1. Diversification, Innovation and Growth W. F. Maloney, World Bank Knowledge Economy Forum Berlin, May 7 th, 2010

2. Three Issues 1. Diversification vs. innovation and growth 2. Doing what we do better 1. Natural Resources 2. Export Quality 3. 2 queries on thinking about the innovation environment Pasteur: “Chance Favors the Prepared Mind”

3. DIVERSIFICATION: WHERE ARE WE?

4. ECA: Some countries likely to diversify, some not $US 1985

5. What does this relationship mean? 1. From diversification to income:  Specialization leads to gains from trade (Ricardo, Krugman)  Diversified portfolio dampens sector specific shocks Only clear negative effect from Natural Resources  For small countries, there must be a trade off of the two Other ways of managing shocks? Sovereign wealth funds? 2. From income to diversification:  Taste for diversity-if opening new sectors is costly then economy will become more diverse with income.  Diversification an outcome of development

6. What does this relationship mean? 3. Co-movement of diversification and income?  Discovery of new goods (ideas) embodies TFP growth  Theoretically, no better or worse than productivity gains in existing sectors.  But, becomes partly an issue of innovation

7. Diversification as a specific innovation policy is tricky Diversification an outcome of difficult to predict productivity shocks/opportunities?  Exports very concentrated and unsystematic (Easterly et al 2009)  Following existing patterns not obviously helpful Market saturation? Past as prologue? There are market failures in experimentation- discovery  But these appropriation externalities held in common with ongoing products as well  Often emerge from existing industries -Nokia Innovation policy  Be prepared to take advantage of advances in what we do  Be prepared to take advantage of new products  Mixed support products (e.g.Tekes)

8. Eventually, development may be about doing fewer things better ] W. F. Maloney Development Economics Research Group World Bank www.worldbank.org/laceconomist/wmalone y Source: Klinger and Lederman 2002

9. DOING WHAT WE DO BETTER

10. 1. Natural Resources: No curse, but lots of heterogeneity in performance Leamer Measure: Net Exports of NR/Worker Resource AbundantResource Scarce

11. The resource curse has no statistical support:  Brunschweiler et. al.(2008), Lederman and Maloney (2006), Sala i Martin et. al, (2004). But need to understand heterogeneity of experiences:  Forestry: Dynamic in Finland, Sweden but not in many LDCs  Mining: Australia, California, Canada vs. Chile, Peru  TFP growth slower in LDCs in both agriculture and manufacturing. (Martin and Mitra 2001)

12. 2. Export Quality: A new lens on resources and growth Quality measured by price (unit value)  Huge variance within products (Schott 2004)  Standardize:

13. Quality rises with development Schott (2005) Krishna and Maloney 2010

14. Quality Growth: Are we are converging to the quality frontier? Krishna and Maloney 2010

15. Figure 1: Unit Values: Drift and Standard Deviation, Unconditional Quantile Regression 1990-2001 Convergence appears to be related to ability to place risky bets Growth in Unit Value vs Standard Deviation of Growth Standard Deviation Growth Rate Krishna and Maloney 2010

16. This appears to be related to: Financial Intermediation: (credit by deposit money banks as a share of GDP) Innovation Effort: (R&D/GDP)  inability to resolve market failures/indivisibilities around innovation and R&D leads to less complex, less risky products

17. 2 QUERIES ON THE INNOVATION ENVIRONMENT

18. Source: Rodriguez y Maloney (2005) 1. A problem of accumulation of knowledge, or of accumulation in general? K/L TFP vs Capital Intensity TFPTFP

19. Returns to R&D vs Distance to the Frontier: Complementary factors are key Distance to the economic frontier (z) Poorer countries- low complementarities Middle income Advanced innovators Fuente: Goñi, Lederman y Maloney (2010) Distance to the technological frontier Peru 1996-2000

20. 2. What type of innovation is necessary?

21. The national innovation system needs to be viewed very generally Universities/ Think tanks/CTs The firm Barriers to Demand Macro Context Trade Regime International Marketing Externalities Competitive Structure Entrepreneurship Innovation “supply” Demand Side Knowledge Accumulation Barriers to Accumulation Credit Entry/Exit barriers Business/Regulatory Climate Barriers to Innovation Market Failures (&IP) Seed/Venture capital Poorly articulated S&T system (including discovery, oversight) Labor regulation Deficient human capital Capital

22. Fin