8 The failures of growth research to predict divergence on a large scale indicates that the proposed theories did not capture the fundamental factor (s) that determines whether or not a developing country will converge. Some researchers have recently argued that the evolution of economic performance of nations is determined by conditional convergence—the idea that countries converge when all other macroeconomic variables that proxy for differences in steady-state characteristics are held constant—or to put it differently, the distribution of world income reveals the existence of convergence clubs among countries.<sup>10</sup> But the puzzle of diverging performances may be more easily sorted out through comparative analysis based on in-depth country studies and historical experience: the key ingredients for convergence of successful economies seem to lie in their ability to change their endowment structure, increase the pace of adoption of new ideas, speed up the process of industrial upgrading, and improve institutions simultaneously. Understanding and replicating the economic strategies and policies that allowed latecomers to catch up with the most advanced economies is still a major challenge for economists and policymakers around the world.

# **_New Directions in Applied Growth Research_**

The disappointments of growth research—most notably from the perspective of policymakers seeking specific action plans to generate prosperity—have led to a reassessment of the validity and usefulness of existing knowledge, and to the development of radically new approaches. An important study by the World Bank (2005) focused on lessons of the 1990s highlighted the complexity of economic growth and recognized that it is not amenable to simple formulas. The report also noted that the reforms carried out in many developing countries in the 1990s focused too narrowly on the efficient use of resources, not on the expansion of capacity and growth. While they enabled better use of existing capacity, thereby establishing the basis for sustained long-run growth, they did not provide sufficient incentives for expanding that capacity.<sup>11</sup> The report concluded that there is no unique, universal set of rules to guide policymakers. It recommended less reliance on simple formulas and the elusive search for "best practices," and greater reliance on deeper economic analysis to identify each country's one or two most binding constraints on growth.

That line of research is exemplified by the Growth Diagnostics framework, which aims at identifying the one or two most binding constraints on any developing economy, and then focus on lifting those. The main rationale is to ensure that economic reforms are contingent on the economic environment. “Presented with a laundry list of needed reforms, policymakers have either tried to fix all of the problems at once or started with reforms that were not crucial to their country's growth potential. And, more often than not, reforms have gotten in each other's way, with reform in one area creating unanticipated distortions in another area. By focusing on the one area that represents the biggest hurdle to growth, countries will be more likely to achieve success

> 10 That is the view expressed by Barro and Sala-i-Martin, 1992; and Baumol, 1986. Prescott (1999) is even more optimistic and expresses the view that continued divergence is not an option, and that the world distribution of income will eventually converge.

> 11 As Zagha et al. note, “whereas reforms can help achieve efficiency gains, they will not put the economy on a sustained growth path unless they also strengthen production incentives and address market or government failures that undercut efforts to accumulate capital and boost productivity.” (2006). Pritchett (2006) suggests that economists abandon the quest for a single growth theory, and focus instead on developing a collection of growth and transition theories tailored to countries' particular circumstances.