| Abstract: |
This paper develops the empirical and theoretical case that differences in
economic institutions are the fundamental cause of differences in economic
development. We first document the empirical importance of institutions by
focusing on two “quasi-natural experiments” in history, the division of Korea
into two parts with very different economic institutions and the colonization
of much of the world by European powers starting in the fifteenth century. We
then develop the basic outline of a framework for thinking about why economic
institutions differ across countries. Economic institutions determine the
incentives of and the constraints on economic actors, and shape economic
outcomes. As such, they are social decisions, chosen for their consequences.
Because different groups and individuals typically benefit from different
economic institutions, there is generally a conflict over these social
choices, ultimately resolved in favor of groups with greater political power.
The distribution of political power in society is in turn determined by
political institutions and the distribution of resources. Political
institutions allocate de jure political power, while groups with greater
economic might typically possess greater de facto political power. We
therefore view the appropriate theoretical framework as a dynamic one with
political institutions and the distribution of resources as the state
variables. These variables themselves change over time because prevailing
economic institutions affect the distribution of resources, and because groups
with de facto political power today strive to change political institutions in
order to increase their de jure political power in the future. Economic
institutions encouraging economic growth emerge when political institutions
allocate power to groups with interests in broad-based property rights
enforcement, when they create effective constraints on power-holders, and when
there are relatively few rents to be captured by power holders. We illustrate
the assumptions, the workings and the implications of this framework using a
number of historical examples. |