As discussed in the first chapters of this book, there has been long-run divergence in the world economy. In the fifteenth century disparities in per capita incomes between countries and regions were small. Since then some economies have moved ahead and others have fallen far behind. After 1820, capital accumulation and technological change accelerated. The rate at which income levels diverged increased, resulting in the wide global disparities of the present international economic order. We have also noted that the ranking of countries was not immutable. Former British colonies such as the USA, Canada and New Zealand or Asian economies such as Japan, Singapore and Korea grew so rapidly that they moved far up the income ladder. Other countries such as Argentina, the Ottoman empire or the Russian Federation slipped downward. For a better understanding of development, we are interested in why some countries or societies forge ahead in given periods, while others stagnate or fall behind (Abramovitz, 1989b). We are especially interested in the conditions under which growth and catch-up can be realised in the developing countries of today. Sections 3.1 to 3.5 of this chapter offer a brief introduction to theories of growth and stagnation. Section 3.6 presents theoretically relevant empirical information on long-run economic trends in developing countries.

What are the basic sources of growth? How do economies grow and societies become more prosperous?

Let us start with the question of what are the basic sources of growth of per capita incomes. In simplified form, these are summarised in Box 3.1.