Efficiency of knowledge-based and job-creating production strategy against Kuznets hypothesis

Simon Kuznets was an American economist and professor at Harvard University who received the 1971 Nobel Prize in Economics. One of his ideas was that in the path of growth and development, inequality first increases and then decreases over time. Although he proposed the idea as a hypothesis, many economists later raised it as an “economic law.” Unfortunately, some prominent Iranian economists are also in favor of this hypothesis, and in their books they refer to the Kuznets hypothesis as an indisputable economic theory. This view has also been prevalent among politicians in the past. For example, it is well known that in the constructive government, at the time of the implementation of the so-called economic adjustment policies, some agents said, “It is necessary to crush some sub-cycles of development.” But Kuznets’s hypothesis has repeatedly proved ineffective in practice.

The emphasis on the need to support “knowledge-based and job-creating production” seems to be a response to the fact that the lower classes do not necessarily improve along with long-term economic growth and that income inequality does not decrease.

* Sub-cycles of development

An example of a violation of Kuznets’s hypothesis is that many developed countries, such as developing and even poor countries, now have a Gini coefficient of 40 percent; That is, class differences are high in these countries. Another example of a violation is the “miracle of East Asia.” Contrary to Kuznets’s hypothesis that growth and development inequality first increase and there is no way out, rapid economic growth in eight East Asian countries – Japan, South Korea, Taiwan, Singapore (four Asian tigers), Indonesia, Thailand. , And Malaysia – From 1965 to 1990, it occurred in a way that reduced poverty and inequality at the same time. In other words, in the very years when East Asian countries had achieved significant growth and development without crushing the poor under the cycles of development, some people in Iran began to repeat the claim and the idea that “it is necessary to have some people under the cycles of development. Crush them! But how could the countries of Southeast Asia achieve such development?

* Miracle of East Asia

26 years ago (in 1994) Paul Krugman – American economist – claimed in an article in The Myth of Asia’s Miracle that “economics The seemingly dynamic Asia does not provide “evidence of improved performance.” Their growth depends more on the rapid increase of production due to labor, capital, etc. “Their miracle happened not on the basis of ‘inspiration’ but on the basis of ‘forehead sweat.’ Although Krugman rightly claimed that growth in East Asia was based on “sweat of the brow” and, in our words today, job-creating production, he erred in predicting that efficiency in this model would not improve. According to the Tokyo-based Asian Welfare Organization, between 2000 and 2017, the growth rate of total factor productivity in Asian tigers was at least twice that of the United States. And this productivity growth was, in a sense, the “growth of knowledge-based production”; A growth accompanied by an increase in labor productivity, which is still a high growth compared to Western countries.

The need to avoid pests

Today, we see China’s national income (in dollar terms of purchasing power parity) – the most important economy in East Asia – increasingly distancing itself from the United States. Experience has shown that long-term sustainable economic growth can be achieved while not impoverishing the poor under development cycles and reducing poverty and inequality as production grows. To achieve this goal, it is necessary to design a “knowledge-based” and “employment-creating” industrial development strategy. Therefore, the slogan “production; Scholars considered “employment-creating” a kind of contradiction with Kuznets’s hypothesis. A hypothesis that has clearly failed, but unfortunately still has its full-fledged supporters in Iran. It should be noted, however, that the scourge of this path is the misuse of the term “knowledge-based company” for tax exemptions and similar protections, as well as receiving low-interest employment loans and using them in business. It is necessary for the executive branch of the country to think of measures so that it does not fall into such traps.

Daniel Davoodi – PhD student in Economic Development

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