Kaldor’S Growth Laws

Published Mar 22, 2024

Definition of Kaldor’s Growth Laws

Kaldor’s growth laws, formulated by Nicholas Kaldor, are a set of principles that aim to explain the elements driving economic growth, especially in the context of post-war advanced economies. Although not empirical laws in the strict sense, they have been influential in the development of growth theory and economic policy. These laws focus on the relationships between the growth of GDP, productivity, and the structural changes within an economy.

Overview of Kaldor’s Three Laws

Kaldor’s growth laws can be summarized as follows:

1. Law of Cumulative Causation: An increase in the growth rate of GDP per capita leads to an increase in productivity growth, primarily due to economies of scale and an enhanced division of labor.
2. Manufacturing Sector’s Role: The manufacturing sector is the engine of economic growth. Productivity growth in the manufacturing sector exceeds that in the agricultural or services sectors due to technological progress and the ability to benefit more extensively from economies of scale.
3. Manufacturing Sector as a Stimulant: The growth of the manufacturing sector stimulates productivity growth in other sectors (the so-called “Verdoorn Law”). This is partly because the manufacturing sector drives technological innovation and efficiencies that spill over into the broader economy.

Examples and Implications

To understand these laws in a practical context, consider the post-World War II economic reconstruction of Western European countries. They experienced rapid industrialization and technological advancements that led to significant increases in productivity and GDP growth. This period exemplified Kaldor’s laws as the expansion of manufacturing sectors propelled these economies to higher growth rates, demonstrating the importance of industrial policies that favor manufacturing and innovation.

Another example can be seen in the rise of East Asian economies in the late 20th century, notably South Korea and Taiwan. These countries heavily invested in manufacturing and technology, fostering environments that encouraged innovation, skill development, and exports in high-tech and industrial goods. This strategy resulted in sustained economic growth and development, showcasing the applicability of Kaldor’s growth laws outside the Western context.

Why Kaldor’s Growth Laws Matter

Kaldor’s growth laws highlight the importance of structural changes within an economy and the central role that manufacturing and industrial policies can play in driving economic growth. They provide a theoretical foundation for governments and policymakers to design and implement strategies that emphasize technological advancement, productivity improvement, and sectoral shifts towards manufacturing.

In today’s global economy, these laws remind us of the value of nurturing sectors with high growth potential and the positive spillover effects they can have on the broader economy. While services have become increasingly significant, the principles underlying Kaldor’s laws regarding productivity growth and the diffusion of technology remain relevant, particularly for developing countries aspiring to accelerate economic growth and development.

Frequently Asked Questions (FAQ)

Are Kaldor’s growth laws still applicable in today’s service-oriented economies?

Yes, although the structure of global economies has evolved, with a shift towards services, the underlying principles of Kaldor’s growth laws about productivity and technological innovation hold value. The focus now also includes high-tech and knowledge-based services sectors, which, similar to manufacturing in the past, can drive economic growth and productivity improvements.

How can governments apply Kaldor’s growth laws to modern economic policies?

Governments can apply these laws by focusing on policies that support innovation, skill development, and infrastructure improvements in sectors identified as growth engines, including advanced manufacturing and high-tech services. Policies that facilitate research and development, education and training in relevant sectors, and the creation of conducive environments for business and technological advancements can be particularly effective.

Can Kaldor’s growth laws apply to small economies or those with limited manufacturing capabilities?

For smaller economies or those with limited manufacturing capabilities, the principles behind Kaldor’s laws suggest focusing on niches or sectors where they can develop competitive advantages, whether in manufacturing or high-value services. Emphasizing quality, innovation, and productivity in these areas can stimulate overall economic growth and structural transformation.