Knowledge and Economic Development

I have been thinking about Uganda, and the role of knowledge in its economic development during the coming decades.

The Cobb-Douglas function is the basis of much of thinking about economic growth. It estimates total economic production by the multiplication of “total factor productivity” times “capital” raised to one power “a”, and “labor” raised to another power, “b”.

It is often assumed that the value of a plus that for b equals one. This implies that if you keep the capital to labor ratio unchanged, and keep total factor productivity unchanged, the total amount produced increases directly with the amount of labor used. Two guys with shovels can dig twice as much in a given time as one guy with one shovel.

In another form Cobb-Douglas suggests that “labor productivity” is equal to “total factor productivity” times the “capital to labor ratio” raised to the power “a”. You can raise the production of workers by either providing more capital per worker, or improving the productivity of the worker and his capital.

It appears that improvements in total factor productivity account for much of economic growth. This is in contrast to early development theories that assigned most credit to capital accumulation.

Capital accumulation is important, and it is important to achieve high levels of investment (and to attract foreign capital in the form of donor assistance and foreign direct investment). We often think of capital in terms of physical infrastructure – roads and utilities – or factories and machines. But it can be in the form of human capital. A big, strong, healthy guy with a shovel can dig more than a stunted, weak, sickly guy with the same shovel. It can also be in the form of resources – fields equipped for irrigation are generally more productive than adjacent fields dependent on rainfall.

But improvements in total factor productivity (TFP) are thought to be more important to long term growth and economic development. Adding improvements in total factor productivity to capital investment at a minimum can multiply the rate of growth in production, leading in turn to still to higher investment.

Improving technology is one way to improve TFP. Getting seeds for improved crop varieties to farmers helps them to improve yields from their farms, even if the capital, labor and other inputs remain unchanged – and a key technology on the farm is the crop variety that is grown there. The bread and butter of engineering is the improvement of productive technology.

Improving organization also improves TFP. Say a farm has a road passing its gate, and there are two market towns, one a mile up the road and the other a mile down the road. If the farmer switches from the market up the road to that down the road, and gets a better price for his produce, TFP goes up. Same produce, same distance to market, but a better price! Similarly, the importance of improving business and public management skills for economic development is in the improvements in economic organization of businesses, agencies and markets that result, and the further improvements in TFP that result from better functioning institutions.

Uganda’s adults generally have no or very little schooling. Their ability to apply new technological concepts, or to improve the organization of their production is thereby limited. Education in science and technology from primary school to post graduate training should be improved to enable the school leavers better to understand development problems and to make technological choices. But the goal of formal education should be broader, to help people learn to solve problems, take recourse in modern scientific and technological systems, and contribute more to economic and social development. I think scientific and technological training should play a key role in producing the habits of mind that are critical in achieving this goal.

Once economists spoke of production as the result of capital, labor and land. The Cobb-Douglas approach often leaves out land, or more broadly, natural resources. But the first scientific and technological capacities developed in the United States were in areas such as cartography, cadastral survey, and geological survey. In Uganda, modern methods have too seldom been applied to the identification and location of natural resources, nor to the management of those resources.

I have long been struck by the idea that the difference between a resource and the useless stuff around us is knowledge – technological knowledge of how a material may be used productively, and scientifically-based knowledge of where it is, how it may be obtained, and how the resource may be managed. Water, soil, forests, fish stocks, as well as mineral resources all count.

The application of modern scientific methods and technologies to natural resources seems to me to be of great relevance to Uganda, and something worthy of donor and national support. Some natural resources can attract foreign direct investment, but Ugandan capacity needs to be developed to negotiate for such FDI, and to staff the organizations it engenders.