Hello and welcome to the lecture 5 of NPTEL
MOOC’s course on Economic Growth and Development.
I have titled this lecture as “Modern Economic
Growth”.
I will run you through the basic ideas of
what constitutes modern economic growth and
how did this concept come to exist and who
is the major proponent of the concept of modern
economic growth.
However, before beginning with this lecture
let us recapitulate from the last class.
In the last class, we discussed the need for
understanding the importance of development
and not just growth.
We saw that there are various competing indicators
of development that have emerged largely in
the 1970’s, 80’s and the 1990's.
We also saw that there is a significance of
using various lenses of growth and development.
To be able to understand this, we looked through
some of the important summary findings of
the first Human Development Report published
in 1990 by the United Nations Development
Program whose focus was on trying to understand
why human development is important and not
just economic growth.
One of the important summary findings of HDR
1990 was that the components of human development
between the Global North and the Global South
has seen substantial progress.
However, the gap in incomes between the Global
North and the Global South has unprecedentedly
risen.
Now, this is extremely important for us to
understand when we are looking at the concept
of economic growth particularly, modern economic
growth.
This report, HDR 1990 also focused on how
modest levels of human development is possible
only with modest levels of income growth.
In other words, incessant income growth need
not be an overwhelming objective of economic
policies of growth and development.
The HDR 1990 also focused on the importance
of continuing subsidies to countries in the
Global South if they need to catch up with
the countries of the Global North.
We also discussed a human development research
paper which was titled “The Human Development
Trends Since 1970: A Social Convergence Story”.
And this paper through its empirical research
based on 111 countries came up with some very
important findings.
One of the first important finding was that
110 of the 111 countries had actually shown
substantial progress in different components
of human development starting from the 1970s.
And since this paper came out in the middle
of the 2000s, it is important to note that
it was trying to bring out a clear-cut difference
in human development in the pre-1990 period
and the post 1990 period.
And the empirical research showed that in
110 countries substantial progress in human
development had taken place in the pre-1990
period.
And that was a 35-year period starting from
the 1990's.
The second important finding of this paper
was that HDI growth was fastest for the low
HDI countries than the high HDI countries
in the pre-1990 period.
In other words, those countries which had
shown very low levels of human development
in education or health and so on, had actually
shown very high levels of human development
or progresses in human development.
The third important finding of this paper
was that life expectancy and education grew
at a much faster rate than income did.
Which also goes to show that in spite of the
very low levels of income, education and health
investments had shown rapid rise in the components
of education and health.
The 4th and the most important finding of
this paper was that income and non-income
components of HDI change had a near 0 correlation.
And this finding is important for the growth
story that we are trying to decide for here.
The growth story has so far told us that we
need not focus more on human development components
but income; because when income rises over
a period of time, the levels of human development
will also catch up with the levels of income.
However, this empirical exercise tells us
that over a period of a long period of time
such as that of the 35 year period, the correlation
between income and other components of human
development simply does not exist.
So, what does this mean?
This means that we need to make interventions.
We need to make income investments on human
development components such as education and
health.
In the last lecture we also discussed certain
competing indices of development such as the
Physical Quality of Life Index, the Human
Development Index, Gross National Happiness
Index and certain sustainable development
indicators such as the Green GDP.
We basically tried to discuss the fact that
while GDP per capita or GNP is one of the
most important indicators of economic growth,
various other indices of growth and development
have also been worked out to take care of
the limitations of GDP growth.
Through this lecture I will introduce you
to the concept of modern economic growth.
And in this context, we will also discuss
the contribution of professor Simon Kuznets
who has been credited with giving momentum
to this concept of modern economic growth.
Before we begin, let us first try to understand
who was professor Simon Kuznets and what was
his focus on and why it is important for us
to understand what Simon Kuznets did to spread
the idea of modern economic growth or giving
it more significant place in the lexicon of
growth literature.
So, Simon Kuznets was the recipient of the
third Nobel memorial prize in economic sciences
in 1971.
