CAJA COSTARRICENSE DE SEGURO SOCIAL JUNTA DIRECTIVA

2.4.1

Historic context of Gerschenkron

Gerschenkron‘s view of economic development fits well with the NSI concept as Gerschenkron‘s unit of observation is the nation state which historically tends to have common languages, laws, policies, cultures and other institutions. Gerschenkron saw the government and a certain type of bank21 _{as particular agents of economic development in countries characterised by economic}

‗backwardness‘. These are part of a more general concept of ‗substitutions for prerequisites‘ of economic development that were missing in ‗backward‘ countries that nevertheless developed. Gerschenkron also viewed ‗ideologies favouring economic development‘ as another agent of economic growth that tends to be stronger in ‗backward‘ countries (Gerschenkron, 1962), (Gerschenkron, 1967). For example during the latter half of the nineteenth century British industrialists were forerunners in industrialization and did not face strong international competition. The technological trend during the ‗First Industrial Revolution‘ was also not so much towards increasing capital-output ratios as that during the ‗Second Industrial Revolution‘ when Germany and Russia began their catching-up efforts. It was thus enough for the British commercial banks to provide industrialists with only operating or working capitals (Gerschenkron, 1962).

However, Germany and Russia required special institutions to mobilize scarce resources in order to implement their catching-up strategies. The mixed banks carried out this role in Germany, a moderately backward country, because the banking sector had already developed to a certain level

20 _{I.e. low rate of growth in national technological capabilities.}

21 _{German banks, i.e. mixed banks that combined commercial and investment banking, are an important}

although the country was far behind Britain in industrialization and per capita income. In Russia, an extremely backward country there was little to expect from the private sector. The Russian state took over the entire role of devising a catching-up strategy and implementing it. A main driver in Gerschenkron‘s views is competition among nations. If Germany and Russia were content to remain in dependent status, they would not have needed to adopt strategies to catch-up. The strategy was pursued because they wanted and needed to compete with Britain in terms of industrial and military might. In a world where industrialization had come to exist, economic backwardness was also a threat to national security. Gerschenkron‘s central concept of ‗substitutes‘ was derived from this competition for supremacy and ensuring security among the European powers. The different strategies and institutions adopted by the latecomers were substitutes for the lack of the supposed ‗prerequisites‘ for economic development like capital, technologies, or efficient financial intermediaries, which were present in the forerunners.

Gerschenkron‘s approach suggests that while a number of countries led the industrialization process, others, lacking a variety of prerequisites for spontaneous industrial development, lagged behind. Their ‗relative backwardness‘ subsequently induced creative tensions which led them towards more rapid economic growth, and to types of institutional innovation which supplied ‗substitutes‘ for the missing developmental prerequisites. Gerschenkron‘s theory implies that the government can speed up economic development by overcoming the barriers, for example through financial innovation such as a ‗mixed bank‘ or the very power of the state. The Gerschenkronian approach is generally considered to contribute to understanding the rationale for numerous cases of state-led development where state practices can achieve catch-up development such as facilitating access to resources and directing resources suitable to development project.

Gerschenkron‘s view on 'substitutes for the needed prerequisites' to overcome the ‗great stumbling blocks‘ to economic development differentiated his view from contrasting 'linear' dynamic models (linear conceptions of development), which implied one fixed way to growth (e.g. Rostovian stages22_{). Gerschenkron‘s methodology suggests that strategies and practices from past cases are}

only part of the problem, the other part depends to a large degree on the social structures in any given society on the ‗eve of their catch-up attempt‘, and how they influence processes of institutional innovation. In contrast to Rostow, Gerschenkron argued that it is essential to look at the differences in stages between individual countries and to analyse in detail the dynamic processes

22 _{Ideas of stages of economic growth were made popular by Rostow. Stages analysis assumed a fairly linear,}

uniform path of development and that ‗prerequisites‘ had to emerge before a society would move from one stage to another (Rostow, 1960). The opposite extreme to Rostow‘s stages of growth is the emphasis on the uniqueness of each case of economic development with no lessons to be learned from studying other cases (Sylla, et al., 1991). Gerschenkron‘s approach is somewhere in between the above two views, emphasising many uniformities in the economic development across societies but also demonstrating many deviations from the prerequisites of economic development (Gerschenkron, 1962), (Gerschenkron, 1967).

of change. He focused on the role of different institutions (e.g. the function of banks in central European industrialization and the importance of the Ministry of Finance in Russian industrialization) in promoting industrialization. Regarding general prerequisites for industrial growth (e.g. the provision of social overhead capital and a favourable ‗value system‘), through his own research on latecomer development, Gerschenkron showed that these prerequisites were sometimes not present or only present to a limited extent in latecomer economies which had gone on to develop. Indeed, in some cases the great ‗spurt‘ occurred without them.

