GROWTH HAPPENS

The third and most radical prediction from Solow’s model is that the growth rate of GDP per head among the relatively rich countries, once the economy reaches balanced growth, may not be very different.

In Solow’s view, as mentioned above, TFP growth just happens—policymakers don’t have very much control over it. This was something many economists were not entirely happy about. Given that growth rates are the language in which the league tables of international competition are written, there was something rather off-putting about Solow’s refusal to offer some assurance that TFP would be higher for countries that pursue “good” economic policies. Was he just being deliberately quixotic? After all, don’t we see many more of the latest technologies being deployed in the richer countries?

This resistance to the idea that a country’s balanced growth rate is not easily influenced by policy is perhaps to be expected. But it misses the subtlety of Solow’s thinking, in multiple ways. First, Solow is asking what drives technological upgrading in countries already at the cutting edge. Presumably the flow of new ideas is a big part of growth for these countries, and it is not clear why ideas should stop at the border. A new product invented in Germany could be simultaneously developed for production in several other countries, possibly by local subsidiaries of the mother company. Productivity would then go up more or less equally in all these countries, even though the invention came from only one of them.

Second, he is talking about growth after countries get to their balanced growth path, and while this might have already happened for some of the richer countries, it is probably a long way away for the ones where capital is still scarce. By the time Kenya or India gets to Solow’s balanced growth path, they necessarily would be much richer and be using many or all of the latest technologies.

Finally, and this might be the hardest piece to wrap one’s head around, countries on the way to the balanced growth path could actually be upgrading their technologies faster than those already there. Of course, the most showy breakthroughs, the self-driving cars and 3D printers of the day, will always be in the more advanced countries, but most technology upgrading is just moving from day-before-yesterday’s technology to yesterday’s. This is typically easier than pushing the frontier, precisely because it has already been done and we know exactly how to do it. It is a matter of pulling things off the shelf rather than coming up with something new.

For all these good reasons, Solow deliberately opted to punt on what drives differences between the balanced growth rates of different countries. He simply assumed the rate of improvement in TFP was a product of mysterious forces that had nothing to do with the countries, their culture, the nature of the policy regime, and so on. This meant he had very little to say about what we can do about long-run growth once the process of accumulation of capital has run its writ and the return on capital is low enough. Solow’s was what economists call an exogenous growth model, where the word “exogenous,” meaning driven by outside effects or forces, acknowledges our inability to do anything about the long-run growth rate. Growth, in short, is beyond our control.