Development on the Ground

Clusters, Networks and Regions in Emerging Economies

Allen J. Scott, Gioacchino Garofoli

• Publisher: Taylor & Francis
• Year: 2007
• eBook ISBN: 9781135984212
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Garofoli and Scott have gathered together a series of outstanding essays by academics and policy experts from around the world to show how the theory of local economic development (as formulated in more economically advanced countries) has major significance for countries in the world periphery.These essays present a general conceptual discussion o

Part I
Region-centric concepts of development

1 The regional question in economic development

Allen J. Scott and Gioacchino Garofoli

Introduction

The role of regions as engines of economic development and growth has been widely recognized in recent years, and abundant documentation now exists on many of the most successful examples of this phenomenon in different parts of North America and Western Europe. The present discussion is focused on the more problematic case of regional development in low- and middle-income countries. We aim to demonstrate the relevance of a region-based approach to practical policymaking in these countries and its potential for improving their developmental prospects. At the same time, the discussion provides an opportunity for pinpointing a number of areas where the theory of development in general might be extended and strengthened.

In order to initiate the argument, a series of simple remarks may be articulated about the logic of economic development in general, and especially about the critical stage characterized by Rostow (1960) as take-off, when a given social formation starts to emerge from stagnation into the early phases of economic growth. Thus, many less developed economies are caught in vicious circles as represented by chronic labor surplus situations (Lewis, 1954), low-level equilibrium traps (Leibenstein, 1954), critical shortages of entrepreneurial talent and skilled labor, overdependence on primary products, and so on. In such cases, take-off is unusually hard to achieve, though growth can sometimes be initiated by certain kinds of push effects that open up promising developmental pathways (Murphy et al., 1989; Rosenstein-Rodan, 1943).

Whatever the initiating factors of take-off may be, processes of cumulative causation will often set in as industrialization advances. As this occurs, intensifying flows of externalities and associated increasing-returns effects help to propel development forward. The same types of flow are apt to result in the concentration of economic growth in just a few regions, especially in take-off situations. Geographic concentration is consolidated by the locational strategies of producers who cluster together in order to translate latent benefits of these sorts into the realizable form of agglomeration economies. Of course, market coordination is essential for efficient resource allocation in cases like these, though externalities and increasing-returns effects significantly limit the overall efficiency-seeking powers of simple atomized competition. For these reasons alone, joint or collective action is required in order for rapid growth to be achieved.

In a globalizing world, national economic autarchy becomes less significant than it once was, especially where vigorous export-orientation policies are in place, and in these circumstances, small or less developed countries can afford to pursue strategies of specialized national/regional development to a degree that greatly exceeds what was once thought possible or advisable.

These remarks can be summarized in the proposition that economic development is critically dependent on the formation of dense industrial regions and cities, and that appropriate policies can greatly enhance the beneficial outcomes of this relationship. Of late years, numerous econometric studies have been published providing confirmation that economic growth and industrial agglomeration are indeed persistently and positively intertwined with one another. Even in low- and middle-income countries much evidence of this type has been forth-coming of late, as exemplified by the work of Becker et al. (1992), Henderson (1988), Henderson and Juncoro (1996), Lee and Zang (1998), Mills and Becker (1986), Mitra (2000), and Shukla (1988), among many others.

A brief perspective of development theory

Regions are not just passive receptacles of industrialization. Any region where industrial investment is proceeding also has some chance of emerging as a dynamic nexus of positive externalities and agglomeration economies. In turn, these outcomes will greatly enhance overall productivity and growth (though disabling negative externalities may also come into being if policy-makers fail to act). In low-income countries, the regional expressions of this process are particularly insistent because the restricted availability of capital for large-scale infrastructural investments means that development is all the more likely to be confined to a limited number of locations.

The contemporary literature ascribes the positive externalities and increasingreturns effects typically found in regionalized industrial systems to three main sets of socioeconomic relations.

First, networks of specialized but complementary producers are commonly found at the core of any burgeoning economic complex. These networks abound with external economies of scale and scope. For example, the presence of many different providers of goods and services in the local area means that producers can rapidly satisfy many crucial but unpredictable input needs. Equally, a high level of proximity between producers and their suppliers and subcontractors makes it possible for the former to adjust their input schedules frequently in response to market vagaries. Second, dense local labor markets invariably come into being in the vicinity of employment centers, and they too generate multiple increasing-returns effects. Thus, the presence of many workers in a given place enhances job-matching activities, reduces search costs, and facilitates the emergence of joint training efforts. Third, processes of creativity, innovation, and learning are often quite intense in regions marked by production networks and local labor markets of these sorts. These processes are most likely to occur in transactions-intensive complexes, especially where interaction is based on frequent face-to-face relationships combined with active exchange of information. Above and beyond these external economies, the mutual proximity of many different interrelated firms and workers helps to reduce overall transport and communications costs, and ensures the rapid flow of circulating capital. Regionalized industrial systems, in other words, have a marked propensity to function as fountainheads of dense multifaceted agglomeration economies and efficiency effects.

