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Summary Fundamentals of Modern Economic Growth

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Course: Modern Societies in Transition 2010, Summary Seminar 9

What are the key characteristics of modern economic growth by Kuznets?

  1. high rates of growth of per capita product and of population
  2. the rate rise in productivity is high
  3. the rate of structural transformation of the economy is high
  4. rapid changes in the structures of society and its ideology
  5. increased propensity of developed countries to reach out to the rest of the world
  6. spread of modern economic growth is limited to small part of the world with the potential of modern technology

Kuznets lists six of them: the first two refer to economic and technical advance, the second two point to related changes in economic structure, society and ideology; the last two say something about the world distribution of growth.

Which role do the individual characteristics play in defining modern economic growth?

The first two which refer to economic and technical advance are marking quantitative characteristic of modern economic growth. The high rates of growth of per capita product and of population emerge as result of advancing technology which based on emergence of modern science. With rather stable ratio of labour force to total population and with average hours of work declining, it means still higher growth rates in product per man hour. This acceleration of productivity cause rapid shift in underlying production (economic) structure and also changes other aspect of society. Two important groups of effects are: (i) urbanization, internal migration from countryside to cities with its cost of social values, character of economic activity, denser life in city. (ii) Shift in relative shares in the economy of the specific population groups attached to particular production sectors. There might be a decline in relative position of one group after another for example farmers. Sectors as agriculture are well known to become relatively poorer during economic growth, because of the limited income elasticity of demand of agricultural good compare to industrial good.

The social structure also associated with rapid changes for example in family formation, in man’s views on his role and the measure of achievement. The dynamic drives of modern economic growth in the countries that entered the process ahead of others, meant a reaching out geographically, facilitated by major changes in transportation and communication, meant a continuous expansion to the less developed areas. At the same time less developed countries are in unfavourable position since they have not been able to achieve levels of modern economic growth comparing with developed countries. This has some causes. First, modern economic growth demand stable but flexible political and social framework, capable of accommodating rapid structural change and resolving conflicts it’s generated; developing countries are still struggling with such frameworks.  The second cause is that organizations in developed countries constructed policies towards other part of the world while introducing some element of modern economic growth, were malevolent for economic development as a whole, for example CAP, protection regulation. Other factor for continuing backwardness of developing countries is that although technological knowledge and innovations are available to leapfrog into modern economic, the stock of innovations most suitable to the needs of less developed countries is less abundant. Thus, we find continuity of unequal modern economic growth.

How do they relate to the properties of techno-economic paradigms and technological revolutions defined by Perez?

TR : set of interrelated technological breakthroughs, forming a major constellation of interdependent technologies, a cluster of cluster or a system of a system.A major upheaval of the wealth creating potential of the economy, opening a vast innovation opportunity space and providing a new set of associated generic technologies, infrastructures and organizational principles that can significantly increase the efficiency and effectiveness of all industries and activities.

TR can more generally be defined as a major upheaval of the wealth-creating potential of the economy, opening a vast innovation opportunity space and providing a new set of associated generic technologies, infrastructures, and organizational principles that can significantly increase the efficiency and effectiveness of all industries and activities.

Core of industries of each revolution can be ranged into three main categories:

-          motive branches – produce cheap inputs: plastic, semiconductor

-          carrier branches – user of input, represent paradigmatic products: computers, steam, automobile

-          infrastructures – technology whose impact is shaping and extending market boundaries: internet, electricity, railways

TEP/meta paradigm:

Evolving as the new technologies diffuse, that multiplies their impact across the economy and eventually also modifies the socio-institutional structures. Such meta paradigm is the set of the most successful and profitable practices in terms of choice of inputs, methods, and technologies and in terms of organizational structures, business models and strategies.

How do Kuznet relate with Perez:

Both discuss modern economic growth, well the question remains whether modern economic growth is more due to changes in the potential of technologies, or due to changes in the societal capacity to catch up with this potential? Kuznets and Perez would answer this question with different emphasis. Kuznets emphasis on societal change. He views societal capacity to cope with structural change as the crux in economic growth. Societal capacity to absorb radical technological change can differ drastically among countries, and this is why inequalities in both technological and economic measures are so huge. While Perez views the technology as the most important. She states that it depends on the capacity of the technology to transform the economy and the society whether modern economic growth can be attained. Perez put forth an evolutionary perspective on technology and sees innovation as part of technological trajectories, when these systems are interrelated and have a transformational effect on the whole economy, Perez speaks of a technological revolution. A technological revolution is accompanied by a techno-economic paradigm (TEP), a ‘way of doing and making things’. These TEP’s enable the technological revolution, evolving as the new technologies diffuse, that multiplies their impact across the economy and eventually also modifies the socio-institutional structures.

Discuss the value added of the analysis by Perez, but also possible missing elements.

-          Draw why specific technology will prevail over other competing technologies

The technological interconnectedness and interdependence of the participating system and the capacity to transform the economy and society of the technology are two factors of a technological revolution, and explain why some technologies succeed in creating a revolution and other do not.

Missing element:

-          Regardless inequality of economic growth between countries

Compare her timeline with the phases identified by Smits in his account of Dutch modernization process.

The Netherlands showed strong levels of growth between World War I and the 1970s, with exception from the years 1929 to 1950. Before 1914 and after the 1970s, growth rates are below the level of growth realized in other countries in Europe. The extent to which these differences can be attributed to technological developments is very interesting for economic analysis.

