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Indonesia needs better recipe to spur growth

Fajar Hidayat (The Jakarta Post)
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Jakarta
Mon, October 29, 2018

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Indonesia needs better recipe to spur growth Indonesia's economic growth 2011-2017 (JP/File)

“Growth springs from better recipes, not just from more cooking.”

The above quote is taken from a piece by American economist Paul Romer titled “Economic growth”. Romer used the kitchen as a metaphor for production in an economy. He reasoned that if economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw material and suffer from unacceptable levels of pollution and nuisance. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Paul Romer, pairing with William Nordhaus, is the 2018 Nobel laureate in economic science. Romer won a Nobel prize for his contributions to developing the endogenous growth theory in the 1980s. It was the latest phase of evolution in economic growth theory after classical theory pioneered by Adam Smith and Thomas Malthus in the late 1700s, and neoclassical theory founded by Robert Solow (the 1987 Nobel laureate) in the 1950s. 

While classical theory emphasized land, labor and population as the elements affecting economic growth, the new elements in neoclassical theory are capital and technological change. It basically provides reasoning that additional capital in advanced and rich countries is subject to diminishing returns of less and less output. Meanwhile, poor countries with small capital can use additional capital with new technologies for rapid growth and to reach income per capita close to those of rich countries through the convergence effect. 

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