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For success and sustainability, seek broad social ‘well-being’; Good governance promotes a ‘virtuous cycle’ of growth

Christopher Colford's picture

Beyond the cold calculus of GDP and TFP and FDI, development is about promoting strong societies as well as propelling powerful economies. But how can we measure societies’ progress toward success? Some may try to calculate “Gross National Happiness” as a yardstick, and some may envision “getting to Denmark” as the ideal end-of-history destiny of development – but are there patterns that reveal how societies can flourish?

Two recent Washington seminars suggest that – by pursuing innovation and inclusion, and by focusing on broad-scale social “well-being” – policymakers can define realistic paths toward development success.

The methodologies used by Harvard economist Philippe Aghion at an International Monetary Fund forum and by former World Bank strategist Enrique Rueda-Sabater at a Center for Global Development discussion may have been different, but their conclusions were in harmony: Societies thrive – in a sustainable way – when inclusion and innovation help expand the circle of opportunity, and when strong governance standards lead to sound civic decision-making.

Taken together, the two seminars’ insights should help inform policymakers’ debate about the Sustainable Development Goals, which are due to be approved in September at the opening of the United Nations General Assembly.

Aghion, at an IMF seminar (sponsored by its Low-Income Countries Strategy Unit) on June 30, approached the topic of “Making Growth Inclusive” by imagining “how to enhance productivity growth while promoting social mobility.” Presenting data from a recent paper on “Innovation and Top-Income Inequality,” which he recently co-authored with an all-star team of economists, Aghion outlined the way that income and wealth inequality have drastically soared in developed countries since the mid-1970s – analyzing trends that by now are sadly familiar to the squeezed middle class, as calculated in the esteemed work of Thomas Piketty, “Capital in the Twenty-First Century.”

Building on that data, Aghion took the inequality-and-inclusion logic several steps further. He lamented the way that “skill-biased technological change” has (in the absence of policy safeguards) provoked societies to stratify along the lines of wealth, income, education and connections. Yet “creative destruction” is inevitable in “a Schumpeterian world,” reasoned Aghion: A significant factor expanding the wealth gap is the same process of continuous economic renewal that helps economies advance. “There is a big [economic] premium to being a superstar innovator,” he asserted, noting that “you can become rich by innovating” – and thus “innovation is a big part of top-1-percent income inequality.”

Philippe Aghion

“Creative destruction is good for social mobility” and broader inclusion, in the long run, because it causes a steady procession of “new innovators to replace old incumbents.” The effect of each wave of innovation is fleeting, especially in a hyperspeed economy: “You get temporary ‘rents’ when you innovate. You don’t get them forever,” because the relentless Schumpeterian process will eventually cause yesterday’s innovators to become, in turn, tomorrow’s has-beens.

The darker danger of entrenched inequality occurs, said Aghion, when incumbent interests use their political power to lobby for the protection of their advantages – whether by pleading for tax-code favors, seeking government-imposed barriers to the entry of new competitors, or purchasing influence with pliant politicians through campaign donations. (In an aside on U.S. politics, Aghion pointed to his paper’s data linking a state’s representation on the congressional Appropriations Committees with its amount of federal favors – a shrewd quantification of the pork-barrel compulsions of Capitol Hill.)

Because innovation promotes social mobility and thus greater inclusiveness, Aghion contended that “innovation is a good guy; lobbying is a bad guy.” So “if you’re for inclusive growth, then you will be against lobbying and [the creation of] entry barriers.”

Focusing simply on present-day inequality is less informative than focusing on social mobility, he asserted. There’s nothing wrong with an economy that bestows ample financial rewards upon genuine innovators who create new products and processes. There is, however, something deeply wrong – and economically growth-inhibiting – with governments that allow no-longer-innovative incumbents to use their political connections to suppress potential competitors.

