Endogenous Growth Theory and Regional Development: a 'new' Modeling Approach

Introduction 1.1 There has been a flowering of theoretical literature in “ new” or endogenous growth theory in the last decade, primarily motivated by the divergent growth experiences of different countries, which the neoclassical growth theory of the Solow (1956)-Swan (1956) genre is incapable of addressing. The path-breaking works of Romer (1986, 1990), Lucas (1988), Prescott and Boyd (1987), Rebelo (1991), Grossman and Helpman (1991) and Aghion and Howitt (1992) demonstrate how the technology (or new knowledge -capital) can be endogenized in a dynamic general equilibrium framework in which all factors including the factors that supply new ‘knowledge’ or technology are paid their marginal products. Growth theory bounced back in the last decade with a passionate search of the fundamental questions of economic growth and development: “ Why Are We So Rich and They Poor?”(David S. Landes, 1990) or, “ Is there some action that a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what exactly? If not, what is it about the ‘nature of