant way. It also provides useful information about structural factors which need to be considered by practitioners when designing pro-poor growth policies. Furthermore, the coverage of the core concepts of innovation, networks and development economics, enriched with multiple examples, makes it a valuable resource for scholars and advanced students of modern development economics.

Introduction Economic complexity and human development

DOI: 10.4324/9780203722084-1

Economic diversification and social networks affect the social choices and human agency of people in a multitude of positive, negative and ambiguous ways. Having limited social contacts and few occupational choices tends to limit the opportunities people have in choosing and determining their own lives. Even assuming that people had the same level of education and health, an eighteen-year-old person living in a city with an advanced economy (for example which produces cars, software and multiple services), tends to have more social choices and opportunities for lifelong capability upgrading compared to a person living in an local economy showing a low-level of economic complexity with a few disconnected economic sectors, small-scale agriculture, informal mining and some garment-trading activities. Improving the educational level of and the health services available to people living in an economy with a low-level of complexity and productive capabilities is an important factor, but on its own is not enough to achieve a sustained convergence of the development and social choice capabilities of these two different economies. The type and quality of the occupational choices in an economy, as well as the type of personal networks, are essential for the agency and life quality of the people. Yet high levels of economic diversity and large social networks can also lead to difficult decision processes and the high opportunity costs of activities which were not chosen by the individuals may result in a negative impact on their quality of life.

Development policies must furthermore consider the fact that economies, their agents, relations, goals and choices are not static, but due to the introduction of economic and social innovation, change over time and differ between various regions and countries. Because of market failures and negative polarization effects, governments need to create an institutional framework and incentive structures that encourage (a) the connectedness of people to diverse social networks and (b) the emergence of sectors that deliberately promote not just economic growth but also human agency and welfare. In addition, sound policy-making needs to recognize that the capabilities people require to become full members of their society and be able to determine their own lives change over time. Whereas physical strength may have been crucial at one point, Internet literacy is increasingly important in the modern age to be (considered) a full member of the society. Indeed, modern approaches in development economics consider development as a set of complex and dynamic processes with multiple directions, goals and causal relations between diverse agents (e.g. Social, Technological and Environmental Pathways to Sustainability (STEPS) centre 2010; Stirling 2010).

Recently, the terms innovation, social networks, diversity, entrepreneurship and also life quality, human development and happiness have gained relative importance alongside traditional topics such as capital accumulation and economic growth. The approach elaborated in this book contributes to the modern perspective on development, which highlights the complex and dynamic character of development, by (a) showing theoretical and methodological possibilities on how to combine the complementary perspectives of the human capability approach, innovation and structural change economics; and (b) asking how innovation-driven economic diversification and social networks affect human agency and welfare. It considers development as a process of structural changes, which from a human development perspective should lead to the expansion of human capabilities and agency (Chapter 3). It also shows through the discussion of the complex relations between diversification and human development (in Chapter 4), social networks, innovation and human development (in Chapter 5) as well as (social) entrepreneurship and human development (in Chapter 6) that structural economic change and human development are highly interrelated forces of development. A sustained expansion of human development requires the joint action of human development, innovation and structural change policies (Chapter 7).

Over the last few decades, the human development approach has become the dominant approach of the United Nations Development Programme (UNDP) and has also become an approach applied by thousands of development agencies worldwide. In other words, it affects the lives of millions of people through projects aiming to address basic needs and empower people. Human development refers to the capabilities of people to actively make decisions and to participate in the development of their societies (Sen 1999; UNDP 1990). It is for this reason that minimum standards in education, health, shelter, income and other dimensions are necessary to empower people. Yet there are still many people (1.3 billion in 2008, according to the World Bank 2013) around the world who are living on less than US$1.25 a day, and too many people are deprived of their basic human rights and access to the decent healthcare and education that would allow them to live healthy, long and full lives. The United Nations and an increasing number of non-governmental organizations (NGOs) and social entrepreneurs aim to address the needs of these people. At the same time, cutting-edge approaches in economic development emphasize the need for economic diversification to bring about economic competitiveness and growth (e.g. Hausmann and Rodrik 2003; Rodrik 2004; Saviotti and Pyka 2004; Frenken et al. 2007; Hidalgo et al. 2007). This approach sees economic development as a recombinant process, in which economies’ technological and productive capabilities are formed through prolific interaction, cooperation and competition between diverse agents from the public and private sectors. Innovation and development economists argue that prolific innovation systems and dynamic entrepreneurs are necessary to generate, implement and diffuse new products, processes, inputs, markets and organizations (Schumpeter 1912; Freeman 1987). As innovations are often new recombinations and alterations of existing competences, a diversity of ideas and knowledge spurs the recombinant growth of new technologies and ultimately leads to the emergence of new sectors (Jacobs 1969). Governments and companies across the world aim to upgrade their technological capabilities to diversify into higher value added sectors, achieving economic competitiveness and providing more and better occupational choices. Key words of this approach include ‘innovation’, ‘entrepreneurship’, ‘innovation networks’ and ‘high-tech clusters’.

