Structural transformation and rural development

Over the past three decades, income and wealth inequality has been rising within many developing countries, despite a global trend towards a decline in income inequality between countries (IMF 2017), reflecting technological catch up and global income convergence.¹ Over the same period, there has been an increasing recognition that excessive income and asset inequality is harmful to economic development (Persson and Tabellini 1994; Deininger and Squire 1998; Rodrik 1999; Ostry, Berg, and Tsangarides 2014; Stiglitz 2015; Ustyuzhantseva 2017). Structural transformation resulting from resource reallocation from low-productivity traditional sectors to high-productivity manufacturing sector is considered a typical way to achieve the advantages of diversification because of the static and dynamic gains that reallocation can bring about (Ranis and Fei 1961; Duarte and Restuccia 2010; Lavopa and Szirmai 2012).² The new structural economics doctrine recommends that structural changes should be organized around firms specializing in industries consistent with comparative advantages, as determined by factor endowments (Lin 2012). The challenges of structural transformation are particularly stark for developing countries with a growing divide between rural and urban populations.

With the global emergence of disruptive technologies typified as a ‘fourth industrial revolution’, more than ever before, successful rural transformation requires the use of innovative solutions directed to broadening the rural production base, from traditional activities into more productive sectors that enable members of rural communities to enhance their livelihoods and wellbeing. The OECD is moving beyond the focus on innovation as one of the key factors contributing to productivity growth, to consider how innovation can play a major role in confronting global and social challenges (OECD 2010).³ Ultimately, a successful development strategy has to build extensive innovation capacities to foster economic growth that is inclusive in its nature, and hence, transformative also for marginalized poor, often in underdeveloped rural communities (Papaioannou 2014; Swaans et al. 2014; Phiri et al. 2016). Rural transformation is to be achieved through a process that involves novel inclusive approaches to innovation that give more space to rural community members to take active part in shaping solutions to the problems they face. The recognition that innovation is not just about high-technology products and the knowledge frontier is an essential foundation to shift emphasis to building innovation capabilities and fostering local innovations to address challenges specific to local contexts.

However, as Mazzucato (2013) has highlighted, transformative innovations that confront big challenges have rarely been the result of market forces left alone.⁴ The notion of innovation, in its neoclassical formation with an emphasis on free markets, technology, productivity and competitiveness, is indeed insufficient for bringing about structural transformation, poverty reduction and long-term human development (Todaro and Smith 2003; Lin 2007; Aghion 2011). There is growing recognition of the imperatives to foster innovation that is oriented to social benefit, inclusive and sustainable development, and the public good.

The importance of state coordination and active intervention in significant transformative endeavours of technological change is exemplified by China's collaborative approach to the successful modernization of the economic structure of its rural provinces, whereby 800 million people were lifted out of poverty in less than 40 years (Baark 2016; Habiyaremye and Turok 2019). Therefore, as a driver and enabler of rural transformation, the active involvement of the state in coordinating, guiding and supporting the acquisition and expansion of capabilities and resources is essential, to shape rural transformation.⁵

Innovation diffusion and structural transformation

Rural transformation ought to be seen as part of a broader process of economy-wide structural transformation, which alters the structure of landholdings, the technologies in use, the capabilities of rural women and men, and the distribution and dynamics of the population and labour force (IFAD 2016).⁶ Multiple benefits that go beyond rural areas are generated as by-products of the transformation. The structural changes involved in rural transformation often require the harnessing of technological knowledge in order to broaden the range of productive activities that rural workers can engage in. Rather than contributing to growth and industrialization only, innovation can be a key factor in addressing urgent developmental challenges, such as providing access to drinking water and sanitation, eradicating neglected diseases, reducing hunger or providing appropriate healthcare and education (OECD 2010, 2015).⁷ Innovation can also contribute to sustainable development by addressing environmental challenges through the introduction of new technologies and non-technological changes (OECD 2011, 2015).

Likewise, rather than an over-emphasis on ‘new to the world’ forms of innovation, it is the diffusion of technologies (whether new to the local or country context) that ultimately determines the rate of change in productivity as well as the economic and social benefits that it brings about (Hall and Khan 2003). Policies and incentives to finance, scale up and diffuse innovations are therefore of utmost importance for transformation to be effective. The adoption and rapid diffusion of new technologies, while carrying the potential to address societal challenges, can nonetheless also bring about new, unintended income disparities, when their benefits are unevenly distributed among members of the adopting communities. An inclusive process of innovation can help mitigate the disruptive effects of the social changes accompanying the adoption of new technologies and production methods.⁸ Achieving rural transformation that is inclusive in its approach requires that in countries affected by rural poverty, the state adopts development strategies that enable and empower rural communities to seize the opportunities, while averting the threats associated with transformation processes.

