Winds of Economic Change: Blowing Up an Innovation Storm?

The United Nations Conference on Trade and Development (UNCTAD) flagship Trade and Development Report (TDR2013) will deal with the ‘Winds of Change in the World Economy: Rethinking Development’. The premise of the report is that the 2008 global economic crisis amounted to a structural economic break in the world economy, and that the consequent ‘winds of change’ blowing through the world economy are changing the economic landscape in a dramatic fashion.

This has both positive as well as negative implications for developing countries. For instance, on the positive side the share of developing countries is growing rapidly; many are converging fast with the more stagnant advanced economies. Arvind Subramanian remarkably describes present times as a ‘golden age of global growth’.

A hurricane seen from the safety of spaceOn the negative side however, with the European and American economies in the doldrums, the report calls into question the sustainability of export-led growth strategies. Instead it is calling for consideration of domestic demand-driven growth strategies and for reform of the global financial system to support this.

The TDR2013 however recognizes that the Achilles-heel in this regard is the lack of capacity and capabilities in most developing countries to produce the goods and services that their growing middle classes demand. Hence the re-tooling of their production systems implies the need for much more innovation, even if of the imitative and incremental nature. China, with an aggressive (incremental) innovation drive has already covered some distance in this respect.

The analyses in UNCTAD’s reports are traditionally focused on the macro (country) level. Of course, it is not countries that trade but firms. From such a firm-level perspective, Europe and the USA remain hugely attractive markets, even if their growth is slow. Their economies remain very large, and their households are wealthy even if their governments are in debt.

Indeed a recent Credit Suisse Global Wealth European Central Bank, Frankfurt, GermanyReport found that average household wealth has increased in all of the world’s regions since 2007, with the exception of Africa. The total net household wealth in 2012 in Europe was estimated to be around €69 trillion, the largest of any region in the world, including North America.

This wealth effect will continue to have an impact on consumption, which in turn will spur competition among firms for this large but slow growing market. Higher competition in a large market will in turn spur competition. Hence it is perhaps little surprise that the Innovation Union Scoreboard recently found that “Innovation performance in the EU has improved… in spite of the continuing economic crisis”.

What does Apple, Kodak, Microsoft, CNN, Disney, General Motors have in common? The answer is they have all been established (or re-established) during a recession. Today, we see in Europe and the USA a resurgence of manufacturing after decades of de-industrialization and financialization of their economies.

A recent article in Time Magazine declared ‘U.S. Manufacturing is back’; in April last year The Economist heralded the Third Industrial Revolution as a result of ‘manufacturing going digital’. This resurgence is innovation-driven: new technologies are making possible 3-D printing, nano-technological production, mass customization, networked production and additive manufacturing to name but a few.

As noted by Peter Marsh, there are already more than 10 billion unique products being made globally (more than the number of people on the planet) and the number keeps rising.  UNCTAD’s ‘winds of change’ may just be blowing up an innovation storm.

3D Printer at the Fab LabBy Wim Naudé, Professorial Fellow at UNU-MERIT and the Maastricht Graduate School of Governance and Dean of the Maastricht School of Management. Images: NASA; Flickr / K.Kissel / S.Giudici