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Published by: api-27028656 on Nov 21, 2009
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The role of \u201ccapabilities\u201d in development: Why some countries manage
to catch up while others stay poor.
Centre for Technology, Innovation and Culture, University of Oslo
Centre for Technology, Innovation and Culture, University of Oslo

Jan Fagerberg (corresponding author), address: Centre for Technology, Innovation and Culture, University of Oslo, Moltkte Moesvei 31, N-0317 Oslo, Norway; phone: +47 97 22 84 16 10; fax: +47 22 84 16 01; e-mail: jan.fagerberg@tik.uio.no

*Acknowledgements: Earlier versions of this paper were presented the UNIDO Industrial Development

Report 2005 Workshop in Vienna, 11-12 May 2005, the 11th International Joseph A. Schumpeter Society Conference in Nice/Sophia Antipolis, 21-24 June 2006 and the 4th Globelics Conference, Trivandrum, 4-7 October 2006. We wish to thank the participants for useful suggestions. All usual caveats apply.


Why do some countries catch up, while others stay poor? In recent years data on different aspects of development have improved a lot. To exploit this opportunity for more in-depth research we use factor analysis on a dataset of 25 indicators in 115 countries between 1992 and 2004. The analysis identifies four different types of \u201ccapabilities\u201d; the development of the \u201cinnovation system\u201d, the quality of \u201cgovernance\u201d, the character of the \u201cpolitical system\u201d and the degree of \u201copenness\u201d of the economy. We show that what matters most for growth and development is a well-functioning innovation system and good governance.

Keywords: catching-up, capabilities, innovation, governance, factor analysis.
JEL: E11, F43, O30.
1. Introduction

Is there an inbuilt tendency for productivity and income across the globe to converge? If we look at capitalist development in a long run perspective the answer is clear. The long run trend since the so-called industrial revolution has been towards divergence, not convergence in productivity and income. For instance, according to economic historian David Landes, 250 years ago the difference in income or productivity per head between the richest and poorest country in the world was approximately 5:1, while more recently this difference has increased to 400:1 (Landes 1998). However, in spite of this long run trend towards divergence, there are many examples of (initially) backward countries that \u2013 at different times \u2013 have managed to narrow the gap in productivity between themselves and the frontier countries, in other words, to \u201ccatch up\u201d. The current frontier country \u2013 the United States \u2013 was itself once on a catch-up path vis-\u00e0-vis the then economically and technologically leading country of the time, the United Kingdom. Japan in the decades before and after the Second World War and the so-called \u201cAsian tigers\u201d from the 1960s onwards are another well-known cases. China and India are examples of countries that may have joined this path more recently (although they still have a long way to go).

The question that suggests itself is how this diversity in patterns of development can be explained. We start the search for what these critical factors for catch-up may be by reviewing some of the main arguments that have been presented in the literature and discussing what empirical measures these give (or may give) rise to. Traditionally, much theorizing in this area focused on the role of capital accumulation for growth and development. However, gradually the emphasis has shifted towards institutions, on how to get the institutional conditions for well-working markets, including the capital market, right. More recently we have seen development of what we may term a \u201cknowledge based\u201d


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