Friday, August 22, 2014

Dialogus de Beijing Consensus -- Optimo on Ramo's idea of a 'Beijing Consensus' (First theorem)

Question:  Does the so-called ‘Beijing Consensus’ present a meaningful ‘model’ or blueprint for development?

Optimo: It does, despite the alleged lack of success of the model in China.

In his last post, Pessimo presented, in a very clear fashion, the three theorems that characterize the so-called Beijing Consensus, as defined by Ramo. He then criticized these three theorems by raising two kinds of objections. One is that some of these theorems are wrong or have unrealistic assumptions. The other objection is that China, which was supposed to be an illustrative case for such theorems, has failed to successfully achieve any of the goals set up by the model.

The first type of criticism is far stronger than the second type. The Chinese failure in successfully following or implementing the model may illustrate problems in the model, but it says little about the overall potential of the model to provide meaningful guidance to other countries. Thus, most of my response will be focused on the first type of objection, the one that questions the basic assumptions of the model.

Let’s start with innovation (and given the length of my response I will leave the other two theorems for future posts).

Pessimo is skeptical of the possibility of creating “and sustaining capacity for leading edge innovation is virtually impossible in the developing world”. To support this idea he mentions that many attempts to create industrial parks modeled after “those that have promoted leading-edge innovation in Taiwan and South Korea have been unsuccessful”. If I understand this correctly, there seems to be an inherent contradiction in the argument here: if “innovation is virtually impossible in the developing world”, how can we explain that countries like Taiwan and South Korea managed to successfully create innovative industrial parks? Should they not be classified as developing countries? Assuming they were developing countries at the time these innovations took place, maybe we can start by toning down the criticism and assume that innovation is not “virtually impossible” but perhaps “less likely to happen” in the developing world?

The fact that some developing countries have failed at producing innovation alone is not a reason to disprove the model. The question that need to be answered is why these countries have failed. This is exactly the point in which my disagreement with Pessimo becomes very clear. To explain the failed attempts to set up “ledging-edge” or “bleeding-edge” innovation, Pessimo argues that a series of pre-determined economic factors that are directly associated with the geographical conditions of the country (the so called agglomeration effects) tend to favor developed nations as the locus for such innovation. This would require a country to “be lucky” enough to be in the right place at the right time in order to develop. I do not subscribe to this explanation, let alone to its deterministic tone.

Innovation requires a variety of factors to take place, but one of the most cited studies to explain the capacity of Taiwan and South Korea to produce innovation is the idea of “Embedded Autonomy”, developed by Peter Evans. The argument has two parts. One is that the state has an important role to play in promoting innovation. Thus, while innovation is not determined by geographic factors alone, it is also not determined by the individual assumptions of the rational actor model either. In other words, institutions matter. The second element is the assumption that a particular type of state is required to promote such innovation. According to Evans, the state’s capacity to produce innovation requires a combination of the “autonomy” prescribed by the Weberian bureaucratic model, while at the same time requiring the cooperation of private actors that can only be obtained if the state in “embedded” in society. This “embedded autonomy” is a “contradictory balance” that is hard to find. Moreover, Evans acknowledges that there is more than one way for a state to be embedded in society, as the contrasting examples of Taiwan and South Korea show. Nevertheless, some form of embedded autonomy is a requirement for innovation to take place.

The best example to support Evan’s thesis and challenge the idea of agglomeration effects is Brazil. As Evans shows, Brazil has not developed a fully functional developmental state like Korea and Taiwan. Instead, the country has mostly a dysfunctional bureaucracy, except for a few departments that are often described as “pockets of efficiency”. When a pocket of efficiency manages to have the required “embedded autonomy”, innovation becomes feasible. The automotive sector in the 1960s and 1970s is one example. In contrast, Brazil’s massive failure in producing innovation in information technology illustrates that a country may be able to innovate in some sectors by not in others, depending on the institutions governing each of these sectors.

Evans’ argument was recently by revised by him and by others. While the revisions do not reject the two basic premises of the argument (the importance of the state, and the need for embedded autonomy), Evans’own revisions indicate that the relevant social relations supporting embeddedness are now broader (i.e. it involves a larger set of actors). Others, in turn, have emphasized the importance of focusing on processes, rather than outcomes as exemplified by the most recent literature on industrial policy (e.g. see this piece by Rodrik). Brazil again offers an example of this type of arrangement with the innovations in the agricultural sector promoted by the Brazilian Corporation for Agricultural Research, EMBRAPA.

In addition to disagreeing with Pessimo’s argument that innovation is “almost impossible” in developing countries due to agglomeration effects, I also want to challenge his interpretation of the first theorem of Ramo’s articulation of the Beijing Consensus. Pessimo seems to assume that the innovation needs to take place in the developing world in order to promote development. I am not sure this is what Ramo meant. The question that Ramo asks is what kind of technology should these countries use to “start development”. His answer to this question is that “bleeding-edge innovation” (rather than trailing-edge technology) that can “create change that moves faster than the problems change creates” is more likely to promote development. Where the technology is coming from, however, is not clear -- not in the excerpt in Pessimo’s post, at least.

There is at least one example that may suggest that the technology can come from the developed world and still benefit developing countries. Mobile banking in African nations revolutionized financial transactions in the continent, allowing money transfers from one cellphone to another without the intermediation of a financial institution. This innovation builds upon a bleeding-edge technology (mobile telephony) created in developed countries to bring change to another industry: banking in developing nations.

My point here is that Pessimo’s argument that innovation can only happen in developed countries seems to assume that there is a linear process of innovation, and developing countries are playing catch-up. If we abandon this premise, we can see that there is not a leader and a follower, but there are instead multiple paths. Indeed, mobile banking in Africa is the case in point. This is a particularly important innovation in a region in which levels of literacy are low and the presence of financial institutions outside large urban centers is scarce. So, the innovation is not relevant to developed nations or even to middle-income countries, such as Brazil and Mexico. But it has been quite relevant in the African context.

Another important question is what kind of technological innovations can be classified as bleeding-edge. One response is to say that it needs to be bleeding-edge from a scientific standpoint. But I wonder if we should also include here the fact that adopting bleeding-edge innovation and making not so bleeding-edge modifications on it could generate relevant social changes. So, we do not need to talk about ultra revolutionary scientific ideas, akin to inventing the laser technology. Sometimes, some marginal modification in existing products can generate quite significant results. One example is the slightly modified system for public buses that has shown significant results. The so-called bus-rapid-transit (BRT) requires less investment than subways, and is able to transport a higher number of passengers than a regular bus system. The changes are the payment system outside the buses, dedicated lanes and a faster entry-exit system in the buses (which are at the same level of the boarding platform). As a result, it is a great option for developing countries. Indeed, the system has been widely adopted in Latin America and has already made inroads in China and India. This may not be a “bleeding-edge” or “ledging-edge” innovation from a scientific standpoint, but it has generated “bleeding-edge” innovations in public transportation systems. If we consider the impact it has had in the lives of millions of people, this could be considered the type of technological innovation that may promote development.

The last point I want to make is regarding the idea that technological innovation will promote development as long as it “moves faster than the problems change creates”. Pessimo questions what does that mean. I think it means that dynamic innovation is better than slow moving one (coming from outside or inside). As a particular technology becomes widespread and settled, it creates a series of self-reinforcing mechanisms that make it hard to move away from it, even if there is superior technology available. The cautionary tale of the QWERTY keyboard is probably the most cited example of this problem.
I think this is enough to start the conversation. My comments on the other two theorems will be coming next week.

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