SOLOW'S IGNORANCE
A few years ago, I participated in a conference in a developing country, presenting how Peter Drucker's ideas are still relevant in today's world. The keynote speaker was Paul Krugman, the Nobel Prize winner (2008) and well known New York Times columnist.
At a certain point, Krugman candidly stated to the utter amazement of the audience that economists do not know the sources of economic growth.
Another Nobel winner (1995), Robert Lucas1, openly confessed his embarrassment when visiting a third-world country and, in the usual audience with the prime minister, he is asked the (also usual) question, “What should I do to increase the pace of my country's economic growth?”
Why do some countries grow while others are left behind? Why are some able to offer world-treasured brands and others nothing outstanding?
It was more than three decades ago, in 1987, that Robert Solow won the Nobel Prize for his work on the theory of economic growth and produced a model which explained 37 per cent of the income variance: 10 per cent due to the number of man-hours full-time and 27 per cent to capital stock. And the remaining 63 per cent, Solow defined as the measure of our ignorance.2;3;4;5;6
More recently, in 2018, Paul Romer received a Nobel for complementing Solow's exogenous sources of growth (man-hours plus capital) with the endogenous cause of the dissemination of knowledge among the population, in terms of R&D, patents, and entrepreneurship.7;8;9
Unfortunately, one has so far been unable to validate the theory with strong empirical evidence10;11. And so, Solow's “measure of our ignorance” persists to a considerable degree: why are some countries so much more competitive than others?
Of course, both the World Economic Forum12 and the Institute of Management Development13, among others, have developed competitiveness indexes which relate stronglyA with GDP per capita.
They do, however, have two disadvantages: first, a far-toolong list of more than 100 variables as possible causes; and second, the possibility of spurious relations between them and the GDP per capita: in the absence of a strong theory which justifies the choice of every single variable, there is the risk that they are both a
