Why are some countries still extremely poor despite decades of foreign aid?
Background
Income differences across countries are enormous and persistent. A worker in a high-income country earns multiples of what an otherwise-similar worker earns in a low-income country. Growth theory has spent seventy years trying to explain how those gaps form and whether they narrow.
The honest answer is that we know a great deal about the proximate causes -- capital accumulation, TFP growth, human capital -- and considerably less about the deep causes. The debate between institutions, geography, and trade openness is not settled, and the policy implications of each diagnosis are different.
What it covers
The Solow model predicts conditional convergence: poor countries should grow faster than rich ones, but only if they have similar steady states. That conditional matters. A country with weak institutions, low savings rates, or slow human capital accumulation has a low steady state -- and it will converge toward that, not toward the income levels of richer countries.
Endogenous growth theory, developed by Romer and Lucas in the late 1980s, challenged this by modeling knowledge and human capital as inputs that do not face the same diminishing returns as physical capital. If ideas and skills can generate non-diminishing returns, the engine of growth is internal to the economy -- and policy has a permanent effect on the growth rate as well as the level.
Open question
What separates countries that converge toward rich-country income levels from those that do not?