Int. J. and Sustainable Development, Vol. 1, Nos. 1/2, 2005 65

Leapfrogging into the future: developing for sustainability

Arnold Tukker TNO, PO Box 49, 2600 JA, Delft, The Netherlands Fax: +31-15-276-3024 E-mail: [email protected]

Abstract: It has become almost a platitude that radical and sustainable improvement of need-fulfillment has to be reached in one generation to prevent the possibility that Nature will break down under the combined pressure of population growth and growth in wealth per capita. This requires ‘radical’ or ‘system’ . In this respect, there is an important difference between consumer economies such as Europe, the EU and Japan, emerging economies such as China and Malaysia in Asia and bottom-of-the-pyramid economies where people survive on 1–2 dollars a day:

• In consumer economies, the physical economic infrastructure is already fully developed, which often causes important ‘lock-in’ problems with regard to realising radical change. • In emerging economies (which might bring about the biggest leap in environmental pressure) this infrastructure, by and large, still has to be built up, so that, in theory, there is much more freedom to design sustainable systems from the onset. • In bottom of the pyramid economies, markets are so different that copying Western market systems is factually quite difficult, although examples and innovative solutions are required anyway.

But is this ‘’, particularly by emerging economies, while theoretically possible and practically desirable, really going to happen? Current experiences are not encouraging: ‘dinosaur’ industries such as the car industry are invited to invest heavily in countries such as China leading to a transplantation of existing problematic transport infrastructures. This paper argues that, where Western countries need a system innovation and transition management approach to realise a change to sustainability, emerging economies would have to apply something very similar to ensure that the larger flexibility they have is indeed used to leapfrog to sustainable systems. This implies that functions such as visioning, indicative planning, foresight and reflexive governance have to be fostered to ensure that foreign and national investments are used to create sustainable systems.

Keywords: leapfrogging; innovation; sustainability; emerging economies; sustainable consumption and production; factor x.

Reference to this paper should be made as follows: Tukker, A. (2005) ‘Leapfrogging into the future: developing for sustainability’, Int. J. Innovation and Sustainable Development, Vol. 1, Nos. 1/2, pp.65–84.

Copyright © 2005 Inderscience Enterprises Ltd.

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Biographical notes: Dr. Arnold Tukker manages the Sustainable Innovation Program within TNO Built Environment and Geosciences. TNO is the major Dutch not-for-profit research organization, with a mission to support innovation of the Dutch economy. He manages a major EU funded research network in support of UNEP’s 10 Year Framework on Programs on Sustainable Consumption and Production.

1 Introduction

Many scholars state that radical innovations are needed to prevent the possibility that Nature will break down under the combined pressure of population growth and the growth in wealth per capita. In the next 50 years, the world population (P) will roughly rise with a factor 1.5 (from 6 to 9 billion people; see, for example, Lutz et al., 2004). The affluence (A) or wealth per capita in areas such as China, India and Africa still need to grow a factor 5 or more only to come close to the prosperity that Japan, Western Europe and the USA currently have. According to the so-called IPAT formula already proposed by Ehrlich and Holdren (1971) in the 1970s, this will lead to an economic growth of about a factor 10 – and hence a factor 10 more environmental impact (I), if there is no change in the efficiency of our way of production and consumption (T):

Impact = Population × Affluence per capita × (Technical) efficiency of production/consumption

Or, in reverse, if environmental pressure were kept at the same level as now, a Factor 10 more effective fulfillment of needs should be reached (e.g. von Weizsäcker et al., 1997; Factor 10 Club, 1997).1 Since both the population growth and the affluence per capita growth will be greatest in developing countries, it is of particular relevance that here this factor 10 should be realised. In the ideal case, developing countries should therefore, where possible, learn from the mistakes of the developed world and implement directly sustainable systems of production and consumption – a strategy that has been coined ‘leapfrogging’. Against this background, this paper will argue the following.

1 Firstly, we will discuss the final consumption domains in which radical innovations seem most needed.

2 Secondly, we will argue that innovations with such radical environmental gains cannot be realised by environmental policy approaches that search for ‘system compliant’ solutions, but that system innovations are necessary.

3 Thirdly, we will give a theoretical discussion on drivers and barriers for realising such radical, sustainable system innovations.

