. 15
( 21)


The socially optimum level of education, then, is ES years, where the supply curve of
education crosses the marginal social benefits curve, that is, where society™s supply curve
intersects society™s demand curve for education, MSB. This is the equilibrium of supply and
demand once again, but now it is the equilibrium from society™s perspective.
For the socially optimum average level of education, ES, to be reached, however, some
sort of state intervention will be required to induce private decision-makers to undertake
more years of education, since they will not, based on their own private maximizing calcula-
tions, accumulate years of schooling beyond the level EP where their individual benefits are
A subsidy to private individuals equal to the amount mn would, however, lead private
decisionmakers to choose to undertake eS years of education. That is because the subsidy
will reduce the individual costs of any level of schooling by the amount, mn, so that now
there will be a new marginal private costs curve shown by MPCS in Figure 12.2. This new
private cost curve of education, representing the direct costs to be paid by individuals
actually undertaking additional years of schooling, lies below and to the right of the old
marginal private cost curve, MPC, by the amount mn at every level of education individuals
might choose.
Individuals will now rationally choose the socially optimum level of education, ES, as is
desired, since the subsidized marginal private cost curve of education MPCS, which can be
interpreted as the new private supply curve, intersects the MPB curve, the private demand
curve for education, at the socially desired average years of education.15 Once again, private
individuals are maximizing their own net benefits of schooling where (private) demand
equals (the new private) costs, but so too is society, since at ES society™s demand curve for
education, MSB, is also equal to society™s supply curve of education, MSC. This is the most
efficient level of education from society™s viewpoint. It is the level of schooling that gener-
ates the maximum level of net benefits from education to both individuals and to society. The
subsidy to education brings private and social interests into alignment.
Figure 12.2 illustrates the theoretical rationale for not expecting individuals to absorb the
full cost of their education. Some of the benefits of that education accrue to others and not
to the person undertaking it. There thus is an efficiency reason for subsidizing the cost of
education and, by simple extension, subsidizing a larger proportion of the costs the lower
the income of the individuals being schooled. even those who do not have children or who
do not undertake additional education themselves gain from the positive externalities of
those who do receive more education. There thus is a rationale for taxing and then subsi-
dizing education and other forms of human capital accumulation so that the socially desired
outcome might be reached.
The assumptions of perfect markets and perfect information, often made in analyzing
412 The Process of Economic Development
more developed economies, is even more inappropriate in the less-developed countries.
Poor households lack access to financial resources or the ability to borrow to capitalize
future expected earnings from education, so the market failure problem extends beyond that
caused by the divergence between private and social benefits. Social returns to education
have been estimated to be nearly 20 percent from primary education. Given the imper-
fect markets and imperfect information facing the population in the less-developed econo-
mies, there is a strong prima facie case on efficiency and equity grounds for providing free,
universal primary schooling, and, over time, extending this coverage to secondary educa-
tion as well.
In the World Bank study on the HPAEs it was noted that:

the allocation of public expenditure between basic and higher education is the major
public policy factor that accounts for East Asia™s extraordinary performance with regard
to the quantity of basic education provided. The share of public expenditure on educa-
tion allocated to basic (i.e., primary and secondary) education has been consistently
higher in East Asia than elsewhere.
(World Bank 1993b: 197“203)

Thus it makes good economic sense, as well as contributing to improvements in equity via
shared growth and broader based human development, to allocate schooling expenditures
first to primary education with a goal of universal coverage of males and females, with
secondary education close behind in terms of spending priority (see Focus 12.3).

In the early 1980s, Bolivia and Indonesia were, superficially, at about the same level of
development in terms of income per capita “ in the low to middle $600 range. Illiteracy
ran at about 20 percent of the population, and girls were especially disadvantaged. Both
nations were predominantly agricultural. And both countries were spending an identical
percentage of their total GDP on education: 2.3 percent.
What each did with this share differentiates the two countries markedly.
Indonesia spent 90 percent of its education budget on primary education. By 1987, 91
percent of rural children were enrolled in primary school, compared to the national average
of 92 percent. And the gender gap between boys and girls in primary education had virtu-
ally disappeared. Free education was extended through the ninth grade.
By contrast, Bolivia spent only about 41 percent of its education budget on primary
education, so only 60 percent of primary school-age children attended school on average.
In the rural areas, only 45 percent of schools even offered education to the fifth grade, with
the remainder providing only three years of primary education. With such low attention to
primary education, the gender gap was larger than in Indonesia. Drop-out rates and grade
repetition by girls were significantly higher than for boys. Worse, the textbook ratio was
only one per ten students, indicating weakness in the quality of education and problems
in achieving significant human capital deepening.
Indonesia™s income per capita grew at a 4.2 percent annual rate, 1980“93, while Bolivia™s
growth rate of per capita income was ’0.7 percent per year. While not all of the variance
in growth rates can be attributed to differences in the attention paid to creating essential
human capital resources via funding universal primary schooling, what we know about
the importance of primary education to future economic growth suggests that Indonesia™s
policies were paying off.
Source: World Bank 1993a: 201, Box 5.1
Population, education, and human capital 413
Post-secondary schooling, which is important for creating the indigenous capacity to adopt
and adapt world-level best practice technological knowledge and for improving total factor
productivity that we will discuss in the next chapter, should not consume too large a level of
government resources at early stages of development. In fact, for low-income economies, there
are alternative avenues for financing tertiary education besides large subsidies from the state.
These can range from requiring university students, who are likely to be from higher-income
families anyway, to pay the major portion of the full costs of their education via tuition and
fees,16 “targeting” state subsidies (via, say, scholarships) only toward those with both ability
and financial need. Further, it may be more efficient and most likely much cheaper for some
period of time to subsidize higher education for domestic students by sending “the best and the
brightest” to study abroad at institutions of high quality rather than attempting to invest in the
expensive infrastructure and training that university-level teaching and research demands.

Population growth and human capital accumulation
In the first part of this chapter, we argued that the rate of population growth in many less-
developed nations has tended to rise because of the incomplete nature of the demographic
transition. Death rates have declined rapidly, but birth rates have fallen much more slug-
gishly as a result of slower changes in fertility rates. Though family-planning programs have
had some success in some nations, the primary determinants of declining fertility and lower
birth rates have been increasing family incomes and an expansion of women™s education.
Population growth is thus a dependent variable rather than an independent, exogenous
factor subject to easy manipulation. It is not rapid population growth which causes low
incomes; it is low incomes and low education levels that engender high population growth
rates through higher fertility rates, as discussed in full above.
This perspective, however, does not deny that rapid population growth can create prob-
lems for less-developed economies, and typically these are greater in economies which can
ill afford them. One of the consequences of a rapid natural rate of population growth over an
extended period of time will be a reduction in the average age-profile of the population.17
The dependency ratio is a convenient, if imperfect, demographic measure that provides
some idea of the impact of population growth and demographic changes on society (Table
12.6). It indicates for each potentially employed worker, the number of non-employed
workers that must be supported by one worker™s production.
In Somalia, for example, with a high and rising population growth rate, the dependency
ratio rose. This means there was a rising proportion of young people in the population so that
those who were working had to produce enough not only for themselves but for a growing
proportion of the population that was young and non-productive. On the other hand, in Korea
and with a slowing rate of population growth between 1970 and 2000, the dependency ratio
fell dramatically, so that rising output per employed person could go to increasing per capita
income and not solely to be spread over a larger number of non-workers.
The table also shows the commitment of governments to education as measured by the
educational expenditures as a percent of gross national income (or gross total income). The
World Bank study on the HPAEs (World Bank 1993b: 194“6) found that in Korea, Thai-
land, and Singapore the absolute number of school-age children actually fell, while in Sub-
Saharan Africa the numbers of those of school age rose as a consequence of a more rapid
pace of population growth. Thus, the increase in spending on education as a share of GNI
for Korea shown in the table was applied to a smaller number of students, and this permitted
a focus on improvements in the quality of education and in the quality of the human capital
414 The Process of Economic Development
Table 12.6 Dependency ratios, population age profile, and public expenditure on education
% of population Dependency Public expenditure
of working age on education
(15“64 years) (% of GNI)

1970 2000 1970 2000 1970 2000

54.8 58.7 0.84 0.71 2.36 2.83
Low-income economies
56.0 68.3 0.79 0.48 1.20 2.03
55.9 61.5 0.79 0.63 2.47 3.35
54.6 54.5 0.98 1.01 2.39
Pakistan 0.82
51.5 49.6 0.94 1.01 1.05
Somalia n.a.
Zimbabwe 48.6 51.6 1.08 0.76 3.26 7.47

56.3 66.0 0.79 0.52 2.48 3.76
Middle-income economies
Argentina 63.7 62.6 0.57 0.60 1.35 3.20
Côte d™Ivoire 51.9 54.8 0.93 0.85 4.70 4.54
47.5 61.3 1.11 0.61 2.58 6.84
Korea 54.6 72.1 0.83 0.39 2.62 3.38
52.6 53.2 0.90 0.91 3.76 3.44

63.5 66.9 0.58 0.49 4.17 4.81
High-income economies
57.7 67.1 0.74 0.49 4.01 5.49
68.9 68.1 0.45 0.47 4.63
Japan 2.87
United Kingdom 62.8 65.3 0.59 0.53 4.69
United States 61.8 66.0 0.62 0.51 4.49 4.70

Less-developed regions
East Asia and Pacific 55.3 66.8 0.81 0.50 1.63 2.47
Latin America and Caribbean 53.4 63.1 0.59 2.67 4.21
Middle East and North Africa 51.3 58.6 0.96 0.69 3.97 4.75
South Asia 55.3 60.3 0.66 3.09
0.82 2.27
Sub-Saharan Africa 52.3 52.6 0.91 0.89 3.43 4.73

Source: World Bank, World Development Indicators 2002.
a Calculated as [(population < age 15) + (population > 64 years of age)] · population aged 15’64.

