Unconnected economic sub-systems

A characteristic of developing economies is the complex production layers that coexist, often disaggregated and disconnected from each other. Hirschman (1958) and Arthur Lewis (1954) were among the influential development economists who recognized the challenge of dispersed, isolated sectors. Their approaches were consistent with the later rise of the neo-Schumpeterian evolutionary tradition that also focuses on non-equilibrium, dynamic characteristics of production systems. These approaches include the non-traded aspects of the domestic economy which constitute heterogeneous production. While there is much written on why these coexisting and evolving systems are not easy to describe in neoclassical economics, there is still a limited body of work addressing what this dynamism means for development and the roles of states. Indeed, the open-ended and evolutionary aspects of this technological change may have been understated. What draws these different economics traditions together, however, is the importance they all placed, admittedly in very different ways, on the institutional permutations through which the sectors connect. This chapter emphasizes that the unconnected sub-systems raise at least two challenges: one, that there are many productive sub-systems within which innovation occurs and coordination is no easy task. This has been well recognized in scholarship; the second aspect, however, has not received the attention it deserves: that demand evolves in these different, inter-linked sub-systems. Determining how demand emerges is no straightforward task.

While global value chains (GVCs) reflect influential changes in the production structure of industrializing economies in trade, these linkages offer some complexities and important omissions. Structurally and cognitively, the ‘ends of the chain’ constitute extensive networks of small firm suppliers. Even when GVCs exist or dominate, the economy may have a large un-traded component, comprising a large mix of ‘informal’ micro and small firms involved in both domestic and international trade, and economic activity that is characterized by piece-rate, own-account, self-employed and subsistence activities (Chen, 2005). Size is not the only qualification; the institutional contexts in which people can productively work and innovate are. How people innovate with an institutional mix that lies largely outside that favouring GVCs deserves attention (Srinivas and Sutz, 2008), and how we consider time t=0 matters in any evolution of a sub-system, even that of the now dominant GVC (see Srinivas, 2009).