How Universities Promote Economic Growth (Directions in Development)

Economic growth and developing world cities: The benefits of urban clustering
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Therefore, if production structures are the same, economic performance can be the same in different countries with different political systems. But our theory of economic structures explains that differences in economic performance lie in the different patterns and rates of structural change, not in the differences in institutions. The debate on institutions and development is centred on the direction of causation. While new institutional economists argue that institutions cause growth, the literature on industrial policies Chang ; Khan and Jomo ; Reinert , among others, contend that growth and development determine the direction and rate of institutional change.

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In this article, we make two claims: 1 there is bidirectional causality between institutions and economic structures and 2 the type of economic structure determines the performance or efficacy of formal institutions. The structural adjustment programs of the IMF and the second-generation reforms of the World Bank are major institutional changes that revise the rules governing business and social interactions. These reforms affect economic performance because they change the structure of economies.

While it is true that their productive capabilities were not on the global technological frontier, it is also true that the growth rates in many African and LAC countries were higher in the s and s as compared to the post-reform period Chang ; Khan ; McMillan and Rodrik But the reverse line of causation is also valid: structural transformations ignite institutional changes Ancochea ; Chang ; Reinert The discovery of gold in California led to what is popularly known as the California gold rush.

This discovery changed both the sectoral distribution of GDP and the type of economic activities produced. As is the case with institutions, the exploitation of this natural resource does not exist in abstraction; it has to be regulated under a new institutional framework. Similarly, institutional changes are needed when oil is discovered. It is instructive to remember Robinson Crusoe on his island.

He hardly has need for the institution of limited liability or a central bank; these institutions are simply irrelevant for the production structure on the island. The key point is that one cannot understand institutions and their causal effects in isolation of production structure. But even new institutional economists understand the importance of economic structure and its relation to institutions. Their emphasis on property rights and the rule of law, etc. The focus on exchange is because of an implied and too often ignored assumption that the problem of production has been solved.

It is as if new institutional economists assume an increasing returns production structure. But one cannot make development policy with the assumption that the problem of production has been solved. A shrewd observer would argue that the principal problem in poor countries is the absence of production capabilities. When this problem is binding, the concern with imperfect exchange becomes immaterial. The view that institutions are the rules that shape human interaction North does not capture the nexus between institutions and economic structures.

This definition allows for one direction of causation—from rules to consequence. It follows that the declaration of the primacy of institutions over all else and its one direction of causation, as in Rodrik et al. Khan contends that institutional performance differs across time and space because of differences in political and economic structures. He explains that developed countries have a larger ratio of private sector production to GDP as compared to underdeveloped countries.

Catalyzing economic growth in the Heartland starts with research universities

This structural difference affects the costs and effectiveness of institutional enforcement. In developed countries with advanced production structures composed of economic activities with increasing returns , allocative institutions are readily enforced since the proceeds from these economic activities are sufficiently high to cover the costs of enforcement.

But in poor countries with little production capabilities and a plethora of commodities with diminishing returns, the gains from private contracting are hardly sufficient to cover the costs of enforcing property rights. This fundamental insight illustrates the dominance of economic structures over institutions. At a general level, as the production of economic activities with increasing returns grow relative to diminishing returns the gains from private contracting exceed the costs of enforcing allocative institutions.

Thus, in countries with advanced or increasing returns production structures, institutions of exchange perform as expected. But in the absence of these conditions, institutions of exchange are inadequately enforced. Consider the implications for poor countries. In diminishing returns production structures, the gains from private contracting are not sustainable.

A great share of economic transactions is undertaken through extra-market institutions for one principal reason—the monetary gains from diminishing returns activities are not sufficient to cover the costs of enforcing formal institutions or private contracts. Extra-market institutions range from black-markets, gifts to political patronage and these can explain the prominence of corruption and poor enforcement of the rule of law observed in many less developed countries. To illustrate this further, consider the political dimensions.

Unlike rich countries, there is no collective or political interest in protecting and developing the private sector in poor countries. This lack of political interest explains the frequency of populist policies and continuous rule violating behaviour.

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The relatively small private sector necessitates a narrow tax base and a low employment premium. Inevitably, the state becomes the largest source of employment and, by extension, represents a formidable political force. Countries across Africa, Asia and LAC with diminishing returns production structures are well known for being highly corrupt with weak institutions and enforcement of the rule of law Khan , , In our view, the different forms of political organizations limited access orders or open access orders are the outcomes of different economic structures.

