Solow to Romer : Policy Shocks and Growth

The adoption of state of the art techniques implemented already in more advanced countries appears as one potential channel whereby developing countries may catch up with leader countries and grow. In order to explore this idea, this paper analyzes the behavior over time of an economy in terms of growth under alternative scenarios using the baseline model of Romer (1990). In the first regime (autarky, as represented by high distortions to the introduction of foreign designs) the economy settles down in the long run in a steady state with no per capita growth, since there is no force that can offset diminishing returns to capital. The second scenario has fewer distortions to external transactions, thus favoring the purchasing of designs of advanced capital goods and inducing a continuous flow of new varieties of durables into the economy. The arrival of these goods, in turn, generates endogenous growth in the developing country. The key feature that enables the transition from autarky to openness is an exogenous policy shock that removes some of the barriers that impeded the access of the domestic agents to technology produced elsewhere