STAGES OFECONOMIC DEVELOPMENTOF THE EU COUNTRIES

Dr.oec., researcher Vera BoronenkoDaugavpils University (Latvia)University of Rijeka (Croatia)

EFRI SUMMER SCHOOL 2014

Structure of the presentation

• The notion of stages of development and methodology of their classification

• Current stages of development of EU countries

• Practical application of knowledge about stages of development

What are the stages ofeconomic development?

• Definite kind/level of development of a country’s economy which compulsory has to be taken into consideration in each economic research because these stages influence almost all aspects of social and economic life of searched countries

Initial framework for classification

• The idea: all countries tend to go through roughly the same pattern when transforming from a poor economy to a rich one

• Theoretical framework: the linear stages theory of economic development (W. Rostow, R.Harrod, E.Domar) which posits that economic development goes forward in fairly determined stages

Methodologies of classification

• Walt Whitman Rostow(linear stages theory, 1960)• Jeffrey Sachs («Common Wealth», 2008)• Michael Porter / World Economic Forum«The Global Competitiveness Report»(from 2001 till nowadays)

Rostow’s stages of economic growth - 1

Traditional society:– characterized by subsistence agriculture or

hunting & gathering; almost wholly a "primary" sector economy

– limited technology;– a static or 'rigid' society: lack of class or individual

economic mobility, with stability prioritized and change seen negatively

Rostow’s stages of economic growth - 2Pre-conditions to «take-off»:

– external demand for raw materials initiates economic change– development of more productive, commercial agriculture &

cash crops not consumed by producers and/or largely exported

– widespread and enhanced investment in changes to the physical environment to expand production (i.e. irrigation, canals, ports)

– increasing spread of technology & advances in existing technologies

– changing social structure, with previous social equilibrium now in flux

– individual social mobility begins– development of national identity and shared economic

interests

Rostow’s stages of economic growth - 3

«Take off»:– urbanization increases, Industrialization proceeds,

Technological break through occurs– the "secondary" (goods-producing) sector expands

and ratio of secondary vs. primary sectors in the economy shifts quickly towards secondary

– textiles & apparel are usually the first «take-off» industry, as happened in Great Britain's classic «Industrial Revolution»

Rostow’s stages of economic growth - 4

Drive to maturity:– diversification of the industrial base; multiple

industries expand & new ones take root quickly– manufacturing shifts from investment-driven

(capital goods) towards consumer durables & domestic consumption

– rapid development of transportation infrastructure

– large-scale investment in social infrastructure (schools, universities, hospitals, etc.)

Rostow’s stages of economic growth - 5

Age of mass consumption:– the industrial base dominates the economy; the

primary sector is of greatly diminished weight in economy & society

– widespread and normative consumption of high-value consumer goods (e.g. automobiles)

– consumers typically (if not universally), have disposable income, beyond all basic needs, for additional goods

More information

Methodology of Jeffrey Sachs - 1

• subsistence economy: virtually all of the population works in agriculture (as farmers), and each farmer can barely grow enough food to feed his family

• commercial economy: farmers have a small surplus of wealth to invest in the health and education of their family; division and specialization of labor occurs

Methodology of Jeffrey Sachs - 2

• emerging market economy: the nation’s infrastructure is quite sophisticated; it includes plenty of paved roads, ports to ship goods, and electrical lines to deliver electricity throughout the country

• technology-based economy: the fourth and final stage of economic development; about 30% of the population is college-educated; their considerable knowledge helps them to gain high-skilled jobs in fields such as the computer software sector and automotive engineering

Empirical interpretation

• subsistence economy: the average person makes about 300 USD per year

• commercial economy: the average person makes about 1000 USD per year

• emerging market economy: the average citizen makes about 4000 USD per year

• technology-based economy: average incomes are about 15000-40000 USD per year

More information

M.Porter: new framework for classification of stages

• The idea: as an economy develops, so do its structural bases of global competitiveness

• Theoretical framework: structural change theory (W.Lewis, H.Chenery) which focuses on the mechanism by which underdeveloped economies transform their domestic economic structures from a heavy emphasis on traditional subsistence agriculture to a more modern, more urbanized, and more industrially diverse manufacturing and service economy

Stages of development and factorsby M.Porter

Factor-driveneconomy

Investment-driveneconomy

Innovation-driveneconomy

Input costs Efficiency Unique value

Source: Porter M. The Competitive Advantage of Nations.New York: The Free Press, 1990.

