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Institutions Do Not Rule: Reassessing the Driving Forces of Economic Development

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  • Wen, Yi

    () (Federal Reserve Bank of St. Louis)

  • Luo, Jinfeng

    (Tsinghua University)

Abstract

The pursuit to uncover the driving forces behind cross-country income gaps has divided economists into two major camps: One emphasizes institutions, while the other stresses non-institutional forces such as geography. Each school of thought has its own theoretical foundation and empirical support, but they share an implicit hypothesis—the forces driving economic development remain the same regardless of a country’s stage of development. Such hypothesis implies a theory that the process of development in human history is a continuous improvement in income levels, driven by the same forces, and that structural changes do not dictate the influences of geography and institutions on national income. This paper tests this theory and found it not supported by the data. Specifically, non-institutional factors predominantly explain the cross-country income variations among agrarian countries, while institutional factors largely account for the income differences across industrialized economies. In addition, we find evidence of developmental trap in which noninstitutional forces explain a country’s lack of industrialization, while institutions do not. The finding that institutions cannot account for the absence/presence of industrialization lends support to views held by many prominent historians who have cast serious doubts on the notion that institutional changes caused the British Industrial Revolution.

Suggested Citation

  • Wen, Yi & Luo, Jinfeng, 2015. "Institutions Do Not Rule: Reassessing the Driving Forces of Economic Development," Working Papers 2015-1, Federal Reserve Bank of St. Louis, revised 01 Jun 2017.
  • Handle: RePEc:fip:fedlwp:2015-001
    DOI: 10.20955/wp.2015.001
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    References listed on IDEAS

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    1. repec:eee:jcecon:v:45:y:2017:i:3:p:563-581 is not listed on IDEAS
    2. Minkler, Lanse & Prakash, Nishith, 2015. "The Role of Constitutions on Poverty: A Cross-National Investigation," IZA Discussion Papers 8877, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Development; Disease; Geography; Industrialization; Income Gaps; Institutions;

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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