Why do some nations grow faster than others? This question has motivated generations of economists. The initial research on economic growth started with two seminal papers in the 1950s by Robert Solow, Nobel Prize winner for Economics in 1987, who had focussed on capital-based theories of economic growth. The relevance of technology was emphasised but was not modelled.
In 1990, Paul Romer published a paper, ‘Endogenous Technological Change’, in the Journal of Political Economy that brought ideas as an engine of economic growth. Ideas improve the technology of production. For this research, Romer shared the Nobel Prize for Economics in 2018 with William Nordaus.
There are multiple examples where ideas had propelled economic growth. The idea of economies of scale — mass production and assembly lines — changed manufacturing in the US. Similarly, lean manufacturing methods made Japan, with minimal natural resources, as one of the richest nations. Japan’s per capita converged to the US level within three decades after the usage of Just-in-Time in manufacturing.
The objective of this article is to decipher the research of Paul Romer on economics of ideas and its relevance to India.
In ‘Endogenous Technological Change’, Romer characterised ideas as “non-rivalrous” and “excludable” goods. Non-rivalrous means that the use of an idea by one will not reduce the value of idea to others. For example, lean manufacturing ideas developed in Japan have been adopted across the globe. An idea has spillover effects on the industry and economy.
Excludable means that the owner of an idea can restrict the use of the idea through patents or copyrights. These characteristics of ideas lead to increasing returns to scale and imperfect competition. Excludability incentivises the firms to invest in R&D.
Paul Romer’s theory has substantial impact in the age of “exponential technologies” for emerging economies like India. The twentieth century saw a slow evolution of technology through a series of incremental innovations spread over many decades. Many of these technologies have crossed their initial linear growth phase and have entered the exponential growth phase at the advent of the twenty-first century.
The technologies are exponentially growing in performance and their cost is falling non-linearly. The convergence of such exponential technologies can disrupt entire industries. These exponential technologies, if they are recognised and leveraged appropriately, can lead to exponential economic growth.
India is expected to grow to be the third largest economy by 2030 only after the US and China. Disruptive technologies and innovative ideas will be the key enablers for this economic growth. The convergence of exponential technologies such as mobile internet, Internet of Things (IoT), data analytics, artificial intelligence (AI), machine learning, robotics, additive manufacturing, advanced materials, renewable energy, energy storage batteries, etc., can create abundance of resources that would fuel the economic growth of India.
Growth enablers
Innovative ideas at the intersection of these domains will further accelerate economic growth. Let us look at the three key growth enablers for India: mobility, urbanisation, and agriculture.
Mobility: Moving people and goods around, in an efficient and sustainable manner, is at the heart of any high growth economy. Clean, safe and convenient mobility will be soon within the reach of all Indians. This is enabled by the rapid progress in electric, autonomous and connected vehicles. The adoption of shared vehicle ownership model extends the reach of these technologies even to those at the bottom of the pyramid.
Urbanisation: Large-scale movement of people from rural to urban regions is commonly observed in fast growing economies. Urbanisation leads to the emergence of smart cities that are powered by smart and connected technologies. Energy self-sufficiency of smart cities is enabled by distributed power generation, advances in renewables (especially solar PV), battery energy storage, etc. Digital technologies such as data analytics and IoT are key to, among others, water resource management and solid waste management for these smart cities.
Agriculture: A growing economy has to feed growing populations and keep its workforce healthy and fit. The shift from improving farm productivity to increasing the farmer’s income is a crucial step. The deployment of precision farming, farm automation (including autonomous tractors), smart agricultural implements, etc., will improve the penetration of technology into traditional Indian agriculture.
Analytics and IoT can also help reduce the wastage of food during its journey from the farm to the consumer.
Disruptive technologies and innovative ideas will be at the heart of the new economic growth model. Growing economies like India can greatly benefit by proactively recognising the disruptive potential of new technologies and by investing in innovative ideas.
To achieve this, India needs to provide the right institutions for innovation and knowledge transfer. To align the social and private benefit of innovation, collaborative mechanisms for innovation of ideas should be encouraged.
The writers are Associate Professor, Department of Management Studies, IIT Madras, and Vice-President (Innovation) at Mahindra & Mahindra, respectively.