This book argues that merely focusing on economic diversification or on human development is not enough to promote sustained social progress and a more equal distribution of capabilities and outcomes across the world. Both approaches are needed, because they can complement and reinforce each other. Whereas economic growth does not automatically trickle down to the poor, neither is an emphasis on human capabilities alone enough to create the economic demand for such capabilities. The establishment of higher value added sectors, providing more and better jobs for the poor, needs both economic policies to create the institutional framework and subsidies required to trigger learning processes as well as human development policies which are needed for a better educated, healthy and creative labour force. Furthermore, the productive structure and level of economic diversification of a country profoundly influence the types of occupational choices available and the contribution that economic growth makes to human agency and welfare. Creativity and demand-driven innovation and structural change are almost impossible without a well-educated and healthy population. However, sustained endogenous investment in human development is difficult to realize without simultaneous investment in economic competitiveness and diversification. Social innovations, such as microfinance, can indeed be powerful mechanisms for providing the poor with the means to help themselves, but they are not enough to allow the formation of globally competitive, small and medium enterprises; a well-educated, healthy and creative workforce that has better access to better jobs is also required. All of this simply means that human and economic development policies are complementary forces. It is, therefore, very important that we gain a better understanding of the linkages between human development and the structures and dynamics of socioeconomic systems if we are to design prolific development policies in the real world.

The idea that the forces of human development and economic growth are not in opposition but rather complement each other is certainly not entirely new. It is worth noting that the UNDP human development index (HDI) is composed of three equal parts: life expectancy, education and income (UNDP 1990, 2010). Some of the leading researchers in the human capability approach discuss how economic growth and opportunities can improve human freedom (e.g. Sen 1999; Ranis et al. 2000; Ocampo and Vallejo 2012). There are also new initiatives coming from the innovation and structural change research community, who deliberately take the human capability approach into account (e.g. STEPS centre, Globelics). Recently, interesting approaches have appeared which scrutinize the effects of productivity growth and structural change or the effects of social capital on human development (e.g. Ranis et al. 2000; Ibrahim 2006; Ocampo and Vallejo 2012; Capriati 2013). Nevertheless, there is still a need for more work on increasing the level of interdisciplinary cooperation between human development and leading innovation approaches, by taking into account the findings of each other. Alkire (2010), for example, has shown that in twenty years of UN Human Development Reports, ‘the terms work and employment only appear under the names creativity and productivity and only for five years’ (Alkire 2010, p. 14). At the Global Network for Economics of Learning, Innovation and Competence Building System there are still comparatively few works which deliberately focus on and enter into the concepts employed by the human development approach (e.g. Johnson et al. 2003; Arocena and Sutz 2005; Cozzen and Kaplinsky 2009; Capriati 2013). It can be argued that the difficulties in establishing interdisciplinary approaches are not due to a lack of interest on either side. Rather, it is due to a series of complex issues. One of these is a natural tendency for researchers to continue working in their core field of expertise. The complexity of interdisciplinary work and the difficulties of publishing such work in leading journals can also lead to scientists conforming to the established or dominant approaches within their research community approaches. This book aims to contribute ideas on how bot research communities can learn from each other to shed new light on the complex relations between economic growth and human development. It attempts to do so by disentangling the positive, negative and ambiguous effects of economic diversification and social networks on human agency and welfare, and presents a set of different methods that enable more comprehensive engagement with the relations between economic diversity, social networks and human development.