The IMF panel’s respondents amplified Aghion’s analysis. World Bank economist Daniel Lederman noted that it would be wise to use “the lexicon of ‘inequality of opportunity’,” because some degree of wealth inequality is inevitable (and perhaps even desirable) when individuals’ talent and effort are rewarded with rising incomes. IMF economist Benedict Clements – deploring the “great degree of disparity in ‘equality of opportunity’ ” that now prevails in advanced economies, including the United States – noted that there need be “no conflict between equity and efficiency if you design your policies right.”

Getting policies right – by upholding strong standards of governance – was also one of the underlying themes at a July 21 seminar at the Center for Global Development led by Rueda-Sabater, who is now a senior advisor to the Boston Consulting Group and a visiting fellow among CGD’s strong lineup of scholars. Rueda-Sabater is well remembered at the World Bank for leading a research team’s detailed “scenario planninganalyses that, in 2009, discerned the contours of three possible scenarios for the world in the year 2020.

Presenting a recent BCG report, “Why Well-Being Should Drive Growth Strategies,” Rueda-Sabater outlined an imaginative BCG diagnostic tool: the “Sustainable Economic Development Assessment” (SEDA), which measures the relative well-being of 149 countries by gauging their success in converting wealth into well-being – that is to say, in effectively translating their potential into tangible progress.


'Mission-oriented' strategies to invest in innovation: Competitiveness via an enterprising public sector

Christopher Colford's picture
Mariana Mazzucato on "The Entrepreneurial State"

“This is the most extraordinary collection of talent, of human knowledge, that has ever been gathered – with the possible exception of when Thomas Jefferson dined alone.” That quip sprang readily to mind this week – it was coined in 1962 by President John F. Kennedy, when he welcomed a group of Nobel laureates to the White House – at a paradigm-shifting, synapse-snapping seminar featuring Prof. Mariana Mazzucato and other leading economics scholars, who convened for a think-tank symposium on innovation policy and competitiveness strategy.

The ideal of innovative, inclusive, green and sustainable economic growth is achievable, Mazzucato explained to the Information Technology and Innovation Foundation – if policymakers and private-sector firms recognize that a dynamic economy requires a “mission-oriented” approach to driving technological innovation. An acclaimed economist at the University of Sussex – and the author of, among other works,“The Entrepreneurial State: Debunking Public vs. Private Sector Myths” – Mazzucato is inspiring an increasingly wide-ranging debate over how to create higher-quality jobs in higher-value industries by sharpening economies’ competitiveness.

An essential driver of creativity is “the innovative state,” as Mazzucato recently detailed in an essay in the journal Foreign Affairs – through disciplined, deliberate public-sector investment, not just in basic research, but in risk-taking ventures as a key stimulant to economy-wide growth. That requires a forthright embrace of the public sector’s ability – and responsibility – to “actively shape and create markets, not just fix market failures.”

With a frisson of what one panelist called “the goosebump factor” enlivening the ITIF seminar – which was moderated by another top scholar of innovation and competitiveness, ITIF’s Rob Atkinson – the think-tank crowd heard Mazzucato outline the need for public-sector agencies to be, not just an occasional partner of private-sector firms, but a persistent driver of investment in leading-edge industries.

Industrial policy is finally back on the agenda,” Mazzucato asserted at the start of her ITIF remarks. Yet her vision of a competitiveness-minded public sector promoting a modernized version of industrial policy goes far beyond the long-ago experiments in heavy-handed planning that many free-market fundamentalists – forever in thrall to Thatcherism – still enjoy deriding as doomed attempts to “pick winners and losers.” Political Washington’s stale bickering over such a frozen-in-time caricature of industrial policy has long since been eclipsed, among economics scholars and practitioners, by the imaginative approaches of Mazzucato and others to energizing “the entrepreneurial state.”

Focusing the debate on the many pro-active instruments that the public sector can assert to help channel investment into innovation, Mazzucato hurled the defeatist “picking winners and losers” accusation back at the laissez-faire fatalists: “The question is not whether we should ‘pick’ but how.”

“The ‘entrepreneurial’ state, to me, means the state being willing and able to take on risk, to take on real fundamental uncertainty,” Mazzucato recently told The Financial Times. An enterprising public sector has often proven far more venturesome than short-term-focused private-sector firms, which often shy away from higher-risk, higher-reward investments that might diminish their next quarter's profits.   

