One of the most major shortcomings of the models presented so far is that each country is treated as an “island” on to itself, not interacting with the rest of the countries in the world.
This is problematic for at least two reasons. The first is related to the technological interdependences across countries and the second to international trade (in commodities and in assets).
In this part of the book, we will investigate the implications of technological and trade interdependences on the process of economic growth.The models presented so far treat technology either as exogenous or as endogenously generated within the boundaries of the economy in question. We have already seen how allowing for endogeneity of technology provides new and important insights about the process of growth. But should we think of the potential technology differences between the United States and Nigeria as resulting from lower R&D in Nigeria? The answer to this question is most probably no. To start with, Nigeria, like most less-developed or developing countries, imports many of its technologies from the rest of the world. This suggests that a framework in which frontier technologies in the world are produced in the United States or other advanced economies and then copied or adopted by other “follower” countries provides a better approximation to reality. Therefore, to understand technology differences between advanced and developing economies, we should not only, or not even primarily, focus on differential rates of endogenous technology generation in these economies, but on their decisions concerning technology adoption and efficient technology use.
While the exogenous growth models of Chapters 2 and 8 have this feature, they too have important shortcomings. First, technology is entirely exogenous, so interesting economic decisions only concern investment in physical capital. There is a conceptually and empirically compelling sense in which technology is different from physical capital (and also from human capital), so we would like to understand sources of differences in technology arising endogenously across countries.
Thus the recognition that technology adoption from the world frontier matters is not the same as accepting that the Solow or the neoclassical growth model are the best vehicle for studying cross-country income differences. Second, while the emphasis on technology adoption makes the process of growth resemble the exogenous growth models of Chapters 2 and 8, technological advances at the world level are unlikely to be “manna from heaven”. Instead, economic growth at the world level either results from the interaction of the adoption and R&D decisions of all countries or perhaps from the innovations by frontier economies. This implies that models in which the growth rate at the world level is endogenous and interacts (and coexists) with technology adoption may provide a better approximation to reality and a better framework for the analysis of the mechanics of economic growth. In addition to technology adoption, other interactions across countries, such as international trade, may also play the same role of allowing for endogenous growth at the world level together with growth in each specific country that depends on technological and other developments at the world level.In Chapter 18, we will start with models of technology adoption and investigate the factors affecting the speed and nature of technology adoption. We will also place special emphasis on whether or not technologies that are available from the world technology frontier are appropriate for the needs of less-developed countries. Recall also that “technology differences” not only reflect differences in techniques used in production, but also differences in the organization of production affecting the efficiency with which existing factors of production are utilized. A satisfactory theory of technology differences among countries must therefore pay attention to barriers to technology adoption and to potential inefficiencies in the organization of production, leading to apparent technology differences across countries.
In Chapter 18 I will also provide a simple model of inefficient technology adoption resulting from contracting problems among firms.The second major element missing from our analysis so far, international trade and international capital flows, will be addressed in Chapter 19. International trade in commodities and assets link the economic fortunes of the countries in the world as well. For example, economies with low capital-labor ratios may be able to borrow internationally, which would naturally change equilibrium dynamics. Similarly and perhaps more importantly, less productive countries that export certain goods to the world economy will be linked with other economies because of changes in relative prices—i.e., because of changes in their “terms of trade”. This type of terms of trade effects may also work towards creating a framework in which, while the world economy grows endogenously, the growth rates of each country is linked to those of others through trading relationships. Finally, we will see that the process of international trade and technology adoption are intimately linked, so that models of a collection of economies trading with each other will allow us to study the interaction between technology diffusion and the “international product cycle”.
Throughout the rest of the book, including this part, I will be somewhat less comprehensive than in the previous chapters. In particular, to economize on space I will be more selective in the range of models covered, focusing on the models which I believe provide the main insights in an economical fashion. I will leave some of the alternative models that also relate to the economic issues under consideration to the discussion of the literature at the end or to exercises. In addition, I will make somewhat greater use of simplifying assumptions and I will leave the proofs of results that are similar to those we have encountered so far as well as the relaxation of some of the simplifying assumptions to exercises.