Growth and Development
Technology transfer

While technological progress is central to growth, it reflects the efforts of only a handful of countries to extend the knowledge frontier in search of new productivity gains, while most economies must only decide which technologies to adopt. The poor growth performance of many LDCs is therefore particularly puzzling since they could many technological improvements at low cost. In Discussion Paper No. 957, William Easterly, Robert King, Ross Levine and Research Fellow Sérgio Rebelo present a simple model of technology adoption for a developing economy in which human capital accumulation is restricted to learning how to incorporate new intermediate goods in production. Adoption costs are therefore proportional to the labour force, and the scale economies that feature in models with endogenous technical progress (in which larger economies grow faster) do not arise. This reflects a more plausible role for human capital, closely related to the availability of better technologies, which accounts for much of the rise in the productivity of today's workers relative those of the last century.

The authors use their model to consider the implications of various policy measures discussed in the recent literature. They show that inflation, taxation of investment and income, trade barriers, quotas and tariffs can all be harmful to growth, while foreign direct investment can foster economic development. Finally, they use a simplified version of the model to show that policy uncertainty has ambiguous effects in a one-sector model but restricts growth in a two-sector model with `risky' and `risk-free' activities. In the latter, greater policy uncertainty shifts resources towards the risk-free sector, reduces the mean real interest rate and slows growth. This type of model may also be easily extended to incorporate recent insights into the role of financial intermediation: policies that restrict individuals' ability to hold diversified portfolios tend, for example, to reduce the growth rate.

Policy, Technology Adoption and Growth
William Easterly, Robert King, Ross Levine and Sérgio Rebelo

Discussion Paper No. 957, May 1994 (IM)