The Quest Continues

• Author: Lant Pritchett
• Position: Lead Socio-Economist in the World Bank's New Delhi Regional Office in India. He was previously a Lecturer in Public Policy at Harvard University's Kennedy School of Government (September 2000-July 2004)

After decades of growth research, what can academic economists really say about policy?

So here I am, in the middle way, having had twenty years-

Twenty years largely wasted, the years of l'entre deux guerres-

Trying to learn to use words, and every attempt

Is a wholly new start, and a different kind of failure

Because one has only learnt to get the better of words

For the thing one no longer has to say, or the way in which

One is no longer disposed to say it.

-T. S. Eliot, Four Quartets

Modern growth theory, which built on the Harrod-Domar model, was born in 1956 with Robert Solow's famous papers and will turn 50 this year. Even the "new" growth theory, born with Paul Romer's papers, is now in its 20s. Why is it that with aptness, if poetic ineptness, many economists feel they could replace "words" with "growth research" in T. S. Eliot's refrain above about his "middle way?" This article is a brief retrospective and prospective on growth research in three parts: growth theory (old and new), empirical growth research (short and long), and the way forward. The theme that runs through all three parts is the tension between the logics of academic interest and the needs of the policy practitioner. The typical policymaker or advisor-whether politico or technocrat-wants to know the likely consequences of concrete public sector actions (not necessarily limited to policies) over their relevant time horizon. If growth research is a quest to satisfy this need, the journey is far from over.

Growth theory: old and new

Growth Theory (as we shall understand it) has no particular bearing on underdevelopment economics, nor has the underdevelopment interest played any essential part in its development.

-John Hicks, Capital and Growth, 1965

Dozens of brilliant (and thousands of amateurish) "new growth theory" papers later, it is hard to re-create the enthusiasm with which "endogenous growth" was first greeted in academic and policy circles in the early 1980s. At that time, growth theory was still dominated by Robert Solow's model, now known as the "exogenous growth" model, and was stuck, badly stuck. By 1971, Solow could write that everything that could be said with his growth model had been said. And what was said was not that nothing could be said with certainty but that, with certainty, nothing could be said by the model. In the model (and all its variants), equilibrium or steady-state growth rates of per capita output were driven by technical progress-but these models, as constructed, could say nothing about the determinants of technical progress. This point is often misunderstood but is important to understanding just how badly cornered the profession was and, hence, how excited it was about new growth.

The Solow model did not assume that technical progress was exogenous-that is, determined outside the model. Rather, the model made the assumptions necessary to produce a model of an economy with a dynamic equilibrium, a path to which, in the long run, the economy would settle down. The implication of those assumptions was that technical progress had to be exogenous to the model. The technical problem is that the assumptions necessary to produce a model with an equilibrium implies that payments to the standard factors of production-labor and capital-exhaust the total product. Nothing is left over to pay entrepreneurs or innovators. But if innovators cannot be paid at all in equilibrium (given the assumptions of the model), then nothing-including policy of any kind-can affect their incentives to innovate. This problem of reconciling purposive economic innovation that results in greater productivity of all factors (such innovation obviously exists and is a key to the success of capitalism) with formal economic models (which could adequately model this phenomenon) was long standing. It was clearly recognized by Joseph Schumpeter and Frank Knight, but Solow's clean algebra and exposition just made it stark.

The best macroeconomic models circa 1980 said national policies could affect the level of incomes but they could not affect steady-state growth. Meanwhile, microeconomic analysis of sector reforms-for example, in trade, privatization, or the financial sector-produced estimates of the level effects of policy changes that were typically only small fractions of GDP. This marriage-of a macroeconomics in which long-run growth rates were driven by technical progress that was independent of national policies to a microeconomics in which policy reform could produce only small efficiency gains in levels-was a stable but increasingly unhappy one. The marriage was stable because both the macro and micro outcomes were not "assumptions" but were technically driven features of their respective analytical approaches.

Into this unhappy marriage of macro and micro came new growth theory models. One of the reasons the marriage was unhappy was entirely technical and internal to the discipline of economics: couldn't economists produce a model that had both purposive innovation and a steady state? Romer (1983) used advances in techniques of modeling "noncompetitive" equilibrium (in...