THE CONTRIBUTION OF ENDOGENOUS GROWTH THEORY TO THE ANALYSIS OF DEVELOPMENT PROBLEMS: AN ASSESSMENT

Presented By:

Sandeep kumar Baranwal

MA (Economics)

Gokhale institute of politics and economics

Development economics is an evolutionary sphere of study. Much prior to its formal recognition as a specialized field of study in 1970s, it was firmly established in the minds of visionary economists. Various models for development have been developed since then. Attempts are made to develop models that would catch up with the complexities of problem of development faced by the less developed and poor countries. There is an urge to establish a given factor as a dominant factor that would play the lead role in ushering development process in the developing and poor economies. The factors which were in the race to be recognized to play the lead role includes level and rate of savings, the use of savings , the ease of technological progress , human capital accumulation , technological innovations , import substitution strategy and outward-orientation of the economy etc.

The concern of all such models were to break up the rigid structural features of less developed countries which includes widespread unemployment , underemployment, urban-rural divide, primitive technology , low human capital accumulation, low productive base, low infrastructural set-up, low saving rate and investment rate , lack of entrepreneurship etc.

Most of the models were formulated, given the inspirations derived from development problems facing the less developed countries.

Gradually as, such economies got integrated with the international economic framework; a new wing got added to its development channel. The very thought that there exists availability of same technological opportunities in all the countries and that there exists a possibility of convergence in the per-capita income growth rate across the countries was given up. Development models were re-invented , but on the realistic ground, searching for the factors that determines the crucial international differences in the factor productivity growth and focusing on the trade and technological diffusion in an international economy. Thus, endogenous growth theory was born.

This development models took care of centering propositions in imperfect market framework, a characteristic resemblance with that of structural foundation of less developed countries.

With the economic integration it is thought that the less developed countries would gain access to the common international pool of the knowledge and thus would save on duplication of research. The entrepreneurs would then have the incentive to produce new products. Thus, with economic integration it is argued that the less developed countries should focus on increasing the aggregate productivity of the resources deployed in such countries.

However, this proposition is not without criticism. Actually the tussle is in between determining whether isolation or economic integration is advantageous for the pace of innovation in less developed economies. The counter argument to the economic integration of the poor economy states that with the free trade the rich economy which has much greater access to the common pool of knowledge tend to exploit the domestic market of the poor economies with their wide varieties of differentiated products. The domestic entrepreneurs of less developed economies would lose the incentive to invest in R&D. Gradually the specialization of production predominates R&D activity and gradual shift in the specialization of the traditional product would result thereby slowing the process of innovation and growth. Thus, the option left to the less developed economies in the context of its free trade policy is to imitate the products of rich economies. The R&D should focus on tech-adaptation of the products and process invented abroad. However, this would cause disincentive to innovate in rich economies, reduce the duration of the monopoly profit of innovators and free the developed countries labor to produce more unimitated products and conduct more R&D.

Imitating developed economies pose problems to the underdeveloped economies with regard to the pace at which it would cope-up with the foreign competitive pressures and induce constant degree of modernization of capital stock over time.

Now the question arises as to what extent would a rich country allow its technological advancement to get accessed by the poor country in course of imitation? Generally rich economies advocate for tighter Intellectual Property Rights (IPRs) which tends to limit the scope for imitation and hence limiting the already slow innovational growth rate in less developed economies.

Though tighter IPRs is presumed to be encouraging innovations, it would also hamper the long run rate of innovation of the new products in rich economies.

Model “learning by doing” provides its support to free trade policy for less developed economies as it presumes that it is only through the free trade policy that learning assist enhancement of the existing sectoral patterns of comparative advantage over time.

Learning by doing may be beneficial for the rich economies which have technical lead and that which produces high quality goods. Free trade would speed up the human capital accumulation. In the rich economies it is possible to ensure on-the-job learning to occur on the sustained basis. It spills over across industries.

Provide less developed countries adopt free trade policy and policy of subsidizing infant export based industry rather than protecting infant import-substitute industries, learning by doing policy would be of great help. Export growth encourages accumulation of technological capability and enables overcoming of imperfections in the technology market.

Thus, the rescue to the underdevelopment of the poor economies lies in the process of introduction of an ever-expanding set of new goods and technologies. Such policy guidelines seem interesting. However, it overlooks the structural rigidities that exist in the poor economies. The pre-conditions to growth are generally non-existing. in other words, new growth theory do have relevance for only those less developed countries which fulfills the pre-conditions to growth requirements. In this context big push theory gains importance under which strategic complementarities of industries in terms of market size is focused on as economy set-off for industrialization. In this framework, effective coordination, given the big push, enables the less developed economies to break away from low level equilibrium trap to higher income equilibrium with industrialization. In due course the structural constraint to development loosens up. However, there too is a problem. The problem is of aggregating coordination at the policy level. There is the difficulty in identifying sectors and locations where the spillover effect is larger. Even the interaction of the policy with the infrastructure is limited. To add to the problem learning is localized and project specific. Even if one assumes that strategic complementarities between sectors is possible , a new set of problems in the path of the development in the form of urban concentration and uneven regional development is bound to occur due to the natural process of tendency towards agglomeration. This would cause the poor country to experience differential development performance.

To overcome such problem fixed costs are incurred which not only includes ordinary set-up costs in starting new economic activities but also encompass the cost of building new economic institutions and political coalition and in breaking the deadlock of incumbent interest threatened by new technologies.

To ensure this, a new model formulation is to take place such that the organization-institution issues and distributive conflict in the process of development confronting the less developed economies is not lost in the way.

Thus, given the interwoven-complexities of the problems of development particularly in less developed economies, the theoretical models have to go a long way before they can catch up with such complexities.