Resource saving growth and opportunities for human capital formation

By Arup Mitra1 and Marie-Ange Véganzonès-Varoudakis2

A world-wide problem that has posed serious concern is relating to the lack of surge in total factor productivity growth. The countries which are able to sustain high rates of growth or low growth rates at very high levels of per capita income are following the resource intensive path which can have serious repercussions in terms of future availability of resources. Faster economic growth based on total factor productivity growth, on the other hand, implies resource saving approaches being followed. Innovations resulting in technological progress, and better utilisation of the new technology are the key to higher output growth relative to input growth, which is defined as total factor productivity growth (TFPG). In other words, with the same amounts of inputs the obtainability of higher returns is envisaged as TFPG.

The developed countries are not able to experience any major increase in TFPG, while the developing countries are neither able to innovate suitable technology nor utilise the imported technology optimally. The emerging economies are also at a loss though one would have expected a rapid TFPG coming from these countries with possibilities of a rapid expansion in trade. Better competitiveness is expected to result from higher TFPG.

What is the driver of TFPG or resource-saving economic growth? One class of literature argues that the only determinant of long-run rate of growth is technological development or technical progress since the rate of return on capital follows a diminishing pattern. Technical change has been considered as the result of learning-by-doing, where “doing” refers to the process of investment. The link between growth of knowledge and cumulative level of investment has been considered to model the rate of technical change which may contribute to resource saving growth. In this postulation investment is seen as causing changes in the environment which would stimulate learning. On the other hand, the other “knowledge-based” endogenous growth models refer to the imitation model. The imitation model involves costs in transferring knowledge which then contributes to positive long-run growth. Another “knowledge-based” endogenous growth theorist argued that the growth of technological progress of a firm can be a function of the level of resources devoted to research as well as the existing level of knowledge the firm has access to. A positive and strong relationship between R&D and the growth in total factor productivity has been noted in this regard. Further, in terms of technology diffusion and growth research noted that a firm with low research and development (R&D) expenditure can draw from the high-tech technology firm without incurring any substantial cost and therefore, the high-tech firms’ innovative efforts may explain other firm’s productivity growth. The channels of diffusion of spillovers which vary considerably may take the following form: intra- and inter-industry relationships, interdependence between public and private sector investment, supplier and purchaser connections, and geographical location, as well as domestic firms and firms in other countries links through international technology market trade and multinational entry. R&D activity is a channel for the diffusion of knowledge on innovative ideas from one firm to another and the increase in productivity growth can be translated to the market value of the firm.

Some of the empirical studies presented evidence to suggest infrastructure— physical, financial and social—as a major determinant of total factor productivity growth. Among the three components social infrastructure is the most important one with an emphasis on human capital (education and health). In fact, human capital investment plays a pivotal role in driving TFP growth. The positive effects of quality change in labour on TFPG due to higher educational level has also been noted for most countries. Many have argued in favour of ICT-led development based on the notion that investments in ICT can accelerate economic growth by enhancing worker productivity and increasing the returns to investment in other capital goods. Labour input can be subdivided into skilled, semi-skilled and unskilled, to measure the achievement of the knowledge-based economy (K-economy) through human capital involved in the sector and evidence shows that contribution of the ICT used in the sector was the highest among all the inputs.

Another strategy which has been deployed by countries to maximise growth is related to higher returns achieved by exploiting the agglomeration economies. Concentration of activities in large urban centres and indivisibilities in investments reduce the cost of operation for each enterprise, resulting in higher levels of productivity. Also, common objectives of firms compel them to cooperate and undertake joint investment for innovative activities. Part of the productivity growth can then be transferred to the workers in terms of higher wages. On the whole, in the globalised era countries have witnessed an increased scale of activities in the large cities as a means of catching up. Consequently, though convergence in growth might have taken place across countries, globalisation has resulted in inter-spatial divergence within a given country. The adversity associated with such divergence cannot be overlooked. Starting from regionalism and ethnic violence to groupism and communalism can be traced to some of this inter-spatial inequality which can threaten the future growth. What strategies must be adopted by countries to reduce the inter-spatial inequality in growth and development is a pertinent question.

Opportunities for human capital formation will have to be provided extensively. In the remote areas and small towns massive investment will have to be made to improve the employability of the work force. This will help create better avenues for growth and employment generation both. Even when people migrate from such areas to the large cities in search of jobs, they will be able to shift with better bargaining power. On the other hand, labour mobility with poor human capital formation only raises the excess supplies of unskilled labour, in the face of which wages remain stagnant. The beneficial effects of agglomeration economies get neutralised and need not be felt on all sections of the workforce, resulting in increased wage inequality and no improvement in living standards of those located at the lower echelons. Thus, even the large cities have been witnessing vast islands of poverty in the midst of prosperity.

1 Professor, Institute of Economic Growth, Delhi; 2 Professor, CERDI, Université Clermont Auvergne (UCA) & CNRS, France

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