“Venture capitalists themselves often enter [the innovation process] late in the game. In biotechnology, they actually came in after the state had made some of the most radical, revolutionary investments – which, after all, will often fail,” said Mazzucato. “And this is a very important point. Innovation is uncertain. It will often fail. So you need to make sure that the government budget can also fund some of the failures, cover the losses, as well as reap the return from some of the successes to fund the next round” of investments in innovation.

In his enthusiastic review of Mazzucato’s book, economics sage Martin Wolf of the Financial Times noted that energetic public-sector investment in innovation – and the abdication by private-sector firms of their oft-bragged-about, seldom-fulfilled role as bold risk-takers – has led to a “free-rider” problem that distorts incentives.

“Government has increasingly accepted that it funds the risks, while the private sector reaps the rewards,” wrote Wolf. “What is emerging, then, is not a truly symbiotic ecosystem of innovation, but a parasitic one, in which the most loss-making elements are socialised, while the profitmaking ones are largely privatised.” Neoclassical purists' continued scorn for the positive role of innovation-minded public-sector investment, Wolf reasoned, may be “the greatest threat to rising prosperity” in austerity-pinched Western economies.

Mazzucato’s analysis at ITIF reminded economy-watchers of how far the innovation-policy discussion has advanced, even as laissez-faire dogmatists belabor their weary bromides about the supposed taboo against “picking winners and losers.” Propelling a more nuanced vision of competitiveness strategy, as an improvement on earlier approaches to industrial policy, this week’s ITIF seminar advanced an enterprising agenda that Washington should weigh more often – analyzing not whether, but how, the public sector and the private sector can share the responsibility of crafting pro-growth policies and pro-jobs initiatives sans frontières. Meeting that challenge will require a paradigm-changing determination to champion an entrepreneurial public sector as a positive catalyst for creativity.

Mazzucato: "Value Creation" -- Dynamic Role for Government


On World Energy Day, Applauding an Energy Breakthrough: Innovation Through Successful 'Industrial Policy'

Christopher Colford's picture

At a moment when good economic news is in short supply, this week’s observance of World Energy Day provides a chance to celebrate some positive news – positive, at least, from the viewpoint of the world's developed economies, which have lately been struggling to recover from prolonged stagnation.

The recent plunge in global energy prices was a major factor informing a World Energy Day forum on “The Green Side of Energy Security” – convened in Washington on Wednesday by the European Union Delegation to the United States. The plummeting cost of energy, thanks in part to vast increases in oil and natural-gas supplies, is now poised to give advanced economies a much-needed additional stimulus. That's helping dispel some of the gloom that pervaded the economic forecasts at the recent Annual Meetings of the World Bank Group and International Monetary Fund. 

Moreover, the current global glut of oil and natural gas also highlights the success of a far-sighted innovation program that has helped strengthen productivity in the energy sector. The success of the 40-year-long U.S. program to create more effective methods of oil and natural-gas production has has transformed the global energy landscape. If those new production methods can be responsibly carried out, in compliance with strict environmental safeguards – and, granted, that’s a big “if” – then the economy will buy some extra time as it seeks to make the transition away from fossil fuels and toward cleaner, greener, more sustainable sources of energy.  

The initiative's technological breakthrough epitomizes the creativity that public-private cooperation can unleash when governments and industries, working together, patiently invest to strengthen productivity in specifically targeted industries and sectors.

The worldwide price of crude oil has fallen about 25 percent – from more than $110 a barrel in midsummer to about $80 a barrel this week – thanks to a combination of reduced demand (due to sluggish economic activity in many industrialized countries) and vastly increased oil and natural-gas production. Despite the geopolitical tensions now afflicting several major oil-producing regions, large new supplies of oil and natural gas are projected to continue arriving on the market, maintaining downward pressure on energy prices.

