Ultimately, a demographic transition reverses the positive relationship between income and population growth, and the economy enters a Modern Growth regime, with reduced population growth and sustained income growth. A multicountry Schumpeterian growth model is constructed. A parameter change that would have raised a country's growth rate in standard Schumpetarian theory will permanently raise its productivity and per capita income relative to other countries and raise the world growth rate. Transitional dynamics are analyzed for each country and for the world economy. We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies.
Good policies are ones that are themselves important for growth.
The quality of policy has only a small impact on the allocation of aid. Our results suggest that aid would be more effective if it were more systematically conditioned on good policy. This paper challenges the current belief that income inequality has a negative relationship with economic growth. It uses an improved data set on income inequality, which not only reduces measurement error, but also allows estimation via a panel technique. Results suggest that in the short and medium term, an increase in a country's level of income inequality has a significant positive relationship with subsequent economic growth.