Introduction
A number of facts suggest that international knowledge externalities are critical for understanding growth and development. The growth slowdown that began in the early 1970s was world-wide, not an OECD-only phenomenon.
Countries with high investment rates exhibit higher income levels more than higher growth rates. Country growth rate differences are not very persistent from decade to decade, whereas differences in country incomes and investment rates are highly persistent. These patterns hold for investment rates in physical, human, and research capital. Together, they suggest that investment rates affect country transitional growth rates and long run relative incomes rather than long run growth rates. They also suggest countries are subject to the same long run growth rate. We argue that this represents evidence of very large international spillovers at the heart of the long run growth process.We organize this chapter as follows. In Section 2 we describe two broad types of externalities and the growth models that do (and do not) feature them. Section 3 presents cross-country evidence that, we argue, is very hard to reconcile with the models that have no international externalities. Section 4 calibrates a model of growth with international externalities in the form of technology diffusion. The implied externalities are huge. Section 5 concludes and points out directions for future research.
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