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CHA PTER F IVE
appropriate industrial and government policies that increase expendi-
tures on knowledge creation, research and development, and such
human capital formation as education and training. To the extent
that government policies can facilitate creation of new knowledge and
technology, there will be an effect on the distribution of wealth and
power within the global economy. Some economists and political
economists have applied the new economic theory to explain the
rapid industrialization ofthe dynamic Pacific Asian economies.
Another important implication ofthe new growth theory is that
political, economic, and other institutions—from governments to uni-
versities to corporations—can either hinder or facilitate technical ad-
vance and hence long-term economic growth. Differing from the neo-
classical economics assertion that free markets tend to produce
efficient outcomes, the new growth theory suggests that national eco-
nomic structures, institutions, and public policies are major determi-
nants oftechnological developments and economic growth. In fact,
long before the new growth theory was formulated by Romer and
Lucas, a number ofeconomists and political economists had engaged
in pioneering work on the determinants ofinnovative activities and
the diffusion of technical knowledge in the production process.
Among the most important contributors to an understanding of“na-
tional systems ofinnovation” are Christopher Freeman, Richard Nel-
son, and Keith Pavitt, whose writings have demonstrated the crucial
role oftechnological advance in economic growth and the dynamics
ofeconomic systems. 28
The new theory’s emphasis on human capital as the key to eco-
nomic growth weakens convergence theory, and this has significance
for the nature and dynamics of the global economy. The new growth
theory suggests that under some conditions, an initial advantage of
one country over another in human capital will result in a permanent
difference in income level between the countries. As Jeffrey Sachs and
Felipe Larrain have pointed out, when human capital endowment is
important, a rich country can maintain its lead indefinitely over
poorer countries by generating sufficient new savings and invest-
29
ment. According to the theory, the rich will get richer, the poor—
unless they invest in human capital—will continue to lag behind, and
the international economy will continue to be characterized by large
28
Richard R. Nelson, High Technology Policies: A Five-Nation Comparison (Wash-
ington, D.C.: American Enterprise Institute, 1984); and Christopher Freeman, Ray-
mond Poignanat, and Ingvar Svnnilson, Science, Economic Growth, and Government
Policy (Paris: OECD, 1963).
29
Sachs and Larrain, Macroeconomics in the Global Economy, 579–80.
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