He is credited in towards the helping transform
the field of economics into an empirically
based social science.
Simon Kuznets was probably one of the first
economists who worked on long term data, who
worked on empirical data to be able to come
up with conclusions based upon historical
data.
He was born in Russia in 1901 and he served
briefly in Ukraine’s labour statistics office
before migrating to the US at the age of 21.
He received a PhD from Columbia University
and met his lifelong mentor professor Wesley
Mitchell who was the founder of National Bureau
of Economic Research.
It is important for you to understand that
the National Bureau of Economic Research was
where the research on national income accounting
was taking place.
Most of the concepts of national income accounting
were emerging from the National Bureau of
Economic Research.
And that is the importance of NBER, particularly
during the period of the 1940's and the 1950's,
when new nation states were emerging, the
concepts of national income accounting and
the different variables of national income
accounts was being churned out of the NBER.
And that was also the time during which Simon
Kuznets played an important role in the NBER.
In 1945 along with Milton Friedman he wrote
an important paper named “Income from Independent
Professional Practice”, in which they demonstrated
how human capital investments can explain
differences in average earnings by professionals.
So, they were talking about human capital
investments, in other words, investments in
education as being one of the important drivers
of earnings in the post-World War period.
Later on, professor Kuznets went on to teach
at the university of Pennsylvania, Johns Hopkins
and Harvard University.
Professor Kuznets has to his credit about
31 books and more than 200 research papers.
And most of his research concentrated on income
growth and distribution of income in the different
countries across the world.
Now, why it is important for us to look at
Kuznets contribution to economic growth literature
is that he was probably one of the first persons
who came up with the definition of economic
growth.
Before we move on to Kuznets contribution
to economic growth and his definition of economic
growth, what were the characteristics of economic
growth that he was working at, let us look
at some of the examples of historical growth
rates that we are talking about because we
are trying to bring out a clear distinction
between modern economic growth and what we
understood historical years economic growth.
If you look at these examples during the period
1580 to 1820 which covers the 17th and 18th
century and the later parts of 16th century
and the early parts of 19th century, the Netherlands
was considered to be the leading industrial
nation and it experienced in average annual
growth in real GDP per worker hour of roughly
0.2 percent which is nothing comparable to
what we experience today.
Today we find growth rate of about 7 percent
to 8 percent or 9 percent as something which
is achievable.
However, compare this to the 0.2 percent growth
rate of Netherlands during this period, it
may come as very surprising.
Note here that I am referring to GDP per worker
hour here which basically refers to labour
productivity, the concept that we use in today’s
GDP per capita.
But in these examples we are referring to
GDP per worker hour which means the GDP per
labour productivity.
Similarly, the United Kingdom which was the
lead economically growing country, if you
may wish, during the period 1820 to 90 was
experiencing annual growth of about 1.2 percent,
which is very less compared to the current
7 to 10 percent that we see in countries across
the world.
Since 1890 or the later part of the 19th century
the United States is considered to have usurped
the leadership as far as economic growth is
concerned.
And its average growth rate during the period
1890 to 1989, roughly a period about a century,
was about 2.2 percent.
And now, 2.2 percent compared to the present
times is of course, a very small number.
But it was dramatic considering the growth
rates of 0.2 percent experienced by the Netherlands
or a growth rate of 1.2 percent experienced
by the United Kingdom.
Now, what does this mean?
This means that GDP for worker or GDP per
labour productivity has grown at an accelerated
pace especially since the 19th century.
And by today’s standards even the fastest
growing economy two centuries ago would be
considered practically stagnant.
Now, through most of human history therefore,
an appreciable growth in per capita GDP was
an exception rather than the rule.
And many even say that the Modern Economic
Growth as a concept came into existence in
the British post-industrial revolution period.
And these examples clearly say so.
Now, you must note here that an annual growth
rate of 2 percent in per capita GDP does not
appear very impressive.
However, it has enormous potential if it is
sustained.
