Economic growth and economic development 171

Introduction to Modern Economic Growth play a significant role in generating the huge income per capita differences across countries We will see that our analysis of the mechanics of economic growth will often be useful in discarding or refining certain proposed fundamental causes As to the question of whether we can make progress, the vast economic growth literature is evidence that progress is being made and more progress is certainly achievable In some sense, it is part of the objective of this book to convince you that the answer to this question is yes Returning to the first question, there are innumerable fundamental causes of economic growth that various economists, historians and social scientists have proposed over the ages Clearly, listing them and cataloging them will be neither informative nor useful Instead, we will classify the major candidate fundamental causes of economic growth into four categories of hypotheses While such a classification undoubtedly fails to justice to some of the nuances of the previous literature, it is satisfactory for our purposes of bringing out the main factors affecting cross-country income differences and economic growth These are: (1) The luck hypothesis (2) The geography hypothesis (3) The institutions hypothesis (4) The culture hypothesis By luck, we refer to the set of fundamental causes which explain divergent paths of economic performance among otherwise-identical countries, either because some small uncertainty or heterogeneity between them have led to different choices with far-ranging consequences, or because of different selection among multiple equilibria By multiple equilibria, we refer to different equilibrium configurations that may be possible for the same underlying economic environment When our models exhibit multiple equilibria, we are often unable to make specific predictions as to which of these equilibria will be selected by different countries and it is possible for two otherwise-identical countries to end up in different equilibria with quite different implications for economic growth and living standards (see below) Luck and multiple equilibria can manifest themselves through any of the proximate causes we have discussed so far (and through some additional mechanisms that will be discussed later 157