Question

“The Elusive Quest for Growth”In one double spaced page, summarize what William Easterly would say about this hypothesis and the data testing its validity:

“If an underdeveloped country has the same savings rate as a developed country the Solow model predicts convergence.”

  

Answer 1

First, he points out that it was never the intention of the model to explain such differences. In fact, Solow never mentioned any other country in his analysis other than the United States.

Second, he describes the reasoning behind the convergence theory. He states “Here’s how it would work …. All countries are assumed to have access to the same technology and the same rate of technological progress. The thinking is that there is no reason that major technological breakthroughs that happen in one country cannot be implemented in other countries…. Then the only reason some countries are poorer than others is that they have started with very little machinery. Poor tropical countries will have higher returns to machines than will the rich temperate countries. Poor tropical countries will have strong incentives to grow more rapidly than the mature temperate economies that are growing at the rate of technical progress. Eventually the poor tropics will catch up to the rich temperate zone, and all will grow at the rate of technical progress.”

Third, Easterly cites research by Robert Lucas and others that demonstrates that the Solow convergence hypothesis is not supported by the data. For example, Lucas estimates that if the difference in income between US workers and Indian workers was based on capital differences, then this would lead to the conclusion that American workers have 900 times more capital than Indian workers. This theoretical conclusion is not supported by the data.

Finally, Easterly points out that Solow’s main goal was simply to show that long-term growth cannot be explained by increases in capital. This conclusion can be extended to differences in growth between countries as well: Differences in capital accumulation do not explain the differences in long-run growth rates between countries. Easterly also highlights that Solow states that long run growth comes from technological improvements which can vary between countries