being created. The large decrease in the average student“teacher ratio in Korea (Table 12.5)
is another quality indicator of the gains that can be attained from lower population growth
rates on the capacity of a nation to accumulate human capital and hence to be able to both
grow faster and to reach a higher level of income per person.
Other countries, such as Zimbabwe, also spent more of their government budgets on educa-
tion (the last column of Table 12.6), but these were expenditures needed, at least partly, to keep
pace with the growth of the school-age population so as to maintain the extent of coverage
of primary and secondary schooling, making any increase in enrolment ratios (Zimbabwe
now has universal primary coverage, but less than 50 percent secondary coverage) more
expensive than would have been the case with slower population growth. Faster population
growth and having a large young population skews the need for spending in the direction
of education and other social services aimed at younger persons, for example neonatal and
natal health care, just to keep pace with population growth, leaving less for other develop-
ment purposes. These trends, however, are being mitigated as population growth slows with
declines in fertility rates, as discussed above.
Population, education, and human capital 415
Summary and conclusions
This chapter builds upon the theory of the structural transformation which has been our focus
since Chapter 7. economic and human development are inextricably linked to the structural
transformation of poorer nations from agriculture-based productive patterns to industrial and
service-based economies. However, this transformation is not just one of changing what is
produced but of fundamentally altering how production takes place. The endogenous growth
theories in Chapter 8 alerted us to the importance of augmenting the stock of human capital,
especially through education, since higher levels of human capital are strongly associated
with higher income per capita, higher rates of economic growth, with progress on the human
development indicators, and with greater equity via shared growth.
In this chapter, we have examined some of the details of human capital accumulation,
drawing attention to universal primary and secondary coverage and reducing both the gender
and urban“rural education gaps if less-developed nations are to build the base for future
growth and development. At low levels of income and development, university education
expenditures should not consume too much of the state™s education budget; 25 percent
might be the maximum warranted amount, leaving the remainder for primary and secondary
This chapter also reinforces the positive role the state can perform, this time in the educa-
tion arena, by helping to overcome the market failure problem that arises from the positive
externalities associated with increasing the average level of education. In this vein, univer-
sity education should not just be left either to the whims of academics or to the current
demands of students. Rather, part of the guiding function of the state is to direct government
funding for tertiary education and to shape incentives so that a critical mass of scientists,
engineers, and technicians are properly trained. In this way, the human capital stock can be
augmented so as to be ready to take advantage of the rapidly changing technological and
knowledge innovations occurring at the world level. (This essential type of investment will
be discussed more fully in the next chapter.) With the proper incentive structure via scholar-
ships, employment, and so on, government can contribute to the formation of a dynamic
labor force capable of contributing on an on-going basis to an economy™s level of develop-
ment over the long run.

Questions and exercises
1 Using data you can find at the World Bank website (www.worldbank.org; look under
“Data and Research” then “Data by Topic”) on the CBR and the CDR:
a calculate the natural rate of population growth for two LDCs not shown in
Table 12.2.
b Then compare these values with their actual rates of population growth and calcu-
late the amount of net migration for each country.
c Have either of these two LDCs passed through the demographic transition or any
part of the demographic transition? Explain.
2 Using data from the previous problem, calculate the doubling time of population for
both the natural and actual population growth rates for both of the LDCs.
3 Crude death rates in Table 12.2 tend to fall within a smaller range than crude birth rates.
However, Sub-Saharan Africa countries like Zimbabwe, Senegal, and Côte d™Ivoire
have somewhat higher crude death rates than other nations within their grouping (and
416 The Process of Economic Development
in some cases, the CDR actually has been rising). What factors might account for these
higher death rates?
4 In Table 12.5 the number of students per teacher is used as an indicator of human capital
deepening, that is, as a quality measure. What other possible measures might be utilized
to get some idea of the quality of education? Can you find data on these measures that
tells a different story for some country in the table, for example, Pakistan?
5 Focus 12.3 looked at the different experiences of Bolivia and Indonesia in their
approaches to providing primary education. Let™s bring the perspective in that focus up
to date. Find data on each country™s public expenditures for: all types of education as
a percentage of GDP for some recent year; the percentage of total public expenditure
on education spent on primary and secondary education; enrolment rates for primary
and secondary education for males and females for the same (or a recent) year; and the
growth rate of per capita income for a recent period of time. Does the “story” of Focus
12.3 that the importance of concentrating spending on primary (and now secondary)
education still apply for Bolivia and Indonesia? How have things changed in both econ-
omies, at least according to the data you have collected compared to the late 1980s? (Try
looking for the data at www.undp.org, Human Development Data, then click on “Data
and factsheets by country.”)
6 Note 8 to this chapter, which refers to the section on “Determinants of the crude birth
rate,” and the accompanying discussion in that section, argue that the inverse relation
between per capita income and crude death rates is much weaker than the inverse rela-
tion between per capita income and crude birth rates shown in Table 12.2. A simple
econometric exercise can test these two hypotheses.
Using Excel, and beginning in cell A1, create a spreadsheet like the following,
using data from the World Bank website (www.worldbank.org; look under “Data and
Research” then “Data by Topic™) or some other source. Input data for eight countries
on their CBR, CDR and income (either GNI or GDP) per capita for a recent year in the
corresponding columns. Try to choose countries from different parts of the world. (If
you do not have access to excel or some other spreadsheet program, draw two scatter
diagrams for the data and fit, by hand, the best straight line to the data.)

Country CBR CDR Income per capita

a You are first going to draw two scatter diagrams (choose the one with no line!). The
first will have the crude birth rate as the dependent variable shown on the vertical
axis and income per capita as the independent variable on the horizontal axis. The
second scatter diagram (with no line) should have the CDR on the vertical axis and
income again on the horizontal.
b Right click on one of the data points in each graph and then have Excel “add trend-
line” (choose linear) and under “Options,” display the equation and R-squared.
Population, education, and human capital 417
c What were the expected signs on the per capita income variable in each equation? Do
the coefficients on income have the expected signs in your regression results?
d How “good” is income in explaining what happens to crude birth and crude death
rates, at least according to the R2 values you obtained for your limited sample?
7 China™s CBR and CDR values in Table 12.2 are more typical of a high-income country
than for low-income economies as a group.
a Find data on what has happened to China™s fertility rate since, say, 1970. (A good
place to look is at www.undp.org where you can find data from the UN Human
Development Report. Look under Human Development Data, and then “Data and
factsheets by country.”) How does China™s fertility rate compare to the average
among low-income economies shown in Table 12.3?
b What might explain any differences between China™s CBR and fertility rate
relative to the average for low-income economies shown in Table 12.3? If you
don™t know about China™s “one-child policy,” try reading something about it and
summarize the policy here. There are lots of good sites on the internet. Check
Wikipedia, too.
c How does China™s one-child policy fit into the “opportunity cost” explanation as
to why families in poor (or rich) economies choose how many children to have?
Does the one-child policy affect the opportunity costs of bearing children in China?
8 If you have studied consumer indifference curves, try the following analysis of a fami-
ly™s decision about choosing the “optimum” number of children which can help you
to understand better why income and fertility are inversely related from a neoclassical
economic perspective.
Draw axes where you measure the “number of children” on the horizontal axis and
“family income” on the vertical axis. Draw in a few normally shaped, convex-to-the-
origin indifference curves. The shapes of the curves indicate that income (a proxy for
“all other goods”) and children are substitutes for a family in providing satisfaction or
Draw and label a “current income” budget line and find the “optimum” number of
children, given that income level. You will remember that the optimum will be at the
tangency point of that linear budget line and the highest attainable indifference curve.
Show on the horizontal axis the number of children “chosen”; label that quantity C0.
Now, let income increase, but at the same time let the “price” of children also increase
(in terms of the opportunity cost of lost income for time spent in caring for children by,
for example, women with greater opportunities for employment). Thus the new budget
line will both shift out and be steeper than the original line, indicating an increase in the
relative “price” of children compared to all other goods as income rises.
You should be able to show that it is quite possible that the new optimum number of
children, CN, that a family now chooses is fewer because of the higher relative price of
children (as a result of their higher opportunity cost) at the higher income level.
9 This is a question that challenges you to see if you have understood one of the major
points of this chapter. Discuss the following quotation using the concepts of and the
interaction between: the CBR, the CDR, the fertility rate, and the demographic transition.
“There is no population problem in less-developed countries. There is only a develop-
ment problem.”
418 The Process of Economic Development
10 Differentiate between human capital broadening and human capital deepening. Is one
more important than the other? Discuss.
11 For a country that interests you or that you are assigned:
a Find the ratio of pupils to teachers in primary and secondary school for two years,
if that is available.
b Has there been “human capital deepening” over that period? Explain what that
means. (Go to http://portal.unesco.org/uis/ev.php?URL_ID=5187&URL_DO=DO_
TOPIC&URL_SECTION=201 and then click on pupil“teacher ratio near the middle
of the page.)
12 One of the side-benefits of expanding education can be an increase in equity or, at least,
no strong increase in inequality. extending primary and secondary education to all resi-
dents of a country contributes to individual productivity and individual incomes and
may be important in creating a regime for shared growth. Compare enrolment rates and
income inequality for five less-developed nations (use the ratio of income of the top
20 percent of income earners to the bottom 20 percent of income earners, or the Gini
coefficient, as the measure of inequality). Do countries with lower enrolment coverage
for primary and secondary education have more or less inequality than economies with
higher enrolment ratios? Are there any systematic differences amongst the countries you
have selected? Why, or why not? What other factors might be at work which contribute
to or detract from the possibility for shared growth?
13 Millennium Development Goal 4 is to “reduce by two-thirds, between 1990 and 2015,
the under-five mortality rate”; Goal 5 is to “reduce by three-quarters, between 1990 and
2015, the maternal mortality ratio”; and Goal 6 is to “have halted by 2015 and begun to
reverse the spread of HIV/AIDS” and to “have halted by 2015 and begun to reverse the
incidence of malaria and other major diseases.”
Examine the data by regions at the World Bank website under Statistics and MDGs.
You can click on each goal and then examine the data in map, table, or chart form.
Which regions are on target? Which are not? Does it look like, globally, these MDGs
will be met by the 2015 target date?

