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May 07, 2008


Pedro Castro

Pedro Castro _ Memo 05/07/2008

It seems reasonable to say that world has shrunk enormously in distance along every conceivable measurement, however, many countries did not reach a high enough development level to take advantage of this fact. The effects from reduced distances can be compared to the effects of higher worldwide productivity, an specific country will only be benefited if its internal conditions allow it to do so.
As explained by Easterlin the ability of a backward country to adopt advanced technologies depend on “whether their populations have acquired traits and motivations associated with formal schooling”. Besides directly spreading the knowledge, universal formal schooling is related to more market oriented societies and institutions. The fact that universal formal schooling takes place is a signal that the values and institutions of a society are relatively fair to its members and aim to provide them with relatively equal opportunities. Once universal schooling is adopted it may generate positive consequences, among them is the increase in the rate of adoption of new technologies (the point is that universal schooling is a necessary but not sufficient condition for faster economic growth). Therefore, countries which did not manage to implant universal schooling cannot take advantage of the high productive levels available elsewhere.
The fact that the world has shrunken in distance is related to the discussion about education. The fact that distances are reduced in contemporary world is not enough to overcome the great disincentives posed to the adoption of new technologies in many countries. The return to their adoption would be extremely high, but only if it was done together with the creation of sound institutions and the proper training of the labor force, otherwise the return to the adoption of such technologies would be quite low.
It is possible to relate these points with Rodrik’s paper. Korea and Taiwan had a well trained labor force in the sixties but did not have high rates of growth. Only after the government intervene in a way that favored the usage of this education endowment in a profitable way that growth took place. The availability of advanced technologies, the reduced distances around the world and the relatively high level of education were not enough for development, it was necessary that they were combined by institutions that favored economic growth (the government in Korea and Taiwan). Moreover, as emphasized by Rodrik these institutions turned out to be quite context specific because the same kind of policies did not work in other countries.
Finally, all this degree of complementariness among required characteristics and actions necessary for development strongly suggests that there is some degree of increasing returns to scale in economic growth at least for some levels of development.

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