The Contribution Of Technological Progress To The Economic Growth In Different Countries
From a long history of wars, poor health, low life expectancy, and hard physical labour, the human race has advanced into a digital era of high efficiency machinery and high-speed technology. Living standards in many societies have improved tremendously over the past couple of decades. Higher life expectancy, less working hours, greater aggregate wealth, and more product variety are all results of economic growth. Economic growth is a purely quantitative concept defined by an increase in the final goods and services produced within an economy and measured by Gross Domestic Product (GDP). There are many factors that directly influence economic growth in a country. New breakthroughs in technology have contributed to factor productivity in many economies, becoming a leading agent for increasing efficiency in production. Technological advancements account for a significant fraction of the growth in GDP across the globe but also impose a few unforeseen consequences. This raises the question: how has technological progress contributed to the economic growth and development in different countries?
Technology is a fairly recent and prominent phenomenon, making it the topic of many ongoing discussions and controversies. Many are curious about the future of technology and whether it brings better living standards or not. This paper should shine light on the pivotal role of technological progress in actual per capita growth and contribute to the extensive topic of economic growth. First exploring Solow’s theory on how technology drives the GDP per capita growth pattern shown in Kuznet’s data analysis, this paper highlights the direct influence of technological progression on economic growth. Then we move on to explore more indirect effects of technology on other production factors such as human capital and infrastructure. Finally, the paper discusses the impacts of technology on development such as income inequality, incorporating Kuznets hypothesis to make a similar prediction about the phenomenon of technology.
Kaldor’s theory points to six stylized facts central to the theory of economic growth. The purpose of the theory is to show the nature of factor variables that ultimately determine the rate at which the economy is growing. From his research Kaldor draws the important conclusion that output per capita and capital intensity increase at a constant rate. The Solow model of economic growth provides theory behind this trend, highlighting the role of technology in increasing per capita GDP. If the growth in population is denoted n then the growth rate of output would be n and the growth rate of output per capita (denoted Y/L) would be zero. This shows that standards of living are not rising and is inconsistent with Kaldor’s conclusion that output per capita has grown.
Technological progress is usually referred to as total factor productivity because an increase in technology leads to an increase in GDP even if capital and labour remain the same. Strictly speaking, major technological improvements increase the productivity of capital and labour, and thus overall GDP growth. Now taking into account an economy with technology (denoted A), the new production function is. If a denotes the rate of technological progress, the growth in output per capita will now be a + n. This analysis shows that with no technology and only capital and population accumulation GDP will rise but GDP per capita will not. In other words, growth in the economy will not be enough to increase the living standards of the rising population. Output per capita, and therefore aggregate wealth, will only grow if labour productivity grows.
Another observation highlighted in Kaldor’s article is that output per capita varies widely among different countries. Solow’s model of economic growth does not account for the wide dissimilarity in growth rate among different countries. We must now look deeper into other growth inputs that the Solow model has overlooked: additional production factors in which technological progress plays a pivotal role. The theory of conditional convergence explains that not all countries have access to the same level of factor productivity and therefore have different production functions driving different rates of growth. Once again, we see that a high level of technology remains a paramount factor in explaining the growth in an economy. Technological progress is not only a catalyst for growth in itself, it also allows better communication, transportation and free access to extensive knowledge, leading other production factors of the production function to prosper. The variation in growth patterns across the world can be due to any of the two main inputs that have not been accounted for in Solow’s theory: public infrastructure and human capital.
A country’s infrastructure refers to its system of large-scale and long-term investments, which facilitate economic activity. Infrastructure can be divided into a few categories including transportation, telecommunications, utilities (such as electricity and water) and investment in human capital. Usually, the government of an economy invests in public infrastructure to expand its productive capacity. The investments to improve public infrastructure of a high technology economy will yield higher returns in comparison to an economy with access to less technology. Particularly, access to better technology allows for these infrastructures to be established quicker and better. The level of transportation we have now is thanks to the advancements instigated by technology. Quick and easy transport allows people and products to be safely transported anywhere, allowing ideas to diffuse all over the world, increasing aggregate demand and consumer choice across different economies. High technology directly boosts telecommunications, allowing us to stay up to date with each other and the rest of the world. Electricity and piping systems have allowed heating and clean water to reach the great majority of populations and introduced the better living standards we know today. Access to internet is a fairly new privilege that has made knowledge more accessible than ever, and as we will see subsequently, knowledge is an important factor of human capital.
The most important factor of human capital is worker skill and training. It is important that workers are efficient in their jobs and that labour skills match the needs of the economy. A central idea is that on average, higher skilled workers tend to be more productive than low skilled workers, thus the path to economic prosperity is to invest in worker training. One of the most important methods of worker training is education and its connection to technology is evident. Introducing technology into a classroom allows access to an unlimited assortment of information that goes beyond the standard textbooks and enhances teaching methods. As students are more efficiently educated and come out the other side with much higher skills, they contribute to the functioning of the economy by bringing new and better ways to solve problems. “The more educated a manager is, the quicker he will be to introduce new techniques of production”. This statement implies that well educated people bring innovation to an economy, speeding up the process of technological advancement and thus economic growth.
Although there is no doubt that technology enhances economic growth, it can lead to a widening of the inequality in the distribution of income. “In periods of major technological inventions, the relative importance of initial conditions decline, leading to income inequality”. In other words, breakthroughs of new technologies can completely eliminate demand for a particular kind of labour. Workers (usually middle class) whose skills have been replaced by information technology will end up un- or underemployed, decreasing average middle-class income. Kuznets provides a plausible hypothesis on the general relationship between income inequality and economic growth in his analysis of the two correlative concepts. Initially, as a less developed economy begins to grow, the rise in income per capita leads to a widening of the wage gap, however as development continues the economy is said to hire better policies and impose better social infrastructure, which begins to decrease the gap between richest and poorest. More growth leads to more innovation and a more rapid growth of younger industries creating new and improved jobs.
Today, corporate profits are at an all-time high, however the distribution is not nearly fair. If we consider the wave of technology as the beginning of a new era, we can create an analogy and relate this phenomenon to Kuznets' hypothesis. When technological development first began to take off, it amplified GDP growth rates of different countries as new innovations diffused across the globe. The higher-class citizens of these economies were the first to seize the advantage of technology and utilize its benefits to increase their own wealth. Another predicament is that technology might be destroying jobs faster than it is creating new ones. Not only is technology beginning to dominate manufacturing and agricultural industries, the skills required in retail, education, and medicine are also being replicated by new information technology. This is why the introduction of new technologies initially increased the wage gap between rich and poor.
The Kuznets’ hypothesis predicts that as technology develops further and integrates into the system, the income gap will begin to shrink due to the development of better public and social infrastructure, a more just economic system, and new jobs created by growth. Higher levels of technology start up new industries and allow younger firms to grow more rapidly: each start up offering the economy a significant number of new jobs. “The various factors that have been suggested above would explain stability and narrowing in income inequality in the later rather than in the earlier phases of industrialization”.
