Black swan events, such as recessions and pandemics, change the course of history. Think of the 2008 financial crisis that forced people to recycle clothes, share assets in the form of spare rooms and car rides. All of that led to Airbnb, Uber, Vinted, and similar solutions disrupting the market. With Covid-19, we already see signs of a disruption that will shape decades to come. Perhaps, there is a bigger opportunity here, especially for the economies struggling to break from the middle-income trap.
Leapfrogging vs. catching-up
According to traditional theories of development, the path to prosperity for latecomer economies is to follow the tracks of developed nations (or, in other words, to catch up). However, in recent years, an alternative theory of “leapfrogging” emerged as countries searched for new ways to leverage technological progress to drive growth. The catching-up paradox (Lee, 2019) is that a country cannot catch-up (meaning overtake) if it continues to work on catching-up (meaning imitation). Leapfrogging occurs when a nation bypasses traditional stages of development to either jump directly to the latest technologies (stage-skipping) or explore an alternative path of technological development involving emerging technologies with new benefits and new opportunities (path-creating). For firms and sectors, leapfrogging entails the latecomer adopting new technologies ahead of the forerunners.
Economic leapfrogging only becomes successful when exogenous windows of opportunity become available. A window of opportunity is a moment in time in which entry barriers for latecomers recede – often created by frontier technologies. Thus, leapfrogging is likely to succeed when executed during a paradigm or generation shift or an exogenous moment of disruption.
COVID-19 and the new wave of frontier technologies
Today, we are witnessing the rapid development of interdependent technologies transforming the world. Unlike experiences with previous breakthroughs, societies can adopt these technologies with relatively low upfront costs. Portability, replicability, and affordability are the essence of many frontier technologies. They can create an even playing field for all countries. With the ongoing pandemic, we see the signs of disruption fuelled by frontier technologies. Can it be an opportunity to leapfrog?
AI in Healthcare
Health care systems are probably among the most hierarchical and static institutions. Before Covid-19, we did not understand the importance of AI and lacked the data to deliver timely solutions. As the pandemic rolled around the planet, innovative AI applications have cropped up in many different locations. Location-based messaging, an AI algorithm diagnosing suspected cases within 20 seconds, a system remotely monitoring the health of the elderly in their homes – these snapshots provide a glimpse of what will be possible in the future of health care. Significant growth of the AI health care market was predicted in these areas: hospital workflow, wearables, medical imaging and diagnosis, therapy planning, virtual assistants, drug discovery, getting appointments, and more. Covid-19 will accelerate these trends rapidly. It will have a major impact on the emerging data economy – which is a big window of opportunity.
According to WEF (2020), the evolution of education will bring about disruption in multiple waves, and AI will be an essential part of it. During the pandemic, educational institutions have strived to find means to ensure students can continue their studies despite the crisis and social distancing. This has created an unprecedented push to online learning and a sellers’ market, where ed-tech companies have eagerly jumped on the opportunity to provide their services. Of course, EdTech can only get you so far without properly adapting the education content. An urgent task is to engage networks, research, and public discussions actively to promote critically and reflectively informed praxis.
The Covid-19 breakout has caused government bureaucracies to spin into action quicker than ever before – from building hospitals to introducing real-time updates. All these efforts and transparency of biological impact could have been improved if there were more smart cities in the world. As governments learn from ongoing experience, the investments will shift in favour of smart cities as it will be critical to have those to manage the next black swan event better. Key players benefiting from this shift in gears would be smart governments, multinationals like Microsoft and Siemens, and digital city start-ups.
These are just a few examples. Possibilities are endless. WESS (2018) describe technologies at our disposal that can help eradicate hunger and pandemics, increase life expectancy, reduce carbon emissions, automate manual and repetitive tasks, and improve quality of life. Firms that choose to capitalize on these underlying changes will succeed, and the ones that don’t will get disrupted.
While such possibilities are alluring, technology cannot make its own choices. Policy, leadership, and institutions will ultimately play a bigger role than technology has in solving global challenges. The window of opportunity to leapfrog also hinges on how quickly countries can master the will and put in strategic policies to facilitate the deployment and adaptation of frontier technologies.
Policies for leapfrogging: lessons from those who did it
Several countries have already seen success in leapfrog development. Their stories below show that the recipe for success depends upon a number of ingredients, such as:
- Bold strategies targeting priority areas for investment and promoting strategic partnerships within them
- Building the necessary capabilities for leapfrogging
- Smart regulation
Targeting priorities and building public-private partnerships
On the verge of bankruptcy at the time of independence (1990), Estonia started from scratch. With few natural resources and a population of just 1.3 million, it had to find a way forward with only its human capital at its disposal. Over 15 years the country reinvented itself into e-Estonia. As early as 1992, Estonia earmarked the ICT sector as the main thrust for its economic development. The development of the ICT sector in Estonia was based on public procurement for innovation and public-private cooperation in developing the solutions, which resulted in spill-overs into the private market. Estonia turned down Finland’s offer of its old analog telephone system when the latter decided to switch to a new digital system – Estonians built their own. Likewise, when the country had no land registry, they developed a paperless one. In 2000, the government declared internet access a human right, and made digital signatures legally binding. In 2002, the country issued mandatory digital identification cards. The country also instituted a cutting-edge X-Road technology platform to help manage and share private and public data. This allowed Estonia to institute online voting in 2005, becoming the first country ever to do so.
