Academic journal article Economic Inquiry

Why Cannot Poor Countries Utilize Existing Knowledge? Expansion of Firms and Human Capital Accumulation by Training

Academic journal article Economic Inquiry

Why Cannot Poor Countries Utilize Existing Knowledge? Expansion of Firms and Human Capital Accumulation by Training

Article excerpt

I. INTRODUCTION

Current economic growth literature explains the growth of the developed countries, but lacks in explaining the stagnation of the poor countries. The notion of poverty traps was commonly used to explain the reason behind the lack of growth of these countries (see, e.g., Azariadis and Drazen 1990; Galor and Zeira 1993; Murphy, Shleifer, and Vishny 1989; and a survey by Azariadis 2004), and development policies were drafted accordingly. (1) However, Easterly (2006) rejects empirically the notions of poverty traps, big-pushes, and takeoffs, and Kraay and Raddatz (2007) empirically reject low-technology-based and low-savings-based poverty traps. Accordingly, as noted by Easterly (2007), development policies have failed. So what prevents the development of those countries?

Early growth and development literature focused on capital as a source of development (Solow 1956, followed by many others). However, although capital is in short supply in those countries, it can flow there from richer countries; therefore, its unavailability cannot explain the economic performance of the poor countries. Nevertheless, as noted by Lucas (1990), capital does not flow to poor countries, probably due to lower level of human capital, lower productivity, and worse technology. (2)

Endogenous growth literature (Aghion et al. 2001; Grossman and Helpman 1991; Romer 1990) focuses on technology, R&D, the development of new knowledge, and inventing new or better products as the cause for growth. However, it is obvious that the salvation of SubSaharan Africa would not come from inventions of new products and patents by these countries. The development problem the poorest countries are facing is how to utilize the existing knowledge. (3) This study will therefore focus on the development phase in which the country tries to utilize the existing technology.

An explanation for the inability to adopt existing advanced technologies and the lack of capital flows to poor countries is the low human capital. The importance of human capital has been expressed by Becket (1964), and its relation to development and growth has been extensively investigated, theoretically and empirically; see, for example, Lucas (1988), Romer (1989), Becker, Murphy, and Tamura (1990), Stokey (1991), Mankiw, Romer, and Weil (1992), Galor and Tsiddon (1997), Barro (2001), and Galor and Moav (2004). The main human capital-based explanations for the lack of development are (1) coordination failure, liquidity constraints, and other poverty traps. (4) (2) Education allows for the acquisition of the local knowledge, and since in less developed countries local stock of knowledge is smaller and productivity is lower, the return to education is lower and education is less worthy to acquire there. However, there is no empirical support for the claim that return to education is lower in less developed countries (Psacharopoulos and Patrinos 2002), traps, as mentioned earlier, have been ruled out, and the remaining explanations are based on the assumption of a smaller local stock of knowledge (or less advanced technology), which is serving as a local public good. Yet, since schools can use the same textbooks as in the developed countries, and since property rights over the technology can explain an economic lag between the poor countries and the developed world of no more than 15-20 years, the patent expiration period, while the actual lag of the poor countries is by far larger, the assumption itself warrants explanation. This assumption is in fact assuming underdevelopment, therefore cannot explain it. The model presented here does not rely on the local stock of knowledge, but rather on the shortage of trained labor, which is required for production and for training new labor.

A possible reason for the dependency of the literature on this assumption is that the vast majority of the human capital literature regards schooling as the equivalent of human capital and analyzes agents' demand for education, while ignoring the fact that a substantial part of the training of managers, engineers, and other professional workers is on-the-job training, a form of human capital that was identified as highly influential by Mincer (1962) and by Becker (1964), which, anecdotally, analyzed in his book training before analyzing education (see also Heckman and Klenow 1998). …

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