The published research on how these main sources of agglomeration economies operate in practice is immense. Detailed accounts can be found, for example, in Cooke and Morgan (1998), Garofoli (1983, 1992), Porter (2001), Scott (1988, 1998), and Storper (1997). Agglomeration economies become even more potent when set in a dynamic framework where networks, local labor market structures, and innovation processes evolve and interact with one another in a logic of circular and cumulative causation. By the same token, agglomeration economies are purely social creations. More to the point: development at any given location is not always or necessarily contingent on the existence of some prior, naturally given comparative advantage. On the contrary, development can also occur – and increasingly does occur – on the basis of endogenously built up competitive advantages in specific regional contexts.

In an older version of development theory and practice based on growth-pole and growth-center analysis as laid out by Perroux (1961) and Boudeville (1966), the more advanced regions in less developed countries were seen above all as focal points for capital-intensive industrialization based on large lead plants. The propulsive effects flowing from these plants, in combination with import substitution policies in response to perceived unequal returns from trade between North and South à la Prebisch (1959) and Singer (1950) were then expected to be the vehicle for eventual national economic independence. In today’s world, where export orientation is generally taken to be a preferred pathway to economic growth, developing regions sometimes advance even on the basis of small-scale labor-intensive industries, of sorts that were previously thought to be the very antithesis of modernization, like clothing, shoes, jewelry, or furniture (cf. Cadène and Holmström, 1998; Cawthorne, 1995; Schmitz, 1995; Scott 1994). Development strategies today are less and less concerned with the establishment of an autarchic and balanced national economy, than they are with the search for a niche within the global division of labor. By the same token, one of the principal problems that developing areas face is to find and maintain market outlets in the global economy that are not already dominated by producers with early-mover advantages. A successful strategy of export orientation offers the further advantage that by widening final markets it also brings in its train an intensification of increasing-returns effects in producing regions.

Appropriate collective action can greatly magnify the agglomeration economies of developing regions. One obvious opportunity for such action is presented by the many market failures to which all industrial clusters are subject, but that are especially severe in developing countries. Another is related to the dysfunctional effects of social breakdown in areas of dense polarized growth. Yet another – above all in take-off situations where markets are often weakly developed at best – is based on the need to ensure some degree of complementary investment in the regional economy in order to foster accelerated growth. Moreover, once any regional economy enters into a spiral of cumulative causation, further forward evolution occurs in a path-dependent process where all elements of the system become mutually constitutive of one another in round after round of growth and development.

For example, a supply of entrepreneurs is essential for economic advances to continue; invariably, individuals can be found in the local area with distinctive personal features that equip them at the outset for the task of entrepreneurship. Contrary to purely behaviorist theories, however, entrepreneurs are also in part made within the evolving economic system as fresh structural spaces open up and as advantageous new prospects appear on the horizon. Irrespective of their personal attributes, individuals who are already caught up in the regional economy are notably well positioned to perceive and to seize these opportunities. But path dependency means that lock-in of the regional economy to suboptimal outcomes is an open possibility, and that some sort of collective steering mechanism may also be required in order to avoid the worst pitfalls of this condition. An immediate corollary of the above remarks, as we argue more closely below, is that the pro-market, anti-interventionist stance of the Washington Consensus and its avatars offers a severely deficient view of all that is at stake in the quest for development (Stiglitz, 2002).

In the same way, region-based economic growth and development are deeply dependent on complex socio-cultural processes of human mobilization and transformation. Regional production systems and their associated communities of workers are the locus of idiosyncratic social routines and conventions, and these phenomena are vital to processes of acculturation and habituation. To be sure, they are also sometimes rife with dysfunctional features. In low- and middle-income countries, moreover, the coming together of many jobless and underemployed individuals in dense urban settlements often results in costly social pathologies, particularly where hyper-urbanization occurs (cf. Wheaton and Shishido, 1981). Yet once this point has been conceded, and in contrast to the anti-urbanist views of development theorists such as Lipton (1977), the arguments already laid out suggest that the high road to development and growth is still more likely to pass through the admittedly troublesome way station of largescale urbanization than it is through a dynamic of spatially dispersed and decentralized investment.

Macroeconomic structure and regional development

The national economy as a framework for regional stability and growth

Much of the time, we think of the economy of any country as a purely macroeconomic phenomenon (e.g. national GDP, unemployment, inflation, export performance, and so on), but we often fail to grasp its full meaning because we tend to abstract away from its underlying geography. While the macroeconomic level is obviously of major importance in its own right, we should not overlook the fact that it is also in part constituted as an association of individual regional economies, each with its own system of synergies and collective order. This remark underlines the increasingly urgent need to explore the relationship between national economic development processes and the regional bases of both growth and decline. The point is of major importance in any attempt to understand the difficulties encountered in practical experiences of economic development and in implementing more effective strategies of regional planning.