1 Easterly (2001: Chapter 4 especially, but throughout) takes a decidedly contrarian perspective on
the role of education. A close reading of his essays suggests, however, that education is important,
but in the right context, which is what we have argued. There is no single approach that, by itself,
guarantees successful development. There are a number of complementary policies that must be
carried out more or less simultaneously.
2 We say the “normal” relation is from income to population growth, but there actually are instances
of more rapid population growth leading to an increase in output and income, as in the United
States in the early to mid-nineteenth century, or in Australia later in that century. In both cases,
high population growth rates resulting from large inflows of migrants contributed to, rather than
subtracted from, the expansion of production. New migrants helped to fill a void in labor supply
and contributed to an increase in total output beyond population growth and did not act as a drain
that reduced income per person.
3 We divide by 10 in equation 12.2, because both the crude birth rate, CRB, and the crude death
rate, CDR, are stated per 1,000 population. When we divide by 10, these are converted to rates per
100 of population, thus permitting us to interpret the difference as a percentage. Crude birth and
death rates depend upon the age distribution of the population, death rates for different age groups
(including infant mortality rates), the fertility rate of women, and other demographic characteristics
of the population. The adjective “crude” is used in the sense of an “average.”
Population, education, and human capital 419
4 Rapid population growth is a very recent historical phenomenon. It has been estimated that in
ad 1 world population was about 300 million. It took 1,500 years for population to double from
that level, an annual rate of population growth of less than 0.05 percent. From 1750 to the early
twentieth century, world population grew at a rate of about 0.5 percent, increasing the doubling
time of world population to less than 150 years. From 1950“87, world population doubled again
from 2.5 billion to 5 billion as the doubling time further decreased, and world population grew at a
rate approaching 2 percent per annum (Birdsall 1988: 479).
5 The average rate of population growth in the less-developed nations was 0.6 percent from 1850“
1900, rising to 1.3 percent by the 1920s, 2.0 percent in the early 1950s, and to 2.6 percent in the
early 1970s (Reynolds 1986: 50). It is quite easy to determine, in an approximate fashion, how fast
population doubles at these rates of growth by using the Rule of 70, which is

doubling time (in years) = 70 · annual percent rate of change of population.

Thus, if population is growing at 2 percent per annum, population will double in approximately
thirty-five years; at 3 percent per annum, the doubling time is reduced to twenty-three and one-third
6 Maddison (1982: 189, Table B6) reports the following crude birth rates for a few of the now-
developed countries, illustrating their trend rate.

1820 1900

31.7 21.3
39.9 35.6
“ 32.4
United Kingdom 30.3 28.7
United States 55.2 32.3

7 This can happen when, as is the case of a country whose population has been growing rapidly, a
large proportion of the population is relatively young compared to that which is elderly. A nation™s
crude death rate is a weighted average of the death rates of different age groups, so with a younger
population the average death rate can be quite low, even for a poor economy, given the large number
of young people relative to older persons.
8 In 2005, the crude birth rate (CBR) varied between 53 per 1000 of population in Niger and 8 in
Japan, while the crude death rate (CDR) varied only between 27 per 1000 of population in Botswana
and 2 in Kuwait. Of course the crude death rate has some association to per capita income levels,
with countries with lower per capita incomes tending to have higher per capita crude death rates.
However, the link between income and death rates is significantly weaker than the link between
income and birth rates. Infant mortality rates are strongly inversely correlated with women™s educa-
tion, just as birth rates are (World Bank 1991: 49).
9 Birdsall (1988: 514) notes that the inverse relation between women™s education and fertility rates is
noted only for more than four years of schooling. For 0“4 years of education, women™s education
and fertility tend to be positively related.
10 China™s fertility rate fell from 5.8 children per woman in 1970 to 2.1 in 1990 and 1.8 in 2005.
11 When crude death rates are high, high rates of fertility and high crude birth rates are quite func-
tional for maintaining the survival of entire populations. In such circumstances, cultural, religious,
social, ideological, and family values have tended to advocate high birth rates and women™s role as
caretaker for the family. The already-developed nations had a longer time period, in some cases a
century and more, during which the demographic transition was taking place at a more measured
pace, so their religious and cultural value systems, particularly concerning the reproductive role
of women, were able to evolve more in line with the falling rate of mortality. The less-developed
nations, particularly those newly independent since 1945, have had much less time for their social
value systems to catch up with changing economic and structural conditions.
12 The same trend for fertility rates to decline is observed when, instead of using average income as an
indicator, the level of human development is used. Countries with a low HDI value in 1992 had an
average fertility rate of 5.1; those with medium HDI values had an average fertility rate of 3.0; and
in those nations with a high HDI value, average fertility was 2.8 (UNDP 1994: 174“5, Table 23).
420 The Process of Economic Development
13 All family incomes could theoretically rise even with a worsening income distribution if those
with higher incomes have a faster rate of growth in their incomes than those with lower incomes.
We simply want to focus here on the direct link between family income and lower birth rates,
abstracting from income distribution changes, although such changes would be important to know
and to analyze as to their impact on fertility and birth rates.
14 In Chapter 13 we shall consider the importance of specific types of education to economic growth,
specifically the role of scientists and engineers in taking the process of development to higher levels
of income and human realization, and especially their role in fomenting technological change. It is
thus not just universal primary and secondary education that are important over the long term for
sustained success, though these provide the base upon which further progress can be made.
Once again, things are more complicated, and yet are not. Universal primary and secondary
education are important in their own right for providing a broader-based and more skilled labour
force that can contribute to greater efficiency and productivity. Building on this base of secondary
students, the needed core of workers with higher level skills that come from having undertaken
tertiary education can be attained more easily. One goal follows another, with each having its own
complementary importance.
15 The subsidy amount of mn is found by determining the vertical difference between the MSB and the
MPB curves at the socially optimum level of education, ES.
16 Students from high-income families are more likely to attend university than are students from
low-income families, both because the out-of-pocket costs for low-income families are a higher
proportion of their income, and because the opportunity cost of attending university or other post-
secondary education compared to total income is larger. Thus when post-secondary, particularly
university, education is funded via low tuition fees to all students regardless of need, it is higher-
income students, who could afford to pay a larger proportion of the actual costs, who dispropor-
tionately benefit from such subsidies. That is why targeted subsidies, rather than blanket subsidies
extended to all regardless of need, tend to be both more efficient for the goals designed and tend to
contribute to greater equity in society.
17 Rapid population growth caused by immigration often is the consequence of positive economic
forces that pull migrants from low-wage, low-opportunity countries toward higher-wage, higher-
opportunity economies. In these cases, as in the large migratory flows from Europe to North
America, Argentina, and Australia in the 1800s, migrants are older, and they often bring valuable
skills and education formed elsewhere. Such migrants add to the labor force and human capital pool
of the receiving nation and contribute immediately to increasing aggregate output. This is different
from the situation discussed here where the growth of population is the result of natural forces and
not of migration flows.

Birdsall, Nancy. 1988. “Economic Approaches to Population Growth,” in Hollis B. Chenery and T.N.
Srinivasan (eds.), Handbook of Development Economics. Amsterdam: North Holland Publishers.
Easterly, William. 2001. The Elusive Quest for Growth: Economists™ Adventures and Misadventures in
the Tropics. Cambridge, MA: MIT Press.
Maddison, Angus. 1982. Phases of Capitalist Development. Oxford: Oxford University Press.
Mincer, Jacob. 1958. “Investment in Human Capital and Personal Income Distribution,” Journal of
Political Economy 66: 281“302.
Reynolds, Lloyd G. 1986. Economic Growth in the Third World: An Introduction. New Haven, CT:
Yale University Press.
Sachs, Jeffrey D. 2005. The End of Poverty. London: Penguin Books.
Schultz, T.W. 1960. “Capital Formation by Education,” Journal of Political Economy 68: 511“83.
Sen, Amartya. 1990. “More Than 100 Million Women are Missing,” New York Review of Books 37
(December 20): 61“6.
UNDP (United Nations Development Programme). 1994. Human Development Report 1994. New York:
Oxford University Press.
World Bank. 1983. World Development Report 1983. New York: Oxford University Press.
””. 1991. World Development Report 1991. New York: Oxford University Press.
Population, education, and human capital 421
””. 1993a. World Development Report 1993. New York: Oxford University Press.
””. 1993b. The East Asian Miracle. New York: Oxford University Press.
””. 1994. World Development Report 1994. New York: Oxford University Press.
””. 1995. World Development Report 1995. New York: Oxford University Press.
””. 2002a. World Development Report 2002. New York: Oxford University Press.
””. 2002b. World Development Indicators 2002. New York: Oxford University Press.
13 Technology and development

after reading and studying this chapter, you should better understand:
• what is meant by “technology”;
• the distinction between an “independent technology learning capacity (ITLC) and
an “independent technology creating capacity” (ITCC);
• the connection between specific forms of human capital accumulation, techno-
logical progress and the level of development;
• the role of facilitating and obstructing institutions in the spread of technology;
• the imbedded nature of technology in a particular society™s institutions and organi-
zational structure;
• the fact that technology is country-specific;
• the importance of appropriate state action in helping to provide the complemen-
tary inputs for capturing the benefits of “best practice” technological change;
• the need for a strategy of “technological autonomy” based upon domestic sources
of financial capital, entrepreneurship and science to create a dynamic “national

The significance of technological change to economic growth and development has been
verified again and again in empirical studies. The endogenous growth theories consid-
ered in Chapter 8 and in the World Bank study (1993) of the East Asian economies are
part of this ever-growing literature. The research based on neoclassical growth models has
found that the basic factors of production, capital and labor, cannot explain all, or even
much, of economic growth. It is often the “residual,” that is, the unidentified variables,
which contribute the most to increased productivity. The non-included variables, which
can encompass such diverse items as technology, business and governmental organiza-
tion, institutional structures, the legal system, property rights, and so on, carry the weight
of “explaining” economic growth over time and the differences in growth rates amongst
In this chapter, we consider in more detail what is meant by technology, one of the most
important contributors to economic progress. We will focus on the required preconditions
for an economy to be able to make effective use of technological knowledge as the struc-
tural transformation process discussed in previous chapters moves forward. We also consider
Technology and development 423
what countries need to do to take better advantage of the ever-expanding world supply of
technological opportunities available to almost any economy.

