This document synthesizes the core paradigms, empirical findings, and policy implications of modern economic growth theory. The central narrative is a progression from early models where long-run growth was determined by exogenous forces to contemporary theories where it is an endogenous outcome of innovation, capital accumulation, and institutional design.

The foundational Neoclassical growth model establishes that, due to diminishing returns to capital, sustained long-run growth in per capita income is only possible through exogenous technological progress. While it provides a powerful framework for understanding conditional convergence—the tendency for poorer countries to grow faster than richer ones, conditional on having similar structural parameters—it cannot explain the origin of the technological progress that drives growth.

Endogenous growth theories emerged to address this limitation.

• The AK model posits that an aggregate of physical, human, and intellectual capital can be accumulated without diminishing returns, allowing saving rates and policy to permanently affect long-run growth. However, in its basic form, it fails to predict the observed patterns of conditional convergence.
• Innovation-based models provide a more micro-founded explanation for technological progress. The Product-Variety model views growth as the result of an expanding array of specialized intermediate products, emphasizing technology spillovers. The Schumpeterian model frames growth as a process of “creative destruction,” where quality-improving innovations render old technologies obsolete, highlighting the roles of competition, entry, and firm turnover.

A critical insight from modern growth theory is the concept of “appropriate institutions.” The optimal policies and institutional arrangements for fostering growth are not universal but depend on a country’s or industry’s “distance to the technological frontier.”

• For economies far from the frontier, growth is primarily driven by capital accumulation and the imitation or adoption of existing technologies. Policies that support this include investment in basic education, protection for incumbent firms to encourage investment, and stable financial systems.
• For economies near the frontier, growth depends on pushing the frontier forward through leading-edge innovation. This requires policies that foster competition and entry, investment in higher education and R&D, and flexible markets that facilitate the reallocation of resources.

The analysis concludes that sustainable growth is a complex process shaped by the interplay of finance, education, competition, trade, macroeconomic policy, and democratic institutions. Failure to adapt institutions as an economy develops can lead to “nonconvergence traps,” where countries stall before reaching the income levels of the most advanced economies.