Private enterprises are unlikely to maintain market share and influence if they are tainted with corruption scandals. This explains why consumer protection codes, fire and other safety regulations, etc. This is hardly an argument to defend poor governance or corrupt business practice, but from a policy standpoint, it is imperative that we fully understand the structural reasons why institutions perform differently across geographies. Given this insight, the claim that institutions determine the rate of economic growth becomes trivial.

Institutions can perform differently due to different economic structures. Any variation in economic growth can only be explained by the factor that causes variation in institutional performance—this factor is economic structure. Through the forces of globalization, institutional diversity is on a downward trend—consider the rise of democracies across the world, the adoption of independent central banks and anti-corruption bureaus, etc.

Nonetheless, the argument presented here explains why expected and actual institutional performance can diverge. It is therefore important to differentiate between effective institutions and institutions as commonly understood. Institutions become effective only when they are adequately enforced. The implication is that transferring the formal political and economic rules of successful Western economies to third-world and Eastern European economies is not a sufficient condition for good economic performance. The connection between economic structure and the allocation of talent has not been explored within the literature.

But we argue that a given economic structure has a given structure of occupational rents that determines the allocation of talent. For instance, FIRE Footnote 1 economies demand financial entrepreneurs, while largely agricultural economies have a labour market structure that corresponds to its economic system.

Why occupational rents rather than occupational remuneration? The former refers to the income earned by key players of a certain economic structure well above what their entrepreneurial talent justifies. In a given economic structure, there is a small group of what we may call rentiers that benefit disproportionally from the production structure and the occupational rents become the regulatory mechanism for the labour market.

Consequently, occupational rents serve as a source of de facto political power that one can potentially transform into de jure political power. The latter is used to enforce economic institutions that support the production structure and by extension, occupational rents. This generates an equilibrium that explains both structural and institutional rigidities. This equilibrium is unlike the stability between reward structures and the allocation of talent proposed in Acemoglu Acemoglu explains that the past allocations of talent influence future reward structures and shape the future allocation of talent—note that economic structure is missing from this equilibrium process.

But as explained earlier, institutions are underpinned by production structures, thus, the equilibrium is among economic structure, political power and institutions. There can be great political interest in creating structural rigidities in economic systems as long as this is beneficial to powerful groups. The financial entrepreneurs in the FIRE economy have a large cohort of lobbyists to ensure that the sector remains under-regulated and to perpetually justify an unfair tax code.

In poor countries, the rural population represents a greater share of the total political constituency and this creates political incentives to maintain an unjustifiably large rural economy. While modernization is always the central objective of poor countries, the rural—urban divide is a formidable political constraint to any modernization project. Further, political entrepreneurs benefit from the rural—urban divide and enact policies to fortify this division.

The contention that economic structures determine the structure of occupational rents is a thesis about the structural origins of the distribution of income. Economic structures determine the pre-tax income across various occupations. In the absence of redistributive transfers, the distribution of income across sectors and occupations affect economic performance, to the extent that these reinforce the economic structure. The latter has become the principal regulator of growth in the USA and other developed countries Lapavitsas and Powell This structural change has manifested itself in a labour market geared towards finance, which reinforces the FIRE economy.

Over time, this equilibrium engenders Minsky cycles Minsky and lead to financial crises. Distributional conflicts are essentially a struggle over property rights to the gains from growth. This means that the rise of inequality is not only structurally determined but also represents an increasing concentration of property rights.

If a broad cross section of society has property rights, then the gains from growth must be shared among a broad cross section of society. In our view, there are limitations on both fronts. The central aim of Political Economy is to emphasize the importance of politics for economic outcomes. It is important to differentiate between liberal and electoral or illiberal democracies Zakaria Besides regular elections, electoral democracies violate civil liberties, censor the media and fundamentally establish an authoritarian form.

Can economic structures predict political transitions? The latter is defined as either land or capital intensive and though this view is different from ours, the difference can be easily reconciled. Among the economic activities located at the periphery of the product space are natural resources like oil, gold and land.

