The search for the ultimate secret of economic growth consumes many great minds and reformers. Theories abound from endogenous to exogenous economic growth models.
One of the latest trends, at least in the development community, is to look more closely at the role of technology in spurring economic growth. For instance, USAID has recently set up the Development Innovation Ventures program and there is a new initiative that seeks to empower women through mobile technologies. There are successful examples – take, for instance, mobile banking, which has transformed Africa.
Yet, as Bill Clinton reminded us earlier this week – technology alone is not enough. It is a necessary component of development, yet without focus on institutions – the success will be limited:
“Do we need technology? Yes,” he said. “But it needs to be in the service of building functioning institutions. The big problem in poor countries is they don’t have the institutions we take for granted.”
Clinton cautioned that while technology holds much promise to help bring progress, technology in itself isn’t sufficient to elevate the condition of the world’s poor, and in some cases (particularly in developed countries), technology is often part of the problem.
One of the founders of the modern institutional economics field, Nobel Prize Laureate Douglass North, has a similar take on new technologies. He argues that institutional and organizational restructuring are key if one is to take advantage of new technologies.
In other words, what allows market economies to succeed is their flexibility and the resulting ability to adapt and adjust to new challenges. Further, North concludes that it is indeed “the economic and political institutions in a society (together with the technology employed) that determine the efficiency of markets.”
One way to look at this debate is from the point of view of innovations rather than new technologies alone. Development is not only about countries being able to import new technologies, it is also about countries’ ability to innovate, create, and embed new technologies in formal and informal practices.
As long as that innovation is restricted by poor rule of law, weak contract enforcement, lacking investment, and insufficient real and intellectual property rights, successes with the use of new technology to alleviate poverty and drive growth will be an exception rather than the norm. Just ask the UN.