Page 11 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 1 : Trade as an Engine of Growth

Modern Neoclassical Theory of Growth Notes
In the late 50’s and early 60’s the interest for the EG reawakened with the recovery of the classical
approach, according to which the production was a function of labour, capital, land and their
productivities. The question of the ‘accounting of EG’ was also raised.
We can be pointed out 1956 as the year of birth of the ‘modern neoclassical theory of EG’ with Solow
[and Swan (1956)]. The proposed model describes the relation between savings, accumulation of
capital and EG based on a function of aggregate production (crucial supply), and there was a point of
sustainable equilibrium (steady-state), which would be reached regardless of initial conditions. By
increasing the productivity of the factors, the exogenous technical progress created positive effects
on the process of accumulation and made the model compatible with a balanced growth path. In
economic terms, this means that it took into account the convergence between economies. Moreover,
along with the diffusion of technical progress there would be a convergence of the rate of EG per
capita for a common steady-state. Consequently, it can be said that, by facilitating the diffusion of
technical progress, the IT would be important for the LDCs.
As far as the ‘accounting of EG’ is concerned, Solow (1957) used the function of aggregate production
as a starting point to measure the sources of EG in the United States. The rate of EG springs from
labour and capital growth rates (which we call traditional sources), weighed by the respective
participation in production and technical progress or total productivity of factors (TPF). The TPF
resulted from the difference between the observed rate of EG and the part of that EG explained by the
traditional sources (thus the designation ‘residual of Solow’). Clearly he distinguished ‘EG effects’
(the three sources mentioned above) from ‘level effects’. As a result, IT would, eventually, be a ‘level
effect’ that would create positive effects in a transitory period of time.

What do you mean by Modern Classical Theory?

From Solow on, many economists considered the advance of knowledge to be a source of the ‘residual’.
However, the ‘accountants of EG’ (post Solow) included as sources the contributions of many elements
such as the accumulation of ‘human capital’, economies of scale, the improved allocation of resources
and the new generations of more productive machines [among others, Kendrick (1961), Denison
(1962, 1974 and 1985) and Griliches and Jorgenson (1967)]. However, they didn’t quantify the
advancement in knowledge, leaving a residual factor unexplained. Furthermore, they didn’t include
IT, at least not explicitly, as a source of EG. We think that this situation is due to two factors that have
already been mentioned. On the one hand, the separation that occurred between the theories of IT
and EG, and on the other, the effects of IT on the level and not on the long-term rate of EG.
Theoretical Synthesis, Empirical Applications and Commercial Policies
As we have said, the works of the ‘accounting of EG’ widened the scope of studies of the sources and
began studying different structural situations, abandoning therefore some neoclassical assumptions. Thus,
studies done since the late 1960s considered, besides the traditional factors, other explanatory variables,
maintaining the functional scheme proposed by Solow. In this context, in view of the need to determine
the totality of growth sources and in view of the failure of introverted growth experiments, along with
EG’s association with the opening of IT, there was an increase in the research on trade and growth.
We present some theoretical studies and empirical applications which ensued, as well as studies/
recommendations on the external commercial policy, whose defining characteristic resides in the fact
that IT (above all the exporting component) is considered an explanatory variable of EG. They generally
associate this situation with an improved allocation of resources (according to the comparative
advantages), with a greater utilisation of productive capacity (which makes it possible to obtain
economies of scale), with a greater propensity to implement technological improvement (in answering
to the greater competition that they are subjected to), and with the higher level of employment created
when compared to introverted strategies.

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