Chapter 5
Technology and economic growth
The general pattern of economic growth over the last few decades that we
noted in Chapter 2 was: rapid in East Asia; moderate in South Asia; and slow
or negative in Latin America and Sub-Saharan Africa. These patterns are paral-
leled by the success in absorbing technology from the rest of the world, show-
ing that technology has a close link with economic growth. The question of
causation, however, is a difficult one. Do new technologies provide new goods
and services for export, raise productivity and reduce costs, thus driving
economic growth, or does a rapidly expanding economy create the wealth and
resources to purchase and create new technologies? New technologies can help
a country overcome diminishing returns to investment, permitting sustained
economic growth and enabling society to avoid the trade-offs associated with
scarce resources. Nevertheless, any act of technological creation is closely
linked to destruction; of older technologies, of traditions and existing patterns
of employment.
Technology and economic growth
We saw in Chapter 2 that growth in developing countries is typically based on
accumulating more factors of production and growth in developed countries is
more often productivity (TFP)-based. This section gives a theoretical explana-
tion for this pattern. Growth based on investment is likely to run into diminish-
ing returns (see Figure 3.2) and increased productivity will be necessary to
sustain growth once a country reaches a higher, developed-country income
level. Although productivity can be driven by many different factors a key
constraint on long-term productivity growth is the ability to introduce new
technologies into the process of production (see Figure 5.1).
Technology:the basic concepts
Sustainable growth and catch-up
Figure 5.1 shows that in an economy with a fixed level of capital stock, quan-
tity of land or labour, technological change (shown as point A) leads to
higher output, land yield or labour productivity. This gives us a big and opti-
mistic idea; that technological change can make growth sustainable, when as