Whether a country transitions to or consolidates democracy depends on whether the source of income of the elites is easily taxed Acemoglu and Robinson Elites in these economic structures choose repression instead of democracy to forgo the redistributive burden. In contrast, industrial elites facilitate a democratic transition since it is harder to tax capital income and entrepreneurship in capital intensive economic structures.

In short, economic development towards a capital intensive economic structure promotes democracy Acemoglu and Robinson Inclusive political institutions democracy and inclusive economic institutions property rights, etc. Given this examination, it is economic structure that is the fundamental cause of long-run growth.

But our framework provides a richer analysis of the link between economic structure and democracy. An increasing returns economic structure produces commodities with longer career ladders and creates a mechanism to climb the ladders across social classes. This provides the means to larger lifetime earnings for an individual, which can improve the distribution of income.

As explained earlier, in increasing returns production structures both wages and profits are sustained for longer periods. This is a recipe for the creation or maintenance of a strong middle class, an important ingredient to the creation and maintenance of democracies Acemoglu and Robinson It is important to underline the difference between our theory of political transitions and the modernization hypothesis Lipset , which claims that growth in per capita income causes the creation and consolidation of democracies.

There are many non-democratic countries with high per capita incomes but with diminishing returns economic structures—Equatorial Guinea is a case in point.

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The contention that economic structures determine the structure of occupational rents is a thesis about the structural origins of the distribution of income. Table 1. In contrast, Perotti argues that the political economy mechanism is not supported empirically. In the initial phases of industrialization, when physical capital accumulation was the dominating source of economic growth, inequality boosted the development process by directing resources toward individuals with higher propensity to save. The connection between economic structure and the allocation of talent has not been explored within the literature. Since the early s, the national and regional governments constructed and managed Korean industrial complexes, which have had significant roles in industrial development. Recent papers based on superior data, find negative relationship between inequality and growth.

Per capita income is not economic structure. Khan argues that democratic transitions become more likely when private sector production to GDP expands. Khan explains that entrepreneurs pay more taxes and thus have more at stake in the political system and consequently demand a greater say. This line of thought is consistent with our work: as an economy transitions to an increasing returns production structure, democratic transitions are more likely. They posit that: 1 a rule of law for elites, 2 civil society organizations and 3 a centralized and consolidated control of violence are necessary, though not sufficient prerequisites for democratic transitions.

But we have already demonstrated that the performance of conditions 1 and 2 depend on economic structures, making these less than robust conditions for democratic transitions. Also, condition 3 is a necessary factor for stability in democratic and non-democratic states, which makes this a less than interesting necessary condition for democratic transitions.

The critical junctures hypothesis Acemoglu and Robinson ; Moore ; Eggertsson and Sokoloff among others explains that historical events like colonialism are a better explanation for divergent paths. We agree that critical junctures are important. Some colonial strategies deliberately prevented colonies from producing commodities with increasing returns and by extension, prevented growth-enhancing structural change.

In Acemoglu , the author highlights the political origins of technological change—in less democratic societies, political elites create entry barriers into different economic activities oligarchic property rights , but in democratic societies, there is free entry and exit democratic property rights. Over time, as comparative advantage changes in favour of the excluded groups, oligarchic property rights reduce efficiency and slow down technical progress. While democratic property rights may diffuse the technical knowledge across society, these democratic property rights are irrelevant in diminishing returns production structures with a low technological base.

This is the key difference between our view and Acemoglu Just as private property rights in the absence of productive capabilities are insufficient to increase production, democratic institutions without a technological base can hardly diffuse or promote technological progress.

The observation in Acemoglu and Robinson is simply reflective of differences in economic structures, and this explains the different political institutions and rate of technical progress. Building on Acemoglu , we now have two routes through which economic structures determine the rate of technical change and economic growth: the economic route, which we have already explained, and now the political route—from economic structures to political transitions to technical change. Pulling all the pieces together result in the following basic representation of our theory see Fig.

Economic structure determines the distribution of income, and this serves as the basis for de facto and de jure political powers. The acquired political power is used to perpetuate the distribution of income through the enforcement of institutions that reinforce the production structure. Finally, the economic structure determines the rate of economic growth. This is the basic process by which institutions, political power and economic structures reproduce each other.