What is technology?
Technology is knowledge applied to the production process. It permits an outward shift of a
nation™s production possibilities frontier (PPF) and creates the potential for greater output and
income from the same resources. Technological progress reduces costs, increases productive
efficiency, conserves society™s resources, and establishes the capacity for a higher standard
of living for greater numbers of persons.
It is primarily due to technological advances that humankind has been able to progress so
rapidly since the Industrial Revolution. Without technological change, the specter of hunger
and deprivation that Malthus expected might have come to pass, as the law of diminishing
returns would have worked its inexorable logic on fixed resources with unchanging produc-
tivity. However, by shifting the production possibilities frontier outward and the aggregate
production function upward, the static effect of diminishing returns was overcome by techno-
logical change that improved the productivity of all the factors of production, thus releasing
resources for an ever higher level of output. The upward trend line of income per capita
following the Industrial Revolution shown in Figure 3.1 in Chapter 3 was the consequence
of this ever more intensive application of new knowledge to production.
Nonetheless, technology is often a difficult concept to understand. This is because it is not
any particular object, but rather is a way of doing things and a way of thinking. Technology
involves not only the entire accumulated complex of scientific and machine-tool knowl-
edge and the tools and machines which encapsulate this knowledge. It also encompasses the
country-specific human understanding, skills, education, and training essential for making
use of this knowledge, the machines, and the tools. Evenson and Westphal (1995: 2213)
describe technology as:

tacit, not feasibly embodied and neither codifiable nor readily transferable. Thus, though
two producers in the same circumstances may use identical material inputs in conjunction
with equal information, they may nonetheless employ what are really two distinct tech-
niques owing to differences in understanding of the tacit elements [of that technology].

Technology is thus specific to each economy. The same physical manifestations of tech-
nology, such as a computer or a lathe, can have quite different effects on productivity since
these tools are combined with labor forces in each economy, even each firm, with specific
accumulated skills operating within a larger institutional and organizational frame-
work. Technological knowledge is thus economy-specific, depending not just on the tools,
machines, and other manifestations of technology in place, but also dependent on the skills
and effectiveness of the operators and users of those tools and that knowledge.
The more rapidly technological knowledge is able to be adapted and put to work in an
economy, the more rapid will be the pace of economic growth. This requires that workers
and entrepreneurs have hands-on experience using such ideas in the act of producing. That is
the tacit part of technology noted in the quote above. Slower technological progress means,
ceteris paribus, slower economic growth and reduced possibilities for augmenting or creating
the social mechanisms that promote greater equity and the higher level of human develop-
ment that technological progress makes feasible.
What has not been well understood in thinking about technology is how some of society™s
424 The Process of Economic Development
social and economic institutions “ including the existing class structure, land tenure relations,
institutions for finance and banking, ideology, religion and superstition, the commitment of
society to education and free inquiry, the openness of the state to change and to shared devel-
opment, the legal structure and property rights, and the nature of the ties between industry
and the scientific and educational infrastructure “ can be powerful forces in determining to
what extent technology is able to perform its dynamic and transformative functions.1 Many
of the above are Ayresian-type ceremonial institutions examined in Chapter 6. They tend to
engender tradition-bound modes of behavior that operate on other than scientific principles.
It is inconceivable, however, to have any socio-economic system where there are not some
such ceremonial institutions, structures which are by their nature past-binding and status
Nonetheless, in economies where this ceremonial structure is relatively weak, facilitating,
and complementary to change, or can be made so by appropriate state policies, technological
knowledge has a better chance of being combined in the production process to contribute to
greater productivity and to higher levels of output. On the other hand, in societies where the
ceremonial institutional structure is retrograde, especially powerful, and non-facilitating of
change, and where the state does not act to debilitate these adverse structures and ways of
thinking, new knowledge is less apt to be applied to production.
The importance of technology has been widely identified as a major contributor to
economic growth beginning with the empirical work of Edward Denison (1967: 299, 315).
His research found technology to be responsible for over 40 percent of growth in the US
and the UK over the period studied. Simon Kuznets™s work also identified the significance
of technological change, broadly interpreted, to productivity and economic growth. Solow
(1988: 314) noted that perhaps over 90 percent of the increases in output can be accounted
for by the combined forces of technology and education, which in our view are interlocked
The magnitude of this technology effect should not be too surprising. In Chapter 8, we
looked at how endogenous growth models have identified the importance of both technology
and of human capital as fundamental complementary inputs affecting the rate of economic
growth and the level of per capita income. The endogenous growth theories also showed how
the ability to apply technological knowledge varies dramatically amongst economies, so that
a convergence of income has not taken place in the simple fashion suggested by the neoclas-
sical growth model. This is because technological knowledge in use is economy-specific
as a result of differences in the capacity of end-users to apply knowledge in the production
This way of looking at technology focuses attention on the need for social investment in
specific human capital and organizational inputs if such knowledge is to be utilized to its full
effect. This way of understanding technology also recognizes that there can be technology
gaps among economies and that each economy must develop its own relatively unique
technological base. Technology is specific knowledge, not general knowledge. It cannot be
applied everywhere in the same way. each country must make a substantial investment in
its social and human resource capital base if it is to gain the capacity “to do” technology in
a way that maximizes the gains that are implicit in any particular component of knowledge
applied to production.
In the past, many economic growth models envisaged technology as an exogenous public
good available to every economy, as in the Solow-type, neoclassical formulation, rather than
understanding technology as a process of knowledge-in-practice.2 Technology is not some-
thing that just happens to economies, like some deus ex machina. It is a process that countries
Technology and development 425
need to consciously and actively promote and nurture if the potential benefits of techno-
logical knowledge are to be effectively achieved.
To an important extent, the current level of technology-in-use in any economy is path
dependent, that is, it hinges crucially on past decisions that affect current outcomes, though
this lock-in on path dependency is never absolutely binding. Countries can do something
about adverse path dependency in their use of technology by investing in the complemen-
tary inputs, particularly education and research and development (R&D), which contribute
over time to each country™s specific capability to effectively make use of the world™s supply
of technological knowledge. It is precisely these areas of social investment that can spell
the difference between successful and less-successful development over time; they are the
necessary preconditions for future progress.

a technological strategy of development
In a meaningful sense, economic development is indistinguishable from the ongoing applica-
tion of technological knowledge to production.3 Without continuing technological change,
economic growth slows and eventually development falters. In their comprehensive overview
of technology, Evenson and Westphal (1995: 2216) quite unequivocally state that “[n]o LDC
has to date achieved rapid economic growth without continued technological investment.”
Technological change is the result of scientific discovery, experiment, and innovation
which must be financed either by the private sector or the state. The successful introduc-
tion of technology into the domestic production process in any country, what can be called
domestic innovation, requires a domestic scientific establishment capable, first, of under-
standing, adopting, and adapting new, often foreign-created, technological knowledge to the
specific needs of the domestic economy. Machines and tools often have to be customized
to fit local conditions. This is the adaptation stage of technological progress where existing
knowledge is “borrowed” from the world supply and made to fit the local economy.
Later, some countries might move into the creation state of technological progress, which
involves the conducting of new research, the designing of experiments, and the dissemina-
tion of new knowledge that adds to the world supply of technological competency and to the
possibility of ever higher standards of living.
Ronald Dore (1984: 65“8) refers to these two distinct stages as, respectively, an ITLC and
an ITCC: an “independent technology learning capacity” and an “independent technology
creating capacity.” An ITLC might also be called, interchangeably, technological autonomy.
Creating an ITLC and achieving technological autonomy is the first step toward greater
self-sufficiency, a higher level of domestic efficiency and the creation of an internal dynamic
for any economy. It is an ITLC that undergirded the Japanese, Korean, and Taiwanese devel-
opment successes. The easy import substitution and easy export substitution phases of indus-
trialization in those countries provided the creative space for domestic entrepreneurs and
workers to be able to attain higher levels of skill that permitted them to become increasingly
technologically competent. It is this learning capacity which permitted the East Asian econo-
mies to grow faster, on average, than other less-developed countries which apparently shared
roughly the same initial endowments, such as the level of investment. Looking back at Table
8.4 in Chapter 8, with the exception of Singapore (which is a service-intensive economy),
the East Asian economies did better at keeping pace or catching up with international “best
practice” technology than did nations in Africa or Latin America.
The ability to create technology and to add to the world pool of knowledge and practice,
that is, for a country to have an ITCC, comes later with the further maturation and deepening
426 The Process of Economic Development
of the ITLC process which preceded it. An ITCC is most likely to appear as more resources
are devoted to R&D and as economies complete difficult ISI and difficult export substitution
and move into the knowledge-intensive phase of structural transformation (see Figure 10.1
in Chapter 10).
An ITLC is essential to sustaining high rates of economic growth and to make progress on
the path to fuller development. An ITCC may be necessary to sustain this progress over the
longer term after the gains from the ITLC strategy become more difficult to sustain and after
a country has learned to be as efficient as world-level best practice techniques.4 It was an
ITCC that Great Britain and then the US created and which contributed to their phenomenal
progress over long periods, while each was the leading force for the creation of new techno-
logical standards and knowledge for the world.
Recent empirical studies have found that a nation™s research and development (R&D)
expenditures are significant in explaining sustained growth rates over time. Other research
has suggested that within the overall goal of increasing the stock of human capital, scientists
and technicians involved in R&D are an important sub-category of human capital which
should be emphasized to better appropriate the benefits of technology. There is now little
doubt that both R&D and the training of R&D researchers contribute to the creation of
specific national technologies and to the learning required to be able to utilize technological
knowledge effectively. Table 13.1 provides data on the number of R&D researchers and the
share of total gross domestic product (GDP) devoted to R&D for a variety of economies.
The story the table tells seems quite unambiguous. Countries at higher levels of develop-
ment, here measured by the human development index (HDI), tend to have larger numbers
of R&D scientists and technicians directly involved in research and development activities
with close links to the production process than do countries with lower HDI values. But even
among these economies, there are evident differences.
Korea™s and Singapore™s attention to R&D researchers is especially noteworthy among
even the high human development countries, though all the less-developed countries have a
stock of technology-oriented researchers that still falls well short of what has been achieved,
on average, in the already-developed countries.5 Singapore™s and Korea™s R&D spending is
also quite high, particularly when compared to other LDCs among the high human develop-
ment category, such as Argentina, Chile, Mexico, and Malaysia. Looking at gross national
income (GNI) per person in 2005, both Singapore and Korea distinguish themselves from the
other high human development economies shown. There clearly seems to be a very positive
relationship between R&D researchers and expenditures and not only the level of develop-
ment, as measured by the HDI, but also in terms of income.
Among the economies that have achieved medium human development, China™s number
of R&D researchers and its level of R&D expenditures is worthy of note. Given China™s large
population, this represents a substantial core of R&D workers who can fuel the ITLC process
and continue to help the economy achieve the high levels of economic growth that have been
attained over the past two decades. China™s income per capita is low relative, say, to Brazil,
but the chances are quite good that soon China will surpass Brazil given the rapid pace of
change and given the technological focus.
For the low human development economies, the low and at times negligible levels of R&D
expenditures and R&D researchers manifests itself in, and is partly the consequence of, low
levels of income per person. There is clearly a path-dependent effect at work in all econo-
mies in that there is a feedback mechanism from the level of ITLC to income and the level
of human development and vice versa. The data is difficult to controvert: more attention to
R&D has a long-run effect on the level of development and income. Look at Japan among
Technology and development 427
Table 13.1 R&D scientists and technicians
R&D scientists and R&D expenditures GNI per capita
technicians (% of GDP) (US dollars)
(per 1,000,000 pop.)