Social capabilities and the role of the state

We have argued that structural transformation does not take place spontaneously as a result of the working of market forces (Gerschenkron 1962; Lall 1992; Fagerberg and Srholec 2008; Fagerberg, Srholec, and Verspagen 2010). As noted by economic historians such as Gerschenkron (1962) and Abramovitz (1986), technological under-development can persist in the absence of mechanisms to promote resource reallocation into more technologically intensive sectors. For Gerschenkron, state intervention is necessary to compensate for the inadequate supplies of capital, skilled labour, entrepreneurship and technological capacity encountered in technological followers seeking to modernize their production methods. As illustrated by the experiences of Taiwan and South Korea during their phases of economic transformation, transforming agrarian rural economies into competitive industrialized ones also requires adequate policies that enable rural communities to harness modern production and commercialization techniques in order to form strong and inclusive linkages with the national and the global economy (Kay 2002; Kim 2016). Transforming agrarian rural economies so that their populations are included in the benefits afforded by technology through diffusion of innovation equally requires state intervention.

The ability to mobilize financial and human resources on a large scale in order to shift production factors from low productivity to high productivity sectors was conceptualized in terms of ‘social capabilities’ by Abramovitz (1986), and such capabilities are deemed by many scholars as critical for the success of structural transformation (Lall 1992; Cimoli and Porcile 2014; UNCTAD 2016). Social capabilities include, according to Abramovitz, technical competence, experience in the organization and management of large-scale enterprises, financial institutions and markets capable of mobilizing capital on a large scale, the stability of government and its effectiveness in defining and enforcing rules that supporting economic growth, and the spread of honesty and trust among the population. For countries to succeed in transforming the structure of their economies, development of appropriate technological capabilities and other complementary factors is essential (Kim 1997; Fagerberg and Srholec 2008). The function of these social capabilities is closely related to the concept of ‘absorptive capacity’, which stresses the importance of accumulated technological knowledge together with the infrastructure and resources needed for firms to internalize and exploit external sources of knowledge (Cohen and Levinthal 1990). Likewise, social capabilities are critical to for the local communities, development agencies, informal enterprises or local government agencies responsible for the learning, innovation and diffusion of new technologies including water, energy or health to exploit new sources of knowledge (Cozzens and Sutz 2014; Joseph 2014; Swaans et al. 2014).

Building and accumulating these capabilities requires time, resources and a continuous process of learning (Cimoli and Porcile 2014; Joseph 2014). Gerschenkron (1962) for example, suggested that governments should set up large banks to foster capability building by providing access to financial capital needed for industrialization. The important role that the financial system may play in mobilizing a country's resources for structural transformation initially advocated by Gerschenkron (1962) was confirmed by more recent research such as King and Levine (1993) or Levine (1997). As noted by Lall (1992), the technological capabilities required for industrialization – and we add, for sustainable and inclusive development of rural communities – must be guided by an incentive system and embedded in a conducive institutional setting in order to unleash their transformative forces.

For the developing countries covered by the contributions in this volume, the acquisition of the necessary capabilities requires investing in skills development in order to facilitate the adoption and diffusion of the new technological know-how necessary to address local challenges (Fagerberg and Srholec 2008; Fagerberg, Srholec, and Verspagen 2010). Fagerberg and Srholec (2008) for example, propose aspects of these capabilities that are most relevant to development, which range from the technological capabilities of science, research and innovation to social and institutional capabilities such as the social values and type of political system in a country. Expansion of supporting infrastructure networks for energy generation, transport and communication is equally important for building the absorptive capacity necessary to adopt external technologies for structural transformation (Narula 2004; Criscuolo and Narula 2008).

The state, innovation and inclusive development

The combination of insights from all these heterodox ideas prepared the stage for the problematisation of the role of the state, and the necessity of an adequate industrial policy that can facilitate productivity convergence and inclusive transformation of rural areas (Öniş 1991).⁹ The state's primary role in the transformation process lies in its capacity to mobilize and reallocate resources on a large scale to provide incentives for harnessing science, technology and innovation for the purpose of spurring transformative development. The contribution of Amsden (1989) on the industrialization of South Korea as a developmental state was particularly significant, in that it showed that East-Asia's success was not the result of the working of free markets, but rather an outcome of state intervention (Shapiro and Moreno-Brid 2014). Korea's development model in the 1960s and 1970s, and more recently, China's rise to global economic and technological prominence, highlighted how judiciously crafted strategic industrial policy is a central component. However, when considering the role of the state and its agencies in innovation processes, power dynamics and agency, particularly of marginalized groups, come to the fore as issues that requires scrutiny in developmental state contexts (Cullen et al. 2014; Arocena 2018; Papaioannou 2014).

