Development Economics core course Lecture 5: Technical progress and new growth theory

Constant returns to all accumulated inputs Decreasing returns (one or more fixed inputs cannot be accumulated) Accumulation drives growth Harrod-Domar model, capital fundamentalism: capital is the only input Human capital model: physical and human capital only inputs Technical progress required to explain continuing growth Solow model Fixed inputs are unskilled labour and maybe land. Are they important?

East Asia”miracle” growth World Bank report (1993) ”The East Asian Miracle” Found 1/3 of growth due to TFP growth: ”Productivity based catching-up” due to trade and openness Young (1995) Took better account of input growth Found good, but not unusually high, TFP growth More ”old fashioned growth”

Technical progress: 1. Investment in R&D 2. Spread of knowledge Current debates about patents and copyright (=”intellectuel property rights”), AIDS medicine. Is spread of knowledge and technical progress a good idea? 1.Yes, more people benefit from knowledge 2.No, it gives lower profitability and less incentives to invest in R&D 3.Yes, because leading firms need to develop new knowledge faster to keep abreast Historically, spread of knowledge has been a key factor, see Jared Diamond ”Guns, germs and steel”

Economic thinking on technical progress Human capital stocks may affect TFP growth Physical capital stocks may affect TFP growth Perhaps even leading to increasing returns, and accelerating growth Externalities Complementarities