This book is structured as follows. Chapter 2 discusses the core ideas and concepts of the different approaches in development economics that are essential to understanding the work presented here: (a) the neoclassical economic growth paradigm; (b) the innovation and structural change paradigm; and (c) the human development approach. Focus is placed on the last two approaches; however, the first must be taken into account, as both the innovation as well as the human development approach developed partly out of a critique of the neoclassical approach. To demonstrate the need for interdisciplinary approaches, a short empirical study of Latin America shows that none of the approaches (i.e. human development, innovation or economic efficiency) were individually able to provide a fully comprehensive picture of the strengths and bottlenecks of development. Whereas some countries and regions in Latin America suffer from serious levels of poverty, violence and unfreedom, the main challenges for further improvement in other countries and regions may be more related to the lack of technological capabilities or economic efficiency.

Having laid out the main terms, ideas and concepts of the innovation economics and human development approach, and having shown the empirical shortcomings of each specialised approach, Chapter 3 then presents the ‘Sen meets Schumpeter’ paradigm. This approach aims to disentangle and analyse some of the complex relations between individuals’ capabilities and the structures and dynamics of the socioeconomic systems that people live under, to broaden the information base which economic policies can make use of to deliberately promote not just economic growth but also human development. In addition, complexity thinking is used – as a third approach – in an attempt to create bridges between the different approaches. Complexity approaches emphasize agents, networks and diversity as key features of complex systems. Neo-Schumpeterian approaches take these features explicitly into account to study the novelties that are created through entrepreneurship and the interaction of diverse agents in complex systems. A main driver of diversification (of sectors, ideas etc.) processes is innovation, which itself is driven by entrepreneurship and interactive learning between diverse agents of the economy. Within the so-called ‘Sen meets Schumpeter’ approach we recognize that social networks, entrepreneurship and economic diversification are not just core features of structural economic change; they also directly affect human agency and the welfare of individuals.

These three structural features and drivers of economic systems can contribute to understanding the complex relations between economic growth and human development and help to design innovation and structural change policies that do not just facilitate economic growth, but deliberately empower and increase people’s social choices. This perspective places human development at the core of development, yet also claims that structural change and innovation policies, which take network structures and the value of different types of entrepreneurial choices and network structures into account, can be important factors in improving people’s agency and welfare. Based on this approach, the subsequent chapters present theoretical and empirical means that help to disentangle the positive, negative and ambiguous effects that economic diversification (Chapter 4), social networks (Chapter 5) and entrepreneurship (Chapter 6) can have on human agency and welfare, as well as what structural change policies need to take into account and how they need to be designed to deliberately provide valuable new social choices and facilitate people’s capabilities and their well-being (Chapter 7).

Chapter 4 argues that economic diversification can expand the social choices of individuals (e.g. their occupational choices) and influences which capabilities are demanded in an economy. Diversification, furthermore, can prevent the emergence of rigid top-down networks in an economy and favour more democratic regimes through better distribution of economic power. Nevertheless, at very high levels of economic diversification, people may be paralysed by the increasing complexity of decision processes and thus well-being can be negatively affected. Consequently an emphasis is required on promoting real new choices (rather than, for instance, choosing between a massive number of very similar products) as well as improving people’s capabilities of dealing with complexity through appropriate education systems. A cross-sectional analysis of over 121 countries confirms that economic diversity has a significant positive effect on human development. Export data from over 772 product categories was used to calculate different measurements of diversity and their impact on income per capita and on the HDI. The results are highly significant for all the diversity measures applied: entropy and the Hirschman-Herfindahl index (HHI) revealed comparative advantages and average product ubiquity on the different levels of disaggregation (1-, 2- and 4-digit level) in the Standard International Trade classification (SITC). The analysis confirms the hypothesis that economic diversification affects human development and economic growth in different ways. Unrelated and related economic variety have a marginally increasing positive effect on income; related variety and product proliferation have a marginally decreasing positive effect on human development.

Chapter 5 studies in more detail how social networks affect people’s capabilities of becoming active agents of development. Social networks have a major effect on the diversity of information and help that people can access (Woolcock and Narayan 2000; Borgatti et al. 2009). Networks strongly impact the choices (e.g. occupations, life styles, nutrition, etc.) that people are aware of...

Table of contents

• Cover Page
• Half Title Page
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Preface
• Acknowledgements
• Abbreviations
• 1 Introduction: Economic complexity and human development
• 2 Development paradigms
• 3 Towards a ‘Sen meets Schumpeter’ approach
• 4 Economic diversification and human development
• 5 Social networks, innovation and human development
• 6 Entrepreneurship and human development
• 7 Policy dimensions for structural change and human development
• 8 Conclusion: Key ideas and research outlook
• Bibliography
• Index