Our website will undergo scheduled maintenance on the morning of Thursday, August 11, 2022. During this time, connection to our website and some of its features may be unavailable. Thank you for your patience and we apologize for any inconvenience.

Working Paper

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

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.

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

JEL Classification: O11; P16; P51;


Access Documents

File(s): File format is application/pdf http://research.stlouisfed.org/wp/2015/2015-001.pdf
Description: Full text

File(s): File format is text/html https://doi.org/10.20955/wp.2015.001
Description: https://doi.org/10.20955/wp.2015.001


Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2017-06-01

Number: 2015-1

Pages: 46 pages