Testing Solow's Implications on the Effective Development Policy

Abstract

The core of the neoclassical growth theory is the capital investment. Solow proposed that the diminishing return is key to such growth process in establishing the stability of the equilibrium growth path. This key postulation has critical implications on the sustainable and effective development policy, suggesting the importance of productivity and human capital in both steady-state and capital-driven transitional growth. This paper suggests a novel way to test the diminishing return assumption and confirmed its strong presence using the Penn World Tables version 8.0 data, hence validates Solows implications on effective development policies.

Keywords: Capital investment, Diminishing return, TFP, Human capital, Development policy, Development effectiveness

JEL Classification: O11, O15, O47