THE CONTRIBUTION OF ENDOGENOUS GROWTH THEORY TO THE ANALYSIS OF

DEVELOPMENT PROBLEMS: AN ASSESSMENT

Presented By:

Sandeep kumar Baranwal

MA (Economics)

Gokhale institute of politics and economics

Development economics is an evolutionary sphere of study. Much prior to its formal

The concern of all such models were to break up the rigid structural features of less developed
countries which includes widespread unemployment , underemployment, urban-rural divide,
primitive technology , low human capital accumulation, low productive base, low infrastructural
set-up, low saving rate and investment rate , lack of entrepreneurship etc.

Most of the models were formulated, given the inspirations derived from development
problems facing the less developed countries.

Gradually as, such economies got integrated with the international economic framework; a new
wing got added to its development channel. The very thought that there exists availability of
same technological opportunities in all the countries and that there exists a possibility of
convergence in the per-capita income growth rate across the countries was given up.
Development models were re-invented , but on the realistic ground, searching for the factors
that determines the crucial international differences in the factor productivity growth and
focusing on the trade and technological diffusion in an international economy. Thus,
endogenous growth theory was born.
This development models took care of centering propositions in imperfect market framework, a
characteristic resemblance with that of structural foundation of less developed countries.

With the economic integration it is thought that the less developed countries would gain access
to the common international pool of the knowledge and thus would save on duplication of
research. The entrepreneurs would then have the incentive to produce new products. Thus,
with economic integration it is argued that the less developed countries should focus on
increasing the aggregate productivity of the resources deployed in such countries.

However, this proposition is not without criticism. Actually the tussle is in between determining
whether isolation or economic integration is advantageous for the pace of innovation in less
developed economies. The counter argument to the economic integration of the poor economy
states that with the free trade the rich economy which has much greater access to the common
pool of knowledge tend to exploit the domestic market of the poor economies with their wide
varieties of differentiated products. The domestic entrepreneurs of less developed economies
would lose the incentive to invest in R&D. Gradually the specialization of production
predominates R&D activity and gradual shift in the specialization of the traditional product
would result thereby slowing the process of innovation and growth. Thus, the option left to the
less developed economies in the context of its free trade policy is to imitate the products of rich
economies. The R&D should focus on tech-adaptation of the products and process invented
abroad. However, this would cause disincentive to innovate in rich economies, reduce the
duration of the monopoly profit of innovators and free the developed countries labor to
produce more unimitated products and conduct more R&D.

Imitating developed economies pose problems to the underdeveloped economies with regard
to the pace at which it would cope-up with the foreign competitive pressures and induce
constant degree of modernization of capital stock over time.

Now the question arises as to what extent would a rich country allow its technological
advancement to get accessed by the poor country in course of imitation? Generally rich
economies advocate for tighter Intellectual Property Rights (IPRs) which tends to limit the scope
for imitation and hence limiting the already slow innovational growth rate in less developed
economies.

Though tighter IPRs is presumed to be encouraging innovations, it would also hamper the long
run rate of innovation of the new products in rich economies.

Model “learning by doing” provides its support to free trade policy for less developed
economies as it presumes that it is only through the free trade policy that learning assist
enhancement of the existing sectoral patterns of comparative advantage over time.
Learning by doing may be beneficial for the rich economies which have technical lead and that
which produces high quality goods. Free trade would speed up the human capital
accumulation. In the rich economies it is possible to ensure on-the-job learning to occur on the
sustained basis. It spills over across industries.

Provide less developed countries adopt free trade policy and policy of subsidizing infant export
based industry rather than protecting infant import-substitute industries, learning by doing
policy would be of great help. Export growth encourages accumulation of technological
capability and enables overcoming of imperfections in the technology market.

Thus, the rescue to the underdevelopment of the poor economies lies in the process of
introduction of an ever-expanding set of new goods and technologies. Such policy guidelines
seem interesting. However, it overlooks the structural rigidities that exist in the poor
economies. The pre-conditions to growth are generally non-existing. in other words, new
growth theory do have relevance for only those less developed countries which fulfills the pre-
conditions to growth requirements. In this context big push theory gains importance under
which strategic complementarities of industries in terms of market size is focused on as
economy set-off for industrialization. In this framework, effective coordination, given the big
push, enables the less developed economies to break away from low level equilibrium trap to
higher income equilibrium with industrialization. In due course the structural constraint to
development loosens up. However, there too is a problem. The problem is of aggregating
coordination at the policy level. There is the difficulty in identifying sectors and locations where
the spillover effect is larger. Even the interaction of the policy with the infrastructure is limited.
To add to the problem learning is localized and project specific. Even if one assumes that
strategic complementarities between sectors is possible , a new set of problems in the path of
the development in the form of urban concentration and uneven regional development is
bound to occur due to the natural process of tendency towards agglomeration. This would
cause the poor country to experience differential development performance.

To overcome such problem fixed costs are incurred which not only includes ordinary set-up
costs in starting new economic activities but also encompass the cost of building new economic
institutions and political coalition and in breaking the deadlock of incumbent interest
threatened by new technologies.

To ensure this, a new model formulation is to take place such that the organization-institution
issues and distributive conflict in the process of development confronting the less developed
economies is not lost in the way.
Thus, given the interwoven-complexities of the problems of development particularly in less
developed economies, the theoretical models have to go a long way before they can catch up
with such complexities.