Where does the money for high investment spending come from? We have already
analyzed how financial markets channel savings into investment spending. The key
point is that investment spending must be paid for either out of savings from domestic
households or by an inflow of foreign capital—that is, savings from foreign house-
holds. Foreign capital has played an important role in the long -run economic growth
of some countries, including the United States, which relied heavily on foreign funds
during its early industrialization. For the most part, however, countries that invest a
large share of their GDP are able to do so because they have high domestic savings. One
reason for differences in growth rates, then, is that countries have different rates of sav-
ings and investment spending.
Adding to Human Capital Just as countries differ substantially in the rate at which
they add to their physical capital, there have been large differences in the rate at
which countries add to their human capital through education.
A case in point is the comparison between Latin America and East Asia. In both
regions the average educational level has risen steadily over time, but it has risen
much faster in East Asia. As shown in Table 39.1, East Asia had a significantly less
educated population than Latin America in 1960. By 2000, that gap had been
closed: East Asia still had a slightly higher fraction of adults with no education—
almost all of them elderly—but had moved well past Latin America in terms of sec-
ondary and higher education.Technological Progress The advance of technology is a key force behind economic
growth. What drives technology?
Scientific advances make new technologies possible. To take the most spectacular
example in today’s world, the semiconductor chip—which is the basis for all modern in-
formation technology—could not have been developed without the theory of quantum
mechanics in physics.
But science alone is not enough: scientific knowledge must be trans-
lated into useful products and processes. And that often requires devot-
ing a lot of resources to research and development,orR&D,spending
to create new technologies and prepare them for practical use.
Although some research and development is conducted by govern-
ments, much R&D is paid for by the private sector, as discussed below.
The United States became the world’s leading economy in large part
because American businesses were among the first to make systematic
research and development a part of their operations.
Developing new technology is one thing; applying it is another.
There have often been notable differences in the pace at which differ-
ent countries take advantage of new technologies. America’s surge in
productivity growth after 1995, as firms learned to make use of infor-
mation technology, was at least initially not matched in Europe.388 section 7 Economic Growth and Productivity
Human Capital in Latin America and East AsiaLatin America East Asia
1960 2000 1960 2000
Percentage of population with no schooling 37.9% 14.6% 52.5% 19.8%
Percentage of population with high school or above 5.9 19.5 4.4 26.5
Source:Barro, Robert J. and Lee, Jong-Wha (2001) “International Data on Educational
Attainment: Updates and Implications,” Oxford Economic Papersvol. 53(3), p. 541–563.table39.1
Photodisc
Research and development,orR & D,is
spending to create and implement new
technologies.