1990“2003 2000“2003 2005

2,968 2.5
High Human Development
(HDI > 0.800)
Argentina 0.4 4,470
444 0.6 5,870
Korea 3,187 2.6 15,840
299 4,970
Malaysia 0.7
268 0.4 7,310
4,745 27,850
Singapore 2.2

523 0.9
Medium Human Development
(0.500 < HDI < 0.800)
Brazil 344 1.0 3,550
663 1.3 1,740
119 730
India 0.8
86 690
Pakistan 0.2
Thailand 0.2 2,720

“ “
Low Human Development
(HDI < 0.500)
251 “ 420
Nigeria “ “ 560
Zambia 51 “ 500

416 1.1
All Developing Countries

3,748 2.5
Developed Countries
5,287 3.1 38,950
US 4,484 2.6 43,560

Sources: UNDP 2006: 327“30, Table 13; World Bank 2007: Table 1.1.

the developed economies. The attention paid to learning to do technology as revealed by the
large share of R&D researchers and the investment in R&D out of total income is part of the
story of why Japan became a powerful economy in the half-century after 1945.
While the rate of economic growth and technological change are path dependent in the
sense of being the consequence of past decisions on the economic strategy, on expenditures
for human capital purposes, on the exchange rate and inflation rate, and so on, modifica-
tions of the path are always possible when a country decides to make a change. What can
be inferred from the Korean and Japanese experiences is that, though the current rate of
economic and human development may be path dependent, the future path has multiple
branches at any moment in time.
The decisions the state sector makes on expenditures for education, health, the military,
on tariffs, on tax laws, on patents and other intellectual property rights, on the treatment of
multinational corporations, and on a whole range of other factors today will determine along
which path the economy and society will traverse in future. Private firms, individuals, and
the state make decisions within the confines of the parameters for economic decision-making
determined by the state and within the cultural and historical confines of each specific society.
428 The Process of Economic Development
They choose the paths now via spending and other decisions which affect future growth and
development prospects and determine the future path dependency of the economy.
While Table 13.1 does not prove causality, the endogenous growth models and research
work by other scholars (see Grossman and Helpman 1994) do find that there is a seren-
dipitous effect, what we would call a positive externality, associated with a larger number of
scientists engaged in R&D activities who are then able to interact with others also possessing
a high level of skill and knowledge. R&D scientists and technicians are one specific category
of human capital which seems to be unambiguously associated with a positive pay-off for
growth, all else the same.
This does not change the conclusion of Chapters 8 and 12 on the importance for coun-
tries to pursue a more generalized human capital accumulation process in which universal
primary and secondary education are extremely important. It does suggest, however, that
resources do need to be directed to tertiary education as well, including funding specifically
targeted at the training of essential R&D scientists and technicians as the level of per capita
income and the level of human development rises. Further, this argument underscores the
importance, in the modern global economic environment, of primary and secondary educa-
tion with a substantial technical focus, with both mathematics and science training given
particular emphasis if today™s students are to have the skills and adaptability which tomor-
row™s economy will demand.
Table 13.2 provides more direct evidence on the relation between the level of techno-
logical capability and other key indicators. The seventy-five less-developed countries with
Level 1 technological capacity had, at most, some industrial research capacity in the public
sector, but not in the private sector, where production takes place. In agriculture, the capacity
for doing technology ranged from nil to relatively advanced.6

Table 13.2 Technological capability and development capacity
Level 1 LDCs Level 2 LDCs OECD

Real GDP growth (1965“90)
0.5“1.5 2.4“7.1 2.5
Per capita
2.5“2.8 4.7“8.1 3.5

R&D/GDP (1990)
0.2“0.3 0.4“0.6
Public 0.7
0.0“0.02 0.05“1.0 2.3

Science/GDP (1990)
0.02“0.03 0.04“0.10 0.40
Private 0.0 0.0

0.2“0.4 0.6“1.3 1.0

IPR (index) 0“1 2“4 5.0

Source: adapted from Evenson and Westphal 1995: 2242“3, Table 37.1.
Level 1 less-developed countries have “traditional technology” to some “islands of modernization”; Level 2 devel-
oping countries have technology ranging from “mastery of conventional technology” to newly-industrialized
countries. OECD are the high-income economies. R&D/GDP is the percent of gross domestic product spent on
research and development. Science/GDP is the percent of gross domestic product spent on science. S&E/GDP
is the availability of scientists and engineers relative to gross domestic product. IPR is an index measuring the
strength of intellectual property rights; it ranges from 0 (no IPRs) to 5 (complete IPRs).
Technology and development 429
There were only twenty less-developed countries with Level 2 technological capacity (all
the East Asian economies were at this level), which means they had at least a basic ITLC
capacity in key sectors of their economies.
It is clear from the first and second lines of Table 13.2, and even clearer from data
that is even more finely disaggregated but not shown here (see Evenson and Westphal
1995), that the level of technological capability was positively correlated with the pace of
economic expansion over the period 1965“90. For Level 2 less-developed countries that
had achieved a higher level of ITLC, the rate of growth of aggregate GDP was higher than
for the Organisation for Economic Co-operation and Development (OECD) industrial-
ized economies and was at least double the pace of growth for Level 1 countries with less
capacity for an ITLC.
The last line of Table 13.2 gives some notion of the institutional, including legal, support
provided to R&D endeavors in terms of protection for intellectual property rights (IPRs),
such as patents and copyrights. Most Level 1 countries have no patent protection for domestic
IPRs and provide virtually no protection for foreign IPRs. In Level 2 countries, there are
laws providing intermediate protection for foreign IPRs, but IPRs in the domestic economy
remain weakly defined, except for the four East Asian economies. Protection of domestic
intellectual property rights is particularly important as economies become more adept at
adapting foreign knowledge to the domestic sphere.
Lacking such protection, private firms and private inventors may be hesitant to invest in
the development or introduction of new ideas for fear of theft of their innovations. But more
importantly, a well-developed legal apparatus which affords IPRs proper and needed protec-
tion is a signal that an economy recognizes the significance of technology and the importance
of the application of new knowledge in the process of production. Laws concerning IPRs are
complementary to efforts to build an ITLC, and they reflect the attention to organization and
institution-building characteristic of economies forging new paths toward a higher level of
development. Thus the legal structure of economies must keep pace with efforts to augment
other endowments for development, such as human capital resources. The positive relationship
between the IPR protection and the pace of economic growth is quite clear from the table.

Total factor productivity and national technology
economists often assess the impact of various inputs to production on economic growth
using a growth accounting methodology. Basically, this is an attempt to measure how much
of any increase in an economy™s output can be accounted for by additional units of the inputs
added to production, for example physical capital (K) and additional labor (L). Any economic
growth left unaccounted for by increases in the quantity of the physical inputs is called total
factor productivity, or TFP.7
Countries able to combine both new capital, which typically embodies new technolog-
ical knowledge (read about the Salter Effect in Focus 13.1), and a growing and improving
human capital stock which is better able to make use of and unlock the technological
knowledge incorporated in new capital, will be better equipped to move toward and keep
pace with the world production possibilities “best practice” frontier and will tend to have
the highest rates of TFP. The World Bank (1991: 42) opined that “the main additional
element (in explaining the growth of TFP) is the quality of labor,” that is, human capital
Total factor productivity gives us an idea about how efficient a country is as it progresses
along its path of economic growth and industrialization. For example, imagine that the GDP
430 The Process of Economic Development

Acquiring an independent technological learning capacity (ITLC) is not solely achieved
via better education and augmentation of the human capital stock, though these are
necessary. Knowing how to do technology requires experience gained primarily by actu-
ally producing. Best practice technological skills can only be acquired by using the most
advanced manifestations of technology and of the ideas associated with them in produc-
tion. This is the essence of learning-by-doing.
A significant proportion of new technological knowledge is embedded in the design
of new physical capital equipment, such as computer-controlled arc welding devices,
stamping machines, computer chips, and computer networks. Thus, the speed with which
new capital replaces older capital will, to some extent, affect the pace at which best prac-
tice technological learning is integrated into local practice by becoming potentially appro-
priated knowledge possessed by local human capital and entrepreneurs.
This is another reason why export substitution industrialization strategies, discussed
in Chapter 10, can contribute to more rapid economic growth. The faster the tempo of
economic growth attributable to an expansion of manufactured exports and domestic
production to accommodate such exports, the more new physical investment that will
be required. Hence, to the extent that a more rapid pace of investment leads to the more
rapid introduction of new physical capital embodying the latest technological knowledge,
exporting can contribute positively to the domestic learning process.
On the other hand, slow-growing economies, such as those that have not graduated from
easy import substitution industrialization to begin to export manufactured goods to the
international market, do not introduce new capital with the latest embodied knowledge as
quickly. Hence the speed at which technological knowledge is acquired and learned will be
slower since any learning-by-doing effects in production will lag best practice technological
knowledge as a result of the slower pace of physical capital accumulation.
The Salter Effect is the term applied to the speed at which new technological knowledge,
embodied in new physical capital, is likely to be appropriated with higher levels of economic
growth. The faster the rate of economic expansion, the more rapid is the potential rate
of technological acquisition and hence future growth. The slower the pace of growth and
investment, the slower the pace of technological learning and future growth is likely to be.
Thus exporting manufactured goods via an export substitution strategy, assuming the
requisite human capital inputs have been created, can create a virtuous circle of technology
learning, leading to altered path dependence.
Source: Salter 1969

