Historic Economic Growth and

Contemporary Development
• Economic Growth is a primary focus of all nations of
especially in the past more than 6 decades….
• Economic growth has assumed a central role in
worldwide assessment of relative national economic
performance.
• It is thus important to understand the nature and
causes of economic growth.
• Here:
– a) we briefly look at the historical record of growth
in contemporary DCs ( characteristics of modern
economic growth )
– b) relevance of this to LDCs
• But we FIRST see the major factors/component of
long-term economic growth
• The Three Factors of Economic Growth
• The Three important factors in long-term
economic growth are:
– 1) Capital accumulation
– 2) Growth in population & Labour force
– 3) Technological progress.
(1) Capital Accumulation
• Capital accumulation is a result of saving and
investment of a certain proportion of national
income.
• Investment basically takes different forms
(a) a net increase in physical stock of directly
productive capital goods.
• These include:
– new factories
– new machinery and equipment
– material increases
• These investments lead to expanded output
levels.
b) Investment in economic infrastructure. This
includes
roads
electricity/power
communication
• These economic infrastructural investments are
vital to facilitate and integrate economic
activities
• E.g. expanded investment in agricultural
machinery may increase output but, without
adequate transport network and facilities to
transport the EXTRA output to market the
gains will be minimal
C) Investments that augment the productivity of
land
• The introduction of irrigation facilities can
increase or DOUBLE output by increasing the
PRODUCTIVITY of LAND by creating conditions
for increased yield and frequency of cultivation
within a year.
• The introduction of fertilizers and chemicals
usually increases the production per unit of
land.
• Both kinds of investments are ways of improving
the quality of existing land resources.
– i.e. more output without clearing additional
unused land (without extensive cultivation).
D) investment in Health and Education
• Formal schooling, training programmes
(vocational and on-job) and adult education
programmes augment human skills. (Social
Infrastructure). This results from
– investment on buildings, equipment and
materials (books, computers, science
equipment, etc.), and
– other effective investments in high quality
education and training that can make
enormous difference in the quality of
leadership and productivity of labour force.
 Investment in health can also significantly
augment productivity
• Generally, all the above forms of investments
(a), (b), ( c) & (d) lead to capital
accumulation and growth
(2) Population and Labour Force Growth
• This is the 2nd important factor of long-term
economic growth
• Population growth and the associated eventual
increase of labour force is traditionally
considered as a positive factor in stimulating
growth:
– (i) larger labour force means more productive
workers, and
– (ii) a larger overall population increases the
potential size of domestic market (Demand)
• Note that the main ingredient in long-
term economic growth is growth in labour
productivity.
• Labour productivity in turn depends on two
major factors:
– growth in the AMOUNT of capital workers
use, and
– technological progress
•
• Note that as far as population growth is
concerned, will be seen the part II the course,
it is questionable whether rapidly growing
supplies of workers in surplus-labour LDC
exert positive or negative influence in
economic progress.
• It all depends on the absorptive capacity of
the economy to productively employ them
(3) Technological Progress
• This is 3rd important factor of long-term economic
growth
• To many economists, technological progress is an
important source of growth. In its simplest
form, technological progress RESULTS from
New and Improved ways of
accomplishing traditional tasks such
as
– new/improved ways of growing crops
– new/improved ways of building a house
•
 Analysis of the Historic Growth Record
• Simon Kuznets, a Nobel Prize winner in
Economics (1971) for his pioneering work in
the measurement and analysis of economic
growth of national incomes of DC,
has identified SIX characteristic features of
modern economic growth-
These as manifested in the growth process
of almost all DCs
• These are observed HIGHER growth rates of:
– a) per capita output and population
– b) total factor productivity growth
– c) structural transformation
– d) social and ideological transformation
– e) high tendency by the DCs to control the
world for raw materials and markets
– f) but the limited spread of this economic
growth activity to only a third of the world
population
[1] High rate of GDP per capita and Population
growth
• Although recent generations have come to
expect economic growth, it is a relatively new
phenomenon.
For the majority of the last 2000 years,
countries have experienced virtually static
output per head over the long-term
Economic growth has become significant only
once countries have undergone an industrial
revolution. It is only with the technological
advance of the 20th century that long term
growth rates of 2% (per capita) or more have
been achieved
• All contemporary DCs have experienced
growth record many times their previous
historical rates during the epoch of modern
economic growth, roughly from 1770 to the
present.
• Annual growth rates for this period was for:
– GDP per capita = 2%
– Population = 1%
– GDP = 3%
[2] Total Factor Productivity Growth
• Total factor productivity growth another aggregate
economic characteristic of modern growth
• Kuznets found substantial rises in TFP during the
modern growth era (after the industrial revolution)
• The TFP shows the efficiency with which all inputs are
used in production function
– i.e. growth that comes with efficient use the
EXISTING level of factors of production
• Total factor productivity (TFP) is often considered the
primary contributor to GDP growth rate.
• TFP is a measure of productive efficiency
because it measures how much output can be
produced from a certain amount of inputs.
• It accounts for part of the differences in cross-
country per-capita income.
• Economists measure the growth in TFP
separately from the growth in factor inputs
• Thus, an increase in TFP causes the PP Curve to
shift upward ( i.e. output expansion) WITHOUT
any increase in labour & capital
• TPF increases means that greater output can be
produced over time with given level of inputs.
• The shift in production function from TP0 to TP1
represents a technological change
• This results in a larger amount of maximum
output that can be produced at every level of
inputs.
 Technological change

