Economic Growth Revisited

In this essay it is suggested that the success of Japan and the newly industrialized countries (NICs) is, in no small measure, due to their intuitive grasp of the relationships between technology, growth and economic policy as these countries constantly adjusted economic policy to reflect changed economic circumstances, with concomitant changes in economic structure. The key element to the explanation in this paper is ‘economic organization’. Economic organization refers to more than the simple dichotomy between ‘centralization’ and ‘decentralization’ of decision making at the highest level. As is now widely recognized, market economies consist of many firms; these firms, however, may be organized in different ways. At one extreme each may be highly centrally controlled, in which case the economy can be thought of as a polyarchy of hierarchies. There are two aspects of economic organization of particular relevance: the ability to monitor and to innovate. Changes in technology have profound effects on how well different organizational structures can perform these central functions and, on the other hand, an important aspect of economic development is organizational innovations which affect the ability of the economic system to monitor and innovate. Moreover, the performance of an economy depends not just on the internal organization of its firms and the market structure; it depends on how well capital markets function. These too may be organized in markedly different ways. The paper is organized into six sections. The first describes the major phenomena to be explained, the stylized facts with which any explanation of growth must come to terms. The second and third discuss the two competing explanations—explanations which emphasize returns to scale and factor accumulation—and argue that these explanations cannot account for * The author is a member of the Council of Economic Advisors, on leave from Stanford University The views expressed are solely those of the author. This paper is based on research which was supported in part by the National Science Foundation, the Sloan Foundation. the Hoover Institution and the World Bank My ideas on the growth process have been greatly influenced by an extended study of the East Asia miracle, sponsored by the World Bank. For fuller discussions of the East Asia miracle, see World Bank (1993). Stiglitz (1994a) and Stiglitz and Uy (1994). This paper incorporates and excends ideas developed there as well as those presented in several earlier papers, in particular Stiglitz (1992a). The influence of my co-authors Bruce Greenwald. Andrew Weiss, Thomas Hellmann, Andres Rodriguez, Kevin Murdock and Marilou Uy should be evident.