per person of some country is growing at an average of 4.3 percent per year, but that it is
discovered that the TFP = 0 for that country. What a TFP = 0 means is that there has been
a zero increase in efficiency (i.e. no increase in the productivity of the inputs) involved in
achieving that 4.3 percent increase in GDP per person.
How, then, was this economy able to grow at all, let alone an average of 4.3 percent per
year, if there has been zero increase in the efficiency and productivity of the economy™s
inputs used in production?
The only way an economy™s total output can increase if there is a zero increase in produc-
tivity (which is what TFP = 0 means) is if more inputs are added to production, inputs that
are of the same quality as in the past. Typically, those inputs are physical capital and labor,
but there could be other inputs as well (such as different types of workers, R&D, or any other
input that might be identified).
Technology and development 431
Whenever GDP increases because there has been an increase in the inputs added to produc-
tion, you will remember we call this extensive economic growth, i.e., economic growth
resulting from adding more inputs to production. If TFP = 0, and a country has nonetheless
experienced growing GDP, then all the increase in GDP has been due to the use of more labor
and capital in production (and whatever other inputs there are), and all economic growth is
On the other hand, if a country has TFP > 0, then that means that some part of the country™s
economic growth is due to greater efficiency. When TFP > 0 that amount of growth is called
intensive economic growth. TFP > 0 is a good thing, obviously, since this means that with
the same quantity of inputs a country can produce more GDP than it could otherwise and at a
faster rate than can be achieved by just adding new inputs to production. Having TFP > 0 is
how countries can achieve even faster economic progress over the long term than would be
possible otherwise. A good part of this increase in efficiency results from countries learning
how “to do” technology.
Most of the time, if TFP > 0, there will have been both extensive and intensive growth,
since nearly every economy is adding more inputs to production over time. So more inputs
plus greater productivity of the inputs (a TFP > 0) adds up to both extensive and intensive
growth at the same time.
Total factor productivity can be estimated by subtracting from the growth rate of total
output the share of that total growth attributable to: (a) increases in the quantity of physical
capital and (b) increases in the labor force, each weighted by their contribution to total produc-
tion (of course, if there are more inputs, the concept for calculating TFP is the same). Any
remainder can be interpreted as total factor productivity. In other words, TFP measures the
synergistic effect of combining an economy™s physical capital and its human capital, which
can result in productivity increases beyond the contribution of of more physical quantities of
the individual inputs. In the language of Chapter 3, TFP measures intensive economic growth
(= total output growth ’ extensive growth).
For example, let™s assume an economy with but two inputs to production, labor, L, and
physical capital, K. If annual output growth was 2.5 percent; physical capital, K, grew by
3 percent per year and K™s contribution to production was 30 percent; and the labor force,
L, which contributed 70 percent to aggregate production, grew by 2 percent per year; then,
TFP = total percentage change in output ’ (percentage change of K — contribution of K to
production, as a decimal) ’ (percentage change of L — contribution of L to production, as
a decimal) = 2.5 percent ’ (3 percent — 0.3) ’ (2 percent — 0.7) = 0.2 percent. (Note: the
combined weights for the inputs must always add up to 1, regardless of the number of inputs.
If there are more than two inputs to production, the weights must still sum to 1.) The 0.2
percent is the annual rate of TFP, that is, it is that part of total economic growth that cannot
be explained by having added more inputs to the production process. It is the amount of
intensive economic growth. And, yes, it can be zero or negative as well as a positive value
as shown here.
In this example, of the 2.5 percent annual growth of total output, increases in K and L
accounted for 2.3 percent growth per year and TFP (greater efficiency, better technology,
better management techniques, better government regulations, etc.) resulted in additional
growth of total output of 0.2 percent. In other words, 0.2 percent/2.5 percent = 8 percent
of total output growth was due to TFP (intensive growth) and 92 percent was the result of
adding more inputs to production (extensive growth).
TFP is an attempt to capture the impact of all the factors that contribute to the greater
productivity of the inputs, K and L (or any broader definition of inputs used). Included in
432 The Process of Economic Development
the TFP measure are: technological change and technological catch-up; improvements in the
efficiency and learning capacity of the labor force due to human capital accumulation; the
positive productivity effects of the structural transformation from agriculture to industry and
other strategy switches; changes in state policy that contribute to greater efficiency, such as
lower inflation rates or an improved tax structure; organizational and institutional altera-
tions, such as better management practices and improved financial control mechanisms in
the banking system, and so on.
In a general sense, all of the variables which might affect an economy™s total factor
productivity are related to an economy™s acquisition of an ITLC and a national technological
capacity to do technology and to be more effective users of resources.
Table 13.3 provides data on TFP estimates made by the World Bank for a crucial period
of time. Part I shows annual rates of GDP growth, annual changes in the physical capital and
labor inputs, and the resulting estimates of total factor productivity over the critical period
1960“87. Among the less-developed regions, East Asia™s TFP growth rates were the highest,
as one might expect from the larger number of scientists and the attention to R&D shown
earlier in Table 13.1. It will also be noticed that East Asia™s rate of capital accumulation was
more rapid than in any other region and additions to the labor force were as high or higher
than any other area. East Asia was thus not only experiencing intensive economic growth (TFP
> 0) but also substantial extensive economic growth. No doubt the two sources of economic
growth complemented one another.
All of these factors combined to give East Asia the highest rate of GDP growth among the
regions and even relative to the industrial economies. Faster physical capital accumulation,
particularly to the extent that it also embodied new knowledge, increased the pace of growth
in the region (remember Focus 13.1 on the Salter Effect and the link between physical capital
accumulation and the pace of technological change).

Table 13.3 Total Factor Productivity (TFP) estimates, 1960“1987 (percentages)
GDP Capital Labor TFP

Part I: Annual percentage changes
Africa 3.3 6.3 2.2 0.0
East Asia 6.8 10.2 2.6 1.9
Latin America 3.6 6.3 2.6 0.0
South Asia 4.4 2.1 0.6
68 less-developed countries 4.2 2.3 0.6
3.9 4.8 ’0.2 1.7
UK 2.4 3.1 ’0.2 1.2
US 3.0 3.4 1.8 0.5

Part II: Total percentage of output growth as a
result of changes in K, L and TFP
Africa 73.0 28.0 0.0
East Asia 57.0 16.0 28.0
Latin America 67.0 30.0 0.0
South Asia 67.0 14.0
68 less-developed countries 65.0 23.0 14.0
23.0 “10.0
Germany 87.0
UK “5.0
27.0 78.0
US 23.0 50.0

Source: World Bank 1991: 43, Table 2.2, 45, Table 2.3.
Technology and development 433
A higher growth rate of labor, the quality of which was increasing over time, also
contributed to East Asia™s rapid pace of growth. And all of the institutional, organizational
and policy decisions made by the state and the private sector added, on balance, to positive
improvements in the efficiency with which the K and L inputs to production were utilized,
hence the relatively large increase in TFP.
In Africa and Latin America, by comparison, all the growth in output shown in Table 13.3
was the result of simply adding more physical capital and labor to production. The lack of
complementary productivity-enhancing change, as registered by a zero TFP, is disconcerting.
On average, there was no intensive economic growth, only extensive economic growth from
adding more inputs to production. This evidence underscores the continuing need for econ-
omies in Latin America and Africa to undertake policies to improve their human capital
resources and to stimulate a higher level of R&D that can speed up the acquisition of an
ITLC if these economies are to more fully provide for a higher level of human develop-
ment. Both regions clearly need more coherent policies that might contribute to national
technological learning that would support the adoption and adaptation of the world supply of
knowledge more effectively.8
Part II of Table 13.3 looks at the numbers in Part I in a slightly different way. According
to the World Bank™s estimates, East Asia™s rate of TFP was double that of any other less-
developed region. Over the period 1960“87, 28 percent of East Asia™s total economic growth
was due to increases in TFP and intensive growth, while 72 percent of economic growth was
the result of adding more inputs, i.e., was due to extensive growth. For South Asia, which
includes India and Pakistan, TFP over the same period was responsible for 14 percent of total
economic growth and added inputs and extensive growth were responsible for 86 percent of
economic growth.
In Africa and Latin America, on the other hand, we again see the zero TFP growth
highlighted “ that is, all the growth in output was due to extensive growth as more inputs,
particularly physical capital, were added to the production process (World Bank 1991: 45,
Table 2.3). For example, in Latin American 67 percent of all economic growth was due to
adding more machines and tools and other capital goods to the production process.
In summary, East Asia and South Asia grew not only by being able to add more inputs
to production, but by producing more intensively and more efficiently.9 Africa and Latin
America produced more output, but at a slower overall pace, and they did so solely by
producing extensively, that is, by adding more of the same quality inputs to the production
process, not by using those inputs in a more efficient manner or by augmenting the quality
of the overall human capital stock. Recent research (Weiss and Jalilian 2004: 298“300)
suggests that the gap in TFP rate between Latin America and East Asia continues, except
perhaps for Mexico, which has increased its structural transformation toward export substi-
tution policies.
The data in Table 13.3 suggest that the less-developed regions continue to experience
a technology gap relative to the more-developed countries. There remains room for them
to improve upon their national technological capacity. That this gap exists should not be
too surprising. About 90 percent of all the world™s R&D is done by the already-developed
nations, where most of the ITCC capability (“know-why”) currently exists. Until that balance
shifts, there will remain opportunities for increased R&D and human capital augmentation
in the less-developed countries to build and consolidate their technology learning capacities
(ITLC), and thus the possibility of even more rapid growth is at least within the realm of
It is this catch-up gap which Gerschenkron (1962) believed would permit late-developers
434 The Process of Economic Development
to advance rapidly. This, however, is true only if those economies make the required
investments in their initial endowments “ basically, the accumulation of human capital
combined with the proper incentives for individuals to be able to succeed “ which result in
more technologically sophisticated augmented endowments that become the future™s new
initial endowments (Easterly 2001). In other words, there continues to be a need for better
trained workers along with scientists, entrepreneurs, and other critical labor resources who
are equipped to apply the ever-expanding knowledge constantly being added to the world
supply of technological learning. Building a technological capacity, and the necessary
human capital investment this requires, is what can alter the nature of past adverse path

