Robert Solow: Finding the Formula for Economic Growth

Let’s talk about all the crazy things that are happening in Korea. No, not North Korea, they get enough attention for much less amazing things. The economy in South Korea has exploded since the Korean War. In just 60 years, they’ve gone from absolute poverty to a country of innovators and technology. A recent study showed that South Korea’s life expectancy would be 90 years by 2030. Life expectancy in the US, today, is less than 80 years.

Seoul, South Korea after 60 years

This rapid growth is unheard of; honestly, it just blows my mind. Indeed, it raises a question that has driven economists. Why are some countries rich and others poor? What is the magic formula that drove South Korea to wild success while the Central African Republic (CAR) is the poorest country in the world, with an astonishing $656 GDP per capita?

Robert Solow was one of the many economists plagued by this question. He actually won his Nobel trying to answer it in 1987. He won his prize “for his contributions to the theory of economic growth.” So, what specifically did he contribute? What was his answer to the age old question?

Solow thought that economic growth was spurred by a mixture of labor and capital. That is to say, the more tools and workers you have, the more economic growth would occur. This seems to intuitively make sense. Looking at prosperous countries, we see large amounts of tools and capital, while countries like the CAR have very little.

In his model, Solow predicted that rich countries would have slow growth rates as they require more capital to grow while poor countries would have fast ones. This would mean that poor countries would eventually “catch up” to the rich countries, also known as convergence.

However, while this explains growth miracles like South Korea, it doesn’t explain the growth disasters. In fact, South Korea seems to be the exception rather than the rule with convergence. When compared to other countries that had the same amounts of capital and labor, they didn’t see such dramatic growth. The global inequality between the US and the CAR is actually growing, creating a divergence. This doesn’t fit with Solow’s initial model, so there has to be another ingredient in this magic formula.

This other ingredient was added to the Solow model, ideas. Innovation and education are vital to a country’s growth. South Korea has created huge corporations, such as Hyundai, Samsung, and LG. I’ve personally owned items from all three of those corporations, and they’re all fantastic and cutting edge. South Korea has become a nation of innovators which has significantly spurred its growth.

Of course, Solow’s model hasn’t completely, or even mostly, figured out the key to economic growth. After all, how do you spur innovation? Is that fire to innovate based on where we live, our cultural history, or our institutions? There are many questions that still are left to be answered related to economic growth. If you could answer them, you’d be the next one to receive the Nobel.

Also posted on Medium Publication “Bygone Econ Icons.”

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