Growth and the Smart State

Abstract

As countries develop, the main driver of economic growth shifts from imitation to innovation. These two sources of growth require different policies and institutions. In particular, in this article we argue that the transition from an imitation-based to an innovation-based economy calls the old welfare state model into question. It is not so much the size of the state that is at stake but rather its governance. What we need to foster economic growth in developed economies is not a reduced state but a strategic state, which acts as a catalyst using selective and properly governed support to the market-driven innovation process. This idea of a strategic state that targets its investments to maximize growth in the face of hard budget constraints departs both from the Keynesian view of a state sustaining growth through demand-driven policies and from the neoliberal view of a minimal state confined to its regalian functions.