Gerschenkron derived a number of hypotheses from his concept of relative backwardness about the patterns of European industrialisation which are generalised here in six points. The more backward an economy is at the start of economic growth in comparison with the economies of more advanced countries at the same point in time: (1) the greater will be the discontinuity with previous economic experience, (2) the more rapid the ‗great spurt‘ in economic growth which enables catching up; (3) the greater the role of industrial banking and the government; (4) the greater will be the reliance on technological borrowing and financial assistance from aboard; (5) the harsher the associated repression of living standards and the agricultural sector; and (6) the more influential the political regime and modernizing nationalism (Sylla, et al., 1991), (Fishlow, 2001). Gerschenkron argued that there are no automatic stages of development and that countries cannot pass through the same stages of development that others have passed through before them, precisely because others had passed through them. As a result, barriers to entry and opportunities for development have changed. Each latecomer economy therefore faces a very different external environment in terms of markets, technologies and opportunities for growth.

Gerschenkron‘s view was that latecomers had to plot their own distinctive path of development. These paths had to take account of how other earlier developers had progressed, including the markets and technologies they had created and influenced. He also argued that the starting position of the latecomer economy (or stage of backwardness as Gerschenkron called it) had to be taken into account. In particular, his research showed how the particular conditions of backwardness shaped the nature, depth and path of state intervention with respect to enterprise, technology, institution building, resource mobilization etc.

2.4.2

Operationalisation of the Gerschenkron ideas

The Gerschenkron idea central to this study is that the government can speed up economic development by providing ‗substitutes‘ for the missing prerequisites of development. The views of Gerschenkron have important implications for innovation and development. They imply that development is an active process involving economic action and reaction, as well as heavy investments in learning, technology and the institutions of development. This type of purposeful

strategy contrasts with market-led processes or passive approaches to development. Hoping simply to ‗pass through‘ the stages of development that earlier developers had followed was highly unlikely to bring about development. Indeed, Gerschenkron emphasized the importance of variety and difference in the development paths of nations. In Gerschekron‘s model, new strategies in relation to government policy, development path, technology acquisition etc. are a central part of economic development. Only by choosing and successfully following distinctive paths (and therefore stages) of development can latecomer nations meet the new circumstances presented to them by the actions of earlier developers. While he also recognized that any development path followed will not be entirely new, it will have to embody at least some innovative features to cope with the new environment (Hobday, 2003). In this way Gerschenkron has linked innovation to the development process in general. A number of substitution methods are outlined in table 2.4.

Table 2.4 – Potential Substitution Methods

Prerequisites in market-led

economies Potential substitution in directed economies

Financial Capital Government-funded capital FDI Inflows/TNC subsidiaries Knowledge Capital Government research laboratories

Government capital, fund, and consultancy services (access to local banks or alternatives)

Link to foreign organisations (knowledge/capital) Strong entrepreneurial and

managerial capacity State support for start-up creation/businesses Large internal markets/markets via

FDI/trade Export-led growth Government support for local brands

In the case of Germany, Belgium, and mainly Russia, the technology was at hand, but the capital was absent. In Gerschenkron‘s view, the prerequisite was capital (bank), and substitutes included government-funded capital (as in Soviet industrialization under Stalin) or FDI inflows (Gerschenkron, 1962). The application of Gerschenkron‘s idea to the information age in a country like Iran is more about the knowledge or the research base where the ‗great stumbling blocks‘ seem to be more knowledge capital rather than physical capital, so the key question is where are the substitutes going to come from? In a Gerschenkronian sense the industry has 3 choices to overcome the gap in knowledge base:

(i) Government research laboratories

(ii) Government capital, fund, and consultancy services (access to local banks or alternatives) (iii) Link to foreign organisations (knowledge/capital)

Gerschenkron‘s emphasis on differential development in response to different initial conditions suggests that the state should be allowed to remain strong and active in economy matters to promote successful industrialization. Gerschenkron sees in the government of a nation a potential

agent of economic development which is essential in conditions where markets fail to promote economic development. Gerschenkron suggests that in situations of backwardness where market share is absent or insufficient, the net economic impact of direct government intervention is likely to be greater than where markets are well-developed (Gerschenkron, 1962).

