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Critical Analysis of Endogenous Growth Theory

Critical Analysis of Endogenous Growth Theory

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Published by: sandeepkumarbaranwal on Apr 06, 2010
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Presented By:Sandeep kumar BaranwalMA (Economics)Gokhale institute of politics and economics
Development economics is an evolutionary sphere of study. Much prior to its formalrecognition 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 agiven factor as a dominant factor that would play the lead role in ushering developmentprocess in the developing and poor economies. The factors which were in the race to berecognized to play the lead role includes level and rate of savings, the use of savings , the easeof technological progress , human capital accumulation , technological innovations , importsubstitution strategy and outward-orientation of the economy etc.The concern of all such models were to break up the rigid structural features of less developedcountries which includes widespread unemployment , underemployment, urban-rural divide,primitive technology , low human capital accumulation, low productive base, low infrastructuralset-up, low saving rate and investment rate , lack of entrepreneurship etc.Most of the models were formulated, given the inspirations derived from developmentproblems facing the less developed countries.Gradually as, such economies got integrated with the international economic framework; a newwing 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 factorsthat determines the crucial international differences in the factor productivity growth andfocusing 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, acharacteristic resemblance with that of structural foundation of less developed countries.With the economic integration it is thought that the less developed countries would gain accessto 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 onincreasing the aggregate productivity of the resources deployed in such countries.However, this proposition is not without criticism. Actually the tussle is in between determiningwhether isolation or economic integration is advantageous for the pace of innovation in lessdeveloped economies. The counter argument to the economic integration of the poor economystates that with the free trade the rich economy which has much greater access to the commonpool of knowledge tend to exploit the domestic market of the poor economies with their widevarieties of differentiated products. The domestic entrepreneurs of less developed economieswould lose the incentive to invest in R&D. Gradually the specialization of productionpredominates R&D activity and gradual shift in the specialization of the traditional productwould result thereby slowing the process of innovation and growth. Thus, the option left to theless developed economies in the context of its free trade policy is to imitate the products of richeconomies. The R&D should focus on tech-adaptation of the products and process inventedabroad. However, this would cause disincentive to innovate in rich economies, reduce theduration of the monopoly profit of innovators and free the developed countries labor toproduce more unimitated products and conduct more R&D.Imitating developed economies pose problems to the underdeveloped economies with regardto the pace at which it would cope-up with the foreign competitive pressures and induceconstant degree of modernization of capital stock over time.Now the question arises as to what extent would a rich country allow its technologicaladvancement to get accessed by the poor country in course of imitation? Generally richeconomies advocate for tighter Intellectual Property Rights (IPRs) which tends to limit thescope for imitation and hence limiting the already slow innovational growth rate in lessdeveloped economies.Though tighter IPRs is presumed to be encouraging innovations, it would also hamper the longrun rate of innovation of the new products in rich economies.Model learning by doing provides its support to free trade policy for less developedeconomies as it presumes that it is only through the free trade policy that learning assistenhancement of the existing sectoral patterns of comparative advantage over time.
earning by doing may be beneficial for the rich economies which have technical lead and thatwhich produces high quality goods. Free trade would speed up the human capitalaccumulation. In the rich economies it is possible to ensure on-the-job learning to occur on thesustained basis. It spills over across industries.Provide less developed countries adopt free trade policy and policy of subsidizing infant exportbased industry rather than protecting infant import-substitute industries, learning by doingpolicy would be of great help. Export growth encourages accumulation of technologicalcapability 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 guidelinesseem interesting. However, it overlooks the structural rigidities that exist in the pooreconomies. The pre-conditions to growth are generally non-existing. in other words, newgrowth 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 underwhich strategic complementarities of industries in terms of market size is focused on aseconomy set-off for industrialization. In this framework, effective coordination, given the bigpush, enables the less developed economies to break away from low level equilibrium trap tohigher income equilibrium with industrialization. In due course the structural constraint todevelopment loosens up. However, there too is a problem. The problem is of aggregatingcoordination at the policy level. There is the difficulty in identifying sectors and locations wherethe 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 thatstrategic 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 isbound to occur due to the natural process of tendency towards agglomeration. This wouldcause the poor country to experience differential development performance.To overcome such problem fixed costs are incurred which not only includes ordinary set-upcosts in starting new economic activities but also encompass the cost of building new economicinstitutions and political coalition and in breaking the deadlock of incumbent interestthreatened by new technologies.To ensure this, a new model formulation is to take place such that the organization-institutionissues and distributive conflict in the process of development confronting the less developedeconomies is not lost in the way.

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