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pulation, and position of the production function characteristics and recently government policies and initial stocks of human capital that might vary across economy.

Strong evidence of convergence was found for the group of developed countries such as the OECD ((Dowrick and Nguyen 1989) ;(Gordon and Kevin 1989; Helliwell and Chung 1995). Cross country analysis of the con hypothesis was also found among developing countries(Barro 1991; Mankiw, Romer et al. 1992).

Other study found strong divergence in income among countries where rich nations grew relatively richer ((Romer 1987; DeLong 1988). The rich countries tend to grow richer duo to the increasing returns to scale in areas such as learning by doing and spillovers from the accumulation of knowledge.(Abuhasan 1996)

The obvious shortcoming of the neoclassical growth models is that it does not, in the end, shed light on economic growth. In the neoclassical model, an economy will always converge towards a steady state rate of growth, due to advances in technology, but technological progress is taken as exogenous. In other words, the long-run rate of growth is determined exogenously, that means it is determined outside of the model.(Mankiw, Phelps et al. 1995; Barro and Sala-i-Martin 2004)

Cass (1965) and Koopmans (1965) received the analysis of consumer optimization that was first used by Ramsey. The Cass- Koopmans version of neoclassical growth model was able to include the saving rate endogenously. The production function featured constant returns to scale and productive factor of labor and capital are paid their marginal product in a competitive framework.

Another shortcoming of the neoclassical growth models is that it was not able to satisfactorily to explain technological change duo to its assumption of a competitive economy. (Barro and Sala-i-Martin 1995)

An important part of technological change is non-rival ideas, without which there would be no increasing return to scale. This finding is in conflict with the competitive assumption that prevents the possibility of research and development in generating non- rival idea. R&D activities can only be generated under an imperfectly competitive environment or by government subsidies.

Mankiw and et. al., 1995 mentioned that the neoclassical model is suitable when we want to explain why standards of living are higher today than a century ago. But, in his opinion, the goal is not to explain the existence of economic growth. A more challenging goal is to explain the variation in economic growth that we observe in different countries and in different times. For this purpose, the neoclassical model's assumption of constant, exogenous technological change does not preclude addressing many of the central issues of growth theory.(Mankiw, Phelps et al. 1995)

The concept learning by doing was introduced by Arrow (1962), who suggested that the level of knowledge is a productive factor by itself. Learning by doing will increase when the level of investment is increased. It is assumed that the productivity of a firm is an increasing function of aggregate out put for the industry. The increase in capital stock of firm increase the level of knowledge to the entire economy through learning by doing and the economy as a whole would be operating on increasing returns to scale. Thus, externalities were possible under the assumption