4 Finally, we will divide typical economies in the world in a number of classes, and discuss the challenges with regard to realising radical change in each class. In doing so, we will analyse the possibility for what we will call ‘emerging

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economies’ and ‘bottom of the pyramid’ economies for leapfrogging at system level and do a suggestion for policy approaches that could be applied.

2 The need for sustainable system innovations

2.1 Relevant domains from a final consumption perspective

Figure 1 gives a simplified representation of the production–consumption system (based on Inaba, 2004). Consumers have needs in different domains, such as housing, food, mobility and leisure. These needs are either covered via business to consumer (B2C) interactions, or (co-) delivered via governmental services (preceded by business to government interactions or B2G). Since these functional needs, in the end, (mainly) drive the economic production system, related material flows and emissions, we will take them as an analytical starting point.2

Figure 1 An overview of the production–consumption system (adapted from Inaba, 2004)

In the past five years, a variety of studies has been carried out prioritising final consumption domains related to their life-cycle environmental impacts. These studies have mainly been for Europe, the USA and Japan. Table 1 gives the final result for a study for the EU25 for a wide variety of impact categories (Huppes et al., forthcoming; Tukker et al., 2005). The pattern visible in this table is confirmed by a large body of other work (e.g. Collins et al., 2005; Nijdam and Wilting, 2003; Weidema et al., 2005),3 and basically implies that the following consumption categories – at least in Western, developed economies – are most relevant since they induce 70% of the environmental impacts, irrespective of the type: • nutrition (food and non-alcoholic beverages plus restaurants and hotels) • transport • housing and living (furnishing, housing, water, electricity and other fuels).

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Table 1 Life cycle environmental impacts (in % of the EU total) and final expenditure (in % of the EU total and 109 Euro) for 12 aggregate final consumption domains (Tukker et al., 2005)4

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2.2 The limitations of ‘system compliant’ environmental policies

The above table gives a clear indication of areas or ‘systems’ where radical, sustainable innovations are most desirable. However, as current practice shows, even in countries that have an active sustainability policy, it is far from easy to realise radical gains in these consumption domains. Problems with regard to, for instance, mobility (congestion, ), agriculture (diseases such as BSE, mouth and foot, manure, emissions) and climate change appear to be persistent and difficult to tackle by the policy approaches that have been used in the last 10–20 years (VROM, 2001; see also Shellenberger and Nordhaus, 2004). This includes not only the largely top-down, remedial, end-of-pipe instrumentality of which the limits already became visible in the 1980s, but also ‘ecological modernisation’ approaches, that search for environmental-economic win-wins through implementing innovative , use a more open and participatory policy process, and rely increasingly on new policy tools such as market-based and communicative instruments (e.g. Mol and Sonnenfeld, 2000; Young, 2000). As pointed out by among others, such as Jänicke (2000, 2004), such approaches predominantly focus on technical, ‘system compliant’ solutions related to production processes alone, and leave structural changes out of sight. This will lead not to sufficient solutions in sectors or branches that by their internal logic will inherently cause a (growing) intensive use of resources, or where adequate technological solutions do not exist. They also leave issues such as rebound effects and the almost unstoppable escalation of needs (that in turn drives material production and hence environmental impacts) out of sight (compare Jackson et al., 2004 and Shove, 2003). Or, as stated by Rotmans (2003): problems characterised by market and system failures require an innovation of the system and usually cannot be tackled by market-based or regulatory instruments alone. Hence, the need for more integral and of systems to deal with persistent sustainability problems is widely recognised, reflected by wordings such as ‘Industrial Transformation’ (Vellinga and Herb, 1999), ‘system innovations’ and ‘transitions’ (VROM, 2001) and ‘fundamental changes’ towards ‘sustainable consumption and production patterns’ (WSSD, 2002). The essence of the message above is reflected by Figure 2.

