In his textbook on “The Process of Development,”
James Cypher outlines multiple models on how to look at development when you
move from the classical standpoint to the more mathed up neoclassical
framework. The first model he introduces is the Solow growth model where total output
is a function of technology, capital, and labor, with diminishing returns to
capital and labor. In the model, technology comes from outside, and “it is this
exogeneous technology which is basic to higher levels of income per capita over
time” (150). The model predicts two important things. The first is that there
is a steady state equilibrium that can be attained, and that there is a
convergence between similar countries. Opposed the classical models, in the
Solow model focusing on building capital goods will not increase the rate of
growth, and there is a ceiling on levels of income per the rate of savings
(which equals the rate of investment) (151), so the model intuits that the way
to growth is the increase the savings rate of the nation to raise that ceiling.
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| Winding Roads Ahead |
The Solow model was created in response to the
Harrod-Domar growth model, a more Keynesian approach. Unlike the Solow model
which looked at the savings rate, the Harrod-Domar model sees the rate of
growth as a function of both the savings ratio as well as the capital / output
ratio (152). The Keynesian view is that investment drives saving, so that the
prescription here is to increase the investment. Cypher notes that all the
theories lead to the same basic idea: “an expansion of total physical capital
goods as a share of total output, that is higher levels of investment, that
create higher income levels” (153). One
thing about this model is that instead of a steady state, there’s a real chance
in the model for instability, so that the country can grow more quickly,
spiraling off inflation, or not quickly enough, lagging.
What the debate between the two models really shows
is that we can make these models on paper, but ultimately, what we want to see
is what these models look like when we take them from paper to the real world –
what maps more to reality, is there convergence or instability? The Solow model
is the most attractive because it assumes that if the model is correct, then
there are not that many levers we need to be able to pull to make less
developed countries meet their peers so that the people in these countries have
better lives. But the Harrod-Domar growth model give policy-makes a much harder
bullseye to hit.
More contemporary researchers have explored which of
these models is more reflective of reality, such as Michelle Baddeley in her
paper “Convergence or Divergence?” Baddeley’s examination sheds doubt on the
validity of the Solow model. What she finds is that the data does not fully
bear out Solow and suggest that something closer to Harrod-Domar is right – the
targets are not as easy to hit as suggested, and if you miss them, there are
negative consequences: “there has been limited convergence and limited
equalization in the distribution of international income and / or that
population growth has been too high” (396). The world has become more open, and
globalization has allowed technology to be exogenous to other countries in that
they have access to technology in unprecedented ways, but there is still a lack
of convergence (406-7). Considering findings that trade and globalization
heighten volatility and do not lead to convergence, what do we do? Baddeley
suggest that the answer is if we “more carefully regulated and monitored” the
financial system as to “moderate the impacts of adverse selection and moral
hazard on effective financial decision making” (407). There is a lot of heaving
lifting built into that line, as it would include boarder global coordination,
an outcome that feels much less likely now than when she was writing.
What are the implications if the Solow model is not
correct and the evidence Michelle Baddeley marshals to her argument is right?
As I wrote elsewhere in this class from a purely mathematical standpoint it
illustrates the impossibility of convergence because the absolute level of
growth needed for less developed countries to meet the output levels of
currently developed countries is seemingly impossible. That locks in the
current levels of development and the international division of labor and gifts
the residents of the developed countries with incredible unearned rents that
instead of being recognized by the residents of those countries, turns into the
accepted birthright in the heads of so many and serves as a justification for
supremacy and racism.
Works
Cited
Baddeley, M. (2006) Convergence or Divergence? The Impacts of Globalisation on Growth
and Inequality in Less Developed Countries, International Review of Applied
Economics, 20:3, 391-410, DOI: 10.1080/02692170600736250
Cypher, J. M. (2014). The process of economic development.
London: Routledge, Taylor & Francis Group.
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