Without further ado...
If one considers two countries that have different levels of technological infrastructure (e.g., expenditures on private and/or public research and development, large amounts of spending on advanced university research centers for "high technology", extensive patent laws that are enforced aggressively within the country, etc.), which country might be more at risk relative to long-run economic growth? Explain using the module. Can public policies be developed to try to alter this situation, and if so, what measurements might help us summarize the extent and impact of such public policies on economic growth?
The two countries that are the subject of this essay will be called Techie and Laboria. Techie is characterized by high levels of technological infrastructure, with quality universities, government subsidized R&D, strong protections for intellectual property, an efficient and well protected patent systems, and a strong respect for the rule of law, as it is aggressively enforced. Laboria is quite the opposite, it has weak institutions, bribery is commonly known, intellectual property protection if it exists is weak, and the few universities that do exist are oriented toward educating the elite and are considered prestigious because graduates are strong candidates for entry into the civil service.
Risks to Growth
Techie will likely be the least at risk relative to long-run economic growth. Its institutions and technological infrastructure make it more likely that it will see continued Total Factor Productivity (TFP) growth. High levels of research spending make it more likely that breakthroughs will occur and strong intellectual property laws that are vigorously enforced provide an incentive for private-sector agents to continue to pursue research. A strong university system makes it likely that Techie will be strong in basic research, which seems to provide the foundation for future technological change, which leads to higher TFP through better machines and workers. Due to its excellent university system, strong institutions, and strong legal apparatus, superior products and companies will have access to the marketplace. The best products will have the chance to succeed, and the energy of entrepreneurs and business people, will be focused on satisfying market needs rather than responding to the dictates of government or working to influence those dictates to benefit themselves.
For precisely the opposite reason, Laboria faces a far greater risk of stagnation. Weak institutions, and a cosseted elite rule a country with little respect for the rule of law, but rather on the rule of whom you know. Little or no research means that Laboria does not innovate but rather copies. The lack of an intellectual property framework reduces the incentive to innovate, because it is easier to simply copy others, especially since the marketplace is directed towards ruling coterie’s benefit. The closed nature of Laboria’s economy allows the elites who hold special licenses to import certain goods to gain monopoly profits. Overall, the lack of genuine market system, strong rules for enforcing contracts, and a closed economy, as much as a lack of technological research capability inhibit the growth of Laboria.
Techie should take further steps to open its economy to foreign trade, as it will benefit from a wider pool of investment capital and foreign technical know-how. It should continue to invest heavily in education and research. Education investment is dependent on its level of development. Techie should invest where it will gain the greatest returns. Techie should continue to insure that playing field is level for all competitors and that price signals are accurately given in the economy. Private property rights, both physical and technical should continue to be enforced. In other words, Techie should strengthen the public policy steps it is already pursuing to maintain increases in TFP.
High investment in universities or shipping students off to foreign countries is a standard practice in less well off countries. It is in fact, the wrong step to take. The best thing that Laboria can do, is the hardest, and that is begin to open its economy and loose the “animal spirits” of free enterprise.
The first step in this process is codifying and establishing property rights, and working to ensure the legal system protects them. Hernando De Soto identifies undefined property rights held by the poor as a huge source of untapped assets, which can power economic growth by establishing a basis for credit to be granted. I would also argue that a stable monetary framework is an essential part of stable property rights. Through inflationary monetary policies governments undermine the property (savings) of its citizens.
After property rights on a physical level, trade needs to be opened up to bring in foreign expertise and technology. As the economy opens up, workers will need to be educated and labor laws relaxed.
Education should initially focus on literacy for the general population and primary education.
Transparency and Government
The size and role of government should be reduced to reduce the scope for bribe taking and rent seeking. This is a long process in a country, and one of the best ways to reduce corruption is by promoting transparency in government, and by limiting its role. As the income of the country starts to grow through the basic steps of reducing the diversionary role of government, the middle class will grow and in the process create the basis cultural and societal framework that is conducive to a strong civil society that will promote greater advances in growth.
Innovation and Intellectual Property
At this point as the returns from playing catch up begin to diminish, it will be necessary to build on physical property rights by implementing increasingly stronger intellectual property protection. Coincident with the development of an innovation oriented growth policy; competitive universities and research institutions should be developed. The development into serviceable products of basic research should be left to the private sector as they will be market driven and have a better idea of how basic research should be translated into an actual product. The key point here is that the incentives for innovation should be created through the introduction of a serviceable and enforceable patent system. Though, the optimal balance must be found between intellectual property protection and the diffusion of innovation, so that organizations don’t hide behind intellectual property laws to protect their monopolies and therefore retard innovation that is essential to continued growth.
Markets and Regulatory Policy
I am hesitant here to strengthen the hand of government because it is often used to deaden the “invisible hand” rather than strengthen it. In this case, there is a role for government in ensuring a clean civil service, open entry into markets, and protecting the populace. In doing all this, the government should work to make sure that the tax base is broad and as non-distortionary as possible. It is here in the tax code that in rich countries, especially the United States that there has been numerous avenues opened for rent seeking. The tax code should be as neutral as possible in concerning the actions of economic agents. The specific role of government should focus on consumer welfare and regulatory agencies should be held to a strict standard of cost-benefit analysis when implementing new regulations.
The challenges that Laboria and Techie face are very different, and the consequent policy prescriptions are slightly different. Techie’s policy should focus on continuance of its existing policy and adapt government regulation to technological change. Laboria faces the much greater task of reorienting its entire framework towards a growth-oriented policy. The best thing Laboria can do is to begin to level the playing field and allow the market to work. As this process opens up, Laboria will grow faster than Techie because it will be playing catch up, and we will begin to see economic convergence between the two. As that happens, the policy of Laboria needs to change its emphasis towards Techie’s initial emphasis on promoting innovation. Good policy will promote strong growth in TFP.