Figure 2 System optimisation, redesign and innovation (Weterings et al., 1997)

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System optimisations (e.g. making cars more fuel-efficient or applying low-emission technologies) usually lead only to a few dozen percent of sustainability improvement. Singular innovations that change elements of production–consumption chains (e.g. implementing a material recycling system for end of life vehicles, or striving for a circular economy in general) may lead to improvements of 50% or 75%. But only innovations at system level create such a large scope for change that really radical reductions of environmental pressure come into sight. Such innovations in principle focus on societal needs or functions (e.g. the need of current office workers to be in contact in a variety of circumstances with others) and the systems that determine how these functions are fulfilled (our organisation of work, our way of spatial planning, resulting in the need for commuting often considerable distances, via an infrastructure dominated by car transport). The time horizon of such changes, or ‘Transitions’, is often decades. It is hence essential that where developed countries struggle with persistent problems in their food provision, mobility and other systems, developing economies should try to choose pathways that avoid copying these systems with all their pitfalls. In the next section, we will highlight some theoretical backgrounds that illuminate the factors that contribute to resistance to radical change, and point at the flexibility that developing countries may have to choose for alternative development pathways.

3 Barriers to radical change: lock-in factors

3.1 Introduction

How can innovation processes be ‘organised’ to bring system innovations nearer? The experience shows that such changes are often hard to reach and indeed that the insights in how policy can stimulate them is still in its infancy. An important point is that the institutional context in which an innovation takes place restricts the scope of innovation. Institutional adaptation can be very difficult since existing institutions represent long-standing habits of doing things. The possibilities for change are therefore path-dependent. Change is only expected if and when the required change is not too big. Here, the so-called logic of appropriateness comes in: When there is a large misfit, existing institutions will resist change (cf. March and Olsen, 1989). The required change then completely counters existing ideas, working routines, existing structures, competencies and so on. Only in cases where there is what is called medium adaptational pressures (so it is not a real stretch), is change possible, and this change will almost by definition then be incremental. Indeed, non-incremental innovations more often than not have their start outside the dominant institutional context (e.g. Christensen, 1997). A useful perspective on innovations therefore needs to address the context in which innovations take place. In this section, we will first present a model for system innovations, which has its roots in socio-technical change theory, and which was developed and articulated most eloquently by authors such as Schot, Geels and Kemp (e.g. Elzen et al., 2004a,b; Geels and Kemp, 2000; Rotmans, 2001; Schot, 1997). We will particularly focus on identifying factors that stimulate or hinder change, and on ideas about how change can be governed.

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3.2 System innovation from an evolutionary viewpoint

The authors mentioned above have elaborated on evolutionary that, simply stated, sees technological development as a process of variation and selection. The interaction between variation (determined by heuristics in research and development) and selection (e.g. by market forces, existing physical infrastructure and institutional and societal factors) leads to certain preferred trajectories (cf. Nelson and Winter’s notion of technological regimes and Dosi’s notion of technological paradigms, Nelson and Winter, 1982; Dosi, 1982). The authors we refer to widened this technological regime concept. Rip and Kemp (1998, p.340) gave already a wider description of a technological regime in terms of ‘the rule set or grammar embedded in a complex of engineering practices, production process technologies, product characteristics, skills and procedures, ways of handling relevant artefacts and persons, ways of defining problems, all of them embedded in institutions and infrastructures’. Later, Geels (2002, 2004) proposed the term ‘socio-technical regime’ to refer to the semi-coherent set of rules carried by different social groups. They provide (dynamic) stability in the regime by providing orientation and co-ordination to activities of relevant actor groups. This leads to interlinked developments (or co-evolution) of different dimensions of socio-technical systems (e.g. technologies, knowledge, markets, infrastructure, culture and symbolic meaning and so on). Next to the regime, which can be seen as a development at mesolevel, niches can be discerned. These niches are relatively limited areas, in which new socio-technical systems and practices can be developed and tested under relatively protected circumstances. Examples are specific market niches (where protection is provided by a specific market demand), or technological niches (where a specific actor network is willing to create the financial and other boundary conditions that make experimenting and learning possible). The last (macro-) level has been called the socio-technical landscape. These are a set of fairly stable factors that are in principle external to (actors in) the regimes and niches, and can only slowly be influenced from these levels. Sudden changes do occur at this level, but they have an unpredictable character (e.g. sudden natural disasters with great impact, the discovery of new natural resources that change geo-political realities, etc.).5 Examples include the existing material infrastructure, but also the existing culture, life- style, demography or trends therein, etc. The landscape basically ‘channels’ the direction of the socio-technical trajectories (see Figures 3 and 4).