During structural transformations, the distribution of income and de jure and de facto political powers change and this facilitates the enforcement of new institutions to regulate the new economic structure. Specifically, growth-enhancing structural changes are observed when institutions of production are effectively enforced by the state. This can potentially ignite democratic transitions or consolidation and increase the transmission of technology across the economy.

In contrast, economic stagnation and growth accelerations and collapses are observed in many parts of the world and these economies are usually embedded in electoral democracies. The origin of their failure to strengthen their democracies and provide a sustainable base for economic growth lies in their diminishing returns economic structure.

We review the relevant changes in the US economy since the agrarian transformation to provide empirical support for our theory. The US economy is chosen because of the recent financial crisis.

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They argue that the present crisis is the outcome of a stalled transformation from manufacturing to services. We agree with the central theme of this analysis but with the aid of our theory, we are able to provide insights into the roles inequality and institutions played in the great depression and recession. But farm productivity shocks and expanded cultivation substantially reduced agricultural prices and incomes in the early s League of Nations ; Timoshenko , and this affected the structure of the economy in important ways.

Modern Economic Growth: Findings and Reflections

How Universities Promote Economic Growth (Directions in Development) [Shahid Yusuf, Kaoru Nabeshima] on ykoketomel.ml *FREE* shipping on qualifying. Jan 1, How universities promote economic growth (English) the objective of identifying the most promising path to development in light of emerging global and regional changes. Directions in development ; human development.

One important implication of this secular decline is the shedding of agricultural employment that led to massive joblessness, since new sectors and economic activities failed to fully utilize the growing pool of the unemployed. This depressed demand in both the rural and urban economies paved the way for a secular stagnation. This period of structural change inevitably altered the distribution of occupational rents against rural labour, which increased rural-urban inequality and exacerbated the deflationary tendencies of the transformation.

To fully grasp the distributional implications, it is useful to remember that during this period initial levels of inequality were already high. In agrarian economies, the ownership of capital was highly concentrated leading to significant inequalities of wealth and income.

Research session 2: Financial development and economic growth

Though some landowners had lost private wealth during the agrarian transformation, the loss of agricultural employment countered any tendency to reduce wealth inequality. During this transformation, manufacturing, construction and trade services were the newly emerging sectors, which demonstrated a structural change towards the centre of the product space or to an increasing returns production structure.

In other words, labour market forces alone were insufficient to facilitate the necessary rural—urban migration. Therefore, the structural transformation was not growth enhancing, especially in consideration of the deflationary tendencies. World War I WWI served as a temporary boost to economic growth in the US economy and accelerated the transformation to an increasing returns economic structure but the process remained incomplete. Based on our theory, we expect institutional reforms to follow that serve only the interests of economic elites. Increase in rural—urban inequality and mass agricultural unemployment alter de facto political power, which influenced de jure political power to reduce top income tax rates, among other things, and this worsened inequality.

Register for a free account to start saving and receiving special member only perks. Federal investments in research and development have historically supported the security of the nation, the protection of public health and the environment, the growth of new industries, and the employment of millions of Americans. However, proposed cuts to federal support and policy guidance could encourage more state governments to take on new or larger roles in developing innovation policy priorities.

Speakers also discussed the ways in which economic development efforts in states and regions drive innovation and economic growth. He opened by describing how states are more important now than any other time he can remember during his time working in state policy.

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According to Pattison, the main question states are asking is: How can we prepare our workforce and our economy—our citizens and our society—for unprecedented change? By his observations, governors and research universities are recognizing that they must address the skills gap together, regardless of political affiliation. States also have the desire to work regionally. At an energy summit we held in Colorado recently, governors of both parties from across the west announced a pact to ensure there are enough charging stations for electric vehicles throughout the region.

And now nearly every governor has joined a pact to fight opioid addiction together. Pattison also sees international collaborations at the subnational level on the rise.

Similar interest is coming from governors and subnational leaders in other countries. State governments are interested in using data and research generated by universities and businesses to solve public policy problems, but one matter of common concern across state borders is cybersecurity. States and local government agencies retain vast amounts of data on residents, and critical services depend on digital systems. Pattison suggested that states must work with research universities to promote innovation and the startup mentality required to address social problems with creative technology solutions.