Much of the increased supply has its origin in North America – where “the revolution in American shale gas and ‘tight oil’ is real,” according to energy-policy scholar and historian Daniel Yergin. Writing in the Financial Times this week, Yergin noted that “U.S. crude-oil output is up almost 80 percent since 2008, supplying an extra 3.9 million barrels a day. . . . Canadian oil sands have added another 1 million barrels a day to North American supply over the same period.”

The energy revolution is poised to deliver a powerful, positive economic impact: As industries and consumers pay less for oil and natural gas, they’ll receive the equivalent of a tax cut – with Yergin estimating its benefit at about $160 billion a year, just for the U.S. economy. Such a stimulus, if it helps buoy economic activity in Europe as well, will boost economies that have been mired in what threatens to become long-term “secular stagnation.”

For motorists who are now paying less at the gasoline pump – and for home-heating-oil and natural-gas consumers who are awaiting their first chilly-season heating bills – the oil-price plunge and natural-gas glut may seem like an economic deus ex machina.

Step by step, consider how this process delivered today's energy abundance.

There: We actually said the fateful phrase: "industrial policy."

That always-somewhat-ambiguous term, "industrial policy," may have fallen out of political favor nowadays -- but there's no real reason to shrink from the idea, even though it's currently fashionable to use a euphemism like "innovation initiative" or "competitiveness strategy."

It's true, as skeptics suggest, that it's difficult to get industrial policy right. Public-private investment programs can be complex to design and sustain: In this case, it took about 40 years of experimentation and evolution to achieve the energy program's goals. Yet, when this initiative was launched in the energy-starved 1970s, various approaches to industrial policy were being vigorously pursued by many economies, large and small. (Yes, even the United States -- and even under conservative governments, as illustrated by the Ford Administration's pursuit of this program.) Put in its historical context, this example of 1970s-style industrial policy succeeded in delivering, at last, its long-promised payoff in productivity.

Piloted during the Ford Administration and ramped-up during the Carter Administration, this effort hailed from an era when repeated oil shocks were raising fears that the industrialized world would be threatened by oil-rich countries’ production cuts and price increases. Pragmatic R&D efforts on alternative oil-production methods were methodically pursued by the U.S. Department of Energy (DOE) and the U.S. Bureau of Mines, drawing on crucial technological insights from the taxpayer-supported network of national research laboratories.

Once that initial government-funded research had laid the foundation for new technologies and techniques, the private sector stepped in and played its indispensable part. A public-private partnership through the Gas Research Institute helped perfect the new techniques, while pro-innovation tax policies granted favorable federal tax treatment for investors’ R&D commitment to the energy sector. A champion of the new technologies, George P. Mitchell, evangelized for hydraulic fracturing and horizontal drilling, even when skeptics scoffed. Researchers at the Breakthrough Institute assert: “Where Mitchell proved invaluable was [in] engaging the work of government researchers and piecing together different federally-developed technologies to develop a commercial product.” 

Mitchell’s determined experimentation with the new technologies built atop the crucial government investment in R&D. His entrepreneurial zeal was even more remarkable considering the opposition of many free-market absolutists on Capitol Hill, who disdained any type of public-private partnership that tolerated an active government role. Mitchell’s team gives credit where credit is due: “DOE started it, and other people took the ball and ran with it,” according to Mitchell’s former vice president and lead geologist. “You cannot diminish DOE’s involvement.”

Indeed, the impact of lower oil and natural-gas prices has been so dramatic that some energy-policy scholars, as became clear at this week’s European Union event, understandably worry that lower energy prices may lull governments and consumers into a false sense of security. Lower energy costs may remove a price-conscious spur to continued investment in cleaner, more sustainable alternative energy sources. That concern surely poses a genuine challenge for policymakers as they craft clean-energy and anti-climate-change strategies for the long term. Avoiding any backsliding on clean-energy investment will require sustained pro-innovation initiatives, and perhaps tax-policy adjustments, that promote long-term investment in cleaner energy sources. Disincentives on the use of fossil fuels is surely crucial to climate-smart strategies, speeding the transition toward renewable sources. The recent shale-gas revolution has bought some extra time for the economy to make that transition, and, as environmental advocates insist, that time must be used wisely. 