Technology-centered development
To capture the full benefits of the world supply of technological knowledge requires the
utilization of best practice production techniques. When technology is viewed not as an
exogenous given or as a public good freely available to all but as an endogenous process
to some extent dependent on indigenous factors specific to each economy, then education
and the improvement of human skills in general and the creation of a core R&D cadre
must become essential components of any development strategy aimed at real structural
Ideally, efforts along this path should begin in the earliest stages of industrialization,
beginning with easy ISI, so as to continually add to the stock of human resources and to the
skills of entrepreneurs who can learn in the process of producing. This is why we do not take
the strong view of some economists that easy ISI failed or that other countries should not do
import substitution in the future. Properly designed, as discussed in Chapter 9, import substi-
tution industrialization is a vital training ground for creating technological competency and
attaining an ITLC, with its potential long-run positive external effects. As Nobel Laureate
economist Simon Kuznets (1968: 272) wrote:

Far more important [than physical capital to economic growth] ¦ are the economic
and social characteristics that reside in the capacities and skills of an economy™s popu-
lation, determine the efficiency of the institutions that direct the use of accumulated
physical capital, and guide the current production into proper channels of consumption
and capital investment.

Technology exists as an intangible and accumulating body of knowledge at the world
level capable of being utilized by any given country only to the degree it has developed
a technologically sophisticated community, that is, an ITLC, which can use and adapt the
existing supply of knowledge to employ the implements of production to advance economic
progress. It is thus not possible for countries to effectively borrow the manifestations of
technology, such as physical capital, tools, and machines which are so often the focus of the
technology transfer literature, and expect to become developed if the human skills, culture,
and institutions required to make effective use of this technological knowledge are absent
or but poorly formed within the borrowing economy. As one study put it, people, not tools,
“are the real agents of technology transfer and diffusion” (Radhakrishna 1980: 170). In
most economies, the state will need to play an absolutely central role in pushing forward
the technological acquisition process (see Focus 13.2 for some of the reasons that such
intervention is necessary).
Technology and development 435

Gerschenkron™s (1962) historical study and those of East Asian scholars, like Amsden
(1989) and Wade (1990) on Korea and Taiwan, found that developmental states were impor-
tant in contributing positively to the pace of technological acquisition and, hence, the level
and rate of economic growth over time. Building on the work of Nobel economist Doug-
lass North and utilizing the concept of transactions costs, New Institutionalist Economics
(NIE) researchers have argued that centralized state intervention was, in those instances,
a lower cost means for achieving an independent technological learning capacity (ITLC)
than a market-based approach would have been. In other words, the state contributed to
economic efficiency rather than acting as a drag on the economy.
It appears that when political power is concentrated within a developmentalist state
with a vision for achieving economic growth, rapid progress is possible. If, however, as in
Pakistan in the 1960s, political power does not reside in the state, no matter how strong
or centralized it may seem, but rather actually belongs to powerful private classes in agri-
culture and trade with no interest in fundamental change, the state™s ability to contribute
to technological acquisition will be severely compromised. In Pakistan, the higher transac-
tions costs of coordinating decisions and of searching for compromises with these elite
groups kept technological acquisition and an ITLC from being an attainable goal. The
same is true of far too many other economies, even today.
While research in the transactions cost vein applied to development is quite new, it
does highlight the importance of specific institutional structures, of power groups and
classes, and of a number of supra-market considerations which can and do impinge
upon economic development via their impact on the feasibility and the cost of techno-
logical acquisition.
Source: Harriss, Hunter, and Lewis 1995: especially Chapters 1, 2, 4, and 5

A technologically sophisticated community is composed not only of knowledge workers,
like scientists, engineers, and researchers, but also of skilled workers on the shop floor who
can utilize new ideas in the ways they are meant to be utilized, perhaps even improving upon
them in their specific, local application. Just as importantly, there must exist or be created an
indigenous entrepreneurial nucleus of determined agents capable of appreciating the poten-
tial of new ways of producing and who are able and willing to make use of new technology
through constant innovation in the domestic production process.
The activities of this entrepreneurial nucleus will be concentrated predominantly in the
private sector, but in some economies the state may be obliged to act as a collective entrepre-
neur to complement or substitute for missing private entrepreneurs. It is here especially that
the state™s macroeconomic policies, discussed more fully in Chapter 15, can either inhibit
or contribute to rapid development through their effects on human capital formation, on
R&D, and on the decisions made by the private sector to invest in creating the capacity to
The state may also be involved in the actual production process in some countries via
para-statals, which are publicly owned enterprises, in key industries where “backward link-
ages” or positive externalities to the private sector are expected to be substantial, for example
electricity, communications, ports, water, transportation, and even some heavy industries.
Para-statals in the steel industry in Brazil and Mexico are examples of state firms that gener-
ated positive externalities for the economy as a whole, as were South Korea™s and Taiwan™s
and Chile™s publicly owned banking systems.
436 The Process of Economic Development
Technological diffusion via multinational corporations
At one time, it was a common dogma that technological diffusion from the more developed
nations to the less-developed economies could help poorer countries skip over stages of
domestic technological development. In this way, they would be permitted to enter directly
into the intensive stage of technology utilization without needing to “reinvent the wheel.” It
was believed that such diffusion could materially contribute to a more rapid narrowing of the
income gap between the developed and less-developed worlds. Some countries attempted
to follow this diffusion path by hosting multinational corporations (MNCs) within their
economies, yet most failed to become more developed. In fact, it might be argued that some
economies, such as the larger Latin American countries, depended too much on MNCs and
that their level of progress was adversely affected as a consequence.
The failure of countries to become more developed by depending upon technological
diffusion from MNCs is not the result of any generalized conspiratorial plot by MNCs to keep
the less-developed countries backward, as some commentators have argued. The problem is
that many less-developed economies to which MNCs have brought, sold, or licensed tech-
nology have yet to create the requisite initial domestic technological culture and the domestic
capacity for an ITLC that would permit them to capture the benefits of tool and machine
diffusion through learning and spread effects at the point of production. In other words, the
requisite human capital is not in place that would allow the country to learn the technological
knowledge the MNC utilize.
If technological borrowing were simply dependent upon the arrival of MNCs in an
economy and nothing else, then the domestic environment of an economy and the idea
of national technologies would be significantly less important, if not wholly irrelevant, for
understanding the process of development. In that case the issue of how to develop would
dissolve into one of increasing physical capital accumulation and technology transfers via
foreign direct investment and MNCs characteristic of the simple-minded foreign aid approach
and the early neoclassical economic growth models.
Albert Hirschman long ago warned, however, of the inherent dangers of pursuing tech-
nological borrowing as the path to technological autonomy, particularly when technological
knowledge is mediated by multinational corporate direct investment, as much of it has
been in some countries. This has been a major issue in Latin America, where the large-
scale promotion of MNC investment was fundamental for the (premature) introduction of
the difficult ISI strategy (from Chapter 10). Hirschman cautioned that attempting to acquire
technology through foreign direct investment may do more to “harm the quality of local
factors of production” than to act as a spur to the expansion of the missing local inputs, such
as innovating entrepreneurs and skilled workers which such investment might be hoped to
encourage (Hirschman 1971: 227“9).
Rather than serving as a complement to local technological development and as a boost
to locally controlled and locally directed production and to the establishment of a dynamic
national technology, foreign inputs can become substitutes for the local factors of production
and for the building of a domestic technological capacity. This is especially likely to occur
in those countries where the necessary components of a technological autonomy strategy
have not been implemented, and particularly where general education levels and technical
education levels are low. How can the sophisticated knowledge imbedded in the MNCs
be appropriated by a local economy lacking in skilled workers, professionals, scientists,
and others who might be able to interpret what the MNC “knows”? In such conditions,
the overwhelming influence and knowledge of the MNCs can stunt the development of the
Technology and development 437
institutions and individuals capable of, and necessary for, learning from the tool, machine,
and applied knowledge components of technology developed and used by MNCs.
When MNCs and their structures substitute for local entrepreneurs, skilled workers,
managers, professionals, scientists, technicians, and other workers, we say that factor substi-
tution or factor displacement has taken place. This is not caused by the MNCs so much as
it is permitted and even desired by some elements of the local ruling elites in many less-
developed countries, elites who often are uninterested in seeing technological autonomy
achieved in their countries.

The dominant classes know that technological development cannot be introduced merely
as an isolated input to production; but is part of a global process, which once started is
very difficult to stop, and which endangers the stability of the social structure on which
their privileges are based.
(Herrera 1971: 35)

As Herrera (1973: 33) argued, then, it is not actually an absence of policies toward science
and technology and human capital creation which characterizes far too many countries and
which manifests itself in the relatively small number of R&D scientists in Table 13.1. Rather,
it is the existence of an “implicit science policy” that is actually hostile to broader applica-
tions of science and technology that is the source of the problem. It is an antagonistic attitude
toward science and technology which inclines at least a segment of the dominant classes in
many less-developed countries toward technological dependency, precisely because more
rapid economic and social change might threaten the existing class structure. The position
and privileges of elites often thrive on maintaining the prevailing configuration of inequality;
for example, powerful agricultural interests who view fundamental structural transformation
and industrialization as a threat to their wealth.
External interests such as MNCs certainly have a stake in preserving control over their
own technological knowledge, which is often expensive for them to produce. It is not
correct, however, to argue that technological dependency can be blamed exclusively or
even primarily upon MNCs or any other outside force. Technological dependency and the
absence of genuine efforts aimed at creating an ITLC is something that the policies of a
country create and perpetuate. And it is policy made in the interests of a narrow, albeit
powerful, elite and against the interests of the majority who lack access to power and to the
state where overall development policy is made and where the spending priorities of the
state are executed.
What is hopeful for change is that technological dependency is not in the interests of all
members of the dominant elite. Many emerging industrialists in the infant ISI sector may
be favorably predisposed toward a policy of technological autonomy and an ITLC. They
increasingly require such technological knowledge if they aspire to be competitive on the
world market and to export. Where the influence of this modernizing fragment of the elite
has been strong and growing, as it has been in Brazil, Nigeria, Chile, and other less-devel-
oped nations, the changeover in state policies toward technology-creating institutions has
been remarkable (Adler 1987).

