As already pointed out, one possible reinterpretation of equation (2) can be motivated
by recent empirical studies of the role of institutions as a fundamental determinant of
development (Hall and Jones, 1999; Acemoglu et al., 2001; Easterly and Levine, 2003;
Rodrik et al., 2004). The institutional framework of a country may be considered as a
‘technology’ that changes very slowly over time but differs substantially across countries. Given that the quality of institutions can be measured across countries, the variable A in equation (2) may be redefined to allow in principle for various country-specific ‘technology’ variables, as informally suggested by Solow (2001). That is, A can be assumed to grow for each individual country i with the same constant rate g over time t (as in MRW), but at different levels which are determined by various factors Xi such that