The Welfare Costs of Not Being Part of the Knowledge Economy: Why Rural Development Needs More Creative Policy Strategies
African Technology Development Forum Journal, Vol. 3, No. 4, pp. 27-47, 2006
21 Pages Posted: 25 Oct 2009
Date Written: December 1, 2006
All forms of knowledge, from advanced science to the simple idea of finding a new use for an old good, contribute to economic growth, not by competing for scarce resources in existing markets but by creating new markets. Current agricultural, environmental and development policies ignore the social welfare generated by new markets because they are still based on the comparative-static approach of neoclassical Welfare Economics that only looks at the welfare effects of existing markets. This approach may have offered practical solutions in the Cold War context but looks increasingly outdated in today’s dynamic knowledge-based economy. New Growth Theory, the more dynamic successor of neoclassical Welfare Economics, puts knowledge creation at the centre of economic analysis. It suggests that improved access to new knowledge and technology, investment in human capital and effective support of rural entrepreneurship will result in a more responsible use of natural resources as well as more choice, diversity, social empowerment and economic growth in poor rural areas. This article discusses the major insights of New Growth Theory, its successful policy applications, as well as the reasons why policy decision-makers in charge of rural development tend to stick to old theory and therefore merely see themselves as regulators rather than facilitators of economic change.
Keywords: New Growth Theory, Paul Romer, Increasing Returns, Development, Poverty Alleviation
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