October 19, 2015

Noted economist Paul Romer is writing a blog series on the 25th anniversary of the publication of his paper "Endogenous Technological Change, JPE (1990)." In last weekend's post, he writes:

"*The bar I set for a model is that it should yield answers we believe to questions that matter. For a model of growth, the two questions that matter most are:*

*1. Speeding-up: Why has the rate of growth at the technological frontier been increasing over time?*

*2. Missed Opportunities: Why have so many countries that start from far behind the frontier failed to achieve rapid catch-up growth?*

*....*

*My conviction that the rate of growth in GDP per capita at the technological frontier had to be increasing over time sprang from a simple calculation. Suppose the modern rate of growth of real GDP per capita (that is the growth rate after taking out the effects of inflation) is equal to 2% per year and that income per capita in year 2000 is $40,000. If this rate had prevailed for the last 1000 years, then in the year 1000, income per capita measured in the purchasing power of dollars today would have been $0.0001, or 0.01 cents. This is way too small to sustain life. If the growth rate had been falling over time instead of remaining constant, then the implied measure of GDP per capita in the year 1000 would have been even lower...*

*... GDP per capita today is about 64 times its value in the year 1000, not 500 million times larger, as it would have to be if the growth rate had been equal to 2% per year for 1000 years. These data also contradict another implication of a model with a constant, exogenous rate of technological progress. In such a model, an increasing rate of growth of population would be associated with a falling rate of growth of GDP per capita.*

*Moreover, as Angus Deaton emphasized in his recent book, The Great Escape, this type of calculation underestimates the remarkable increase in the rate of improvement in standards of living because it takes no account of the rapid improvement in health in the modern era. Like Deaton, I look at these data and see grounds for optimism...*

*The rate of growth of GDP per capita has increased over time. The rate of progress in standards of living has increased even more.*

*Because the logic is so clear, there has never been any serious debate about the historical fact that is the basis for the question about speeding up. My contribution was merely to pose the question. How could economists understand in a conceptual framework that still built on the logic of diminishing returns based on resource scarcity that has been central to economic theory at least since the work of Malthus and Ricardo?...*

*Figure 3*

*Figure 3 plots the real rate of growth of GDP per capita measured in local purchasing power, for a sample of countries over the interval 1960 to 1981... The downward sloping upper boundary of the triangular cluster of points shows the behavior we would expect: Countries that start out far behind the frontier have faster rates of growth as they catch up with the frontier. Moreover, these rates of growth can be very fast. Some countries that started at less than 20% of US GDP per capita grew at rates that exceeded 6% per year. The key take away from this figure is that most poor countries did not take advantage of the potential for rapid catch-up growth that the frontier shows is possible. Holding constant the level of income in 1960, some other variable has a big effect on subsequent growth.*

*The second question, about missed opportunities, asks what that other variable might be...*"

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