Archive for the ‘technical change’ Category

Why Technical change in developing countries is mainly ‘labour-saving’

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Technical change in developing countries is mainly “labour-saving”: how is this an outcome of and in turn shapes (i) core-periphery structure of the world economy, and (ii) relative factor endowments of developing countries themselves?

In developing countries, we expected the use of more labor intensive in industrial sector as labour more abundant than capital, thus labor’s price is relative lower than capital. However, in practice technical change in developing countries is mainly labor saving. It can be explained by the limitation of techniques available because of both factor endowment within developing countries and the structure of world economy.

Within developing countries, there is limitation of a domestic capital goods sector (machinery, used in the production of commodities, producer goods). On the other hand, the structure of world economy divides the world into industrial ‘core’ and ‘peripheral’ countries. The core nations are highly industrialized, produce manufactured and capital goods rather than raw materials for export. They are economically wealthy and powerful, with capacity in the forefront of R&D and innovation, the government or firms’ expenditure of developed country into R&D relatively higher than developing countries, because R&D is high risk sector with long term output. Also, to develop technology to save capital (spending to buy foreign technology) there should be existence of capital goods sector in developing country, which is in fact non exist or inadequate. There has been very little incentive to establish capital good industries because lack of domestic know how related with level of education, inadequate expenditure for R&D, and large interest for investment of capital goods from developed country.  In turn, the periphery nations become dependent to import labor saving of technology change from developed country.

When firms (multinational corporations) faced with competition for global market, they tend to adopt defensive innovation strategy which lowering labour intensity in production for global profit-maximizing motives. Through this process of foreign investment, labor saving technical progress widely used by developing countries.

Another endowment factor within developing countries is the tendency of developing countries to subsidy to scarce capital and paying high wages to its own employees.  So that they face conflict between output, saving, and employment in the choice of techniques. Government usually prefers to maximize output and saving so the more capital intensive (labor saving) techniques will tend to be the choices.  It is also a problem with productivity of labour in terms of cost per unit of output. Although labor abundant in developing country and wage relatively lower than developed country, it is not automatically less costly to employ, it’s productivity might be lower because the wage rate divided by the productivity of labour (efficiency wage) may differ slightly with developed country. This efficiency wage gives incentive for developing country to choose labor-saving technical change.

However, technical change of developing countries should consider the growth of both rural and urban unemployment, income inequality, and foreign exchange position. There is a new thinking to use intermediate technology with more labor per unit of capital and fewer foreign inputs. If developing countries need to do so, they should pay attention and investment in education and innovation.