Quarterly Review 1722

Early Progress on the "Problem of Economic Development"

James A. Schmitz, Jr. | Senior Research Economist

Spring 1993

This study describes recent attempts to solve what Lucas has called the "problem of economic development"—the problem of accounting for the great disparity in per-capita output across countries. The study examines a number of economic development theories, including the neoclassical theory of growth, which relies on cross-country differences in physical capital per person to explain the disparity, and newer theories, which stress cross-country differences in human capital, or education. It is argued that these models cannot account for observed per-capita output diversity. More promising theories are those that stress differences in incentives for entrepreneurs to create businesses (i.e., business capital) and adopt new technologies.

Download Paper (pdf)