And Simon Kuznets’ calculations showed us,
which we will discuss in brief in the later
slides, that at a 2 percent rate a nations
per capita GDP would have doubled in about
35 years.
And a simple calculation will show you that
35 years is about half the life expectancy
of what we experience in various countries
of the world today.
Now, what does this mean?
This means that within half a period of a
person’s lifetime, you are actually experiencing
a doubling up of GDP.
And how does that translates to?
This translate to the fact that modern economic
growth enables people to enjoy vastly improved
living standards compared to their earlier
generations.
Now, let us try to look at another example
of per capita GDP in selected OECD countries
during the period 1870 to 1978 which is roughly
about a century covering the latter parts
of 19th century and the large part of the
20th century as we know.
The large part of the 20th century as we know
had registered modern economic growth rates.
Note here that OECD basically stands for Organization
for Economic Cooperation and Development which
is a group of developed North American and
European countries.
Now if you look at this table here this table
shows how economic growth has transformed
in the now developed world within the space
of a century, 1870 to 1978.
This table shows per capita real GDP valued
in 1970 in US dollars for the years 1870,
1913 and 1978.
The 1913 and 1978 columns also show you the
ratio of per capita in GDP in those years
to the corresponding base line which is 1870.
So, columns 3 and column 5 of 1913 and 1978
basically give you the ratio of the per capita
in GDP in those years corresponding to the
year 1870.
If you simply come down to the last row which
gives you the simple average of these figures
that we are talking about, you would see that
the GDP per capita in 1913 was 1.8 times the
figure for 1870.
But by 1978 the ratio had risen to 6.7.
That is a nearly seven fold increase in real
per capita GDP in the space of a century and
that is the kind of transformation that economists
are talking about in the context of modern
economic growth.
And such figures have the capacity of transforming
societies all together.
And now the question arises that what are
the drivers of such modern economic growth.
And various models of economic growth have
been worked at by various economists.
In this lecture we will talk about some of
the points that Professor Simon Kuznets was
talking about in the context of modern economic
growth.
Particularly the reference here is with regard
to what were the emerging characteristics
of the so called industrialized developed
nations who had experienced modern economic
growth.
Let me introduce you to definition provided
by Professor Kuznets in his pioneering paper
called “Modern Economic Growth: Findings
and Reflections” published in the American
Economic Review in 1973.
He said that a country’s economic growth
may be defined as a long-term rise in capacity
to supply increasingly diverse economic goods
to it is population.
This growing capacity is based on advancing
technology and the institutional and ideological
adjustments that it demands.
And in this definition, all these three components
in bold are equally important.
The sustained rise in the supply of goods
is a result of economic growth by which it
is identified.
He was laying a lot of importance to the concept
of technology or advance technology.
And he did say that advancing technology is
a source of all economic growth.
However, it only has the potential, in other
words it is a necessity, but not a sufficient
condition for all economic growth.
Now we will try to unpack this definition
provided by Simon Kuznets because it is important
that we spend some time over this definition
and what were the reflections that he was
having with respect to this definition that
he came about.
Before I come to some of the important characteristics
that was summarized by professor Simon Kuznets,
let me give you a background to how he came
about or how he came to summarize some of
these important characteristic features of
what constitutes modern economic growth.
Now Simon Kuznets, most of his work on economic
growth or national income distribution or
national income accounting was based in the
post Second World War period.
Now, during the decade following World War
Second when Simon Kuznets began to lay out
his research agenda for studying and explaining
high long-term rates of economic growth, he
was aware that there was a persistent tendency
among various economist and observers of economic
growth to underestimate the capacity of technological
advances.
Half a century after the forecast of stagnation,
technological advances not only continued
but likely had also accelerated as we saw
in the 1970s and the 1980’s.
There was a lot of talk about technology transfer
from the developed countries to the developing
countries.
However, during the period of the 40s and
particularly the period succeeding the great
depression, there was a lot of gloom and despair
among the observers of economic growth that
there are limits to growth and that technological
advances are not the solution to most of the
economic problems.
