Academic journal article The Lahore Journal of Economics

The Productivity Growth-Technology-Entrepreneurship Nexus: Implications for Pakistan

Academic journal article The Lahore Journal of Economics

The Productivity Growth-Technology-Entrepreneurship Nexus: Implications for Pakistan

Article excerpt

1. Introduction

Productivity growth is the basis of rising living standards and a country's ability to compete in the world market. Productivity improves when producers seek ways to lower costs and improve the quality and range of goods and services produced. This entails tapping new technologies and finding innovative ways to produce and deliver products to the consumer - a task typically performed by entrepreneurs. They innovate, adopt and adapt new technologies in production and distribution and, in the process, raise productivity. However, in traditional neoclassical economics, productivity growth is not a dominant concern but rather incidental to producers' efforts to maximize profits. This paper attempts to elucidate the nexus of productivity growth, technological progress and entrepreneurship and examine its implications for Pakistan.

2. Productivity Growth

A country's per capita income depends directly on labor productivity, as can be seen from the following two relationships:

Per capita income (Y/P) = labor productivity (Y/E) x employment rate (E/N) x labor force participation rate (N/P) (1)

where Y is national income, P is population, E is employment and N is the size of the labor force. Expressing equation (1) in terms of growth rates:

Growth of per capita income = growth of labor productivity + proportionate change in the employment rate + proportionate change in the labor participation rate (2)

The first relationship is simply an identity: per capita income is the product of labor productivity, the proportion of labor force employed and the proportion of active labor force in the population. The second relationship, derived from the first, states that the growth of per capita income is the sum of the growth in labor productivity and proportionate changes in the employment rate and labor force participation rate. In other words, per capita income can rise on account of an increase in any of the three factors on the right-hand side, i.e., labor productivity, the employment rate and labor force participation rate. Over the longer term, however, since unemployment and labor force participation rates change only within fairly narrow limits, the growth of per capita income depends primarily on growth in labor productivity.

A country's terms of trade also affect national real income. An improvement in the terms of trade is analogous to an increase in productivity because the country can obtain more in imports for a given volume of exports, i.e., the domestic resource cost. How the terms of trade move over time is not usually within a country's control and depends largely on exogenous episodes such as war, crop failures, new resource discoveries or mining disasters. Countries might want to move the terms of trade in their favor but they have few means available to make this happen on a sustained basis.

The overall growth of labor productivity is affected by an economy's sectoral orientation (some sectors tend to have higher labor productivity) and the growth in productivity of individual sectors, that is:

Overall productivity growth = E (individual sectors' productivity growth x the sector's weight in GDP) (3)

In other words, overall productivity rises both because individual sectors experience technological improvements and because the economy's structure moves toward more sophisticated, higher-productivity sectors. This simple and rather obvious proposition is at the heart of economic progress: as economies evolve, higher-productivity or higher value-added sectors gain in salience. However, the above relationship also shows that, because of their weight in the economy, traditional sectors remain dominant in the economy's overall performance in the earlier phases of development. How long this lasts depends on the pace of economic restructuring.

Another implication of Equation 3 is that, from the viewpoint of longer-term economic growth and development, the choice of industry does matter. …

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