Imitative Versus Innovative Economies
In case you haven’t checked it out, do take a look at Brink Lindsay’s essay on the relationship between economic development and economic freedom. He discusses some important trends in the global economy. Imitation lets poor countries jump start their economies and catch up to rich countries in GDP rankings. For instance, it’s easier to bring 20th century plumbing to China than it is to bring 21st century biotech to California. The really hard task is to discover new ideas, not to spread current best practices to places where they’re absent. The main thesis of Lindsay’s paper is that he believes he sees a positive ratchet effect as the developing world develops. They run out of things to imitate so they have to start thinking for themselves. But that requires economic reforms in favor of liberty:
…the richer and more advanced a country gets, the more economic freedom it needs for growth to continue. Even at the most basic level, poor countries need to develop successful market economies to grow rich. But, once countries become rich, they find themselves ever more dependent on unpredictable entrepreneurial innovation—and, therefore, on a broader range of well-functioning, competitive markets—for continued prosperity. Consequently, as countries develop, they come under increasing pressure to liberalize their markets to stave off deteriorating economic performance.
And later on:
Both when economic development is at a relatively low level (behind the technological frontier), or when it is still at an absolutely low level (still transitioning from mass poverty to mass affluence), the uncertainty of economic life is thus at a relatively low ebb. But, as an economy approaches the technological frontier, and as successful industrialization ushers in mass affluence, increasing uncertainty about how best to advance consumer welfare requires incessant, extensive trial and error to plot a viable path forward. This requires, in turn, an institutional and policy environment that gives free rein to entrepreneurship and competition.
Singapore imitated Hong Kong. In the mid to late 60s, the Koreans imitated the Japanese, who had implemented reforms after WWII. Then, in early 80s, the Chinese imitated the Koreans. The result has been gangbusters. And Lindsay’s contention is supported by this story. But he neglects to tell the countervailing ratchet effect–namely, that yesterday’s innovators become today’s vested interests. And boy do they like to erect barriers to entry in the U.S. and elsewhere on the economic frontier. Yes, in the long run, the jury’s still out on this. Maybe enough stagnation will bring the matter to a head. Get ready to cue the Twisted Sister. On the other hand, maybe it won’t and U.S. dynamism is imperiled by sclerosis.
The future may be better, it may worse, but either way it will come down to whether or not individuals turn up the ratchet Brink takes for granted in the developed world. Continued expansion in economic freedoms doesn’t happen by itself even on the frontier. When there’s no one left to imitate, and no one can create, there’s nothing left but plunder.