Working paper 16
Two key unanswered questions in theories of growth are (a) why some countries successfully initiate episodes of rapid growth while others suffer extended stagnation and (b) why some countries are able to sustain growth episodes over many decades of rapid (or steady) growth while other growth episodes end in reversion to stagnation or collapse. We create an analytical model that is capable of generating both transitory and sustained episodes of accelerated growth. The new feature is a feedback loop from existing economic conditions the pressures on policy implementing ‘institutions.’ This feedback loop can be positive (with economic growth leading to improved institutions for inclusive growth) or negative (with economic growth leading to worse conditions for further growth by shutting off the inclusiveness of growth and limiting economic opportunity to existing successes). Whether economic elites use their influence activities with political and bureaucratic elites to create more possibilities for economic structural transformation or, conversely, use their power to entrench their privileged position will, to a significant extent, determine whether episodes of rapid growth can be sustained or will peter out, or even be reversed. The mechanisms for elite commitment to sustained inclusive growth are discussed.