The rule of 72 is that the rate of growth times doubling time equals 72. Thus if per capita income grows at three percent per year, it will double in 24 years. If per capita income grows at six percent per year, it will double in 12 years.
Per capita income generally increases because labor productivity increases. That may not be true of oil exporting countries, but who needs to think about making oil exporting countries richer? Not me.
These days it is generally accepted that labor productivity can increase through the increase in capital to labor ratio or from technological change -- doing things smarter. Of course when a country changes capital to labor ratios, then the country moves from more labor-saving technologies towards more capital-intensive technologies.
The point I would make is that if a country that can save and invest enough to increase gross national product per year, if it can also add an additional three percent per year introducing better ways of doing things, then it reduces the time to double per capita income from 24 to 12 years. That is the difference between multiplying per capita income by a factor of four versus a factor of 16 in a half century. No wonder that innovation is being added to saving and investment to accumulate capital as an important objective of development policy.
The development path for the least developed country seems to involve a shift from subsistence level rural life based on extractive industries -- farming, fishing, etc. -- to urban life based on manufacturing and service industries.
This involves two kinds of technological change. Many armers have to change technology to produce more food and fiber per worker, but many other farmers have to leave their farms and learn to work in factories or service industries. Thus technological development involves both improving the technology in existing industries, but also introducing technology for new industrial activities.
The other day
I posted on Howard Pack's article (titled "
Asian Successes vs. Middle Eastern Failures: The Role of Technology Transfer in Economic Development."). That article contrasts the development paths of the industrializing countries of Asia with the less rapidly growing countries of the Middle East. Pack points out that the industrializing countries had developed export oriented econoomies and had acquired technology rapidly especially through transfers from abroad. That is a path focused on developing the jobs and acquiring the associated technologies for the increasing urban populations of the industrializing nations.
The poorest countries are the most rural, with the vast majority of their populations living in rural areas. For such countries increasing the productivity of agriculture is necessary, because the increased yield from agriculture is likely to be the best mechanism to generate the income needed for investment, and the best mechanism to free farm workers to take up the industrial and service industry employment.
Ideally technological innovation should be economy wide, improving the productivity of primary, secondary and tertiary industries. However, the different industries have different innovation systems. For the poorest countries, it seems to me that policy emphasis should be placed on the agricultural innovation systems. As countries industrialize, the emphasis should shift to focus more and more on innovation systems for the secondary and tertiary industries.
To maximize economic growth, the scarce resources should be allocated appropriately among these innovation systems. Those resources include capital, but also the scarce capacity to make and implement good policies.
Note, however, that the allocation of benefits from innovation depend on the where the innovations are taking place. Rural populations can be expected to benefit more from successful agricultural innovations than from successful industrial innovations. Those with capital are likely to benefit more from innovations in more capital intensive industries, while those in labor intensive industries are likely to benefit more from innovations in their industries.
The allocation of resources by market processes seems likely to be influenced to benefit more those with more economic power. The allocation of resources by political processes seems to be likely to be influenced more by those with more political power. And, of course, economic and political power are often correlated.
There are countervailing processes. For example, the right to life has been recognized to imply that health service innovations serving the poor be given priority. International donors, who provide a significant portion of national budgets in some of the poorest countries and which focus more on poverty alleviation than on economic development per se, can also emphasize innovation systems serving the poor. Thus, one has seen emphasis on appropriate technology and microfinance in the donor agencies.
The fundamental point is that there should be a shift in the balance of innovation policies from as countries proceed from abject poverty to the early and intermediate stages of industrialization. Thus policy advice on technological innovation should be tailored to the circumstances of the individual country. Of course it is obvious that this is true in the sense that countries with different physical resources and different environments need different technologies, but it is also true in terms of the degree to which a country has made the transformation from a rural agricultural society to an urban industrial society.
Moreover, one should measure the success of overall innovation policy not only in terms of rate of growth of per capita GDP, but also in terms of the changes in the distribution of income. The United States is an example of a country that has experienced relatively rapid growth of per capita GDP over the last decade, but in which the beneficiaries of that growth have been almost entirely limited to the most wealth members of the society. I would have preferred more equitable growth, even if slower, had it benefitted the most needy more.
