Bush Administration Embraces New Growth Theory
By Arnold Kling
In an article for the Concise Encyclopedia of Economics, Paul Romer explains the difference between old and new growth theory.
A traditional explanation for the persistent poverty of many less developed countries is that they lack objects such as natural resources or capital goods. But Japan had little of either in 1950 and still has few natural resources, so something else must be involved. Increasingly, emphasis is shifting to the notion that it is ideas, not objects, that poor countries lack. The knowledge needed to provide citizens of the poorest countries with a vastly improved standard of living already exists in the advanced countries. If a poor nation invests in education and does not destroy the incentives for its citizens to acquire ideas from the rest of the world, it can rapidly take advantage of the publicly available part of the worldwide stock of knowledge. If, in addition, it offers incentives for privately held ideas to be put to use within its borders (for example, by protecting foreign patents, copyrights, and licenses, and by permitting direct investment by foreign firms), its citizens can soon work in state-of-the-art productive activities.
(For more on new growth theory, see What Causes Prosperity?)
In this year’s Economic Report of the President, chapter 6, the Bush Administration apparently has embraced new growth theory. The chapter says that economic growth rests on
Three broad principles–securing economic freedom, governing justly, and investing in people
The chapter outlines policies that are intended to support countries that take steps to achieve those three principles. It specifies measurable indicators of economic freedom, just government, and human capital investment. The Administration proposes rewarding countries that achieve progress along those dimensions by giving them low tariffs, increased bilateral aid, and grants from multilateral lending institutions, such as the World Bank.
For Discussion: Is the Administration on the right track, or this is just another futile effort in what William Easterly called The Elusive Quest for Growth?