On New Growth Theory

by A. Salces Cajes, PhD

There is no single formula for development. Economic development is not just about infrastructure and economic activities, but also covers knowledge, institutions, and culture. The new growth theory underscores the role of ideas in promoting economic growth. The proper implementation of good ideas can increase the country’s total productivity. Innovation serves as a catalyst to hasten the occurrence of development, and  innovation can be used to offset diminishing returns.  Indeed, sound ideas are part of human capital. Thus entrepreneurial ability, as a form of human capital, can help accelerate the process of economic development.

Structural changes and better economic outcomes can also be fostered by scientific ideas and rationality. That is why the importation of ideas is generally accepted as a strategy to stimulate economic development. However, ideas are an insufficient, although a necessary, condition for development. Bad ideas have wreaked havoc on the economies of many nations. Hence, the rejection of bad ideas is as important as the adoption of good ideas.

The story of economic development is paved with good and bad ideas. This is clearly demonstrated by the experiences of several socialist countries. In the case of the Philippines, the infusion of liberal ideas eventually awakened the consciousness of the natives about the bad economic situation they had after more than three centuries of Spanish domination. The lessons that the Ilustrados gained, by visiting and studying in other countries, enabled them to distinguish between right and wrong political and economic ideas.

The post-World War II Philippines was generally a poignant reminder of the failures of the import-substitution industrialization. This idea was adopted despite the fact that it was meant for industrial countries. To some extent, import-substitution industrialization produced some benefits, such as the development of local industries. However, in the long run, it became outdated and obsolete compared to what our Asian neighbors have adopted. Thus, the abandonment of unsound ideas is as good as the reception of rational ideas.

In the end, good ideas are like appropriate technologies. They have to be tested and analyzed to ensure that they fit the context of the place where they are to be planted. During my humble experiences in cooperative development, I have first-hand knowledge of the fact that a model that works in one cooperative won’t work when transplanted to another cooperative. There are several factors to be considered, such as the culture of the cooperative members and officers, their risk appetite, the type of business they are into, the supplies of raw materials, infrastructure support, access to funding and coaches, etc.