For example, how can ridesharing apps help women get to prenatal care appointments—potentially reducing the likelihood that babies are born prematurely—and thereby help reduce Medicaid expenditures on neonatal care? State policymakers need to feel like they are part of collaborative dialogue when it comes to solving policy issues related to research and innovation. The first presentation on October 18 was offered by Richard Celeste , president emeritus of Colorado College and former governor of Ohio. Celeste argued that states have a place in the science and technology enterprise in six ways:.

Celeste concluded that successful collaborations require an initial vision that achievements can be measured against, and that all collaborations should be striving to solve problems with world-class solutions, whether that is in business, academia, or public policy. The results were the proportion of workers in high-tech industries, the proportion of workers in science and technology occupations, and the percentage of population that was above average in postsecondary educational attainment.

Arkansas had an economy based on subsistence farming until the s, when a member of the Rockefeller family bought a lot of land and founded the Arkansas Industrial Development Commission, which leveraged a lot of development in Arkansas.

How Universities Can Promote Economic Growth

During the next 20 to 25 years the state saw significant industrial and manufacturing development, with low-skilled jobs that had attractive labor rates for corporations. But as low-wage job markets emerged in other nations, that model lost traction. In , a Milken Institute report determined that Arkansas was falling behind in terms of developing a knowledge-based economy. The initiative took about 4 years to get going, but then the private sector disengaged, leaving the public sector and the public universities to carry it through.

According to Chilton the state research enterprise has been functioning like a three-legged stool supported by only two legs—the public sector and public universities. Concerning state metrics, Chilton restated the importance of job creation to the governor, policymakers, and Arkansans, but emphasized assessing the quality of those jobs as well. That includes social initiatives and skills development. Higher education institutions saw steep reductions in state funding, and the university lost many faculty. The University of Nevada, Reno is following a strategic plan that was updated in and is achieving record levels of enrollment, retention, graduation, diversity, and faculty achievement, as well as a significantly higher research output.

Numerous innovative businesses—Tesla, Google, Switch, and Apple included—have chosen to locate businesses in Nevada. This has prompted an upswing in smaller high-tech, knowledge-based startups, which in turn has helped to create high-paying jobs. The Innevation Center, which was established in collaboration with Switch, a global technology leader, is a co-working, collaborative space to spur ideation, commercialization, and entrepreneurialism. NCAR, which was created through the Knowledge Fund investment, provides access to talent, facilities, and equipment on campus.

Fifty companies are intimately engaged, eight venture start-ups have been created, six faculty spinoffs have been launched, and four early-stage investment funds have been established. We also worked with the Nevada System of Higher Education to get entrepreneurial activity to be included in the promotion and tenure criteria. According to Sebastian, U. Merck, John Rockefeller, and more. The state did not need to depend on universities to deliver intellectual content, nor did it need to invest in businesses and startups.

About 8 years ago the state started to think about how to identify clusters in which to invest and grow the economy. We are looking at ways to diversify our industrial base and to upgrade and mature existing industries. The New Jersey Innovation Institute is oriented toward solving the problems related to industrial clusters, connecting the work that happens in universities and innovative small start-ups with the big companies, which have shorter-term business perspectives.

Another goal is to put together programs to properly train citizens to go into those industries, an effort that is evolving into Talent Development Centers. Extensive literature validates the degree of locally derived university IP, and confirms that much of the company growth that stems from university enterprise is in close proximity to research universities.

At the same time, industry experts can provide their research findings to universities, which leads to new solutions and insights. Ranked 32nd, the University of Nebraska had the best performance among universities in these 15 states, followed by the University of Missouri at 34th and the University of Wisconsin-Madison at 35th. With that said, other states contain nationally significant crown jewels.

Purdue had the highest tech transfer rating in the Heartland at 12th, and was first among public universities without a medical school, followed by the University of Minnesota at 14th, the University of Michigan at 16th and the University of Illinois Chicago-Urbana at 18th. In total, the 19 Heartland states had 25 universities in the top in the nation. I believe that public universities in the Heartland can learn a lot from best practices at Purdue, Minnesota, Michigan, and Illinois by providing greater incentives and support for faculty to participate in entrepreneurial activities.

Purdue provides a good case study. Established in , the Purdue Foundry added a commercial accelerator to the mix of entrepreneurial support. It also provided social network assistance in connecting talent and mentors among Purdue alumni with skills that align with a particular startup.