Figure 3 Topography of a socio-technological evolution (Sahal, 1985, p.79, as reproduced in Geels and Kemp, 2000)

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Figure 4 A multilevel perspective on innovation (Geels and Kemp, 2000, p.17)

3.3 Stability and change in socio-technical systems

From this description, one can identify two main sources of stability that stimulate incremental innovations of socio-technical systems. Firstly, the landscape usually provides a stable background that limits the options for change considerably. And secondly, the dynamic stability in the regime forms another factor that limits change. Despite these stabilising factors, system innovations do occur. Developments in niches play a key role in such changes, since they can act as stepping stones for maturing and the diffusion of radical new (compare Christensen, 1997). Research on how these processes actually work and how a stimulating policy can be developed is still in its initial stages, but the following tentative ideas have been formulated (Geels and Kemp, 2000):

• Successful transitions roughly can be divided in a preparatory phase (during which various singular innovations are tested in niches), a take-off phase (during which the alternative system gains some ground in its total form), an acceleration phase (where the new system starts to overtake the old system) and a saturation phase (see Figure 5). • A change in socio-technical regime usually tends to grow out of a combination of niche technologies, and the form of change usually cannot be predicted. • Often, a process of niche-cumulation can take place (i.e. several key elements of a new socio-technical regime are applied in several, parallel or consecutive niches). • Often, hybrid forms of old and new technology have a role as intermediates. This means that changes often originate outside the existing regime in niches that subsequently grow to replace the old system. Therefore, it is important to link niches to existing technologies.

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Figure 5 Phases in a system innovation

The mere existence of a rich variety of alternative socio-technical systems in niches seems not a sufficient condition for change. Indeed, some authors argue that niches are around always and hence not decisive (Berkhout et al., 2004). ‘Events’ that change the landscape can have an important influence (for instance, the discovery of a major gas field in The Netherlands that triggered a shift in the base of energy supply; Verbong, 2000). Weaknesses and internal pressures developing within a regime form another factor. Niches may also innovate in a quicker pace than the mainstream regime, thereby starting to out-compete the latter over time (Christensen, 1997). Typically, a combination of such reasons has to occur before the window of opportunity is created that allows until then niche systems to take off (compare Te Riele et al., 2000). As said, how to govern system innovations is still much in debate. It seems clear that they cannot be totally controlled – for this, the time horizon is too long and the system at stake too complex (compare the notion of ‘muddling through’ (Lindblom, 1959) and concept of bounded rationality (Simon, 1957). Plan and control concepts alone usually will not work. Scholars analysing system innovation hence tend to favour a combination of the application of market-based instruments, complemented with an indicative planning approach and using a process-oriented . As formulated by Kemp and Rotmans (2004), key elements of transition management are: • long-term thinking as a framework for short-term policy • backcasting: setting of short- and long-term goals based on long-term, guiding visions and short-term options • thinking in terms of multidomain and multilevel • a focus on learning, particularly learning by doing. The role of government varies in each transition phase. Initially, there is a clear need for experimentation and visioning. Later, there is a need for controlling side effects of large- scale applications of new technologies. During the whole process monitoring has to take place to ensure the right adjustments into a sustainable direction are made. Transition management in that sense can be seen as what Hamel and Prahalad (1994) – with regard to individual companies – called ‘strategic intent’: being clear about rough direction that one wants to go, and learning by doing along the way.

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3.4 Factors that support and hinder system changes

The text above already indicates a number of factors that will support and hinder system changes. They are summarised in Table 2 by level of innovation and briefly discussed below. Given the relatively immature status of theories on system innovation, it has to be regarded more as a first list of attention points than a complete and rigidly structured overview. Deepening the understanding of why and how some niches lead to transformational change and others fail is one of the key questions on the research agenda for this field (Elzen et al., 2004a,b).

