Barriers and the Transition to Modern Growth

This paper attempts to account for current huge international income disparities by considering the fact that countries enter into modern growth at different points in time. The mechanism for the transition from stagnation to modern growth is taken from Hansen and Prescott (1999). Countries in the model are indexed by levels of barriers to capital accumulation, which is modeled as influencing the relative price of capital goods. The model implies that countries with larger barriers leave the state of stagnation later. In contrast to a current line of research which focuses on steady state income differences, this paper argues that the current income differences are not just steady state consequences of policy distortion, but more importantly that they are due to a delay in the transition to modern growth caused by the policy distortion.