How does new growth theory explain the lack of convergence?...

Key Concepts

Lack of Convergence

Within the new growth theory framework, the lack of convergence can be explained by the heterogeneous ability of economies to generate and absorb new technologies and ideas. Because innovations and improvements in human capital can lead to increasing returns, countries with better institutions, policies, or initial conditions in terms of innovation capacity may continue to pull away from poorer economies. This divergence undermines the traditional convergence hypothesis, which anticipated that poorer economies would eventually catch up to richer ones.

Increasing Returns and Non-Diminishing Returns

New growth theory introduces the idea that some inputs, particularly ideas, knowledge, and human capital, exhibit non-diminishing returns. Unlike physical capital, these inputs can be used repeatedly and spread across multiple users without being depleted. This characteristic can create self-reinforcing cycles of growth and divergence, as economies that are more effective at generating and applying new ideas tend to accelerate further without the natural tendency to converge.

New Growth Theory

New Growth Theory is a framework that explains long-term economic growth by modeling technological change and innovation as outcomes of economic decisions rather than exogenous factors. It emphasizes the role of research and development, human capital, and knowledge as drivers of growth, which leads to a focus on internal (endogenous) factors that can result in sustained increases in productivity.

Endogenous Technological Change

This concept refers to the process by which the rate and direction of technological progress are determined within the economy, through activities such as research and innovation. In the context of new growth theory, technological advancements are generated by the economic agents themselves, rather than arising from external factors, meaning that differences in innovation capacity can lead to persistent disparities in growth rates across economies.

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