Factors of development

The essence of factor-driven stage

• At low levels of development, economic growth is determined primarily by the mobilization of primary factors of production: land, primary commodities, and unskilled labor

Main challenge for factor-driven stage

• To get the basic factor markets – for land, labour, and capital – working properly

• To move beyond competing solely on cheap labour or natural resources

The essence of investment-driven stage

• As economies move from low- to middle-income status, global competitiveness becomes investment-driven, as economic growth is increasingly achieved by harnessing global technologies to local production

Main challengefor investment-driven stage

• To make connections with international production systems by attracting sufficient flows of foreign direct investments

• To improve their productivity in utilizing inputs, on the model of successful countries, which have invested in building up the stock of factor inputs

The essence of innovation-driven stage

• For high-income economies at the innovation-driven stage of economic development, global competitiveness is critically linked to high rates of social learning (especially science-based learning) and the rapid ability to shift to new technologies

Main challengefor innovation-driven stage

• To generate high rates of innovation and commercialization of new technologies

• To achieve high level of innovations• To transform technological advances into

attractive new products and services, using flexible work organizations and the delegation of authority, combined with sophisticated marketing and advanced production processes

Why countries find the transitionto a new stage so difficult?

• Economic development is a sequential process of building interdependent microeconomic capabilities

• The influence of one part of the microeconomic business environment depends on the state of others

• Lack of improvement in any important area can lead to a plateauin productivity growth, and stalled development

Empirical interpretation

• Factor-driven stage – low-income countries with GDP per capita less than 2000 USD

• Efficiency-driven (i.e. investment-driven) stage – middle-income countries with GDP per capita 3000-9000 USD

• Innovation-driven stage – high-income countries with GDP per capita more than 17000 USD

World GDP (PPP) per capitaby country (2012)

Current development stagesof EU countries

• Innovation-driven stage: Austria, Belgium, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia, Spain, Sweden, United Kingdom

• Transition from efficiency-driven to innovation-driven stage: Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic

• Efficiency-driven stage: Bulgaria, Romania

Dynamic trends in development stages of EU countries: 2005-2009-2013

No any changes:• Bulgaria (efficiency-driven stage)• Hungary (transition from efficiency-driven to

innovation-driven stage)• Austria, Belgium, Cyprus, Denmark, Finland,

France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Spain, Sweden, UK (innovation-driven stage)

Ascending development:2005-2009-2013

• Croatia, Latvia, Lithuania, Poland – from efficiency-driven stage in 2005 to transition between efficiency-driven and innovation-driven stage in 2009-2013

• Czech Republic, Malta, Portugal, Slovenia - from transition between efficiency-driven and innovation-driven stage in 2005 to innovation-driven stage in 2009-2013

Non-stable development:2005-2009-2013

• Romania – from efficiency-driven stage in 2005 to transition between efficiency-driven and innovation-driven stage in 2009, and back to efficiency-driven stage in 2013

• Estonia, Slovak Republic – from efficiency-driven stage in 2005 to innovation-driven stage in 2009, and back to transition between efficiency-driven and innovation-driven stage in 2013

Stages of development:Belgium and Netherlands

• Stable innovation-driven stage since 2005 till nowadays

• Drivers of economic development:- Business sophistication- Innovations

Stages of development: Macedonia

• 2005-2006 – at the transition from factor-driven to efficiency-driven stage

• Since 2007 – at the efficiency-driven stage• Drivers of economic development:- Higher education and training- Markets’ efficiency- Technological readiness

Stages of development: Croatia

• 2005-2006 – at the efficiency-driven stage

• Since 2007 – at the transtion from efficiency-driven to innovation-driven stage

Stages of development: Slovakia

• 2005-2006 – at the efficiency-driven stage• 2007-2008 – at the transition from efficiency-

driven to innovation-driven stage• 2009 – at the innovation-driven stage• 2010-2011 - at the transition from efficiency-

driven to innovation-driven stage• 2012 – at the innovation-driven stage• 2013 - at the transition from efficiency-driven to

innovation-driven stage

Stages of development: Slovenia

• 2005 – at the transition from efficiency-driven to innovation-driven stage

• Since 2006 – at the innovation-driven stage

Interregional disproportions:the case of Latvia

Stages of economic developmentof Latvian regions

• Riga region (capital region) – innovation-driven stage

• Pieriga and Kurzeme regions (regions near the capital and near the Baltic Sea) – transition from efficiency-driven to innovation-driven stage

• Latgale, Vidzeme and Zemgale regions (peripherian regions) – efficiency-driven stage

Dynamics of developmentof Latvian regions, 2003-2011

Territory 2003 2004 2005 2006 2007 2008 2009 2010 2011Latvia 3 3 3 4 4 4 4 4 4Riga region 4 4 4 5 5 5 5 5 5

