The Neoclassical Growth Theory: The Key Drivers Of Economic Growth

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The neoclassical growth theory proposed by Solow-Swan (1956) proposes that the key drivers of economic growth are capital accumulation, labour and technological change. Higher levels of savings and increase in the labour force are necessary for short run economic growth. Once the steady state is reached and the economy is at full capacity, further growth is only possible through innovation and technological change. Several authors have extended the Solow-swan model, based on a closed economy, to incorporate international capital transfers for an open economy, see Otani and Villanueva (1989), Agenor (2000), Villanueva (2003), and Villanueva and Mariano (2007). Notwithstanding its simplicity, the neoclassical model acknowledges the role of capital accumulation in the growth process. Hence higher levels of domestic savings adequate to support domestic investment are expected to impact positively on growth in the long run. Low levels of domestic savings and the inability to rein in adequate foreign exchange are binding constraints to growth in capital-constraint countries, limiting the role of capital accumulation in the growth process under the neoclassical model. This is explained by the dual gap theory where the savings gap and foreign exchange gap are inadequate to support the expected level of growth in the economy, revealing the role of external borrowing (Daud. et al 2013). According to Adegbite, et al (2008) developing countries prefer to borrow externally than

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