THE CHILEAN ECONOMY EXPERIENCE: THE WEAKNESS OF THE SOLOW MODEL
THE CHILEAN ECONOMY EXPERIENCE: THE WEAKNESS OF THE SOLOW MODEL

Summary/Abstract: The lost decade (1980-1990) for Latin American economies, required an alternative economic model. The Chilean economy case came from a free market economy whose main theoretical support concerning output performance was the Solow Model, with positive macro empirical evidence in advanced economies (USA). But, Solow’s growth model is based on the unrealistic assumption of homogeneous capital, despite the fact that capital goods are highly heterogeneous. Consequently, it is not easy to arrive at a steady growth path when there is heterogeneity of capital goods. Besides, its assumption about full employment leads to overestimating output expansion and a negatively biased social policies efficiency due to a lagged response arising from the gap between actual and expected (overestimated) output growth. This paper will review some fundamental weaknesses of that model when applied to less developed economies, such that despite its simplicity in explaining economic growth performance, it lacks the microeconomics foundations to understand the nature of economic growth and its implications for social policies. The main conclusion of this essay deals with the consequences for an LDC’s economy to overestimate its output growth trend for setting social policies, business decisions and strategies for internationalization, and the Government’s effort to play a reliable fiscal rule policy.

• Details
• Contents