Growth & Development

Growth Theory Through the Lens of Development Economics

Abhijit V. Banerjee and Esther Duflo ∗

March 2004

The presumption of neo-classical growth theory was that being a citizen of a poor country gives one

access to many exciting investment opportunities, which eventually lead on to convergence. The point

of the previous section was to argue that most citizens of poor countries are not in a position to enjoy

most of these opportunities, either because markets do not do what they ought to or the government does

what it ought not to, or because people find it psychologically difficult to do what is expected of them.

What can we say about the long-run evolution of an economy where there are rewarding opportunities

that are not necessarily exploited? In this section we will explore this question under the assumption

that the only source of inefficiency in this economy comes from limited access to credit. The goal is

to illustrate what non-aggregative growth theory might look like, rather than to suggest an alternative

canonical model.