Rethinking development after Romer Pakistan’s power gap behind its idea gap

The International Monetary Fund (INF) wants Asia to obtain more growth from better investment, deeper markets, skills and artificial intelligence. Paul Romer makes us ask what produces productivity in the first place. Pakistan adds the decisive question: who controls the institutions that create, select and spread productive ideas?

A recent Evonomics post has brought Paul Romer back into the development debate. His work cannot be treated as an optional academic addition. It changes how growth itself is understood.

The September 2026 article “Asia’s New Growth Challenge” by Krishna Srinivasan for  IMF starts from a genuine problem. Asia’s established growth model is losing force. Productivity has slowed. Returns on investment have declined. Bank-centred finance often favours large incumbents and state-owned enterprises.

The proposed answer is familiar. Capital should move towards more productive users. Financial access should improve. Capital markets and venture finance should deepen. Skills, regional trade, digitalisation and artificial intelligence (AI) should support a more efficient model.

These proposals contain useful elements. They still treat productivity mainly as an allocation problem. Romer takes the analysis one stage deeper. Capital does not become productive by moving into a different account. People must discover better ways to use labour, materials and institutions.

Capital is not enough

Traditional growth models treated technological progress as something arriving from outside the economic system. Romer’s theory of endogenous technological change placed purposeful discovery inside it. Firms invest in research. Workers accumulate knowledge. Universities train people. Institutions determine the incentives to invent and diffuse new methods.

Romer’s central insight is that ideas differ from ordinary goods. A machine can normally be used in one place at a time. An idea can be used by many people without being exhausted. Knowledge is non-rival. Its repeated use can generate increasing returns.

This does not mean that markets are irrelevant. It means that ordinary market reasoning is incomplete. Private firms need an incentive to bear the cost of discovery. Society also needs wide diffusion after discovery. Excessively weak protection may discourage research. Excessively strong monopoly rights may obstruct further innovation.

Public research, universities, competition policy and the design of intellectual-property rights are part of the growth process. They are not decorative social expenditure. Romer’s Nobel Prize lecture presented progress as a consequence of human choices about ideas and rules.

The IMF prescription says that market-priced capital will reach more productive recipients. Romer shows why this cannot be assumed. The social return from an idea may greatly exceed the private return captured by its inventor. Banks also prefer assets and predictable cash flows. Transformative knowledge is uncertain and difficult to collateralise.

Venture finance can help selected firms. It cannot replace basic science, universal education or open systems of learning. Nor can it ensure that technology serves broad social needs. The choice between worker-supporting technology and labour displacement is shaped by taxation, research funding, procurement and bargaining power.

Pakistan’s idea gap

Romer’s distinction between “idea gaps” and “object gaps” is especially valuable. Poor countries are often advised to acquire more objects: roads, machines, power plants and foreign capital. Their deeper constraint may be limited access to knowledge, organisation and workable rules.

Pakistan suffers from both gaps. Its infrastructure is inadequate. Its human capabilities are gravely neglected. Its research institutions are weak. Useful knowledge also fails to travel from universities to farms, factories, schools, hospitals and municipal governments.

The problem is not simply a shortage of ideas. Many reforms have been known for decades. Pakistan knows that children require nutrition and foundational learning. It knows that local governments need political, administrative and financial authority. It knows that untaxed privilege, protected markets and unreliable energy damage productive investment.

These ideas repeatedly lose to interests benefiting from existing arrangements. Pakistan has an idea-selection problem. Institutions do not impartially choose the most productive proposal. They often select what preserves authority, rents and access.

This is where Romer must meet the argument developed in the Rethinking development series. A captured state can possess knowledge and still prevent its use. Its failure cannot be cured by another seminar, loan or imported reform menu.

Financial deepening under such conditions may deepen privilege. Venture funds may follow political access. Public guarantees may socialise private risks. Digitalisation may make ordinary citizens more visible while leaving powerful beneficiaries concealed. AI may automate clerical work without improving the productive capabilities of workers.

When technique conceals assumptions

Romer also challenged the internal culture of economics. In “Mathiness in the Theory of Economic Growth”, he criticised the use of mathematical language to disguise weak reasoning. His later paper, “The Trouble with Macroeconomics”, warned against theories insulated from evidence through implausible assumptions.

This warning should not be misused as an argument against models. Pakistan needs more disciplined measurement, not less. The question is whether numbers clarify a causal claim or protect it from examination.

The IMF estimates that productivity gains from AI could add between 0.2 and one percentage point to Asian growth. It also estimates substantial gains from deeper regional integration. These are conditional projections. They do not establish that gains will arise in Pakistan or be widely shared.

A scientific prescription must identify its assumptions. Who owns the technology? Which workers are displaced? Who receives credit? What prevents incumbents from blocking entry? What fiscal cost supports the transition? Which institution can be held accountable if the expected gain does not appear?

Every IMF and World Bank programme should ‏ ‏‏include a Pakistan Applicability Statement. It should specify the causal mechanism, distributional effects, institutional assumptions and counterfactual. It should identify beneficiaries and risks. It should also provide an exit rule when evidence contradicts the programme.

Ideas need democratic power

Romer explains how ideas can sustain growth. Daron Acemoglu explains why institutions and power determine the direction of technology. Martin Wolf then asks where the political coalition capable of reforming those institutions will come from.

The sequence matters. Ideas create possibilities. Institutions select among them. Power distributes their gains. Organised citizens determine whether the rules can change.

Pakistan should add a Knowledge and Diffusion Account to the constitutional development compact. It should disclose public research spending, ownership of publicly financed discoveries, links between universities and production, technology imported through public concessions, and access to knowledge across regions and income groups.

Every major incentive should carry a Productive Transformation Contract. The recipient should promise measurable investment, learning, employment, technology diffusion or export capability. Public support should expire when these results do not appear.

Romer’s optimism about human ingenuity remains essential. Scarcity does not place an absolute limit on development because people can discover better arrangements. Pakistan’s tragedy is different. Its governing order frequently suppresses experimentation that threatens established power.

The IMF asks how capital can be moved towards productive uses. Romer asks how productive ideas arise and spread. Acemoglu asks who directs technological change. Wolf asks who can build the institutions needed for shared prosperity.

Pakistan must answer all four questions together. Its deepest gap is not between available money and desired investment. It is between knowledge and the constitutional power required to use it for equal citizens. Ideas can transform an economy. They cannot govern themselves.

References

Acemoglu, Daron. What Happened to Liberal Democracy? Remaking a Politics of Shared Prosperity. Dutton and Profile Books, 2026.

Romer, Paul M. “Endogenous Technological Change.” Journal of Political Economy 98, no. 5, 1990.

Romer, Paul M. “Idea Gaps and Object Gaps in Economic Development.” Journal of Monetary Economics 32, no. 3, 1993.

Romer, Paul M. “The Origins of Endogenous Growth.” Journal of Economic Perspectives 8, no. 1, 1994.

Romer, Paul M. “Mathiness in the Theory of Economic Growth.” American Economic Review 105, no. 5, 2015.

Romer, Paul M. “The Trouble with Macroeconomics.” 2016.

Srinivasan, Krishna. “Asia’s New Growth Challenge.” Finance & Development, September 2026.

Wolf, Martin. “Is it too late to save liberal democracy?” Financial Times, August 12, 2026.

World Bank. World Development Report 2017 Governance and the Law.

Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.