Solow Growth Model Solow's Growth Model Posits

Solow Growth Model Solow's Growth Model posits that growth is due to capital accumulation. This implies a few things: that growth is strongest when countries begin acquiring capital, and then moves towards an equilibrium point. Nations go through the path of development until they roughly reach the point where they enjoy the same standard of living as industrialized nations -- something that happened with Japan and is on the verge of happening in a few other Asian nations like Korea, Taiwan and Singapore (Gahagan, n.d.).

The model is as follows: Q = A Ka L. b Critical to the model is the role of multifactor productivity. The Solow Growth Model argues that capital accumulation combines with productivity to deliver growth. Thus, either capital accumulation or an increase in multifactor productivity can result in growth. The model also assumes that productivity being equal, an increase in labor will yield diminishing returns -- that capital and productivity are more important factors.

This does not imply that an increase in labor will have a detrimental impact on the economy, just the that impact of increased labor diminishes as the increase becomes larger. The model has a number of implications for policies regarding liberalization. For the most part, the model argues that liberalization is beneficial for an economy. Consider the impacts of liberalization. One of the first things to be liberalized, among nations engaging in the liberalization process, is capital. Liberalization of capital flows encourages foreign direct investment.

Solow's model argues that by increasing capital stock, a nation can increase its production. In addition to liberalizing capital flows in order to attract more FDI, nations will also benefit from liberalization in other areas of the economy. This implies privatization, it implies the removal of bureaucratic layers and it implies liberalizing the economy from as much government intervention as possible. It is worth noting that Solow's model does not include the government. This implies that the economy can grow rapidly without direct government involvement in the economy.

It also implies that the less involved the government is in the economy, the better this will be as far as creating the conditions that facilitate economic growth. Government represents a distortion in the Solow model. The Solow model also posits that production growth can derive from increases in labor. This implies that some liberalization in labor laws would be beneficial. This works on two levels -- it brings in labor at the bottom end to lower total labor costs. That results in an increase in multifactor productivity.

Liberalization of immigration policy would also apply at the high end, ensuring that talented, educated professionals are able to enter the country and work. The third implication of the model for liberalization is with respect to technology. Innovation -- in particular in the field of technology -- has traditionally been a critical driver of productivity increases. The trade liberalization process, therefore, needs to facilitate the free flow of ideas. This actually seems to contradict current policy regarding intellectual property rights. The protection of those rights protects.