Developments in urban sanitation and food
processing and substitution of automobiles
for horse drawn vehicles had let to dramatic
declines in the prevalence of deadly diseases.
Vaccines, penicillin and other powerful medicines
were widely available to deal with these fatal
diseases.
The US particularly, the context in which
Simon Kuznets was largely writing in the 1920s
in the 1930s had largely been electrified.
And host of household appliances was available
to improve the efficiency of home production
and to provide low cost entertainment.
In the election of 1928 Herbert Hoover had
made the promise that if he was elected as
President there would be a chicken in every
pot and an automobile in every garage.
And by 1955 advances in animal feed had turned
chicken into the cheapest meat and there was
about as many cars as households.
Now in the 1950s the spectra of great depression
still haunted many economics and policy makers.
They worried that the post war boom would
simply not exist.
The fear was not cast out of professional
and public discourse in the 1950's.
The topic continued to be vigorously debated
in 1960s and beyond in the 1970s as well.
Now, as early as 1949 Kuznets was one of a
relatively few economists who thought of the
great depression as an exception and not that
strong.
And that long term growth was the rule.
So what was needed was not another speculative
theory to confront the pessimistic theories
but a careful study of history that might
yield an empirically warranted theory.
But he was considering this question of how
to proceed in coming up with a theory, a long-term
theory of economic growth and how to organize
research into long term trends of economic
growth.
And there were various problems in coming
up with such a theory and one of the problems
was with regard to the unit of observation.
Should it be individual entrepreneurs?
Should it be different climatic zones?
Should it be different ethnic groups of population?
Or should it be different economic social
classes, religious denominations and so on
and so forth.
Kuznets rejected all of these options in favor
of the nation state because the available
data were organized and maintained by sovereign
states.
And it must be mentioned here that in the
post-World War period, particularly the period
after 1945, saw the emergence of this discourse
of nation states.
And it is in this context that one needs to
look at national income accounts and the differences
in economic growth calculated by Kuznets by
taking the nation state as a unit of observation,
looking at the historically available data
for the industrialize nations of the world.
He believed that the political system governing
the operation of a particular nation state
might turn out to be an important variable
in explaining economic growth.
So, Kuznets’ plan to use national income
measures to describe and explain long term
economic trends of the industrial nations
was formulated in the late 1930s.
And in spite of the various problems that
he faced with regard to putting together the
historical data with regard to income growth
in countries, he gathered statistics on the
growth of nations over a period of at least
a half century.
In order to have secular trends dominate short
term cycles, the data had to be capable of
being decomposed in various ways in order
to study structural changes in the economy
during the course of economic growth.
The demands of the data meant that the study
of growth would be focused in the score or
so of nations that had achieved high levels
of industrialization by the mid 20th century.
He characterized the modern industrial system
as one in which entrepreneurs applied the
empirical findings of science to the solution
of problems and the organization of production.
Now, this is the background to how Kuznets’
empirical statistics or empirical data on
economic growth or trends in economic growth
came to be.
Following this, he published 10 monographs
on quantitative aspects of economic growth.
I will not enter into the details of these
monographs.
But what is important for us to focus on here
are the most important characteristics that
emerged from his study on secular trends in
economic growth or the long-term trends in
economic growth that we are talking about
here.
His data mostly comprised of the historical
data of the latter parts of 19th century and
the early parts of the twentieth century for
the industrialized nations of the world.
So, he was trying to come up with some of
the most common characteristics of modern
economic growth as were seen in the most industrialized
nations of the world.
They may be summarized as follows.
There were basically 6 characteristics that
he was talking about.
The first is that there are high rates of
growth of per capita product and of population
in the developed world.
There is a very high rate of rise in productivity.
Rate of structural transformation of the economy
is very high.
The developed nations of the world have gone
through extremely important changes in structures
of society and changes in ideologies.