• Through technological change, the

production function will SHIFTS over some
range such that:
– i) more output can be produced with the
SAME quantity of inputs
– ii) the SAME output can be produced with
a smaller quantity of inputs

20
Technological change & total product curve

Total
output
TP1
B TP0
A

0 Fertilizer Usage
F1 F0
• Thus the technical change, which is
represented by shift in production function,
means that the efficiency with which all
inputs are combined in production
increases.
 This is the definition of TPF.
• Among the sources of TFP growth are:
– a) better technology
– b) better organization
– c) gains from specialization (** see next)
– d) innovations on the shop floor (areas in a
factory where the goods are produced by
the workers (i.e. in the process of
production); not the management floor
(offices)
• Note that in specialization & division of labour
production is broken down into a number of SIMPLER,
more Specialized tasks,
And this allowing worker to acquire a high degree
of efficiency
• In large scale plants workers can do more simple
repetitive jobs
• With this specialization and division of labour, less
training is needed; workers can become highly efficient
in their particular job, especially in long production
runs (e.g. car assembly?):
there is less time lost in worker switching from one
operation to another; and supervision easier
• Workers and managers can be employed who have
specific skills in specific areas
[3] High rate of economic structural transformation
• The historic growth record of DCs shows the important
characteristic of a high rate of structural and sectoral
change inherent in the growth process.
• The major components of structural change include:
– a) a shift away from agricultural to non-agricultural
activities, and more recently, from industry to services.
The share of agriculture in GDP declines (due to change
in structure demand with increases in income)
– b) Change in the spatial location and occupation of
labour force
• away from rural, agricultural, and related activities
towards urban-oriented manufacturing and service
pursuits
– Example: % labour force in agriculture
– 1870 2000
• USA 54% < 2%
• This drop in the share of labour force in countries like
USA, Japan etc has been very fast in the last 100 years
than the previous centuries.
[4]. High rates of social transformation
• This is quite broad.
• It is a general urbanization process with the adoption
of attitudes and institutions to be known as
modernisation
• It includes the SUBSTITUTION of modern kind
of thinking, actions, producing, distribution and
consumption for age-old traditional practices
• Improved institutions, increased labour
efficiency, and diligence:
promote effective competition,
promote social and economic mobility and
individual enterprise
• Attitude: the ideal “modern worker”, which
includes:
– efficiency, diligence, orderliness,
punctuality, honesty, integrity, self-
reliance, willingness to take long view:
[5]. Trade and Colonialism
• Trade and colonialism: This characteristic of modem
economic growth is related to the role of DCs in the
international economic system.
• This is based on the DCs strong desire and search for:
Cheap labour, raw materials and markets for
finished products
They always sought for cheap raw materials for
their manufacturing industries and also a place
where to dump their finished products
• They opened possibilities for economic and political
dominance of poor countries particularly by the
establishment of colonies for cheap labour, market
and raw materials (Africa, Asia, L. America)
[6]. The limited spread of economic growth-
Global inequality
• Modern economic growth entailed global
inequality
• In spite of the enormous increases in world
output in the past two centuries ,
the spread of sustained modern
economic growth is still largely limited to
less than 1/3rd of the world population.
•  15% of the world population enjoys the
majority of the world income
• There is an extreme inequality at the global
level the benefits of growth ONLY to the
minority
• The unequal power relations between
developed and less developed countries may
have the tendency to exacerbate the gap
between the rich and the poor
 Therefore, the growth process has benefited the
already rich nations disproportionately in
relation to poor countries
 The Limited Value of the Historical Growth
Experience
• The historical growth experience of DCs has
limited value to contemporary LDCs
• This is because of the significant differences in
initial conditions
• The position of many LDCs today is significantly
different from those of DCs when they
embarked on their era of modern economic
