Endogenous growth models have revived the debate over the role of technological innovation in economic growth and development. The consensus view is that institutional and policy failures prevent poor countries from generating or using new technological ideas to reap greater economic opportunities. However, this view omits the important contribution of natural-resource degradation and depletion to institutional instability. Rather than generating automatic market and innovation responses, worsening resource scarcities in poor countries can lead to social conflicts and frictions that disrupt the institutional and policy environment necessary for successful innovation, including appropriate market responses to scarcity. This indirect constraint of resource scarcity may help explain the disappointing growth performance of many poor countries.
Introduction
In recent years there has been a vigorous debate about the role of technological innovation in long-term economic growth. At the debate’s forefront are new theoretical models in economics that have been termed “endogenous” or “new” growth theory (1-4). A key feature of these models is that technological innovation-the development of new technological ideas or designs-is endogenously determined by private and public sector choices within the economic system rather than being exogenously available to the system, as assumed in more conventional neoclassical growth models. This endogenous innovation overcomes diminishing returns to physical capital, thus allowing per capita accumulation of capital and economic growth to be sustained at a positive rate indefinitely (5). In other words, if public and private sector investments in human capital and innovation are “optimal” then it is possible for an economy to attain a perpetually constant rate of growth in output and consumption.
The current debate over the role of innovation in economic growth has fostered empirical investigations across countries and regions to determine the extent to which long-term economic growth rates fit the predictions of endogenous growth or neoclassical growth theories (5-8). The cross-country comparisons of growth rates have pointed to an important issue for analysts: Why is it that the long-term economic growth rates of poor countries as a group are not catching up with those of rich countries?
According to the endogenous growth school, the answer is fairly straightforward. Poor countries fail to achieve higher rates of growth because they fail to generate or use new technological ideas to reap greater economic opportunities. In particular, according to Romer (9), “the feature that will increasingly differentiate one geographic area (city or country) from another will be the quality of public institutions. The most successful areas will be the ones with the most competent and effective mechanisms for supporting collective interests, especially in the production of new ideas.”
Even some critics of this endogenous growth explanation concede that institutional and policy “failures” are an important reason for the inability of poor countries to attain high growth rates. For example, Pack (7) argues that “the potential ‘benefit’ of backwardness is that, if countries could capitalize on their backwardness, they could enjoy a rapid spurt of catch-up growth.” However, he also states that “the benefits from backwardness do not accrue automatically but result from purposive activities on the part of individual firms within a general favorable policy environment. This includes a stable macroeconomic policy and institutions designed o facilitate the identification and absorption of technology.” Consequently, the inability of poor countries to “take off’ economically “can be attributed to failed policies and weak institutions.”
We agree here that institutional and policy failures in poor economies are important explanations of their inability to innovate sufficiently to achieve higher long-term growth rates. However, we make an additional point: in many poor economies the depletion and degradation of natural resources-such as croplands, forests, fresh water and fisheries-contribute to this institutional instability and disruption. Resource scarcities can cause social conflicts that disrupt the institutional and policy environment necessary for producing and using new ideas and for absorbing useful knowledge from the rest of the world. Thus, we argue that in many cases resource scarcities have their most important effect on developing economies, not by directly constraining economic growth, but by indirectly affecting their potential to innovate.