Growth and Technological Change
For all its simplistic setting, the 1957 Solow paper provides enough of a case to support the following claim: accumulation of physical capital per capita does not create growth. And as far as the domestic economy goes, this is what comes out:
Y | H | K | TFP ------+-------+------+------- 1.40% | 0.07% | 0.22% | 0.83% | 5.12% | 15.68%| 59.38%
(Quarterly growth. Y: Output, H: Labour, K: Capital, TFP: Solow Residual)
Over the past half a century, capital accumulation accounted for only 15.7% of the average GDP growth in the Moroccan economy, three times as much as demographic growth (actually, growth in the labour force) but most of the observed growth (in real terms) comes from TFP, Total Factor Productivity, or commonly known as ‘The Solow Residual’.
TFP accounts for almost 60% of the long-run average GDP growth. It does a lot more than that: it is more aligned with GDP growth, more correlated, and most importantly, a 1% increase in the Solow residual accounts for .96% in output growth, even as 1% in Capital growth accounts for only .08% in output What can the policy-maker learn from this very simple yet robust model? First, that accelerated accumulation of capital is unlikely to get output to grow faster. In the universe of our government’s commitment to get the 5.5% growth over their legislature, they need to generate a mind-boggling 23% increase in gross capital formation – i.e. an annual additional investment of 9.42 Bn dirhams above the current trend.
The findings are easy to sum up: what drives most of economic growth is not physical capital accumulation, but rather those things policy makers in Morocco care little about: research & development, labour and capital efficiency (a sad story I can recall from a lecturer in my Alma Mater, about a project of diesel-powered desalt water plant in Laayun, a wasteful process the Moroccan officials were reportedly proud of) and most important of all, institutional changes. These of course do not refer exclusively to political reforms, it encompasses labour market regulation and rigidities, rule of law and enforcement of contracts.
What is the real effect of this ‘technological change?’ first, a 1% sustained increase in innovation (such as it is) over 4 periods (or one year) results in boosting investment productivity 4.24%, with spillover effects going up to 3.2% on average over a 5-year period. Just think of it: this is sustained investment over just the first year in office. In budget terms, this means a relatively low investment of 50 Million dirhams in efficiency programs can increase investment efficiency by 4.24%, hence contributing an additional 12.5 Bn dirhams a year, a net contribution to growth by 360 basis points in one year – that is, an additional 3 Bn in added value, jobs and economic activity.
In fact, the accrued effect of a one-year investment produce a marginal effect of almost one percentage point of GDP growth. And it is only right GDP grows thanks to technological change – because these resources when allocated to capital accumulation have a much lower return (one observes in the second graph capital accumulation declines by similar amounts (4.43% the first period). I argue this provides good evidence that accumulated investment for its own sake (which is about anything when it comes to some of the ongoing Grand Design workshops)
One last thing; since the mid-1970s, a particular component I have not described here accounted for the remaining 20% in real growth: even the impact of foreign trade (or perhaps just foreign productivity spillover effects) generates more growth than capital accumulation.
See Cooley & Prescott for the model used to generate the IRF graphs. Steady-state values have been used to calibrate the deep parameters.