Table 2 Some stabilising and destabilising factors with regard to system change

Level Stabilising Destabilising

Landscape Existing worldviews and culture Gradual changing views and culture Existing policy relations Sudden events changing the landscape Existing geo-political realities Regime Sunk material investment, e.g. Internal weaknesses, e.g. – Infrastructure – Performance bottlenecks Sunk immaterial investment, e.g. – Diminishing return on investment – Heuristics and routines Negative externalities – Education and skills High inherent (innovation) dynamics Symbolic and cultural meaning of practices Existing synergies between elements of the socio-technical regime Low inherent (innovation) dynamics Niche Availability of promising niches – High speed of innovation – Clear niche cumulation trajectories

It is clear, however, that landscape factors such as existing life styles, cultures, price levels and geo-political realities stabilise systems. At regime level, sunk infrastructural costs, sunk investments in skill sets, cultural and symbolic meaning of practices and mutual interrelation between regime elements are another source of stability. At the same time, these levels can be a source of destabilising factors. At regime level, sudden ‘events’ such as discovery of new resources, wars, revolutionary policy changes or other crises may have a destabilising effect. The same applies for gradually changing worldviews and cultural changes. At regime level, internal problems such as performance bottlenecks or diminishing returns on investment within the existing regime may have a destabilising effect.6 The same applies for negative externalities that become gradually visible. Another factor is the inherent dynamics in the regime: as stated before, a regime is in a continuous dynamic equilibrium, but in some regimes the dynamics are simply ‘speedier than others’ (which in turn may create more frequent windows of opportunity for radical changes).7 And finally, the available of promising alternatives in niches is relevant for destabilisation.

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4 Different economies: opportunities for system innovations

4.1 Types of economies

The whole premise of this paper is that certain economies may be able to ‘leapfrog’ towards sustainable systems without copying the Western ones first. This already indicates that a differentiation in type of economies has to be chosen. In this paper, we follow a division in three classes developed by Hart and Milstein (1999). They discern: 1 Consumer economies (Western Europe, the USA and Japan) with a high wealth per capita level, and where poverty is all but eradicated (some one billion citizens). 2 Emerging economies (e.g. China), that are rapidly changing and developing fast to modern consumer economies (some 1–2 billion citizens). 3 Bottom of the pyramid (BOP) economies.8 economies where the large majority of the people survive on a few dollar per day, and which concern consumer markets that are of relatively low importance to the others in the global system (some 3–4 billion citizens). This division is somewhat rough, since some economies may in fact fall in part in different classes.9 Yet, Hart and Milstein used this division to show that from a sustainability perspective, these different economies face quite fundamentally different challenges (see also Table 3): • Consumer economies such as Western Europe and the USA need to focus on reducing material use per consumption unit. • Emerging economies can look how they can ‘leapfrog’ directly towards sustainable consumption and production structures. • In BOP economies, consumption and production structures need to be implemented that allow for covering basic needs and subsequent sustainable growth.

Table 3 Sustainability challenges per type of economy (adapted from Hart and Milstein, 1999)

Type of economy Example countries Main sustainability challenge 1 Consumer USA, Japan and Western Dramatically lowering Europe resource use while maintaining economic output (‘Factor 10’) 2 Emerging China, S-E Asia and South Leapfrogging to sustainable America structures of consumption and production without copying Western examples first 3 Bottom of the pyramid Many countries in Africa Developing dedicated solutions for the ‘Bottom of the pyramid’; providing a basis for sustainable growth

In fact, in all these types of economies transitions or system innovations are asked for. However, the division proposed by Hart and Milstein point at the fact that the nature of these system innovations is rather different. We now will turn to a discussion per type of economy.