He was also talking about the increased power
of technology particularly in transport and
communication in the developed world.
And lastly, he was talking about the limited
spread of modern economic growth.
We will look closely at some of these important
characteristics that Kuznets was talking about.
The first among them was high rates of per
capita output and population growth.
He also pointed out that it is important to
understand that all of these 6 characteristics
are closely related to each other.
And some of the important analysis of his
was based upon the conventional measures of
national product and its components population,
labour force and the like.
So he was basically looking at the estimates
of national output, national product, population
growth rate, and the labour force, the structure
of the labour force in different sectors of
the economy and how these change in labour
force in different sectors are trying to say
about the nature of change in the societies
that we are concerned with.
The first one was with regard to very high
rates of per capita output and population
growth.
And what was Kuznets trying to say here was
that most developed nations, developed countries
have seen very high rates of growth of per
capita output and of population in multiples
of the previous rates observable in these
countries and of those in the rest of the
world at least until the recent decade or
two.
And he is talking about this largely in the
1950's and the 1960s.
So, basically it meant that both per capita
output and population growth of all developed
countries have seen very large increase compared
to what it was in the latter part of the 18th
century to the 20th century.
That also meant that for the now industrialized
countries annual growth rates over this period
averaged almost 2 percent per capita output
and one percent for population or 3 percent
for total output or real GNP.
Which means that it can be doubled in a time
of roughly 35 years for per capita output,
70 years for population and 23 years for real
GNP.
Now, these estimates had real implications
in the growth story of nation states that
was shaping up in the post 1940's period or
the post Second World War period.
It was basically trying to say that at this
rate of growth of the industrialized nations
and if the so called under developed countries
of the world are able to catch up with developed
nations following their paths of development,
then at this rate in roughly about 35 years
per capita output of the world would have
doubled.
Population would have doubled in 70 years
and real GNP would have doubled in about 23
years.
So these estimates had real implications for
the growth story that various economist and
observance of the time were engaging themselves
with.
As a part of this first point of high rates
of per capita output and population growth,
Kuznets also implied that for the last two
centuries the growth rate of per capita output
is about 10 times, population growth four
to five times and the GNP growth rate have
been about 40 or 50 times.
Now, note here the importance of the trend
that GNP has been rising over a period of
time.
Among all the important indicators that professor
Kuznets was considering whether it is the
structure of various sectors within the economy,
the labour force in different sectors within
the economy or the various national income
concepts, it was basically GNP or GDP per
capita which showed a very high potential
of increasing drastically over a period of
time.
And which is why economic growth became one
of the important indicators of development
based upon these empirical exercises.
The second point he was referring to was high
rates of Total Factor Productivity increase.
By factor productivity here we mean the various
factors of production that are used for production
purposes within the economy.
Labour being one of the most important factors
of production here.
And Kuznets based upon his empirical exercise
was concluding that over this period of half
a century in the developed countries of the
world or the industrialized nations of the
world, there has been a very high rise of
total factor productivity or the output per
unit of all inputs.
Even if we include among inputs other factors
in addition to labour which is the major productive
factor and here too the rate is a large multiple
of the rate in the past.
Which means that labour productivity has also
shown a very high increase compared to the
previous periods considering the past half
century taking from before the period of 1940's.
Another important point that he was trying
to make in terms of total factor productivity
increase was that growth of countries is not
due to factor accumulation but due to total
factor productivity.
Which means that if a country has more of
labour abundance or labour accumulation that
does not mean that that country will automatically
progress but the use to which the labour is
put to will show how much the country has
progressed.
And that became one of the important structural
differences of the industrialized and the
then non-industrialized nations of the world,
where the industrialized nations of the world
were characterized by what is the productivity
of the labour force whereas the underdeveloped
countries or the non industrialized nations
were characterized by a largely dormant labour
force that was not involved in various economic
activities within the country.
So it is not just factor accumulation that
is important but growth of countries is due
to the Total Factor Productivity, what is
the labour productivity or what is the number
of output per unit of all inputs used within
an economy.
