Economic Development as Problem Solving

There has been a vast recent literature which has emphasized the role of human capital and knowledge on the economic growth process. This paper presents a model where the knowledge occurs through solving "problems." These problems which are partially idiosyncratic to the country. We think of a problem as a new technique or good. Each nation must master the problems associated with an activity in order to achieve productivity increases and growth. We will follow the tradition of learning by doing models where learning occurs after production on a good, or a particular type or grade of a good. Growth occurs by solving or learning about successively harder problems. What is emphasized in this paper are two issues. First, as is well known, countries can improve their productivity and learn to produce new goods by observing other nations, especially as they solve their own production related problems. Solutions to one country’s problem, however, only translate partially help solve one’s own country’s problems. The growth-enhancing effects of learning from others depends upon how closely related (or correlated) are the problems of one country with those of the others. Second, we introduce the concept of the "direction" of growth in our theoretical model. We consider a situation where countries could choose a number of different directions of growth. They choose the ones that are best for them, given their individual circumstances. As regards first issue addressed by this paper, the learning from other nations, we are able to model a hypothesis which was described eloquently in the recent best-seller by Jared Diamond "Guns, Germs and Steel:" the East-West versus North-South Axes Hypothesis. A grossly simplified version of this hypothesis says that Europe developed faster than Africa because Europe has a wide East-West axis which allowed for a lot of shared learning among similar countries, an advantage lacked by Africa because of its lying on a North-South axis. On the East-West axis, the geography of countries is similar, so things learned or problems solved at one location are easily transferred to another location on the east-west axis. On a North South Axis however, learning at one site is not readily transferred to another site, because the geography quickly