The highest comparative advantage of the Dutch industry is found in the agriculture and food cluster, the chemical industry and the electronics sector. The decline after the 1970s was largely an effect of the electro-technological industry’s decline and of the lowering of the competitiveness of a number of labor-intensive business sectors.

During the period of 1890 until 1916, the Dutch economic production had a strong emphasis on agriculture and service industries and an abundance of small companies. This was one of the factors responsible for a less susceptibility of the Dutch economic structure to the productive application of steam power. This caused productivity development to come to a standstill, and as a consequence Dutch companies were less capable of profiting from the growth of world trade.

The period of 1916 until 1970 was characterized by strong growth. The growth in the Netherlands was mainly caused by the high diffusion of the electromotor, which could be used in all kinds of industrial activity. Because the steam engine never had been fully diffused in the Netherlands, the shift to the electromotor-paradigm was relatively easier than in other parts of the developed world.

The period after the 1970s is characterized by deceleration of technological development and productivity growth in the Netherlands. This was partly due to the energy crises, which struck the energy-intensive Dutch industry hard. From that moment on, the Netherlands began to lose ground in terms of competitiveness.

On balance the economic growth experienced by the Netherlands in the period after 1890 has led to a reduction of income differences and to increased welfare. Household production sharply increased, leisure time increased but recently dropped again, and environmental damage increased sharply, to level off in the 1970s.

The technological paradigms as described by Perez can also be distinguished in the situation of the Netherlands during the 20th century. The degree to which the Netherlands took advantage of different global technological paradigms nevertheless varied greatly. During the steam technology paradigm, the Netherlands failed to diffuse the required technology to an extent desirable to be one of the front-runners in the new paradigm. One of the reasons for this was the many small enterprises, whereas steam technology required larger-scale firms to be profitable, and a large focus on agricultural production. Thus the lack of societal capacity to catch up with these developments was responsible for the backwardness of the Netherlands in regard with the shifting to the steam technology.

Luckily for the Netherlands the failure to become one of the front-runners during the steam technology paradigm has had the benefit that the Netherlands was not locked into production facilities using steam technology to an extent to which most of the developed world was. Dutch manufacturers found it easier to make a shift to electromotor-powered production, since they often had no steam engines to be replaced. This led to a leading position of the Netherlands during the electricity paradigm. The Dutch economy was structurally very well able to support the new electromotor paradigm.

This leading position led to problems when the energy crises unraveled, and after that the Netherlands lost its leading position in the prevailing technological paradigm.

Discuss the role of path-dependence in economic growth by reference to specific country experiences, in particular the Netherlands and the core countries identified by Perez.

Perez identifies five such technological revolutions since the start of industrialization, age of steam and railways, age of steel, electricity and heavy engineering, age of oil, automobile and mass production, and age of information and telecommunication. In such a revolution, there are generally four core industries involved: motive branches, that provide the generic technologies and inputs for the new system, carrier branches that are the most visible and active users of the new inputs and technologies, infrastructures that flow from the technologies in the system but have impact on the markets of all industries and induced branches, industries and developments that facilitate the diffusion of the (products of) core industries in a technological revolution.

A set of systems and technologies becomes a technological revolution when it brings a new Techno-economic Paradigm (TEP) with it. A TEP is constructed in three areas simultaneously: (1) in the dynamics of cost structure, involving a new key input (e.g. coal, steel, microprocessors) and new infrastructures that change industries and markets, (2) the perceived space of innovations providing direction for further development and (3) in organizational criteria and principles, bringing new work and consumption patterns. A TEP is a ‘new way of doing things’ that maximizes the wealth creating potential of the technologies in a technological revolution. Thus in a technological revolution, the old TEP gets replaced by a new one, something that involves conflict and resistance. The new TEP has to be the powerful mechanism making possible the technological revolution, but will be a hindrance for the next revolution.

During the steam technology paradigm, the Netherlands failed to diffuse the required technology to an extent desirable to be one of the front-runners in the new paradigm. One of the reasons for this was the many small enterprises, whereas steam technology required larger-scale firms to be profitable, and a large focus on agricultural production. Thus the lack of societal capacity to catch up with these developments was responsible for the backwardness of the Netherlands in regard with the shifting to the steam technology.

Luckily for the Netherlands the failure to become one of the front-runners during the steam technology paradigm has had the benefit that the Netherlands was not locked into production facilities using steam technology to an extent to which most of the developed world was. Dutch manufacturers found it easier to make a shift to electromotor-powered production, since they often had no steam engines to be replaced. This led to a leading position of the Netherlands during the electricity paradigm.

References:

Kuznets, S. (1973, Jun.). Modern Economic Growth: Findings and Reflections. The American Economic Review, Vol. 63, No. 3 , 247?258.

Perez, C. (2009). Technological revolutions and techno?economic paradigms. Working Papers in Technology Governance an Economic Dynamics no. 20 , 1?26.

Smits, J. P. (2010). Technology, Productivity and Welfare. In J. Schot, H. Lintsen, & A. Rip, Technology and the making of the Netherlands: The age of contested modernization, 1890?1970 (pp. 433?483). Zutphen: Walburg Pers/MIT Press.

Bonus Track: Omar Akram Passage into Midnight :)