Capital-Labor Substitution and Technical Progress in Planned and Market Oriented Economies: A Comparative Study

Abstract

Many economists have attempted to measure aggregate growth performance of various economic systems. Empirical studies on this topic dealt primarily with measurement of gross national product and its main components for different countries. In one of his pioneering works Kuznets [11] presented the aggregate and per capita GNP levels and the rates of growth of these indices for various countries. While such estimates of rates of growth of GNP are interesting in themselves, the contributions of Solow [14] and Denison [5] stimulated interest among economists concerning the question of why these growth rates differ. The literature on economic growth and development cites differences in the initial conditions as a major cause for the differences in the rates of growth of the developed and underdeveloped nations. Another argument attributes differences in growth rates to differences in the quality of physical capital and technologies used in production. The human capital literature claims that different growth rates arise due to differences in the quality of labor which depends on such factors as education, health, age, sex composition, etc. In recent years, some monetary economists, e.g. Nadiri [13], have suggested that money ought to be treated as an additional factor of production. Hence one may argue that differences in growth rates are due to different degrees of monetization. Comparative systems literature would argue that growth differentials are due to differences in patterns of organization of the economic activity. In our study we are interested in comparing the growth performance of countries characterized predominantly by centralized socialist economic planning vs. countries with decentralized decision making and with a predominant private sector. The comparison of growth performances of the present study is based on the estimated structural parameters of production for the manufacturing sectors of various countries. The production structure for the manufacturing sector in each of the countries under investigation is assumed to be of CES form of Arrow et al. [1] with Hicks neutral technical progress. Handicapped by the quality of the available data, we have limited our investigation to cover only six countries: USSR, Hungary, and Yugoslavia -in the first category; and USA, Canada, and Israel-in the second one. In a similar attempt, Balassa and Bertrand [2] tried to compare the growth performance of a wider variety of countries. They have used primarily, however, unpublished data that we could not obtain and whose quality we could not have judged. This was, furthermore, coupled with highly deficient assumptions that we will comment upon in the next section. In the following section a unified treatment of the various explanatory factors of growth differentials is provided. Section III outlines our approach and presents the cross differences in rates of technical progress with other parameters of the production * We are greatly indebted to our colleague James Gapinski for his comments and suggestions. The authors alone are responsible for any errors. This research was supported in part by a Summer Research Grant to the first author by the Florida State University. P. Hanumantha Rayappa assisted us in carrying out the computational work reported in Section III. 103