Gerschenkron‘s concept of economic backwardness is too broad to be fitted into standard procedures of empirical testing.23 _{It essentially means the stage of economic development that a}

country has reached. Scholars have for example used GNP per capita to rank countries relative backwardness. Socio-economic indicators are rough measures of the differences in the degree of backwardness and should be used with great caution in comparative analysis. Use of different sources, indicators and methodologies may arrive at quite dissimilar results. In addition Gerschenkron‘s ‗index of economic output‘ is only statistical and doesn‘t demonstrate the causality (Sylla, et al., 1991).

In a Gerschenkronian sense evaluation of Iran‘s economic condition provides an assessment of its ‗stage of development‘ or its ‗backwardness‘. However, economic performance indicators such as GDP, GERD or number of patents, provide a narrow understanding of NSI. In a developing country context, a wider set of indicators is appropriate, including, in particular, information on the education system and S&T capability of the country (Viotti, 2002), (Johnson, et al., 2003). Iran‘s macroeconomic setting, S&T infrastructure, and innovation policy framework are presented in chapter 4 (based on availability) including some comparisons of selected countries. However these statistical indicators don‘t demonstrate the causality (Sylla, et al., 1991).

The study tries to overcome the methodological difficulties in ‗measuring the relative backwardness of a country‘ as there is little guide on how to judge the relative backwardness of countries in particular fields, through a qualitative analysis of Iran‘s specific NSI characteristics including economic and S&T structures (with comparison to selected countries) and the study of knowledge, supply, demand, and financial components of Iran‘s biotechnology NSI through identifying actors, institutions and their linkages.

23 _{―Gerschenkron‘s broad definition of backwardness was meant to supply an explanatory variable in the}

literal meaning of the word. A backward country not only was less endowed with such factors of production as skilled labour, up-to-date technology, infrastructure and financial capital but was likely to be burdened with a ruling class whose very interests would be at least partially jeopardized by successful industrialisation. Such a country was likely to encounter many obstacles on its way to industrial progress. Moreover, the majority of its ruling class would not perceive the advantages of such progress. In these circumstances market forces alone would be rather slow in generating conditions of rapid economic growth. A short-cut along the road of industrialisation could be taken if those among the ruling class who could see the advantages of taking the road could also get hold of a tool capable of surmounting the major obstacle to industrialisation. Those tools might be a financial innovation such as the ‗mixed bank‘ or the very power of the state, according to the country‘s degree of backwardness‖ (Sylla, et al., 1991).

The operationalisation of the insights of Gerschenkron necessitates that the progress of Iran‘s biotechnology SIs be interpreted as a pattern of substitution of missing prerequisites, in line with Gerschenkron‘s view of European latecomer industrialization. More broadly, the progress of Iran‘s NSI should not be viewed as repetitions of earlier industrialization experiences as they involve significant deviations from the latter, usually entailing distinctive institutional, technological, and development. The thesis tries to interpret Iran‘s biotechnology development in the light of Gerschenkron‘s argument ―that European history should be seen as a pattern of substitution governed by the prevailing—and changing—degree of backwardness‖ (Gerschenkron, 1962 p. 359). By examining the biopharmaceutical and bioagricultural sectors of Iran, the thesis assesses the extent to which the development of Iran‘s biotechnology sector can be viewed as a pattern of substitution for prerequisites of economic development. Chapter 3 (Methodology) addresses factors identified as significant for innovation in the conceptual framework of this study (which parts make up the system) and how the conceptual framework will be useful for opening up parts of the Iranian NSI for analysis the effect of state‘s substitution.