The turning point: These innovations laid the groundwork for Estonia’s first major success story – Skype. Today, the country is one of world leaders in ICT. Due to a well-arranged digital ecosystem, the country has reached unparalleled government transparency and trust levels. The digital ecosystem of Estonia has proved to be extremely resilient to emergencies. The live proof is being demonstrated in these trying times of Covid-19. For example, the Estonian government had already planned for education digitalization in 2015 and was about to finish transformation by 2020. Such a pre-arrangement turned out to be extremely beneficial while dealing with distant learning solutions.
Taiwan’s successful entry to higher value-added industry segments would have taken a longer time had there been no public-private R&D cooperation. The first successful example was a consortium to develop laptop computers. Such public-private joint effort does not guarantee immediate success, but is the only way out of the old specialization in low-end goods sectors, and hence, out of the middle-income trap. In South Korea, the first case of a successful public-private R&D consortium was digital telephone switches. This marked the beginning of the country’s emergence as a leader in telecommunication and IT devices. Given that this success was a source of learning and confidence, it, in turn, led to further public-private cooperation in the production of memory chips, mobile phones, and digital TVs.
Investing in education, upskilling and reskilling
Milton Friedman described Singapore as „an example of how to do development right”. Its transformation from a small fishing village to a modern and prosperous city-state is an incredible story “from rags to riches” based on a bold leapfrogging strategy. Investment in human capital through education and training has been at the heart of Singapore’s progress. First, as foreign investment money poured in, the country set up many technical schools and paid international corporations to train their unskilled workers in IT, petrochemicals, and electronics. The strategy of having multinationals educate their workforce paid great dividends.
Second, Singapore views education as “a national investment” and has increased government expenditure on education by about 200 times from 1959 to 2016. In 1997, the TIMS Study, which compared 13-year-olds in mathematics and science tests in 41 countries, ranked Singapore first in both subjects. In 2015, Singapore students retained their top position. Finally, with the fast pace of technological advancements, skill upgrading is essential to maintain a competitive edge. The SkillsFuture Council drives a national effort to help Singaporeans develop skills relevant to the future. For example, a SkillsFuture Credit top-up of $500 is provided to every citizen aged 25 years for upgrading their skills to fit the future needs better.
According to the former President of Estonia Ilves, the lesson is even more simple: invest more in math and engineering. In 1998, Ilves led the Tiger Leap programme to equip every classroom with computers and internet access. “I got trashed completely for several years, but my thinking was that 3-5% of the children who get to a computer — even if they are just a poor kid in the countryside — would have the innate curiosity to tear it apart”. Tiger Leap was one of the pillars for introducing the digital identity in Estonia and defined the education of the young people who ended up creating the basis of Kazaa, Skype, TransferWise, Bolt, and other Estonian start-ups.
The role of FDI and talent from abroad, and the “three detours”
The key lesson here is that technological capabilities must be built up. If local firms lack such capability, nothing will happen, even if R&D incentives or subsidies are substantially increased. Foreign direct investment (FDI) may assist in this through the provision of capital, the inflow of technology, managerial know-how, and their impact on the creation of efficient markets. The trick is to attract “quality FDI” that links foreign investors into the local host country economy.
It was the emergence of Israel’s high-tech sector in the early 1990s that put the country’s economy on track. Specialising in computer hardware and software, medical technologies and pharmaceuticals, this sector became world-renowned for innovation. High-tech industries represent about 50% of total industrial exports today. By 2018 there were 365 active foreign R&D centers operating in Israel, including giants like Google Inc., Facebook, Intel Corp., and Apple. Attracting talent also played a major part in Israel’s success. The country saw the influx of almost one million ex-Soviet Jewish immigrants in the 1990s. These highly educated immigrants, whose ranks included 82,000 engineers, assimilated into the local labour market, providing key scientific and IT skills. The Jewish diaspora also provided a large pool of researchers. According to the OECD’s Observer, government policy was instrumental in unleashing the potential of this abundant human capital. The technological incubator programme was set up in 1991, in part to provide these skilled immigrants with funding and know-how to become successful entrepreneurs.