In macroeconomic approaches, two different kinds of development paths or strategies can often be observed. The first involves an emphasis on accumulation in the manner of Nurske (1958) and Destanne de Bernis (1966, 1967). Here, the role of the economic surplus is paramount (and, indirectly, income distribution as well) and the trade-off between consumption and investment becomes a major object of policy concern. Empirically, developing countries with high rates of GDP growth tend to be marked by high ratios of investment to income, often exceeding the 20 percent mark. The second tends to be favored by adherents of the Washington Consensus. It preaches a doctrine of economic austerity and flexibility, i.e. the imperatives of low wages and competitive labor markets, the removal of political barriers to profitability, the dismantling of social protection policies, market discipline, and so on. However, this second kind of model has led to much social unrest, increasing inequalities, and economic instability in many of the countries where it has been applied, and as we have seen, it erroneously dismisses on principle the usefulness of collective action as a condition of development.

Nowadays, it seems increasingly clear that economic development cannot be managed at the macroeconomic level alone. Whereas there is broad acceptance that macroeconomic stability is a prerequisite for development to occur, there is also widening agreement that the fundamentals of the macroeconomic order (inflation, budget deficits, public debt, trade balances, and so on) are not in and of themselves sufficient to fulfill the objectives of economic development. Critical elements of the development process such as learning, innovation, upgrading of productive structures, labor training, and so on, are significantly related to the aptitudes of local and regional decision-making systems and to the behavior of individual firms. These kinds of outcomes depend heavily on strategic capability implementation at the local level and not just on macroeconomic actions like the devaluation of the national currency or the reduction of import tariffs.

The structural adjustment programs proposed by international agencies like the World Bank and the International Monetary Fund in the 1980s typically overlooked or under-emphasized this important issue. Thus, macroeconomic stability and coherent macroeconomic fundamentals are necessary but not sufficient conditions of development, and even recent European experiences confirm the same point. In fact, an overly aggressive macroeconomic policy will often have deleterious effects on many regions, undermining the very search for growth and development. Premature or poorly executed market-opening measures are examples of this kind of failure. Centrally mandated development policies are, in any case, usually ill equipped to respond to the detailed idiosyncrasies of individual regions and industrial communities.

The mesolevel: resources and institutions

The economic health of regional economic systems depends, in particular, upon the progressive accumulation of knowledge and practical competencies. These phenomena emerge in significant degree out of creative interactions among local actors and the continuous production of external economies in the regional milieu. This process of accumulation, together with its encouragement of innovation and new entrepreneurship is the consequence of a dynamic economic and social environment, itself dependent on the capability of finding new opportunities and of exploiting specific social and cultural assets. Any capability of this sort is typically a socially constructed territorial resource; it is the outcome of a regional development process forming a space of human interplay and learning. For these reasons, the density of social and economic relationships is of paramount importance, as is the complementary role of institutions fostering positive interactions between the different spheres of regional life (industry, research, education, and so on) and supporting transfers of knowledge and experiences, thereby helping to upgrade the productive capability of local firms.

In successful experiences of economic development, then, governments at every level have invariably been of crucial importance, not only as agencies of coordination, investment, and system steering, but also as guarantors of the legal and social infrastructure that provides the basis for effective operation of market exchange relationships. In fact, without a network of collective order – whether it is government agencies as such, or (as is increasingly the case in contemporary capitalism) diverse institutions and organizations of civil society – economic life of any degree of complexity must necessarily collapse. This proposition follows not only from the market failures that are endemic in contemporary society, but also and more importantly from the inability of the atomized system of social and property relations that characterizes civil society in capitalism to reproduce itself unproblematically through time. The conflicts, collisions, diverging interests, and general immobilization that would necessarily follow from any dissolution of institutional and political order would almost certainly result in rapid economic decay.

More specifically and concretely, governmental and nongovernmental agencies are needed at the local level to mobilize investment capabilities and human competencies, and to provide various kinds of bottom-up support. They are needed to facilitate information flows, to underpin learning processes, to encourage local entrepreneurial cultures and network interaction, and, in general, to manage the complex systems of synergies and externalities (both positive and negative) that typically emerge as regional economic systems start to develop and grow.

The discussion above takes on added force in light of contemporary trends toward globalization and international economic integration. These trends help reinforce agglomeration in favored areas (by extending the market range of producers) and they highlight the tendency of the national economy to assume the form of a mosaic of regional structures of production and entrepreneurship. By contrast, they also lead to an intensification of the developmental predicaments faced b...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contributors
• Preface
• Part I: Region-centric concepts of development
• Part II: Regional development in the Middle East and Africa
• Part III: Regions and development in mixed economies
• Part IV: Technology-intensive clusters in emerging economies
• Part V: Cluster-based strategies for development
• Part VI: Regional development and global value chains