And historical facts also suggested that the
rate of increase in TFP account for about
50 to 75 percent per capita output in developed
countries.
And this was primarily due to technological
progress.
And this became one of the cornerstones of
Kuznets’ ideas of Modern Economic Growth.
The total factor productivity increases have
been registered to the extent of 50 to 75
percent of total per capita output and that
is primarily due to technological progress.
And therefore, technological progress became
one of the important drivers of modern economic
growth and that is what distinguished factor
productivity particularly, labour productivity
between the developed countries and the under
developed countries.
The third important characteristic that Kuznets
was talking about was the high rates of economic
structural transformation that have taken
place in the developed countries.
And this related mostly to the shift away
from agriculture to non-agricultural pursuits
in the developed countries.
As the name suggests, the industrialized nations
were producing more of manufactured goods
already.
There was a shift of labour away from the
agricultural to nonagricultural pursuits.
And more recently if we look at various countries
across the world there is a shift away from
non-agriculture to services or from industry
to services.
So a change in the scale of productive units
or related shift from personal enterprise
to impersonal organization of economic firms
with the corresponding change in the occupational
status of labour.
So, shifts in several other aspects of economic
structure could be added.
For example, structure of consumption, the
relative shares of domestic and foreign supplies
and so on and so forth.
So, this economic structural transformation
also contributed to the idea of modern economic
growth and particularly the shift away from
agriculture to non-agriculture and in the
most recent times from industrial to services
and so on and so forth.
For example, one of the notable examples that
we generally take in the growth literature
is that of the United States where labour
engaged in agriculture was about 53 percent
in 1870.
And it had come down to about 1 to 2 percent
in the present times.
So, the structural composition of the labour
force in agriculture and industry and other
sectors within the economy also contributes
to the concept of Modern Economic Growth.
And this is not a very new phenomenon.
This has been observed right from the later
part of the 19th century onwards.
The 4th point that he was trying to make was
with respect to the high rates of social and
ideological transformation.
And here he refers to how important it is
to look at the changes that are taking place
to the structures of society.
And what are the related ideological changes
that are taking place within the society.
And one of the important areas of discussion
in which sociologists an anthropologist have
lead the way in this area, is with respect
to the concept of family, the notion of family
and how that has contributed to economic growth
or not contributed to economic growth.
What we refer to when we are talking about
changes in social and ideological transformation
is with regard to how the institutions have
been changing within societies because of
the change in technology, change of technology
use.
For example, the concept of nuclear family
versus joint families in many countries across
the world.
How technology transformed social security
programs or how technology contributed to
the existence of a family and the changing
notion of a family and how that has contributed
to various other components of economic growth.
He has taken examples of urbanization and
secularization.
In other words, the long-term changes in the
economy because changes in institutions and
ideologies that are taking place in an economy
and how that contributes to economic growth.
Successive economists after him have also
added the ideas of economic planning.
How economic planning contributes to economic
growth or the rational allocation of resources
between different sectors of the economy.
If you have a more labour abundant economy,
whether you need to use more of labour intensive
technologies and if you have a more capital
abundant economy, whether you need to use
more capital-intensive technologies, these
also become important drivers of modern economic
growth.
And that is what was the focus of his reflection
on high rates of social and ideological transformation.
So, this was basically trying to say that
the industrialized nations of the world had
already seen very high rates of social and
ideological transformation.
The fifth point he made was with regard to
the existence of technology in the industrialized
nations of the world and here he was focusing
more on the existence of transport and communication
technology.
And what are the possibilities of outreach
because of the existence of transport and
communication technology in the developed
countries of the world or the industrialized
nations of the world.
So, there is a propensity to reach out to
the rest of the world by the industrialized
nations because of the existence of the technology
of transport and communication particularly
with regard to accessing primary products
and raw materials or cheap labour or lucrative
market for the manufactured goods.