Looking back on the process that delivered today’s shale-gas and tight-oil abundance, the lesson is clear: A well-targeted industrial policy – or, if you’d prefer to use the modernized lingo, competitiveness strategy – inspired today’s revolution in energy policy. It’s the latest proof that competitiveness strategies, with the public sector and the private sector both playing constructive roles, can contribute to positive change.

So the next time a dogmatic defender of laissez-faire passivity tries to tell you that government should always keep its hands completely off the economy – or scoffs that all forms of competitiveness strategy are merely doomed attempts at “picking winners and losers” – remind that laissez-faire fatalist about the positive economic impact of government-and-industry partnerships.

Yes, it took decades of patient public-private teamwork to trigger this energy revolution. And, yes, as environmentalists wisely warn, the new technologies must be used under strict regulation that upholds the highest degree of environmental protection. Yet, accepting all the caveats, the economy now seems ready to reap a rich reward.

Whether you embrace the term "industrial policy" or use a euphemism like "competitiveness strategy," this example of mission-focused, government-organized, private-sector-driven, technology-led progress provides dollars-and-cents evidence that activist strategies, promoting research and investment in high-priority sectors of the economy, can deliver a dramatic payoff in productivity.


#TakeOn Job Creation and Economic Growth

Better knowledge for better innovation policies: the new Innovation Policy Platform

Gerardo Corrochano's picture

We are surrounded by innovations – the outcome of innovative activities. Some affect us more than others. Some are more visible than others. In reading this blog post on a computer or a portable device, you can see how this innovation has made your personal and professional life more productive (although not necessarily easier).
You might not have heard, however, about other kinds of innovations – like the eco-friendly and affordable cooking stoves that reduce exposure to toxic gases for people in Mongolia, substantially increasing their health and lowering costs. All kinds of innovations improve people’s lives from Ulaanbaatar to Washington, increasing social well-being and driving economic growth.

Governments can support innovation through the effective use of public policy. Innovation has steadily climbed its way to the top of policymakers’ agendas in recent years, in developed and developing countries alike. This is illustrated by the importance given to innovation in such strategies as the European Commission’s “Europe 2020” growth strategy, China’s 12th Five-Year Plan (2011 -2015), or Colombia’s National Development Plan (2010-2014). Yet despite the growing consensus around innovation as a driver of sustainable growth, governments face considerable difficulties in identifying, designing and implementing the best-suited policy instruments and approaches to support innovation.

Defining good policies is a walk on a tightrope. Much like the barriers that constrain innovators inside an economy, policymakers face high costs of retaining and retrieving valuable information and best practices to help define their policies. To address this issue, the World Bank – in collaboration with the Organisation for Economic Cooperation and Development (OECD) – has developed a new tool destined to enhance the capacity of policy practitioners around the world to support innovation through better policies.

The Innovation Policy Platform (IPP) is a one-of-a-kind web-based interactive space that provides easy access to open data, learning resources and opportunities for collective learning on the design, implementation, monitoring and evaluation of locally appropriate innovation policies. The IPP contains a wealth of practical information on a wide array of innovation-related topics, such as financing innovation, technology transfer and commercialization, and innovative entrepreneurship. The IPP is intended to enable North-South and South-South policy learning and dialogue through a wide array of case studies, policy briefs and collaborative working tools. The IPP aims to create a dynamic community of practice. It is now available to the public and can be accessed at

Innovation Policy Platform

Meet the Innovators: Tech Entrepreneurs Forge a New Future for the Western Balkans

The countries of the Western Balkans – which include the states of the former Yugoslavia, along with Albania – are not exactly world-famous for their entrepreneurial spirit. Yet if you look at their societies more carefully, you’ll soon find a surprising number of new companies dotted throughout the Western Balkans. They’re already setting their sights beyond smaller domestic markets: They’re looking to Europe, and the world.

