ABOUT two weeks ago, the head of the Special Investment Facilitation Council declared that Pakistan has a ‘failed’ economic model. As an eco­nomist, though, I was not surprised because the failure of our ‘economic model’ (whatever that is) has been known for long. Importantly, though, how did we end up with a ‘failed’ model? And, what does a ‘successful’ economic model look like?

I’ll address the second query first, partly owing to the recent award of the Nobel Prize in Economics to three economists (Joel Mokyr, Philippe Aghion and Peter Howitt) and also because it will give us a fair idea of the first query.

The recorded history of mankind’s economic activities shows that real income growth followed a pretty flat trajectory, but saw a remarkable uptick in the 19th century as the Industrial Revolution picked up pace (the ‘hockey stick’ phenomenon). What factors underlay this stupendous transformation? The work of the three winners addresses this very question.

The two most famous long-term growth theories are that of Robert Solow and Paul Romer (both Nobel Prize winners). Solow identified population growth, savings, and technological change as the factors that drive economic growth. Of this, technology is the most important component since by itself, population and savings alone can drive growth to a certain level, but beyond that, as depreciation catches up, the economy reaches a ‘steady state’ beyond which returns of these two factors keep falling. It was persistent technological change that would keep the economy above its steady state level. However, for Solow, technological change was ‘exogenous’ (the ‘black box’) — determined........

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