Pieriga region 3 3 3 3 4 4 3 4 3

Vidzeme region 3 3 3 3 3 3 3 3 3

Kurzeme region 3 3 3 3 4 4 4 4 4

Zemgaleregion 3 3 3 3 3 3 3 3 4

Latgale region 2 3 3 3 3 3 3 3 3

GDP per capitain Latvian regions, USD, 2003-2011

Territory 2003 2004 2005 2006 2007 2008 2009 2010 2011Latvia 5422 6386 7829 9767 13025 14384 11884 11872 13504Riga region 9305 10961 13617 17635 22505 24862 19827 19866 21315

Pieriga region 4018 4693 5605 7223 10022 10902 8859 9190 8082

Vidzeme region 3223 3840 4662 5704 8213 8481 7917 7790 8972

Kurzeme region 4886 5786 7032 7311 10086 11282 9556 9311 11993

Zemgaleregion 3348 3827 4582 5379 7739 8651 7619 7780 9042

Latgale region 2610 3149 3763 4647 6563 7541 6678 6287 7667

The challenge for social researches

• The fact that at different stages of economic development different factors act as engines of competitiveness/development/performance of a country is the main methodological guidance which has to be taken into consideration investigating ANY social or economic process/phenomenon in ANY country or region

Main development factors include:

• basic requirements: institutions, infrastructure, macroeconomy, health and basic education

• efficiency enhancers: higher education and training, market efficiency, technological readiness

• innovation and sophistication factors: business specialization, innovations

Determining role of development factors at each stage

Stage of economic development

Main development factors

Basic require-ments

Efficien-cy

enhan-cers

Innovation and

specializa-tion factors

Factor-driven stage 60% 35% 5%Efficiency-driven stage 40% 50% 10%

Innovation-driven stage 20% 50% 30%

Higher education –efficiency enhancer

Its determining role:• at the factor-driven stage – 35%• at the efficiency-driven stage – 50%• at the innovation-driven stage – 50%

Role of higher educationfor economic performance of countries:

2005-2009-2013Empirical interpretation of main notions:• higher education - Tertiary education

enrollment rate, Quality of the educational system (from The Global Competitiveness Reports)

• economic performance – real GDP (PPP) per capita

Design of the research

• Aim: to get empirical evidence on the role of higher education for economic performance of countries in the whole world

• Methodological framework: the world’s countries are at different stages of development where the role of higher education has to be different too

• Applied method: linear regression analysis• Informative base: The Global Competitiveness

Reports for 2005, 2009 and 2013

Statistically significant determinantsof the country’s economic performance,

2005, 116 countriesStage of

development Linear regression Statistically significant determinants

Factor-driven stage (n = 41 countries)

y=-273++812*x1+53*x2

Technological readiness (x1, p=0.007)Tertiary education enrollment rate (x2, p=0.000)

Efficiency-driven stage and transition to it (n = 37 countries)

y=-2838++1416*x1+1289*x2+

60*x3

Quality of the educational system (x1, p=0.010)Technological readiness (x2, p=0.013)Tertiary education enrollment rate (x3, p=0.008)

Innovation-driven stage and transition to it(n = 38 countries)

y=7308+4363*x1Brain drain (x1, p=0.018)

Statistically significant determinantsof the country’s economic performance,

2009, 133 countriesStage of

development Linear regression Statistically significant determinants

Factor-driven stage (n = 41 countries)

y=-1228++625*x1+65*x2

Availability of latest technologies(x1, p=0.010)Tertiary education enrollment rate(x2, p=0.000)

Efficiency-driven stage and transition to it (n = 37 countries)

y=-21184+10170*x1Brain drain(x1, p=0.000)

Innovation-driven stage and transition to it(n = 38 countries)

y=-29913+6321*x1++5754*x2

Availability of latest technologies(x1, p=0.033)Brain drain(x2, p=0.007)

Statistically significant determinantsof the country’s economic performance,

2013, 146 countries

Stage of development Linear regression Statistically significant determinants

Factor-driven stage (n = 41 countries)

y=-950++543*x1+64*x2

Firm-level technology absorption(x1, p=0.037)Tertiary education enrollment rate(x2, p=0.000)

Efficiency-driven stage and transition to it (n = 37 countries)

y=-91+3577*x1Country capacity to attract talent(x1, p=0.035)

Innovation-driven stage and transition to it (n = 38 countries)

y=-40126++7794*x1+6855*x2

Availability of latest technologies(x1, p=0.026)Country capacity to retain talent(x2, p=0.003)

