Economic development in an “Average is Over” world

Here is my new paper on that topic (pdf, new link here), commissioned by the Asian Development Bank (but not yet approved or refereed by them).  The key question is what kind of development path will follow, given the realities of premature deindustrialization in emerging economies today.  Here is one bit from the paper:

…trickle-down growth from price discrimination and the erosion of intellectual property rents becomes more important as a source of economic improvement. I call this mechanism “cell phones instead of automobile factories.” Many economic ideas are subject to non-rivalrous use, as they can be deployed by many people once they exist. That phenomenon may sound separate from the substitution of capital for labor outlined above, but that is part of the same broader process. If the wealthier nations use smart software to displace imports from the developing world, poorer nations will benefit from the software in other ways, including a trickle-down of goods and services.

The cell phone (and by extension the smart phone) is a paradigmatic example of trickle-down consumption. The technologies behind the cell phone were invented across a variety of nations, none of them poor (although China contributed to the finishing process), and yet cell phones are extremely prominent in poor and lesser developed nations. Internationally, cell phones and smart phones have brought significant benefits and often at relatively low cost. In the poorer parts of Asia, cell and smart phones are available for much lower prices than in the West. Part of that is the result of price discrimination, such as when Samsung sets deliberately lower prices for most of Africa and the poorer parts of Asia. In other cases the poorer countries buy a somewhat lower quality product, but one still effective for many of their needs. The Blackberry was not long ago state of the art in the United States, but now it sells primarily in poorer countries, including Indonesia, Vietnam, and South Asia, in addition to parts of Africa, and of course it sells to these regions at lower prices.

And this:

Or in other words, rather than Indonesia or Cambodia exporting manufactures to buy imported goods, an alternative development path is that some of those imports trickle down and enter poorer countries at especially low prices. Poorer economies can’t get constant cost goods and services for any cheaper than they are available in wealthier countries and in fact they may have to pay more because of shipping costs, poor institutions, and less efficient retail systems. If the wealthy nations produce more cement, the trickle down benefits from that activity may be slight. But for declining cost commodities, it is a different story entirely.

The more the economies of the wealthy countries are focused on increasing returns to scale sectors, the more important this version of trickle-down growth will become. And for the last few decades, many of the most important innovations in the wealthy countries have been shifting into increasing returns to scale sectors, most notably in the tech world. The tech world is geographically clustered, and centered in Silicon Valley, which are both classic signs of an increasing returns to scale sector. Some of the outputs are given away for free (Google, Facebook), and others show high degrees of market concentration, with a single dominant supplier providing a network good (eBay, Facebook, Instagram, Twitter). When it comes to the hardware behind the tech sector, there is an emphasis on new models, upgrades, and differential pricing plans, again all signs of increasing returns to scale.

In the limiting case, if everything in the economy looks and acts like the tech sector, this source of growth could be quite significant indeed. In other words, a world where “software eats the world,” to borrow Marc Andreessen’s phrase, is a world where the developing nations end up doing pretty well, even if the traditional export-oriented path to convergence has gone away.

Most forms of economic growth are fundamentally imbalanced (Hirschman 1958), but in this “cell phones scenario” we see a new form of imbalance. The new imbalance would be based on increasing returns to scale goods, which would trickle down to poorer countries, vs. constant and increasing cost goods, which would not trickle down. Developing nations thus would be very well supplied with (cheaper versions of) increasing returns to scale goods, but have relatively stagnant supplies of constant and decreasing returns to scale goods.

Comments of course are welcome.  The paper also includes some brief discussions of how the main arguments might apply to China, India, the Philippines, and Central Asia, in line with its ADB origins.


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