Ireland is another example to learn from – called an “innovation engine of Europe”, it has more venture funding per capita available than any country in Europe. FDI has been identified as one of the key drivers of Ireland’s return to economic prosperity. Over 1,100 companies, including 15 of the top 15 US technology companies, have decided to place Ireland at the hub of their European operations. In addition, many companies recently have re-located to Ireland as part of their Brexit plans to enable them continue to trade into the EU. The IMD World Competitiveness Yearbooks have called Ireland as No. 1 for investment incentives and attitudes about globalization. The factors contributing to such highly-attractive investment climate include the following: a skilled, flexible and adaptive labour force, Corporation Tax Rate of 12.5% on trading activities, adaptable and efficient business legislation, 25% R&D Tax Credit, and Double Taxation Agreements with 72 countries.
A few east Asian economies, such as Taiwan, South Korea and Singapore, have also experienced rapid growth by successfully leapfrogging in developing a limited number of short-cycle technology sectors such as semiconductors. Typically, they began with the assembly of final goods using imported parts. Next, they moved on to developing low-technology components, and gradually to higher-technology components, before learning to modify the design of existing products and ultimately, to create new products. Keun Lee (2019) coined the capability-building process in East Asia as “three detours”:
- From imitation to innovation. The first detour promotes imitative innovation under a loose IPR regime in petit patents and trademarks instead of promoting and strengthening regular patent rights.
- More GVCs-less GVCs-more GVCs again. The second detour is related to global value chains. An economy should initially learn by participating in a GVC but later reduce its reliance on these chains by building increased domestic value chains in sequential entries into high-end segments. Otherwise, the latecomers might remain in low value-added segments, which is a middle-income trap symptom.
- From short to long cycle sectors. The third detour entails specializing first in short-cycle technology-based sectors and products (i.e., ICTs) and only at a later stage, in long-cycle sectors and segments (i.e., pharmaceuticals). Long-cycle technologies imply that previous knowledge remains useful and is important for a long time. Such technologies act as an entry barrier against latecomers, although they denote high profitability and thus have desirable attributes. Therefore, latecomers are advised to target short-cycle technologies for which entry barriers are low, but growth prospects are good due to high innovation frequency.
Smart regulation and the importance of standards
Governments with an evolutionary mindset can use incentives, taxes, and standards to push in the right direction. For product innovations to be successful on the market, standards are a critical factor.
Recognizing that HD TV would be the next-generation technology, South Korea established the Committee for Co-development of HD TV in 1989 with 17 institutions comprising business and science. Their strategy was to develop several alternative standards simultaneously, with different private companies assigned to monitor and follow different standards. Initially, they were heavily influenced by the Japanese leaders in analog HD TV. A group of Japanese firms arrived during the 1988 Seoul Olympic Games and staged a promotional tour. One year later GI (US) staged a demonstration of the possibilities of digital TV. The Korean team consequently decided to target digital HD TV instead of the Japanese technology. The US standard had not yet been determined. After the so-called ‘grand coalition’ had agreed on a common standard for digital TV, the Korean firms became the first movers in terms of producing the first digital TVs compatible with the common standard in the US markets (Lee, 2019).
The Lithuanian fintech sector is a case of more recent leapfrogging. Over the past couple of years, Lithuania has become home to the fastest-growing fintech sector in the EU. Success was based on two factors – smart regulation and proactively taking advantage of post-Brexit opportunities. The country has passed smart regulation to support the development of fintech. For example, while other European countries issue electronic banking licenses in approximately 12 months, Lithuania does it in three, and start-ups can apply remotely. Also, Lithuania has adopted the so-called Sandbox regime. Developed by the Bank of Lithuania, it lets fintech companies test their solutions in a supervised and regulated environment before introducing them to the rest of Europe and then to the rest of the world. Finally, for companies looking to expand their business portfolio with deposits and lending, Lithuania offers a specialized banking license.
The magic ingredient
Successful policies for leapfrogging need to consider the lessons above, and possibly more. However, the windows of opportunity can’t be copied. For example, Estonia “jumped” using the Internet boom of the 1990s, and Singapore exploited the growth of global financial sector. Sadly, the majority of strategies nowadays are ultimately catch-up strategies, looking to copy. Policymakers rarely consider how they might create an enabling environment for more disruptive, path-creating forms of leapfrogging.
This brings us to the main lesson. Nothing will work without the most crucial element – a smart and gutsy policymaker who knows how to get things done.
Quah (2018) attributed Singapore’s success to “having the best and brightest” people in government that are able to invent what the country needs to survive and grow. Indeed, the government’s policy of paying competitive salaries to attract the brightest Singaporeans to join the administration has been successful as reflected in consistently high international scores on governance effectiveness indicators.
My biggest inspiration comes from the remarkable Mart Laar — the father of the Estonian economic reform. Mr. Laar, a historian by training, was only 33 years old when he was elected prime minister in 1992. Up to that time, the only economics book he had read was Milton Friedman’s “Free to Choose.” He said that it sounded good to him, “so we went ahead and did it.”
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