Long- run Growth and Convergence In Endogenous Growth Models In the last class we argued that capital accumulation models cannot deliver positive long – term growth and convergence simultaneously The main question in today’s class is: What makes some developing countries grow much faster than others (“catching up”)? In particular: 1) Endogenous growth models where growth is driven by technical progress (or adaptation/ imitation), long – run growth and (potential) convergence are possible 2) Inspired by India’s path over the last two decades, we shall argue that endogenous technical progress has been a) the main engine of long-run growth, catching-up (convergence), and poverty reduction.

1) Endogenous Growth Models: An Example

Potential Benefits from R&D or Innovation/imitation

2) India’s Path (WDR 2005, pp. 58) Since the early 1980s, an important shift in government policy toward the private sector:: Encouraged exports Facilitated foreign technology transfers Rationalized the tax system Eliminated tariffs Taxes on profits for exports cut by half Fewer industries were subject to licensing

Results: Private investment as a share of GDP grew from less 9 per cent in 1981 to more than 20 per cent in 2000 Growth increased from an average of 2.7 per cent in the 1970s to 6.7 per cent in the in the mid – 1990s A large number of firms have increased their productivity significantly And…..

Poverty has decreased →Next Class: Club convergence (DR, Chap. 4 on East Asia)