Placing your bets: Subsistence or Transformational Entrepreneurship

Morten Seja's picture

The importance of dividing entrepreneurs into two distinct categories: transformational and subsistence was the topic of an inspiring talk of MIT Professor of Entrepreneurship and Finance, Antoinette Schoar at the World Bank. In crude terms, subsistence entrepreneurs are solely concerned about their survival,  and are tiny businesses and unlikely to grow or create new jobs. However, it needs to be said that they remain an important economic pillar, especially for developing countries. Contrarily, transformational entrepreneurs, the considerably smaller group of the two, strive for growth, are generally larger business owners, and provide relatively secure employment opportunities for others. They are the catalysts of innovation, job creation, productivity, and competitiveness.  This leads to a crucial question for development – should we target our policies towards entrepreneurs with transformational qualities even though they may not be the poorest of the poor since these are the ones that create more, sustainable and (often) productive employment?

Innovator-in-Chief: The Public Sector – Catalyst of Creativity

Christopher Colford's picture

Brace yourself for some dramatic new evidence about innovation and entrepreneurship – and and circle the dates October 16 and 17 on your calendar.

Propelling leading-edge ideas about competitiveness, Professor Mariana Mazzucato will be among the luminaries at a major conference at the World Bank in mid-October, organized by the Bank's global practice on Competitive Industries. An all-star array of policymakers, academics, business leaders and development practitioners will focus on today's top global economic-policy challenge: spurring growth and job creation.

Exploring “Making Growth Happen: Implementing Policies for Competitive Industries,” the conference in the Bank's Preston Auditorium will include Mazzucato among
some of the world’s foremost analysts of competitiveness. A professor at the University of Sussex in the U.K., Mazzucato’s iconoclastic new book  – “The Entrepreneurial State: Debunking Public vs. Private Sector Myths” – is now rocking the economics world. Mazzucato's insights are forcing a rethinking about the essential role of the public sector in driving the investments that are shaping the modern economy.
Public sector? Shaping the economy? Yes, you read that right: Mazzucato amasses persuasive evidence that the government-funded development and deployment of advanced technologies has been pivotal in changing the economic landscape.

Government’s role as a growth catalyst has been just as creative as the role of the private sector – and perhaps even more venturesome. Despite their buccaneering bravado, for-profit firms have lately shied away from high-stakes, high-risk investments in unproven technologies. Mazzucato refutes the defeatist dogma that claims, falsely, that public-sector investment can never do anything right.

Competitive Cities: Driving Productivity and Prosperity

Christopher Colford's picture

The future will be won or lost in the world’s cities. With half of humanity now living in cities – and with the breakneck pace of urbanization likely to concentrate two-thirds of the world’s population into metropolitan regions by 2050 – getting urbanization right is the over-arching challenge of this globalizing age.
Urban policy is now at the top of the news due to the bankruptcy filing of forlorn Detroit, which has long been a symbol of urban decay. Yet the urbanization drama goes far beyond the de-industrializing North: The destiny of cities worldwide will determine the success or failure of virtually every development priority – and it will be especially vital for job creation, innovation and productivity growth, environmental sustainability and social inclusion.

Entrepreneurs slaying dragons in South Africa

Gerardo Corrochano's picture

“You have a good social project, but it is not an investable company”, I heard fellow judge and technology activist Mariéme Jamme say to a South African entrepreneur who had just given his best business pitch. He was taking part in the Dragons’ Den at the 5th Global Forum on Innovation and Technology Entrepreneurship, a fantastic 3-day learning and networking event organized by the World Bank’s infoDev and the South African Department of Science and Technology. You could see the entrepreneur (let’s call him ‘B.’) gasping for air, and one could hear a pin drop in the completely filled auditorium of the Global Forum. Over 800 people, mostly entrepreneurs, financiers, policy makers and technology ‘evangelists’ from all over the world had gathered here. 

Harnessing Innovative entrepreneurship for growth

John Paul's picture

How are emerging market entrepreneurs leveraging technology and changing development paradigms?  Why are the rewards of funding innovative new ventures in emerging economies worth the risks, and what makes these investments succeed?  How can investors, policy makers, and the private sector in general help find and groom transformative high-growth enterprises?