Yesterday I was speaking at the 13th Annual OECD LEED Forum in Prague on ‘Resilient and Diversified Local Economies’, or in more old fashioned academic terms: structural economic change and productivity.
One of the questions today was whether regions grow faster if they are more specialized or more diversified. In academic research you can find almost as much evidence pro as contra both options. So, well, it depends…, is the unsatisfactory answer. In general for the economy to evolve and prosper you need experiments and successful experiments to be scaled up and diffused. A diversified economy is generally better at enabling experiments, but for scaling up you need to develop a critical mass, sometimes leading to a specialized economy. So a specialized economy may be more the outcome of successful development than the cause. The latter phenomenon is good for growth, but along the lifecycle of an industry, it’s not good to be stuck with a dying industry in your (specialized) region.
A key element of economic development is structural change: the creation of new industries and the destruction of old industries. For this process of creative destruction to take place, policy needs to stimulate the entrepreneurs and businesses that have the potential to create new sectors. Targeted industrial policy has many problems. An effective option may be to create the best context for productive entrepreneurship: a flourishing entrepreneurial ecosystem.
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16th July 2019
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