And this is at the heart of the discussion
of what we know as terms of trade between
different countries of the world, how international
trade takes place and technology transfer
is one of the important factors driving international
trade in the context of modern economic growth.
And of course, as the experience of the last
20-30 odd years has shown us, we live in a
more globalized world and transport and communication
technology have made a very big contribution
to such processes of globalization.
The 6th point and a very important one in
that, that he was making with respect to modern
economic growth was the limited international
spread of economic growth.
And there are two important points in here.
The first is that in spite of enormous increases
in world output over the past two centuries,
the spread of sustained modern economic growth
is still limited to less than one third of
world population which was about 15 percent
then, which may have gone up to about 30 percent
now.
What it essentially says is that even though
modern economic growth has unprecedentedly
risen historically, it has still not reached
even half the world’s population today.
There are still large numbers of nation states
which are lagging behind.
And therefore, there is a limited spread of
economic growth.
And a number of factors contribute to such
limited spread of economic growth or the outreach
of the highly industrialized nations to the
less industrialized nations.
One of them of course being the unequal international
power relationships between the developed
and the underdeveloped countries.
But added to this of course, are the different
kinds of economic policies, the unequal trade
policies, unequal ideologies across the countries
of the world which contribute to be exacerbation
of the gap between the rich and the poor.
So, there are different reasons why there
is a limited international spread of economic
growth.
So, which means that economic growth is not
enough.
So, the implication of this characteristic
brought out by Simon Kuznets is that economic
growth is not enough.
We need to promote economic growth in such
a manner that the distribution of economic
growth is equal across countries of the world.
And of course, there are various drivers of
how this can come about.
International trade being just about one of
them.
So, the most distinctive feature of modern
economic growth is the combination of a high
rate of aggregate growth with disrupting effects
and new problems.
The high rate of growth is sustained by the
interplay between mass applications of technological
innovations based on additions to the stock
of the knowledge and further additions to
that stock.
The disrupting effects are those imposed by
the rapid rate of change in economic and social
structure.
I’ll just go back to the main points again.
These were some of the findings as well as
the reflections of Simon Kuznets’ Modern
Economic Growth.
The 6 important points that he was making
were closely related to each other.
But the most important driver here was technology
use with respect to factor productivity, technology
use with respect to structural transformation
in the economy, technology use with respect
to changing structures of society and ideology.
And the technology use was one of the necessary
conditions of economic growth as pointed out
by Simon Kuznets.
Now, moving on.
One of the reasons for introducing Simon Kuznets’
idea of modern economic growth in some detail
was to lay a foundation to where we are leading
to in terms of the economic growth story.
While the economic growth story of the 1990's
and the 2000s have seen a large number of
changes in terms of principles and the way
it should be carried out in different countries,
there are certain stylized models in economics
that we follow with respect to economic growth.
And in this course, I will be mostly focusing
on 3 models of economic growth, the Harrod
Domar Model and the Solow Model.
These are basically growth models which have
been forwarded as some of the important pathways
of the growth and development by the so called
less industrialized nations of the world.
Just to introduce you to some of the things
that we would be doing as a part of growth
models.
And it is of course, important that we position
these growth models in the context of economic
development and here the distinction is that
economic development implies progressive changes
in the socio-economic structure of a country.
It involves a steady decline in agriculture’s
share in GNP and corresponding increase in
share of industries, trade, banking, construction
and services.
This is one of the most important working
definitions or distinctions between economic
growth and development.
Starting from what Simon Kuznets was talking
about in terms of structural transformation
within the economies of the industrialized
nations.
So, this is what we understand as the basic
distinction between economic growth and when
we say that economic development has taken
place or economic growth has taken place.
Economic growth and economic development or
more or less used synonymously.
And the distinction comes in when we use the
term human development.
So, economic development basically means that
there is a steady decline in agriculture’s
share in GNP, and a corresponding increase
in the share of industries, trade, banking,
construction and services.
Now, there are various theories of economic
development that have been worked out and
are posed against the theories of economic
growth.
