Technology-driven growth By Shahid Javed Burki

Initially economists believed that economic growth was the consequence of applying increasing amount of capital and labour to production processes. By capital they meant machines as well as land, the latter being more important in the economies in which agriculture was the most prominent activity.

However, diminishing returns set in beyond a certain point and output per unit of input declined as more and more of the two factors were added to the processes of production. This was one reason why rapidly growing work force in developing countries employed mostly in agriculture did not produce corresponding increases in output. A way had to be found to employ labour in more productive activities. An economy had to industrialise in order to grow.

More recently, economists have concluded that a production function that only has capital and labour as variables does not fully explain economic growth. They brought in two additional factors into play: human development and technology. Human development was also referred to as skill formation. Improving either could improve the rate of economic growth without adding greatly to the stock of capital and labour. Since developed countries had a distinct advantage over those that were still developing in being able to improve their technological base and the levels of skills of their work force, they could still sustain higher growth rate even when fewer and fewer people were able to join the work force.

Even more recently, there is a growing recognition that a new type of technological development is taking place that will give the more populous emerging economies an edge over those that have reached the post-industrial stage. This is aimed at developing products that can reach the markets in the countries that have large populations but still low per capita incomes.

This realization was first applied to marketing by large manufacturers of basic consumer products. Large firms began to see handsome returns if they could package their products in a way that they could be transported at a lower cost and could be sold at a lower unit price. Companies such as Lever Brothers and Proctor and Gamble came out with smaller soaps and shampoos packaged in small plastic bags rather than in large bottles. This way they were able to attract new and relatively less well-to-do customers.

But then manufacturers went a step further. They came to the conclusion that repackaged old products were only a small technological way to develop markets for old and traditional products. What was required were entirely new products. That led to some remarkable innovations by large companies that had their base in large emerging economies.

There are several examples of this approach to manufacturing. One of the most interesting ones is the Nano, a small car that is being marketed in India at a price of $3000 and is likely to take a significant share of the markets in the developing world. The other is a $300 laptop computer developed by Huawei, a Chinese telecommunications, giant that would reach millions of new customers in the developing world.

Some observers of changes in the global economy believe that this development is as significant a revolution as the introduction of the assembly line by Henry Ford in the United States in the early part of the 20th century or the development of lean manufacturing by Toyota in the later part of the same century. But the new innovations are not only being applied to the automobile industry. They are being developed for application in some unexpected areas.

One example is the Narayana Hrudayala Hospital in Bangalore where Devi Shetty, India’s most celebrated heart surgeon, has developed techniques and processes to perform mass surgery. His hospital has 1000 beds and he and his team of four dozen cardiologists are performing 600 open-heart surgeries a week. The hospital charges an average of $2,000 for open heart surgery compared with $20,000 to $100,000 in America, but its success rates are as good as in the best American hospitals.

These developments in the emerging world have been noticed by the firms in more developed countries. Many of them have begun to take advantage of the technological surge in many emerging economies. For instance, of the world’s 500 largest firms, 98 have R&D facilities in China and 63 in India. IBM now employs more people in developing countries than in the United States. Its largest product development facility is no longer in Poughkeepsie, north of New York, but in the vicinity of Beijing. This –devolution of many advanced firms to locations considered appropriate by western and Japanese firms not only helps with the employment of trained people who may not be able to find jobs in the part of the economy run by indigenous firms. It also provides the developing world access to new technologies. This development in the world of technology involving firms in many emerging markets has earned a new epithet: it is being called “frugal innovations”.

This on-going technological revolution is not likely to peter out soon. It is the result of a set of circumstances that are going to be around for a long time to come. First is the sheer size of some of the emerging markets. Between the two, China and India have 2.5 billion people. Of these a billion would be classified as the middle class. They are potential customers of all kinds of manufactured products that were beyond the dreams or imagination of their parents. Their demand is funding the growth of firms that are already giants in their fields. For instance Infosys (an IT services company) and ZTE (a manufacturer of mobile phones) are growing at the rate of 40 per cent a year.

Second firms in emerging markets are bringing in managerial and technical talent from outside the world. Toyota for long did not hire non-Japanese to the senior ranks of its management but companies in countries such as Brazil, China and Indian are bringing the talent from wherever it is available.

Third, technologically savvy firms are expanding outside the borders of the countries in which they are located. In 2007, before the world went into recession, China spent $30 billion acquiring assets abroad. India did even better. It reported spending $35 billion. Brazilian companies are also picking up companies in Europe and the United States

Once again Pakistan is missing out on an important development which could quicken the pace of the economic development and help alleviate poverty and improve the distribution of income. No significant technological innovation in the past decade can be attributed to a Pakistani scientist, or a Pakistani engineer or to an institution based in Pakistan.

There are many reasons for this. Of these two are particularly important: neglect by the state to develop skills among the members of the rapidly expanding workforce and neglect, once again by the state, to encourage the development of institutions that can take the lead in technological innovations.

The state needs to step forward with a well developed plan. This should be aimed at improving the technological base of the economy, making research and development (R &D) an important component of the activities of all enterprises, moving the export sector towards the marketing of more knowledge-intensive products, helping the farming community better their processes, move towards the production of crops for which the country has comparative advantage, and provide incentives to all firms to upgrade the levels of skills of their workers.

Source: http://news.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/technologydriven-growth-350