6 Another important question has been to understand how technological diffusion takes place across countries and generates or sustains growth—and why it does not take root in others. Various interesting possibilities have recently been explored in an attempt to answer that critical question: one option has been to add an avenue for technology transfer as a new component to the endogenous growth model, that is, “endogenizing” the mechanism by which different countries achieve the ability to use various intermediate capital goods (Jones, 1998). Another popular route is to try to identify the fundamental determinants of growth through political economy models. Contrary to previous waves of growth modeling, this line of research focuses not on the proximate determinants of growth but on the impact on growth of such factors as institutions or the quality of governance (Acemoglu and Robinson, 2001; Glaeser and Shleifer, 2002). Several other approaches to growth research have yielded various insights to the mystery of modern economic growth (Barro and Sala-i-Martin 2003; Jones 1998).

# **_Challenges of Explaining Convergence—and Divergence_**

Both on the theoretical and empirical fronts, progress has been made in our understanding of growth in recent decades. On the theoretical front, the analysis of endogenous technical innovation and increasing returns to scale has provided economists with a rich general framework for capturing the broad picture and the mechanics of economic growth. From Solow’s work, we know the importance of the role of capital accumulation (both physical and human) and technical change in the growth process. From contributions by Becker, Heckman, Lucas<sup>7</sup> and many others, we also learned about the importance of human capital through diffusion of new knowledge or on-the-job learning, often stimulated by trade, and the so-called college wage premium. From work by North (1981), with supporting theoretical and empirical analyses exemplified by the works of Acemoglu et al. (2001), Greif (1993), Glaeser and Shleifer (2002), we have learned that growth is in large part driven by innovation and institutions that have evolved in countries where innovative activity is promoted and conditions are in place for change to take place. From Romer and the endogenous growth theorists, we have understood the need to change the focus of growth theory from accumulation to knowledge creation and innovation. In sum, we know quite a lot about some of the basic ingredients of growth.

On the empirical side, the availability of standardized data sets—especially the Penn World tables—has stimulated interest in cross-country work that highlights systematic differences between high-growth and low-growth countries with regard to: (i) Initial conditions (such as productivity, human capital, demographic structure, infrastructure, financial development, or inequality; (ii) Policy variables of various sorts such as trade openness, macroeconomic stability, levels and composition of public spending, taxation, or regulation; and (iii) Institutional variables such as general governance indicators, administrative capacity, rule of law, protection of property rights, or corruption.

However, growth research still faces significant methodological difficulties, and challenges in identifying actionable policy levers to sustain and accelerate growth in specific countries.<sup>8</sup>

> 7 See, in particular, Becker (1992); Heckman (2006); Lucas (2004).

> 8 This is the case not only in development economics but also in various sub-disciplines of macroeconomics. Following the 2008-09 global crisis, a heated debate erupted among economists over the pertinence of the dominant models and their policy prescriptions. See for instance Blanchflower (2009), Krugman (2009), or Stiglitz (2009). For