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3 Growth and Development: Review and Theoretical Issues

A literature review on growth and development would be a herculean task given the vast literature on the subject: We, therefore, attempt to discuss briefly theoretical issues associated with the subject matter.

According to Solow (1956, p. 65) “All theory depends on assumptions which are not quite true. That is what makes it theory. The art of successful theorizing is to make the inevitable simplifying assumptions in such a way that the final results are not very sensitive”. This quote is apt and has implications for all theories of economic growth. The neo-classical growth model stresses why some countries are rich while others are poor with technology and factor accumulation as exogenous. The Romer growth model endogenizestechnology utilizing microeconomic foundations emphasizing that technology is not only the engine of growth but that it can also be derived within the economic system.

Table 5 Fiscal balance, including grants (% of GDP) for West African countries, 2000–2013

Country

2000

2005

2012

2013

Benin

-1.7 (-44)

-2.5 (-6.2)

-1.3 (-8.5)

-1.2 (-8.2)

Burkina Faso

-3.8 (-13.2)

-5.1 (-11.5)

-3.1 (-0.8)

-3.2 (-0.7)

Cabo Verde

-7.4 (-10.9)

-3.6 (-4.1)

-9.8 (-11.7)

-7.9 (-5.7)

Cote d'Ivoire

-1.2 (-2.8)

-0.8 (0.2)

-2.6 (-3.8)

-2.0 (-6.4)

Gambia

-0.7 (-5.7)

-7.2 (-11.2)

-4.4 (-16.4)

-3.3 (-16.0)

Ghana

-5.3 (-6.6)

-1.2 (-6.2)

-5.8 (-12.4)

-7.8 (-12.3)

Guinea

-3.4 (-5.6)

-0.9 (-5.4)

-3.2 (-33.9)

-5.2 (-20.2)

Guinea Bissau

– (8.8)

-5.9 (-1.8)

-2.7 (-9.5)

-4.7 (-6.6)

Liberia

0.3 (-16.0)

0.6 (-23.3)

-2.3 (-33.9)

-2.6 (-48.0)

Mali

-3.0 (-9.6)

-4.7 (-10.1)

-1.3 (-3.0)

2.5 (-9.8)

Niger

-3.8 (-6.7)

-2.1 (-9.2)

-1.1 (-15.1)

0.1 (-15.2)

Nigeria

5.9 (12.5)

-1.2 (25.3)

-1.4 (4.9)

-1.8 (8.2)

Senegal

0.5 (-7.0

-3.2 (-7.8)

-5.9 (-10.3)

-5.4 (-9.0)

Sierra Leone

-9.3 (-6.5)

-1.3 (5.8)

-1.4 (5.6)

00 (-2.1)

Togo

-4.7 (-6.2)

-2.4 (-21.8)

-5.8 (-11.9)

-4.6 (-11.7)

Source: ADB, Tunisia

Notes: Current account/GDP (%) are in parenthesis

Building from the Romer model of economic growth with the addition of technology transfer (Jones 2002), we endogenize the mechanism by which different economies achieve the ability to use various capital goods. Countries produce a homogenous output good thus:)

(1)

where:

Y = Output

L = Labour

xj = range of capital goods

The number of capital goods that workers can use is constrained by their skill level h: A worker with a high skill level can utilize more capital goods than a worker with a low skill level. The assumption is that the economy is single and small, far removed from the technology frontier. The country grows by learning to use the more advanced capital goods available in the world. The countries in West Africa fit this characterization.

In the value chain, one unit of intermediate capital good can be produced with one unit of raw capital. Thus[1]:

(2)

From Eq. (2), the total quantity of capital goods of all types used in production is equal to the total supply of raw capital; the intermediate capital goods are similar hence x j= x for all j. Consequently, the aggregate production technology for this economy follows the Cobb-Douglas type:

(3)

Capital (K) is accumulated by foregoing consumption hence:

(3a)

Where sk = the investment share of output (the balance going to consumption); d ¼ constant exponential rate of depreciation greater than zero.