The role of the MNCs
MNCs do not arrive one morning and begin producing in an economy. There is a long,
sometimes too long, process of negotiation that takes place between MNCs and the national
438 The Process of Economic Development
government on taxes, subsidies, regulations, property rights, labor laws, and a whole range
of issues. It is at this stage that a government with a developmental vision can bargain with
MNCs to encourage them to hire and train local workers, professionals, managers, engi-
neers, scientists, and others who can, through on-the-job learning-by-doing, contribute to the
diffusion of the knowledge imbedded in the MNCs to the local economy through spin-off
companies and new industries.
To the extent that the knowledge gained while working for MNCs is generalized knowl-
edge, workers, managers, entrepreneurs, scientists, technicians, accountants, and other
professionals can carry that training and apply it to other firms and in other settings. This
is how diffusion of technology truly takes place, as learned knowledge is applied to the
domestic economy by those whose skills have been upgraded while working for the MNCs.
Vigorous state promotion of technological progress, from education, to science policy
and research, to support for R&D, to favorable treatment in the production process of local
science and technology efforts, to the conscious effort to use MNCs as a learning platform
are essential to the success of the pursuit of technological autonomy and an ITLC. Domesti-
cally-controlled and adapted technological progress has substantial public goods character-
istics and significant positive externalities over the longer term. As Sachs (2005: 41) puts it:
“The beauty of ideas is that they can be used over and over again, without being depleted.”
However, the problem of market and institutional failure obliges the state to take action to
avoid sub-optimal outcomes by making certain that the human capital and institutional struc-
ture is appropriate for adopting technological knowledge from the world supply, including
that imbedded in MNCs (Adler 1988).
American economist Alice Amsden (1989: 9, 21, 76) noted that Korea “has entertained
almost no direct foreign investment outside the labor-intensive sectors” and that “industriali-
zation has occurred almost exclusively on the basis of nationally owned rather than foreign-
owned enterprise.” Direct foreign investment was viewed as another policy instrument to be
selectively utilized in an effort to the meet the growth and technological objectives of the
developmentalist regimes in all the East Asian economies, and in Japan as well before them.
Foreign investment was used to gain access to technological knowledge which foreign
MNCs had created. MNCs also were a fulcrum around which domestic production linkages
could be forged. But it was national capitalists and domestic finance which provided the
base for the successful East Asian experience with both growth and shared development.
This situation contrasts sharply with the experience of the major Latin American economies
which have had more than twice the level of foreign direct investment as a share of total
output, and substantially less success since initiating difficult ISI (see Focus 13.3 on how
Korea learned foreign technology).
These differences, and Hirschman™s observations above on the threat of factor displace-
ment, suggest that foreign investment is not a perfectly substitutable factor input for domestic
inputs in the development process. National development must be built upon national capital
and national expertise (Evenson and Westphal 1995: 2237). In the next chapter, the possible
benefits and costs of foreign direct investment are considered more carefully and thor-
On one criterion, that of the acquisition of a national technological capacity and an ITLC,
countries must be very careful and selective in their approach to multinational corporations.
Too much foreign investment can prevent the creation of the technological autonomy and an
ITLC that every country needs to sustain economic growth over the future. MNCs provide no
shortcuts to such autonomy unless a country has created the entrepreneurial core, the skilled
workers and the scientists and engineers who can assimilate the knowledge potentially
Technology and development 439

Korea was quite adept at learning foreign technology along its industrialization path. This
did not happen by chance. There was a conscious policy to appropriate the technological
knowledge that foreign companies, workers and professionals held.
For example, when it was determined that the economy needed a steel industry, foreign
engineers were brought in to construct the earliest mills. Korean engineers served as
observers. What were they doing? They were learning how to build and then run these
mills. During the second and third stage of steel mill construction, Korean engineers
assumed greater responsibilities relative to foreign consultants. By the time that the fourth
generation of steel mills was built, Korean engineers were able to oversee construction
without foreign engineers or consultants. They had internalized the knowledge that foreign
companies and experts held and made it their own. Interestingly, there was an increase in
the efficiency of operation of each successive vintage of steel mill constructed.
This is a further example of the learning-by-doing effects and the positive externalities
that arise with the ever greater application of technological knowledge to the production
process. It also is an illustration of the importance to economies of the need to be focused
on building an indigenous cadre of scientists, engineers, and technicians who become
increasingly capable over time of performing closer to international best practice.
This can be accomplished through better education, including the training of students
abroad at the world™s best universities, students who then return home to adapt new
knowledge to the domestic economy. But it is also possible to learn technology from
MNCs via the direct training of workers at all levels of the firm if the state has put in place
policies that encourage and reward MNCs who contribute to the formation of an ITLC.
After all, MNCs typically get special incentives, like tax breaks to subsidize buildings,
when they begin operations in an LDC. Isn™t it simply prudent for the LDC to ask that the
MNC provide critical training for workers, managers, accountants, financial analysts and
other professionals over a period of time as the quid pro quo for receiving state-funded
incentives? This was the Korean approach, and it is one from which other economies
could still learn.
Sources: Enos and Park 1988; UNCTAD 1996

available from the MNCs or the state imposes policies on MNCs to create such a base. Proper
state policies vis-à-vis the MNCs must be in place, as discussed in the next chapter, if such
learning is to be facilitated.

Industrial innovation: continuing technological progress
Grossman and Helpman (1994: 24) have referred to “industrial innovation as the engine of
growth” for the expansion of a national technological capacity. Research and development is
a purposive activity. It is one in which private firms will engage if they are: (a) encouraged to
do so, for example by tax policies that treat R&D expenditures as tax credits or extend some
other favorable treatment for such expenditures; (b) if they are compelled to invest to be
more competitive, for example, as a result of the opening of the economy to foreign competi-
tion with reduced tariff barriers or when technological competency is necessary to increase a
firm™s exports as a condition of receiving loans or other rewards in contests for scarce state or
private resources (as discussed in Chapter 10); or (c) if expected monopoly profits accruing
to a firm are predicted to cover research and development costs ex ante.
To illustrate how the development of technology can be understood as part of an industrial
440 The Process of Economic Development
innovation process, and one that requires continual investment and nurturing, rather than as
a thing that can be appropriated easily or costlessly from other countries or firms, consider
Grossman and Helpman™s (1991) concept of a “quality ladder” faced by a firm. Each input to
production has its own potential for improved productivity, or its own quality ladder, which
is virtually unlimited.
What firms do by engaging in R&D is to search for ways to move up the quality ladder for
one or more of their inputs. When such investments yield results, the discovering firm gains
economic or monopoly profits over its rivals who have not discovered how to improve the
productivity of their inputs so as to lower production costs. And this is where the importance
of the size of the stock of human capital, particularly of R&D workers, becomes most impor-
tant. Profit-maximizing firms will have an incentive to search for input quality improvements
by investing in new R&D, assuming that any expected monopoly profits can be received.
As new industries emerge, firms will form research and development centers, assuming a
modicum of competition and the availability of a critical mass of R&D scientists and techni-
cians capable of adapting knowledge to the domestic production process.

[A]n increase in the magnitude of the typical quality improvement attracts additional
resources into R&D. Then the growth rate [of the economy] accelerates, not only because
the quality steps are larger, but also because advances come more rapidly.
Grossman and Helpman 1994: 34

These are the positive externalities to R&D which begin to accrue beyond some critical
threshold of R&D expenditure and given appropriate previous human capital accumulation.
More innovations become possible, and more technological innovation, including greater
technical efficiency change and higher rates of TFP, will be the result of passing this threshold.
But that critical threshold must be in place before such gains can begin to be appropriated.
Interestingly, the structural transformation as presented in Chapters 9 to 11 have important
consequences for the pace of technological progress. Some products and some sectors of
production are likely to be better candidates for higher levels of technological change than
are others. For example, the production of computers or other electronics products would
seem to offer greater opportunities for new product innovation and improvements in factor
productivity along a quality ladder than, say, the production of wheat or footwear. Then,
assuming the requisite stock of human capital has been or is being accumulated, a country
that has moved in the direction of more complex products and more capital- and knowledge-
intensive production techniques would be expected both to do more R&D and to have a
higher return to such investments compared to a country specializing in primary products or
simpler manufactured goods predominantly destined for the domestic economy.
For primary products or the most basic easy ISI products, cutting-edge technology may
not be required or be important, especially if tariffs have remained high to protect ISI indus-
tries. And even if they have not, there may be a limit to the productivity of the inputs in these
labor-intensive areas of production. This is why strategy shifts along the lines explained in
Chapter 10 that lead to the exporting of manufactured goods of ever greater complexity are
so important to contributing to the long-run growth of an economy.

Industrial policies to promote an ITLC
State industrial strategies which target the promotion of knowledge- and technology-inten-
sive industries as loci of dynamic comparative advantage quite naturally become a part of an
Technology and development 441
ITLC policy. This is because the returns to R&D and economic growth would be expected
to be high and cumulative in precisely these sectors. Such promotion by government may
include not only temporary infant industry protection measures but also special subsidies or
contests for loans or other critical resources designed solely for firms in these sectors. As
discussed in Chapters 7 and 10, any such targeting of specific industries for special treatment
must be performance based if it is to have the desired effects.
Firms should receive special treatment that reduces their costs and increases profits only
on condition that they meet certain objective standards which help the economy reach its
development objectives. Such targeting has been most successful when the quid pro quo
performance standard has been based on the firm™s ability to increase its exports, particularly
manufactured good exports, over time.
Why is exporting an effective performance standard for determining which firms are
worthy of special treatment? Because it is a criterion that is implicitly based on the level of
a firm™s technological capacities. Firms which are able to export manufactured goods to the
international market must be able to produce a product that at a minimum meets international
quality and price standards, and even factoring in state subsidies, this must mean that the firm
is producing with, or very near, international “best practice” technology.10 In simple terms,


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