The example: Luxembourg

• Luxembourg is is at the innovation-driven stage of economic development. In 2013 in Luxembourg the tertiary education enrollment rate was 18.2%, which is comparable with such countries like Nicaragua and India. In 2013, the quality of the education system of Luxembourg was average (4.4 points on a 7-point scale), which is lower than, for example, in Malaysia and the United Arab Emirates, and it is the same as in India. Though this does not prevent Luxembourg from having one of the highest economic performances in the world on account of other factors – high level of technological development of business and the ability to attract and retain on its territory talented people from all over the world

The example: Qatar

• In 2013 occupied the 3rd place in the world according to its ability to attract talented people onto its territory. It was on the 1st place in the world according to its ability to retain them. The tertiary education enrollment rate in Qatar is only 11.6% taking into account its good quality (5.8 points on a 7-point scale) and high level of the factor of technological development of business. As a result, Qatar entrenched itself at the innovation-driven stage of economic development, occupying the 13th place in the world by the Global Competitiveness Index

The example: Russia

• In 2013 the tertiary education enrollment rate was 75.9% (one of the highest rates in the world) with rather low quality of 3.5 points on a 7-point scale. Though neither the ability to attract and retain talented people nor the high level of technological development in business Russia does not differ, taking places in the area of 100 on all these indicators (as to the technological indicator it takes even the 124th and 126th). As a result, Russia has a traditionally low level of economic performance

General results of the researchStage of economic

development

Determinants of the country’s economic performance2005

n = 116 countries2009

n = 133 countries2013

n = 146 countries

Factor-driven stage Technological readiness Tertiary education enrollment rate

Availability of latest technologiesTertiary education enrollment rate

Firm-level technology absorption Tertiary education enrollment rate

Efficiency-driven stage and transition to it

Quality of the educational system Technological readiness Tertiary education enrollment rate

Brain drain

Country capacity to attract talent

Innovation-driven stage and transition to it

Brain drain Availability of latest technologiesBrain drain

Availability of latest technologiesCountry capacity to retain talent

What does it practically meanfor EU countries?

• The indicators, which characterize higher education system, affect the state economic performance only at the lower stage of the economic development of the countries and only then, when they come tighter with the factor of technological development

• At the innovation-driven stage and during the transition to it (at which Latvia has been since 2009) a new factor – country’s ability to retain and attract talent – “enters the game”

• The countries, which are able to attract and retain talented and highly educated people in their economy, have better state economic performance, in comparison to the countries with a relatively high level of development of their higher education system

Role of clustersin the regional competitiveness

• Hypothesis: the role of clusters in the regional competitiveness depends on the development stage of this region

• Applied method: correlation analysis• Informative base: The Global Competitiveness

Reports for 2004, 2006 and 2007• Published: Boronenko V. (2014) The Role of

Clusters in Regional Competitiveness. LAMBERT Academic Publishing.

Main results: correlation betweencluster development and competitiveness

Development stage2004,

number of regions=102

2006,number of

regions=125

2007,number of

regions=131

Factor-driven stage 0.464** 0.552** 0.621**

Efficiency-driven stage 0.247 0.480* 0.686**

Innovation-driven stage 0.480* 0.744** 0.786**

Result forfactor- and efficiency-driven stages

• Direct correlation - the higher/lower the level of region competitiveness is, the higher/lower level of cluster development its economy can reach

• It happens because low competitiveness means bad quality of the environment where clusters could be created and operate

Result for innovation-driven stage

• The higher level of cluster development the region has, the higher level of competitiveness its economy can reach

• It happens because clusters at this economic development stage raise its competitiveness

Clusters as a factorof competitiveness

Strategy, structure and competition

Type of factors

Type of demand

Related and supporting industries

Clusters as an indicatorof competitiveness

• At factor-driven and efficiency-driven stages, clusters are not a factor, but rather an indicator of the competitiveness of region that shows that the region has reached such a level of competitiveness, which allows it to create clusters

General conclusions in brief• EU countries are at different stages of economic

development – from efficiency-driven till innovation-driven stage

• There are also interregional differencies of development stages within EU countries

• Every development stage has its own main factor of progress, i.e. «drivers of development»

• Stages of development of territories have to be taken into consideration in social researches

The presentation is worked out with support of the Marie Curie FP7-PEOPLE-2011-COFUND program - NEWFELPRO (The new International Fellowship Mobility Programme

for Experienced Researchers in Croatia) within the project «Rethinking Territory Development in Global Comparative

Researches (Rethink Development)», Grant Agreement No. 10