Edited by Guido Buenstorf
9. Economic development as a branching process Koen Frenken and Ron A. Boschma INTRODUCTION 1 The central question in economics has been, at least historically, the question of economic development (or ‘the wealth of nations’). Classical economists typically viewed this as a historical process of structural change, in particular as a process of modernization through industrialization. Later, the question of economic development was approached in a narrower sense by equating economic development with economic growth, namely, with upward movements in macroeconomic variables such as productivity, GDP, or export volume. Of course, it has always been known that the quantitative process of economic growth is accompanied by a qualitative process of economic development in the form of structural change in the industry composition of a country. However, the large majority of macroeconomists tended to assume that specific qualitative dynamics are of no interest to an understanding of economic growth. In more recent macroeconomic literature, the interest in structural change reappeared. For example, Harberger (1998) argued that the remarkable interindustry variation in productivity growth, and the changes therein over time, calls for theories that take the industry level seriously. He argued that the effect of broad externalities, for example, due to the growth of knowledge or human capital as central in new growth theory, is negligible compared to industry-specific productivity growth. Metaphorically, Harberger compared economic growth to the way mushrooms grow, where growth in particular industries can take place ‘overnight’, as opposed to growth likened to the way yeast grows, as implied...
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