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# **_Growth Analysis in Historical Perspective_**

The analysis of growth—and the specific factors that have sustained it and accompanied the structural changes associated with it—became a major topic of interest for thinkers in general and economists in particular in the early 18<sup>th</sup> century. David Hume, whom Rostow claims to be “the first modern economist” (1990: 18) placed economic analysis at the center of his analysis of the human condition. He also offered economic concepts that are considered to “form a reasonably coherent and consistent theory of the dynamics of growth”. Classical economists who followed in his footsteps—such as Adam Smith, Alfred Marshall, David Ricardo and Allyn Young—were also obsessed with economic growth. Perhaps because of their fascination with the idea of human progress celebrated during the Enlightenment, they explored the determinants of economic development, and the role that policymakers could play in fostering prosperity. Their pioneering work highlighted important notions such as factor accumulation, factor substitution, technical change, or specialization, which are at the core of modern growth theory.

But growth analysis slowed down after the Great Depression, as the intellectual focus shifted from long-run to short-run issues. In fact, with the notable exception of the pioneering work of Robert Solow, for much of the 20<sup>th</sup> century and certainly through the 1960s and 1970s, macroeconomists tended to study business cycles issues that characterized the post-war period. As they tried to better understand stabilization policies—monetary and fiscal measures to avoid disruptive and costly inflation—few resources were devoted to the analysis of the long-run determinants of growth.

Things changed in the 1980s when many prominent researchers focused their attention on differences in economic performance among countries. Surveys of economic growth and levels of performance in different parts of the world economy show that growth has indeed been uneven across countries and regions: between 1900 and 2001, per capita GDP in Western Europe increased by a factor of 6.65 (6.7 in Western Offshoots), compared to 5.2 in Latin America, 4.2 in Eastern Europe, and only 2.5 in Africa.<sup>4</sup> . The number of people living in high-growth environments or in countries with OECD per capita income levels has increased in the past 30 years by a factor of four, from 1 billion to about 4 billion (Growth Commission 2008).

Following the initial work by Harrod and Domar, the Solow-Swan model sparked the first major wave of systematic growth analysis. The objective was to understand the mechanics of growth, identify its determinants, and to develop techniques of growth accounting, which would help explain changes in the momentum and the role of economic policy. That first generation of growth researchers highlighted the centrality of capital. Their models featured neoclassical forms of production functions with specifications that relied on constant returns to scale, diminishing returns and some elasticity of substitution between inputs. In order to present a general equilibrium model of the economy, these researchers adopted a constant saving rate rule. This was a crude assumption but a major step forward in tool building, as it offered a clear demonstration that general equilibrium theory could be applied convincingly to real world issues. One important prediction from these models was the idea of conditional convergence, derived

> 4 Source: Maddison (2006). See also _The World Economy: Historical Statistics_ , available at http://www.ggdc.net/maddison/