growth
• Some of the differences in the initial
conditions include the following:
(a) Human resource endowment gap
• Human resources, in term of the ingenuity
(inventiveness, creativity), managerial and
technical skill of the people of any country is
critical for sustaining long-term economic
growth
• Population of contemporary LDCs are
generally less skilled, less informed and less
experienced than their counterparts in the
early stages of economic growth
• The gap between countries is very huge
today
and poor countries’ citizens do not have
access to the ideas that are used in
industrial nations to generate economic
value.
The majority are illiterate and only a few
elites
[b] Differences in economic position
• At the beginning of their industrial era,
today’s developed nations were economically
in advance of the rest of the world
• They could therefore take the advantage of
their stronger financial position to widen the
income gap between themselves & the less
fortunate ones- even could colonize them
• Today’s LDCs started their development race
at the very low income & DISADVANTAGED
status.
• They were even colonies rather than
independent states
[c] Climate differences
• Climatic differences may have an effect
• Almost all LDCs are situated in tropical or
sub-tropical climatic zones
• The extreme heat and humidity:
may contribute to low productivity of
some crops,
weaken regenerative growth of forests,
and
poor health of animals and thus less
productivity.
– Malaria and other parasitic diseases are
often concentrated in tropical areas
• Extreme heat and humidity
may cause discomfort to workers,
affect their health, reduce their desire to
engage in strenuous (tiring) physical work,
and generally lower productivity and
efficiency.
• Generally, there is an argument that tropical
geography does pose serious problems for
economic development
• Is the Gap Narrowing or Widening?
• This is a serious area of debate in growth
economics.
• Are LDCs catching up?
• There are two reasons that may lead us to
EXPECT that LDCs would be catching up by
growing faster on average than DCs
(i) Technological transfer.
• Today’s LDCs do not have to “reinvent the
wheel”
• They can adopt the existing technology, not
going ups and down of long trials and errors
and long term processes experienced by DCs
• They can adopt the existing technology, not
going ups and down of long trials and errors
and long term processes experienced by DCs
• Adopting the EXISTING technology should
enable LDCs to leapfrog over some of the
earlier stages of technological development,
 moving immediately to very high
productivity technological
development
• This way, LDCS should be able to grow faster
than DCs.
• In fact, confining our attention to CASES of
SUCCESSFUL DEVELOPMENT” the LATER a
country begins its modern economic
growth, the SHORTER the time needed to
DOUBLE output per worker
• NEXT ….. NEXT
• Example:
Britain doubled its output per person
(productivity) in the first 60 years of its
industrial revolution
America did so in 45 years
South Korea accomplished it within 11 years
from 1965-1977.
•
(ii) Factor Accumulation
• The Second reason to EXPECT convergence IF
conditions are similar is based on factor
accumulation
• DCs have high physical and human capital; & this
implies higher level of output per person
(productivity)
• However, the Marginal Productivity of CAPITAL
and the profitability of investment is lower in
DCs where capital intensity higher, due to the
law of diminishing returns
• That is, the impact of additional capital on
output is EXPECTED to be smaller in a DC that
already has a lot of capital
 i.e. in RELATION to the size of its work force
(labour) than an LDC where capital is scarce
• Thus we expect higher investment in LDCs.
• With HIGHER investment rates, output would
grow MORE QUICKLY in LDCs, until
approximately equal output level per worker
was achieved. (with DCs)
• Given BOTH these conditions [(i) & (ii)], incomes
would tend to converge in the long-run,
• Because of FASTER growing LDCs (due to
higher productivity of investment and thus more
growth there) would be catching up with
SLOWER growing DCs
• Incomes would rather tend to be equalized
conditional on systematic differences in key
variables such as population growth and saving
rates
• HOWEVER, this is only simple theoretical
expectation.
• It has been very difficult to find this
CONVERGENCE in the actual empirical data.
• The tendency is rather for the poorer countries
to grow more slowly than the rich countries
• DIVERGENCE is in relative productivity & living
standards between rich & poor countries is
rather considered to be the dominant feature of
global development