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4.2 Consumer economies

As said, the challenge for consumer economies is how to realise the ‘Factor x’: reducing resource use, whilst growing in wealth. It seems that the analyses presented in Section 3, how to realise system innovations or transitions, are mainly focused on these countries. It is clear that one of the major bottlenecks in realising these transitions is a – largely physical – lock-in related to existing infrastructures, plus hard to change incentive structures and societal contexts. An example can be given from the field of mobility. Introducing an energy label that supports enhancing the fuel efficiency of a car results typically in a sustainability improvement is 20%–30% per kilometre driven. There is no change in the structure of the production–consumption system, and since there, people are locked in a situation where at a private level they are almost forced to commute to work, shop by car, etc., no radical changes can be expected. This is only possible if spatial planning and incentive systems are in place that result in a context of life asking an inherent low need for transport. This, for instance, is the case in the quarter of Floridsdorf near Vienna, that had been designed to be (almost) car free and that has excellent public transport facilities. The housing rental contracts discourage car ownership as well. These push and pull factors (pressure to diminish car ownership and a life context stimulating the same) created a successful example of sustainable consumption (e.g. Hertwich, 2002). A major problem for western economies is of course that the current (spatial) infrastructure by and large has been completely built, and that totally adapting it to form a low-transport need environment is difficult. More in general, most of the factors identified in Section 3 that determine the feasibility of radical innovations seem to play out negatively (see Table 4). At the same time, there are factors at stake that contribute to change of existing regimes. For instance, in Western Europe, Japan and Singapore the negative externalities of certain regimes (automotive, agriculture) have been clearly visible, thereby creating pressure on these regimes, which in some cases lead already to stringent measures.10

4.3 Emerging economies

In theory, emerging economies are much more flexible in this regard. They go through a period of rapid change, and an important part of their infrastructure still has to be build in the next 40+ years.11 In many cases, the future regimes (including infrastructure, skill sets and the symbolic meaning of practices) still have to be built up. Hence, many stabilising factors already present in Western societies, are less important in emerging economies. This implies that with foresight and (indicative) planning one could try to structure society in such a way that ‘inherently sustainable production and consumption structures’ are set up. In the area of spatial planning and transport, for instance, for many fast developing cities there is probably still a choice between allowing a car-based system to grow, thereby ending up with the same problems as experienced now in Bangkok and Jakarta, or following the much cited example of Curitiba in South Brazil (e.g. von Weizsäcker et al., 1997). In the 1960s that city developed an integrated plan to minimise urban sprawl, reduce downtown traffic, preserve its historic district and provide easily accessible and affordable public transit via a cost-effective express bus system. The approach was so successful; now 60% of the travel in the city takes place via the public bus system.

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Table 4 Some stabilising and destabilising factors with regard to system change in consumer economies

Level Stabilising Destabilising Landscape Existing worldviews and culture* Gradual changing views and culture* Existing policy relations* Sudden events changing the Existing geo-political realities* landscape* Regime Sunk material investment, e.g.** Internal weaknesses, e.g.* – Infrastructure** – Performance bottlenecks Sunk immaterial investment, e.g.** – Diminishing return on investment – Heuristics and routines** Negative externalities** – Education and skills** High inherent (innovation) dynamics* Symbolic and cultural meaning of practices** Existing synergies between elements of the socio-technical regime** Low inherent (innovation) dynamics* Niche Availability of promising niches – High speed of innovation – Clear niche cumulation trajectories *Unclear or probably highly case dependent relevance. **Rather relevant.

However, it is clear that such positive developments will not happen on their own. For instance, American, European and Japanese automotive manufacturers are investing heavily in local production facilities in China and these activities are contributing to the development of a vehicular transport system that is virtually indistinguishable from the one that presently exists in these companies’ native countries (Gan, 2003; Sit and Liu, 2000; Tukker and Cohen, 2004). The opportunities for business expansion in these fast developing markets are just too promising, and negative externalities may have not yet lead to (public or political) pressure on the regime. So, where internal weaknesses and externalities may start to become destabilising factors for regimes (in this case related to transport) in Western economies, this may still be much less the case in emerging economies. This situation is reflected in Table 5. The table suggests that in principle there is actually more room for radical, sustainable innovation than in the current dominant economies. The main challenge for emerging economies is if they are capable to grasp this opportunity. In many ways, it seems that the elements of transition management discussed in Section 3 are applicable here as well. After all, emerging economies are economies in transition, and – just like transition management to be applied in Western economies – it is all about creating a sense of direction or strategic intent of development into a sustainable trajectory. This implies: • to develop foresight and indicative planning with regard to the desired (sustainable) situation, and • to develop governance structures for reaching this situation in a situation where societal or physical pressure still is relatively low.