As pointed out by Schneider (2015), what differentiates a state oriented to structural transformation and human development is that it is designed to shift a country's global ranking rapidly and permanently. For a state to be effective in its transformational agenda, their ambitions must go beyond mere government discourse and campaign promises: such states demonstrate this ambition with extensive material and institutional investments (Schneider 2015).

To various extents, governments in the countries covered by the contributions in this volume have each in their own ways attempted to use the insights from developmental models to drive their industrialization and economic transformation process (Chibber 2004; D’Mello 2005; Edigheji 2010; Evans 2014; Schneider 2015; Baark 2016; Li 2016; Mukherji 2016).

While we consider the developmental approach as critical to the success of structural transformation, the papers in the special issue are more strongly focused on understanding how the state may underpin and drive innovation and economic inclusion policy in emerging economies. The ability to effect inclusive rural transformation is largely dependent on the extent to which the state can mobilize resources and apply new knowledge that enhances labour and land productivity in rural areas. It is worth recalling that the early developmental states in Asia, such as Japan and Korea, did not see the reduction of inequality as part of their endeavour (Kay 2002; Kim 2016; Pirie 2016). By and large, they governed markets and directed resource allocation to favour national champions for rapid industrialization, often allowing inequality to go unchecked, because of the preference given to investments over consumption (Pirie 2016). In Taiwan, for example, land reform programmes instituted by the state used public enterprise stock shares offered to landlords to convert investments in landholding into industrial assets, and thereby lay the foundation for industrialization (Bowden 1961). Likewise, land redistribution, agricultural innovation and skimming of agricultural surplus by the state played a crucial role in the development of South Korea (Shin 1976; Kay 2002; Kim 2016).

In the present context of growing inequality, a case can be made that innovation facilitated by the state in rural settings should foster inclusive development. Indeed, the OECD (2012, 4) suggests that:

Insights from the contributions

The ambiguous relationship between developmental state policies and economic inclusion provides a suitable space to question how state policies commit to fostering rural innovation, technology diffusion and inclusive development in countries grappling with extreme levels of poverty and inequality. In other words, how do state policies in these emerging economies deploy science, technology and innovation tools to spur transformative development in a way that also directly addresses the issues of inequality and poverty in poor rural communities?

The contributions in this volume provide insights through interrogating and analyzing a wide range of examples of rural transformation and economic inclusion programmes found in countries spread throughout much of the developing world, ranging from Africa (Algeria and South Africa) to Asia (India and Vietnam) and Latin America (Argentina and Peru).

Thematically, we can identify three categories of issues highlighted by the authors:

1. How does the state at various levels promote transformative innovation policies by applying new agricultural methods? The first paper in this set compares the modernization of rice production in two river deltas in Vietnam, and the second, compares state processes of agricultural reform for integrated development that targeted selected rural communities in Algeria.

2. How does the state build capacity for inclusive transformation? Here the authors work at contrasting scales, the first focusing on the local level of co-operative learning for innovation co-creation in ‘living labs’ projects in South Africa, while the second explores the role of governance and standardization in Alpaca value chains in Peru.

3. How does the state catalyze and support provision of pro-poor innovation for social inclusion in rural transformation? Two cases are interrogated, the first focused on renewable electricity production in rural Argentina and the second, on the supply of ecological toilets to address open defecation in a rural district of Tamil Nadu, India.

We highlight the most significant insights illuminated by each of these six papers in relation to how the programmes they analyze contribute to rural transformation, inclusive innovation and capability building efforts as part of a broader structural transformation project driven by the developmental agenda of the state.

Building capacity for inclusive transformation

Habiyaremye's contribution throws light on how this participation may be facilitated, by exploring the knowledge exchange between university-based knowledge producers and members of marginalized communities with their own epistemic and reference frameworks. The paper stresses the importance of cooperative learning as a strategy to increase cognateness and reduce knowledge asymmetry between the two epistemic communities in an effort to facilitate the co-creation and absorption of new technological knowledge intended to transform the livelihoods of rural and peri-urban communities. Here, rural transformation is triggered by the behavioural changes resulting from new knowledge developed through the co-learning process inherent in local Living Labs projects. The inclusive nature of this transformation process go beyond the usual dimensions of being pro-poor and enabling participation, as it puts the end users at the heart of the innovation process by involving them as co-creators (see also Jacobs et al. 2019). State support in the form of providing co-learning incentives and facilitating the expansion of human capital was a key driver for the success of these transformative projects.

