Page 123 - Global Political Economy_Understanding The International Economic Order

CHA PTER F IVE
tors ofproduction accompanied by technical change accounts for the
long-term growth ofan economy. 12
Over the long term, economic growth is dependent upon techno-
logical progress, which raises labor productivity and counters the in-
13
herent tendency toward diminishing returns. Economists argue that
a sustained increase in real GNP must be due either to an increase in
the quantity ofcapital and labor used in production or due to more
efficient use of these inputs (e.g., technical and/or organizational
progress). Although empirical models ofeconomic growth can deter-
mine the contribution ofeach cause to economic growth, they cannot
explain the factors causing the growth of capital, labor, and/or tech-
nology.
Neoclassical growth theory leads to the conclusion that govern-
ment policies can do little to accelerate the long-term rate ofeco-
nomic growth. That rate is determined by what Solow called the
“steady state,” which is defined as that point in economic growth
when capital per worker reaches an equilibrium and remains un-
changed. This means that any attempt to accelerate the growth rate
ofsuch an economy by increasing the savings rate or the amount of
capital investment will have only a slight or transitory effect on the
long-term rate ofeconomic growth. A government-induced sustained
increase in capital investment, for example, has only a temporary im-
pact on the long-term growth rate. Although the ratio ofcapital to
labor may increase, the marginal product ofcapital will decline and
thus will reduce the effectiveness of the investment. While the govern-
ment can do some things at the margin, such as increasing the na-
tional rate of savings or the supply of “effective” labor, such efforts
will not have a major impact over the long term. 14
Another important implication ofthe neoclassical growth theory
for international affairs derives from the convergence theory or hy-
pothesis. This hypothesis posits that labor productivity and per capita
income levels ofthe relatively less developed countries should over
the long run converge or catch up with those ofthe more developed
15
countries. Due to the technological gap between developed and less
developed countries, LDCs can make large productivity gains by bor-

12
Sachs and Larrain, Macroeconomics in the Global Economy, 556.
13
Shahrokh Fardoust and Ashok Dhareshwar, Long-Term Outlook for the World
Economy: Issues and Projections for the 1990s, International Economic Analysis
Working Paper No. 372 (Washington, D.C.: World Bank, February 1990), 65.
14
This discussion is based largely on Sachs and Larrain, Macroeconomics in the
Global Economy.
15
Fardoust and Dhareshwar, Long-Term Outlook for the World Economy, 72.
110