Innovation, economic diversification and human development

Hartmann, Dominik (2011). "Innovation, economic diversification and human development" Paper presented at the 8th annual conference of the HDCA, 6-8 September 2011, the Hague, the Netherlands.

In this paper we bridge a gap between the human development approach and innovation economics by analyzing positive and negative effects of different types of economic diversification on social welfare. Variety changes with economic development and different types of variety are affected in different ways. This leads to ambiguous effects on the well-being of human agents: on the one hand, an increasing variety enlarge the possibilities to choose. On the other hand, limits in the individuals’ capabilities to make economic decisions can deteriorate their well-being. Strikingly, our empirical analysis -based on export data, human development indicators and diversity measures- reveals that economic diversification is even more crucial for human development than mere economic growth. It becomes clear that human development policy has to go hand in hand with an industrial policy, promoting different types of economic diversification - such as related and unrelated variety - depending on their dynamics. From a better understanding of the co-evolutionary development of economic variety, social choice and well-being a better design of development policies can be expected.
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