Delving into the reasons underlying the link between technological advancement and innovation.
By Piya Mahtaney
Part of the Globalization and Sustainable Economic Development series.
Innovation holds the key to unlocking opportunities of economic progress for every nation. It is important to understand the dynamics of innovative endeavor to reinforce the connection between innovation and economic development particularly because of the emergence of a paradox. This has arisen because:
- Rapid technological advancement in certain sectors has not led to significant expansion in innovative capacity.
- Considerable financial innovation has not led to significant financial development.
The National Knowledge System
In assessing the impact of policies, whether related to trade and investment, the labor market or technological advancement, a critical factor is the national knowledge system. Education, skill development and other media of learning, along with innovation, comprise the national knowledge system of a nation, the edifice of a dynamic development process.
The evolution of the national knowledge system, in turn, determines the pace at which technical and managerial advances are assimilated and absorbed by society, and the expediency with which its latent talent and underutilized skills are transformed into competences and social capabilities.
Structural transformation results from a combination of rising levels of productivity, wage increase and employment expansion. These underly the capacity for sustained wealth creation.
At a country level, therefore, establishing and strengthening a positive link between productivity, skill development and employment begins by addressing the weaknesses and gaps in the national knowledge system. Education and innovation are integral for stepping up an expansion in measures that would reduce the knowledge gaps and increase the competences and capabilities in any society.
Underinvestment in Human Capital Formation
The role played by human capital formation, particularly education, is critical in facilitating a context that can propel development. Growth-induced measures, if unaccompanied by an adequate increase of human capital formation, actually disempower growth, making it not only short lived but also the crucible of inequality - and, in more than a few instances, political instability.
The irony today, however, is that although the importance of intellectual capital and other aspects of the knowledge economy are becoming increasingly pronounced, the education sector continues to be among the most underinvested.
Poverty exists in various dimensions, translating into other problems in the social sphere. The limitations that this places on the development of society is manifold and rampant poverty in education leads to constraints on capital formation.
Having fewer than four years of education (the minimum required for literacy) is an indicator of extreme disadvantage. According to the Education for all Global Monitoring report (2010), spending less than two years in school is an indicator for extreme poverty. The report states that in 22 of 63 developing countries, 30 percent or more or those aged between 17-22 have less than four years of education. In 11 countries of Sub-Saharan Africa, about 50 percent of individuals in the same age group suffer from education poverty.
The Link between Productivity and Employment
The International Labor Organization [ILO] estimates that 210 million people are unemployed today. A large portion of the increase in these numbers since 2007 is the result of rising levels of unemployment in advanced nations.
The compelling need to increase employment globally, given the numbers of the unemployed and the new entrants to the labor force, makes it necessary for the link between productivity gains and employment to be a positive one. What underlies the gain in productivity invariably indicates its impact on employment.
Productivity gains that result in an increase in employment need to be differentiated from those that have a negative impact. The scope for improving productivity in a host of activities that contribute significantly to net employment creation is an opportunity for growth that has not been given the priority that it should have.
Opportunity Creation and Human Capital Formation
Spheres that are currently identified as high performance have been able to achieve this largely as a result of investments made over a period of time and policies that have been able to encourage the availability of skills and talent required for the expansion.
Opportunity creation and human capital formation have to occur simultaneously in developing nations. It is at this point that the need to foster local innovation becomes important.
In a milieu of high-decibel borderless commercial expansiveness, the importance of small and medium scale enterprises (SMEs) has become obvious, not just in developing but also in developed countries, where over 90 percent of the enterprises are SMEs and account for 60-70 percent of employment.
In developing nations, the subsistence agricultural sector, the informal sector, and small scale and micro enterprises represent spheres that are employment intensive but have low levels of productivity due to a dearth of infrastructural and financial inputs, coupled with a shortage of skills and training.
Therefore, in most developing nations, increasing investment for infrastructure building and skills development would improve productivity performance without reducing employment. To view these sectors as productivity laggards without considering that they are investment-deprived and confronted by shortages of almost every input is an oversight that the contemporary global economy cannot afford.
Next: Why financial innovation has not led to a significant expansion in financial development.
Part IV: The Building Blocks Of Sustainable Economic Development: Contextualizing Economic Reform
Part III: The Building Blocks Of Sustainable Economic Development
Part II: The 'New Normal': What Will Lead The Next Phase of Globalization?
Part I: Searching for Sustainable Economic Development In Our Rush For Globalization