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he roles of increasing returns, R&D activity, human capital and the diffusion of technology.

The broad consensus highlighted in the literature is that a country’s growth over a long period is basically determined by three factors, namely the effect ultization of the existing stock of resource, the accumulation of productive resources such as human capital, and technology progress.

It is worth emphasizing that the contribution of endogenous growth models to the literature on economic growth is very significant. Endogenous growth specifications allowed researchers to examine the effects of policy variables and human capital, and to articulate the hypothesis of conditional income convergence. This helped to resolve some puzzling results derived from traditional Solow growth models.

The paper by Xavier Sala-i-Martin in this volume is devoted to reviewing the main contributions of the new growth literature. Sala-i-Martin identifies three defining characteristics of this literature. They are, first, the empirical touch, that is, the close connection between the new theories and the empirical data and methods used to test them; second, the emphasis on endogenous technological progress, in particular on the type that generates increasing returns and is provided by the market through monopolistic competition; and third, the merging of different strands of economics, which is both a feature of the new growth literature and a consequence of it. One particular example is the fruitful interaction, induced by economic growth, between macroeconomics—previously dominated by business cycle theories—and economic development—formerly centered on institutional analysis and economic planning. (Barro and Sala-i-Martin, 1995).

Theoretical framework

In the late 1980s, Romer and Lucas extended the Solow’s neo-classical growth theory by making the rate of technological change and/or population growth endogenous rather than exogenous and developed “endogenous growth theory” in which attempts to explain technological change, especially investment in research and development, but also institutional factors such as protection of property rights, regulation of international trade, and taxation, endogenously as the outcome of market activity in response to economic incentives. The main implication of recent growth theory is that policies which embrace openness, competition, change and innovation will promote growth. Conversely, policies which have the effect of restricting or slowing change by protecting or favoring particular industries or firms are likely over time to slow growth to the disadvantage of the community.

Considering the technological change is endogenous, they modify the general form of production function (output) as:

Y t=F (Kt, Nt, At)

Where A is endogenous here, firm’s output depends not only on its own level of K and N, but also on the economy wide level of A advances in the A are therefore assumed to increase the productivity of all firms. In endogenous growth model, the growth of technology is assumed to depend on the growth of capital. New investment fosters inventions and improvements in the machines that comprise the stock of capital. It is assumed in the neoclassical model that the increase in K and N will cause output to rise proportionately. These increase in K and N will advance the economy wide A and increase in A wil