Likewise, through an analysis of segmented governance in the Peruvian alpaca fibre value chain, Miklos Lukacs de Pereny, Ronnie Ramlogan and Marcela Miozzo illustrate the important role that public governance plays in empowering rural communities to adequately participate in and benefit from global value chains. Standardization in the alpaca fibre value chain also plays a critical role in promoting regional industrial development, and the concomitant social change among the rural communities involved at different levels of the value chain (see Lall 1992). The role of supporting infrastructure as a key pillar of the capacity necessary for a more thorough structural transformation is underscored by the failure of the localized rural transformation in the southern Peruvian Highlands to connect to larger structural changes, as a result of missing transportation and communication infrastructure (Narula 2004).

Pro-poor innovation for social inclusion

Shyama Ramani's analysis of the various difficulties encountered in the adoption and subsequent abandonment of many of the innovative toilets installed in a rural district of Tamil Nadu underscores once more the importance of participation of end users in marginalized communities in the design of innovations meant to meet their needs (Petersen et al. 2016; Jacobs et al. 2019). Her paper addresses the critical issue of open defecation in India, as a thorny problem of social inclusion in rural transformation. This is a reminder that sanitation remains one of the most important manifestations of marginalization and poverty in India, especially in rural areas where almost 70% of households do not have access to toilets. The provision and adoption of toilets contributes to reduce the incidence of faeces-related diseases and helps to enhance income generation capabilities.

Equally important to the innovation process is adequate communication to convey the benefits, and to build the social capabilities to ensure that end users acquire the knowledge and tools necessary for appropriate use, and the maintenance capacity to sustain, the newly adopted sanitary innovations. The involvement of marginalized communities in the innovation process, to solve problems they identify and provide solutions based on their realities, results in better development outcomes (Arza and Zwanenberg 2014; Petersen et al. 2016). Although the state government was a formal partner in the consortium that was in charge of this initiative, its role appeared to be limited, ceding leadership to private actors and charities, instead of proactively driving the diffusion and sustainability of this social innovation. The lack of an agency to ensure continuous repair of toilets and monitor a sustained adoption process also provides space for the state to step up its involvement, if it wants the innovation to be truly transformative.

María Schmukler's analysis of the techno-social factors that affected renewable energy rural electrification in Argentina is of particular interest as it offers the opportunity to contrast two opposing approaches to rural transformation in the same country: the neo-liberal approach emphasizing market forces and the developmental state approach focusing more on the provision of energy infrastructure necessary to fuel growing economic production. Her contribution also highlights the inadequacy of imposing technological solutions deemed universal without a prior understanding of the localized context of the problem to be solved. The mitigated success of the rural electrification programme in Argentina highlights the limitations of reliance on market forces alone (Mazzucato 2013), while calling for an approach that gives more room for consultation with end users about their real needs and the best ways to meet them. Similar to the adoption problems Djeflat identified in the top-down approach to the PPDRI in certain rural communities in Algeria, the concept of socio-technical adequacy of the rural electrification programme raised in this paper shows yet again the necessity to adapt technological innovation to the local context.

Conclusion

Taken together, the papers in this special issue juxtapose a complex set of issues: the role of the state in innovation that drives structural change and inclusive development, to narrow the rural-urban divide in developing countries. In six country contexts, and using a range of conceptual lenses, the papers investigate how states with developmental ambitions deploy innovation to spur structural transformation and address inequality in rural areas, in relation to both production and to human and social development. What are the high-level conclusions we can draw across the papers?

The state in emerging economies can play a critical role in harnessing innovation policy to enhance agricultural production methods, but it can also intervene by promoting capacity building for inclusive transformation, and by ensuring the provision of pro-poor social innovations. The state is not homogenous, however, and operates at different levels, and in different regions, enacting different strategies in each, which can have distinctive positive or negative outcomes within a country, with implications for inequality. Where the state is more directly involved, at all levels and across regions, there is a higher likelihood of success, but where state agents promote local capabilities and end-user participation, interventions are even more likely to succeed. Further research to test these assertions in a wider range of country, sectoral and social settings can be of great value.