It is interesting to state that 'skill' is defined as the range of intermediate goods which an individual has learned to use. Individuals can make progress as the economy grows:

(4)

where

μ = the amount of time an individual spends accumulating skill instead of working, for example, years of schooling, μ > o

A = world technology frontier in an index of advanced capital goods invested;

Dividing both sides of Eq. (4) by h:

(J)

Equation (5) makes explicit the hidden assumption that it is difficult to learn to use an intermediate good that is currently close to the frontier. “The closer an individual's skill level (h) is to the frontier, A, the smaller the ratio A/h, and the slower the individual's skill accumulation”.

Another assumption is that the technology frontier expands at a constant rate, g:

(5)

Assuming that the investment rate and the amount of time spent accumulating skill are exogenously determined and constant, Eqs. (1)–(5) can be solved for the balanced growth path (steady-state) in the economy. Assuming that output per worker y≡y/L and capital per worker k≡k/L then from Eq. (5) h`/h will be constant if and only if A/h is constant so that h and A must grow at the same rate. Hence, we have:

(6)

Equation (6) states that the growth rate of the economy is shown by the growth rate of human capital or skills and this rate is tied down by the growth rate of the world technology frontier.

If governments in West Africa have stable institutions, good policies, right environment etc. then the production function of Eq. (3) can be altered thus:

(7)

Where G denotes the influence of government on the productivity of the factors in its economy. Economies grow over time based on the use of new kinds of capital (h). But two countries with the same k, h and L may still produce different amounts of output because the economic environment dictated by government (public sector) denoted by G may not be the same. If the interest of G is in collecting bribes then growth may be slower. Our argument is that G (government) would have to be involved in both the productive stage (if interested because government is also an economic agent) and in distributing the growth to avoid wide inequality as well as increasing poverty.

However, because growth in recent times has not resulted in development, the concept known as “inclusive growth” has emerged. Inclusive growth is defined as rapid, sustained growth that is inclusive of a large portion of a country's labour force. It stresses productive employment rather than income redistribution (Ianchovichina and Gable 2009). We have argued elsewhere that the conventional definition of economic growth is not different from that of inclusive growth. “The fundamental difference lies in how the growth is distributed, the extent of the role state in the economy as well as that of the market. Therefore, the notion of inclusive growth is to ignore how the 'cake' should be distributed and reject the multidisciplinary approach to development; growth has always been inclusive—as the production possibility frontier shifts based on innovations, idea, knowledge and technology, an economy moves to a higher growth trajectory.” (Ekpo 2013a, b, c). A responsible Government/state would then address the questions: What is happening to unemployment? What is happening to education? What is happening to health? What is happening to the provision of food, shelter, clothing and water? What is happening to poverty reduction? These burning issues have been left to the market according to the inclusive growth approach, thus drastically reducing the role of the state in the growth-development nexus. There cannot be development without growth but there can be growth (even if it is inclusive) without development. Countries such as India, China, Singapore, Malaysia and Indonesia that grew double–digits in 40 years had strong public sector participation in economic activities. What then is economic development?

Baran's (1968) definition of economic development is classic: “Economic development has always been propelled by classes and groups interested in a new economic and social order, has always been opposed and obstructed by those interested in the preservation of the status quo, rooted in and deriving innumerable benefits and habits of thoughts from the existing fabric of society, the prevailing mores, customs and institutions. It has always been marked by more or less violent clashes, has proceeded by starts and spurts, suffered setbacks and gained new terrain. It has never been a smooth, harmonious process unfolding placidly overtime and space”. This notion of economic development allows us to investigate whether sustained growth in any economy has resulted in improved standard of living for majority of persons; whether growth has provided basic needs to majority of persons; what is happening to inequality, (issues of distribution), among others.

  • [1] The section draws from: Jones (2002)
 
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