ABSTRACT
The quest for determinants of cross-country differences in per capita income has been a fundamental theme in economics literature. It reemerged in different forms as competing approaches were introduced to challenge the existing ones over time. Solow’s (1956) neo-classical growth model explaining per capita income differences through differences in the pace of capital accumulation resulting from savings rate differentials and its extensions have dominated the scene for decades. After a while, however, the economics profession began to feel increasingly uneasy about the incompatibility of real life observations with the neo-classical prediction that poor countries would grow faster than richer countries and eventually catch up over time (Sayan, 2006). Following Romer (1986), endogenous growth models began to challenge the neo-classical framework more strongly, eventually bringing the neo-classical model’s dominance in the growth literature to an end. While the significance of investment in human capital and R&D activities that endogenous growth theorists suggested as critical factors to promote growth is widely recognized now, the theory stopped short of providing answers to what determines the pace of investment in human capital or R&D activity itself. The silence of early contributions to endogenous growth literature on the question of what determines growth on a deeper level gave rise to a rapidly growing literature that underscores the role of institutions in explaining rather low rates of convergence or even divergence of per capita incomes between developing and developed countries.
