145STEADY-STATE ANALYSIS

Equations (6.6) and (6.8) represent the key equations that describe the implications of our simple model for economic growth and develop-ment. Recall that equation (6.6) states that along a balanced growth path, output per worker increases at the rate of the skill level of the labor force. This growth rate is given by the growth rate of the techno-logical frontier.

Equation (6.8) characterizes the level of output per worker along this balanced growth path. The careful reader will note the similar-ity between this equation and the solution of the neoclassical model in equation (3.8) of Chapter 3. The model developed in this chapter, emphasizing the importance of ideas and technology transfer, provides a “new growth theory” interpretation of the basic neoclassical growth model. Here, economies grow because they learn to use new ideas invented throughout the world.

Several other remarks concerning this equation are in order. First, the initial term in equation (6.8) is familiar from the original Solow model. This term says that economies that invest more in physical cap-ital will be richer, and economies that have rapidly growing popula-tions will be poorer.

The second term in equation (6.8) refl ects the accumulation of skills.

Economies that spend more time accumulating skills will be closer to the technological frontier and will be richer. Notice that this term is similar to the human capital term in our extension of the Solow model in Chapter 3. However, now we have made explicit what the accumula-tion of skill means. In this model, skills correspond to the ability to use more advanced capital goods. As in Chapter 3, the way skill accumula-tion affects the determinaaccumula-tion of output is consistent with microeco-nomic evidence on human capital accumulation.

Third, the last term of the equation is simply the world technologi-cal frontier. This is the term that generates the growth in output per worker over time. As in earlier chapters, the engine of growth in this model is technological change. The difference relative to Chapter 3 is that we now understand from the analysis of the Romer model where technological change comes from.

Fourth, the model proposes one answer to the question of why differ-ent economies have differdiffer-ent levels of technology. Why is it that high-tech machinery and new fertilizers are used in producing agricultural prod-ucts in the United States while agriculture in India or sub-Saharan Africa relies much more on labor-intensive techniques? The answer emphasized

by this model is that the skill level of individuals in the United States is much higher than the skill level of individuals in developing countries.

Individuals in developed countries have learned over the years to use very advanced capital goods, while individuals in developing countries have invested less time in learning to use these new technologies.

Implicit in this explanation is the assumption that technologies are available worldwide for anyone to use. At some level, this must be a valid assumption. Multinational corporations are always looking around the world for new places to invest, and this investment may well involve the use of advanced technologies. For example, cellular phone technology has proved very useful in an economy such as China’s:

instead of building the infrastructure associated with telephone lines and wires, several companies are vying to provide cellular communica-tions. Multinational companies have signed contracts to build electric power grids and generators in a number of countries, including India and the Philippines. These examples suggest that technologies may be available to fl ow very quickly around the world, provided the economy has the infrastructure and training to use the new technologies.

By explaining differences in technology with differences in skill, this model cannot explain one of the empirical observations made in Chapter 3.

There, we calculated total factor productivity (TFP)—the productiv-ity of a country’s inputs, including physical and human capital, taken together—and documented that TFP levels vary considerably across countries. This variation is not explained by the model at hand, in which all countries have the same level of TFP. What then explains the differ-ences? This is one of the questions we address in the next chapter.⁴

6.3 TECHNOLOGY TRANSFER

In the model we have just outlined, technology transfer occurs because individuals in an economy learn to use more advanced capital goods.

To simplify the model, we assumed that the designs for new capital goods were freely available to the intermediate-goods producers.

4Strictly speaking, we must be careful in applying the evidence from Chapter 3 to this model. For example, here the exponent (1/g) on time spent accumulating skills is an additional parameter.

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The transfer of technology is likely to be more complicated than this in practice. For example, one could imagine that the designs for new capital goods have to be altered slightly in different countries. The steering wheel on an automobile may need to be switched to the other side of the car, or the power source for an electrical device may need to be altered to conform to a different standard.

Technology transfer also raises the issue of international patent protection. In Chapter 4, we explained that secure property rights for ideas (usually in the form of patents) made innovation profi table and increased the pace of technological growth. Are the intellectual prop-erty rights assigned in one country enforced in another? If so, inno-vators can capture more profi ts, encouraging more research. However, protecting these rights means that countries behind the technological frontier have to pay for the right to use new ideas, slowing down the transfer of technology.

The net effect of implementing intellectual property rights (IPR) in a developing country is unclear. Helpman (1993) analyzed a model in which the frontier countries in the “North” are producing designs for new types of intemediate goods, and developing countries in the

“South” can potentially imitate these designs. Greater IPR protection in the South makes it harder for them to imitate, but it increases the effort put toward research in the frontier countries. In terms of our model, slower imitation shows up as a decline in µ in equation (6.5), lead-ing to a lower ratio h>A along the balanced growth path. On the other hand, better IPR protection should induce a higher level of A.⁵ Looking at output per capita along the balanced growth path in equation (6.8), one can see that lower µ and higher A have offsetting effects. Helpman, using a Romer-type model to explain innovation in the North, fi nds that the net effect of greater IPR protection is negative for developing countries. The increased innovation in the North is not suffi cient to fully offset the slower imitation in the South.

Our model, and the one developed by Helpman (1993), both assume that any techonolgy from the frontier countries can be implemented

TECHNOLOGY TRANSFER

5From the North’s perspective, better IPR protection in the South increases the profi ts from any given idea. Assuming the North operates in a Romer-like way, this would show up in an increase in s_R. This has a level effect on A, but for the reasons we covered in Chapter 5 the growth rate of A will still be determined by the population growth rate in the North.

immediately in a developing country. However, certain technologies may only be appropriate once a certain level of development has been reached.

For example, the latest version of “maglev” trains from Japan may not be useful in Bangladesh, which depends on bicycles and bullock carts. Basu and Weil (1998) base the notion of “appropriate technology” on physi-cal capital, whereas Acemoglu and Zilibotti (2001) focus on the skill mix of the population. In the latter’s setting, Northern countries are inventing technologies that are optimized for a highly skilled workforce. Countries in the South can imitate these technologies, but they cannot use them to their full potential. In terms of our model, this scales down the level of A in the South. However, if the South implements IPR protection, then Northern fi rms will fi nd it profi table to develop technologies optimized for the South, increasing the level of A. In models of appropriate technol-ogy, the net benefi t of IPR protection is generally positive.

The arguments for and against IPR protection in developing coun-tries have been on display during the negotiations over the Agree-ment on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

Beginning in 1995, ratifying TRIPS became compulsory for nations wishing to join the World Trade Organization. The frontier countries (the United States, Japan, Western Europe) pushed hard for TRIPS, as it would ensure IPR protection for their ideas in developing countries.

Developing countries, worried about the ability to easily adopt frontier technologies, negotiated a delay in the requirements. They originally had a ten-year window to implement TRIPS, which ended in 2005. For the least developed countries, this window has been extended to 2013.

Exceptions continue to be negotiated, including one that lets develop-ing countries infrdevelop-inge on patents for medicines that address serious public health problems.

6.4 GLOBALIZATION AND TRADE

Adopting foreign technologies is a particular kind of openness that can contribute to economic growth. As we saw in Figure 1.5, openness in terms of greater imports and exports of goods and services is also asso-ciated with faster growth over the last fi fty years. From the perspective of our model, we can incorporate explicit trade in intermediate goods to accommodate the stylized fact captured by Figure 1.5.

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