Economic Growth and Technological Progress in Developing Economies: Okun and Kaldor-Verdoorn Effects in China and India (1991–2019)

The nature of the causal relationship between economic growth and technological progress has been open to debate. The conventional view following Solow’s 1957 seminal discussion is that growth is supply-constrained and determined by exogenous technological progress. An alternative view preceding Solow is referred to as the Kaldor-Verdoorn Law, and emphasizes the importance of demand-side factors in determining technological progress and productivity growth. This paper looks at the evidence for the Kaldor-Verdoorn Law in China and India, two fast-growing Asian countries that have been central in the process of globalization. It also estimates the influence of short-term cyclical fluctuations associated with changes in the unemployment rate, or the Okun effect on their productivity growth. The results appear to provide support for the Kaldor-Verdoorn Law or the notion that technical change is the result, and not the fundamental cause of economic growth. The estimated Okun effects are small and insignificant in both countries, suggesting that cyclical influences on productivity growth may be less significant in developing countries that are growing rapidly and do not (at least till the recent pandemic) experience the conventional recessions of mature economies, but only slowdowns in rapid economic growth. The results therefore provide some support for the importance of demand-led regimes in rapidly growing developing countries.