Introduction

Abstract

In the wake of endogenous growth theory, economic growth in developing countries (DCs) has been increasingly analysed by means of theoretical growth models. On this occasion, the growth process has been interpreted predominantly as representing balanced-growth dynamics (e.g. Azariadis and Drazen, 1990 and Becker, Murphy, and Tamura, 1990). These approaches are theoretically appealing because they demonstrate the possibility of multiple dynamic equilibria with strong implications for the prospects of economic development in low-income countries (Rebelo, 1992 and Benhabib and Gali, 1995). In addition, the models are empirically plausible to the extent that they are in line with the empirical finding of non-convergence in per capita incomes across the world (Romer, 1989, Section 2.1). At the same time, these approaches have some difficulties in explaining other empirical regularities of growth applying to the lower range of per capita income, e.g. a continuously increasing saving rate as income per capita rises and a positive correlation between the growth rate and the level of per capita income (ß-divergence). In contrast, according to a fundamentally different approach, the process of economic growth can be interpreted as representing mainly transitional dynamics towards a balanced-growth equilibrium. This strand of growth models can potentially explain specific aspects of growth in DCs without conflicting with the empirical regularities mentioned above.