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Table 5 Some stabilising and destabilising factors with regard to system change in emerging economies

Level Stabilising Destabilising Landscape Existing worldviews and culture* Gradual changing views and culture* Existing policy relations* Sudden events changing the Existing geo-political realities* landscape* Regime Sunk material investment, e.g.** Internal weaknesses, e.g.** – Infrastructure** – Performance bottlenecks** Sunk immaterial investment, – Diminishing return on investment** e.g.** Negative externalities** – Heuristics and routines** High inherent (innovation) dynamics* – Education and skills** Symbolic and cultural meaning of practices** Existing synergies between elements of the socio-technical regime** Low inherent (innovation) dynamics* Niche Availability of promising niches – High speed of innovation – Clear niche cumulation trajectories *Unclear or probably highly case-dependent relevance. **Not (yet) very relevant.

4.4 Bottom of the pyramid economies

The situation in bottom-of-the-pyramid economies is fundamentally different as in the emerging and consumer economies (Hart and Milstein, 1999). The traditional business models and consumption and production structures used in consumer economies are, as indicated, gradually taken over in the emerging economies. With the development of these economies, the emergence of a middle class with purchasing power makes this a logical step. The main difference in bottom of the pyramid economies is that a large majority of the population has only a very limited purchasing power. This, in turn, implies that the business models and consumption and production structures that work well in consumer economies, will not work in these markets. Yet, as shown by Prahalad (2004), innovative business models tailored to these bottom of the pyramid markets can work very well, be profitable and contributing to rising wealth, by slashing transaction costs, other inefficiencies and supporting entrepreneurship. The examples given by Prahalad (2004) and others such as Hart and Milstein (1999) include systems for providing microloans, a leasing system of mobile phones, etc. The interesting point here is that since these economies are so different in comparison to the current main economies in the world, in many ways existing structures cannot be copied. For making progress, something (radical) new has to be invented. Though – admittedly – at world scale it concerns in monetary terms probably minor (niche) markets, it might in fact be that these economies provide testing and developing grounds for real radical innovations (compare Christensen, 1997) (Table 6).

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Table 6 Some stabilising and destabilising factors with regard to system change in ‘Bottom of the pyramid’ economies

Level Stabilising Destabilising Landscape Existing worldviews and culture* Gradual changing views and culture* Existing policy relations* Sudden events changing the landscape* Existing geo-political realities* Regime Sunk material investment, e.g. Internal weaknesses, e.g.** – Infrastructure** – Performance bottlenecks** Sunk immaterial investment, e.g. – Diminishing return on investment** – Heuristics and routines** Negative externalities** – Education and skills** High inherent (innovation) dynamics* Symbolic and cultural meaning of practices** Existing synergies between elements of the socio-technical regime** Low inherent (innovation) dynamics* Niche Availability of promising niches – High speed of innovation – Clear niche cumulation trajectories *Unclear or probably highly case-dependent relevance. **Not (yet) very relevant.

5 Conclusions

So to conclude, one sees that the challenges and opportunities for embarking on radical sustainable innovations differ greatly per type of economy: 1 In consumer economies, the main challenges is to maintain and grow wealth, but with a radical reduction in resource use. This requires a targeted system innovation approach, which is certainly hampered by high (material and immaterial) sunk costs in the systems. 2 In emerging economies, in principle there are much more degrees of freedom to ‘leapfrog’ directly to sustainable consumption and production patterns, without making the mistake of investing into what has been termed ‘dinosaur’ infrastructures, that in the end will make it more difficult to reach inherent sustainability. Since particularly the emerging economies will become important drivers behind resource use, it is in principle in their interest to what Hart and Milstein termed ‘avoid the collision’. Though in theory this is true, the following provisions have to be taken: a There needs to be a kind of long-term ‘indicative planning’ or at least a guiding vision/foresight function in place that can create a sense of awareness of the direction into which the development preferably could go.12 b In relation, governance mechanisms that can ‘guide’ these developments need to be put in place.

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c A major point of attention in this governance is how foreign and national investment in such a way that they are directed towards enforcing desired inherent sustainable systems, rather than merely are used to build a copy of what is available in consumer economies. 3 In bottom-of-the-pyramid economies, interestingly, there might be most opportunity to experiment with wholly new production and consumption systems. Firstly, the ‘copy’ danger is probably less than in emerging economies, simply because for the vast majority of the population traditional market rules, business models, etc. do not apply. Secondly, small-scale experiments in such countries are incomparably less expensive than in consumer economies, implying that they might actually be the best testing grounds for sustainable consumption and production structures.