Some of them are as follows: the Classical
Theory of Economic Development, the Marxian
Theory of Economic Development, Schumpeterian
Theory, Lewis Theory of Unlimited Supplies
of Labour and Fei Ranis Theory of Development.
We will be doing in detail the Harrod Domar
Model and the Solow Model.
And in the theories of economic development,
we will be looking into detail Schumpeter
Theory of Development and the Lewis Theory
of Unlimited Supplies of Labour.
And we will get snapshots of what are the
basic features of the Classical Theory of
Economic Development, Marxian theory and the
Fei Rani’s theory of development.
So, if one has to now summarize about what
are the basic distinguishing characteristics
of growth versus development, economic growth
is quantitative in nature whereas economic
development is qualitative in nature.
Economic growth is a narrower concept but
economic development is a wider concept.
Economic growth means more output, more GDP
per capita on the other hand economic development
implies both more output and changes in the
technical and institutional arrangements by
which it is produced and developed.
Now, in this context let me also introduce
you to what are the basic differences between
an Endogenous Model and an Exogenous Model.
These are some of the basics that one ought
to know when one is running through a course
on growth and development.
Endogenous Growth is a kind of policy under
which the emphasis is laid down on the internal
processes and capital investment rather than
external factors.
This is also referred to as the Theory of
Limited Development which came into existence
in 1980’s.
This was presented as a criticism to Exogenous
Growth Theory.
And the supporters of this theory believe
that the size of capital investment matters
more in economic development.
The Exogenous Growth Model or which is referred
to as Comprehensive Development is estimated
on the primary basis that which external factors
play the role of development of economy in
comparison to internal factors.
And the external factors that are harped on
more when we look at the Exogenous Models,
when we deal with the Exogenous Models are
mostly technology used or the technological
interventions that take place within an economy
and how that contribute to economic growth.
Exogenous Growth supports the external factors
like adoption of new techniques, as I just
mentioned should be increased to bring about
economic development.
And Comprehensive Development Model helps
in increasing productivity.
This can also help in reducing the manufacturing
cost.
So, to be able to summarize what are the distinctions
between Exogenous and Endogenous Growth Models.
In Exogenous Growth economy’s temporary
innovations to policy variables lead only
to temporary change in GNP levels while in
Endogenous Growth economy’s innovation can
lead to permanent changes in GNP levels because
in Endogenous Growth Models we are basically
referring to the changes in institutions and
structures within the economy.
And any institutional change is of course,
a very long run phenomenon, its a permanent
phenomenon.
Reversing the role of institutional changes
is fairly difficult.
Exogenous Growth Models predict that permanent
innovations in government policies do not
have permanent effects on the per capita growth
rate of GNP.
While Endogenous Growth Models predict that
permanent innovations in government policies
can have permanent effects on per capita growth
of GNP.
In Exogenous Growth Models policies cannot
affect per capita level of GNP while in Endogenous
Growth Models they can affect the per capita
level of GNP.
So, to conclude in this lecture on Modern
Economic Growth, we understood what are the
basic characteristics of Modern Economic Growth.
We went into some detail with respect to the
economist professor Simon Kuznets who is credited
with giving momentum to this concept of Modern
Economic Growth because his work is one of
the first empirically researched work based
upon historical data that shows us the trends
of modern economic growth.
And one of important drivers of modern economic
growth as pointed out by Kuznets and various
other economists after him is the use of technology
and how technology use has transformed the
highly industrialized nations of the world.
And how technology use has also increased
Total Factor Productivity of different countries
across the world.
And one of the implications of technology
used in Total Factor Productivity, particularly
labour productivity is that, labour abundance
is not enough.
What is the use to which the technology is
put or what is the use to which the total
factors are put and how much output is increasing
with respect to the given number of inputs
used is one of the major indicators of economic
growth and development of a country.
In the next lecture, we will go into the models
of economic growth starting with the Harrod
Domar Model of Economic Growth.
Thank you.
