New Structuralism and Evolving Policy Capacities in the Eastern European EU Member States Erkki Karo & Rainer Kattel Ragnar Nurkse School of Innovation and Governance Tallinn University of Technology, Estonia

Research questions What are the theoretical/conceptual challenges of smart specialization (SS) as a policy concept in the context of EUs Cohesion Policy and Eastern European economies? … how can the new structural economics (NSE) contribute to the conceptual and theoretical clarity of SS in this context? What kind of policy capacities do both SS and NSE presume and whether the EE economies are equipped to design and implement policy mixes based on these rationales? … SS as 3 rd conditionality based policy reform in EE makes institutional legacies one of the central issues to consider.

Evolution of the concept and theoretical challenges of SS in EE from sectoral to regional/national concept -in EE, there are countries (i.e. Baltic States) where smart specialization is conducted on the national level (no regional policy) -in other EE countries regional strategies tend to be top-down, or centrally designed, plans for the regions (i.e. for NUTS2 regions) from specialization to developmental concept? -cohesion and convergence policies aimed at structural change of EE economies Would NSE provide a more coherent framework given the centralized realities of regional policy in EE and the specific structural development challenges?

Policy capacities for SS and NSE Policy bias in economics: the what vs. the how … policy rationales of economics (what, but also how) tend to remain as ideal-type outcomes of the black-box of policy-making Capacity as multi-level concept -state capacity -policy capacity -administrative capacity … capacity is not so much a continuum of abilities (from less to more), but rather a variety of modes of making policy that originate from co-evolutionary processes in capitalist development We can depict co-evolutionary processes between three levels – political and policy ideas, public management or implementation, and private-sector dynamism (and feedback) – and policy and administrative capacities are essentially functions or outcomes of these co- evolutionary processes. Do the EE economies possess the capacities (or policy-making modes) that support the SS & NSE policy rationales (especially entrepreneurial self- discovery)? … in essence, entrepreneurial self- discovery processes are also a function of existing policy and administrative capacities.

Policy capacities in EE Washington Consensus and the 1990s -regulatory policies of liberalization, stabilization -emulation of western markets (financial liberalization and FDI, privatization) -no policy innovation policy (except for education and science) -regulatory efficiency as capacity indicator Europeanization and the 2000s -importing EUs innovation policy rationales (European Paradox, high-tech bias etc) and policy-making practices (innovation agencies) -emerging as a parallel policy rationale next to the WC legacies (in regulatory and financial, but also science policies) -technocratic and managerial efficiency as capacity indicator Outcome: fragmented policy space -in policy setting (between regulation and finance vs innovation; and innovation vs science) -in private sector (e.g. enclaves of FDI-based exporters vs domestic firms) -in public-private ties (fragmented feedback systems, low coordination) -Are there capacities for SS and NSE rationales?

Policy capacity preconditions for SS in EE Remedying weak linkages within the economy presupposes some sort of either sector or value-chain-specific institutional and management structure. Such managerial specialization presupposes in turn meso level institutional thickness in the form of industry, labor and similar associations that is not the norm in many EE economies. Demand-side policies such as public procurement, regulatory standards, etc, should be considered as part and parcel of smart specialization policies. But given the EE legacies, this will most likely firstly require building analytical and sectoral competencies (both in economic policy-making and procurement and regulatory agencies) of what types of instruments (e.g., procurement vs. standards) will work given the R&D and industrial trajectories in specific regions or economies. For the entrepreneurial discovery process and targeted policies to support specialization, policy-making processes in general need to be less formalized and allow for greater room for experimentation, policy reversals and shifts. SS policies should be managed on relatively broad outcome levels and probably more flexible strategic planning framework than allowed for in the EUs financial frameworks and cohesion policy.

Acknowledgments Research for this article was partially supported by the Estonian Science Foundation (grants no 8418 and 9404) and by the European Social Foundation through the Research and Innovation Policy Monitoring Programme.

New Structuralism and Evolving Policy Capacities in the Eastern European EU Member States Erkki Karo & Rainer Kattel Ragnar Nurkse School of Innovation and Governance Tallinn University of Technology, Estonia