Acknowledgements

A former draft of this paper was presented during the November 2004 Greening of Industry conference, Hong Kong. It was fundamentally revised during a visiting scholarship of Arnold Tukker to the Centre for Business Relations, Accountability, Sustainability and Society (BRASS), Cardiff University, Wales/UK in the period March–June 2005. This paper may or may not reflect the official position of these organisations.

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Notes 1There is of course debate whether ongoing economic growth will indeed affect the Earth’s carrying capacity, with the book ‘The Skeptical Environmentalist’ of Bjorn Lomborg (2001) as one of the most visible examples that argue that such disasters will not happen. However, on a closer look, Lomborg’s book does not deny that changes in production and consumption structures are needed, but basically argues that humanity has found answers for such problems in the past and will find them again in future. This paper is not the place for a fundamental discussion about the need for active ‘Factor X’ policies. Yet, by only taking the example of Global Warming one can hardly deny the need for this. The Kyoto protocol calls – based upon the best science currently available – for a slight reduction of emission of greenhouse gases compared to 1990. This target can never be met while at the same time realising the Factor 10 economic growth indicated in the main text, if there are no radical changes in our systems of energy production and – use in the next 50 years. 2To some extent this is of course a simplification, since consumption not fully autonomous in driving for B2C, B2G and B2B processes. The production side of the economy in turn shapes the context in which consumption takes place – and hence becomes a driver in itself. This phenomenon is popularly coined as the rebound effect. 3We refer further to 10 papers in a forthcoming special issue on this subject of the Journal of Industrial Ecology, envisaged publication in Spring 2006. 4COICOP stands for Classification of Individual Consumption According to Purpose, a UN classification system for consumer expenditure. The aggregated score in the 10th column has been calculated with weighting factors as published in Huppes et al. (2005) from the scores on the impact categories mentioned in the 2nd to 9th column. For the detailed calculation procedure we refer to Tukker et al. (2005, p.400). 5One example may show that the theories on system innovation still need specification, among others with regard to how is differentated between the landscape and regime. Geels (2004) states that ‘the main point is that the landscape is an external context for actors in niches and regimes. This definition makes what belongs to the landscape actor-dependent: certain actor-coalitions or countries will, for example, have to take a certain level of access to natural resources for granted, where other, much more powerful actors can try to influence any problems with such access (compare the entrance of Japan in WWII in 1941). 6See, for instance, how the automotive industry has ‘locked’ itself in by the use of capital intensive production technologies (stamping, welding, painting, machining). These can only be profitable if high volumes of the same car model can be build, which is at odds with the trend of consumers asking for more diversity and more customised solutions. Due to this paradox, Paul Nieuwenhuis and Peter Wells (1997) have predicted ‘The death of motoring’, that is the end of the regime of automotive production as it exists still today. 7For instance, compared to the chemical industry the development in mobile phones (and indeed, electronics in general) goes so quickly, that the latter tend to see challenges like the phase out of certain chemicals much less threatening than the chemical industry (compare Tukker and Simons, 1999). 8Or ‘survival economies’ as called by Hart and Milstein. This term has been suggested by Prahalad (2004). 9For instance, a large part of the population in India may be regarded as living in BOP economies. At the same time, in this country also a middle class is rapidly developing in large numbers, which would classify them as emerging economies (compare Myers and Kent, 2004). 10For instance, car traffic in The Netherlands is now so dense that in many parts of the west of the country the new EU Air quality guidelines are exceeded – with as a result that court of appeals have stopped quite some planned building projects. There is a real fear that car traffic now will become the cause of major restrictions in spatial planning and building projects (VROM, 2005). Myers and Kent (2004) mention the example of electronic smart cards applied in Singapore to divert people from car driving.

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11Some data provided by Myers and Kent (2004) give an impression of the magnitude of such changes in China: 120 million people will move from rural areas to cities; the number of cars is rising from a mere 1.9 million in 1990 to a potential 40 million in 2010. 12As has been discussed intensively, words such as ‘planning’ and ‘forecast’ actually are not right in this context, since we talk about processes that take place on such horizon that they cannot be ‘planned’ in a traditional sense.