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Acemoglu D Johnson Robinson Institutions as Thr Fundamental Etc

Acemoglu D Johnson Robinson Institutions as Thr Fundamental Etc

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Institutions as the Fundamental Cause of Long-Run Growth
Daron AcemogluDepartment of Economics, MITSimon JohnsonSloan School of Management, MITJames RobinsonDepartments of Political Science and Economics, BerkeleyApril 29, 2004
Prepared for the
 Handbook of Economic Growth 
 edited by Philippe Aghion and Steve Durlauf. Wethank the editors for their patience and Leopoldo Fergusson, Pablo Querub´
ı
n and Barry Weingast fortheir helpful suggestions.
1
 
Abstract
This paper develops the empirical and theoretical case that di
ff 
erences in economicinstitutions are the fundamental cause of di
ff 
erences in economic development. We
 
rstdocument the empirical importance of institutions by focusing on two “quasi-natural ex-periments” in history, the division of Korea into two parts with very di
ff 
erent economicinstitutions and the colonization of much of the world by European powers starting in the
fteenth century. We then develop the basic outline of a framework for thinking aboutwhy economic institutions di
ff 
er across countries. Economic institutions determine theincentives of and the constraints on economic actors, and shape economic outcomes. Assuch, they are social decisions, chosen for their consequences. Because di
ff 
erent groupsand individuals typically bene
t from di
ff 
erent economic institutions, there is generallya con
ict over these social choices, ultimately resolved in favor of groups with greaterpolitical power. The distribution of political power in society is in turn determined bypolitical institutions and the distribution of resources. Political institutions allocate
 de  jur
 political power, while groups with greater economic might typically possess greater
de facto
 political power. We therefore view the appropriate theoretical framework asa dynamic one with political institutions and the distribution of resources as the statevariables. These variables themselves change over time because prevailing economic in-stitutions a
ff 
ect the distribution of resources, and because groups with de facto politicalpower today strive to change political institutions in order to increase their de jure po-litical power in the future. Economic institutions encouraging economic growth emergewhen political institutions allocate power to groups with interests in broad-based prop-erty rights enforcement, when they create e
ff 
ective constraints on power-holders, andwhen there are relatively few rents to be captured by power-holders. We illustrate theassumptions, the workings and the implications of this framework using a number of historical examples.2
 
1 Introduction
1.1 The question
The most trite yet crucial question in the
 
eld of economic growth and developmentis: Why are some countries much poorer than others? Traditional neoclassical growthmodels, following Solow (1956), Cass (1965) and Koopmans (1965), explain di
ff 
erencesin income per capita in terms of di
ff 
erent paths of factor accumulation. In these models,cross-country di
ff 
erences in factor accumulation are due either to di
ff 
erences in savingrates (Solow), preferences (Cass-Koopmans), or other exogenous parameters, such astotal factor productivity growth. More recent incarnations of growth theory, followingRomer (1986) and Lucas (1988), endogenize steady-state growth and technical progress,but their explanation for income di
ff 
erences is similar to that of the older theories. Forinstance, in the model of Romer (1990), a country may be more prosperous than an-other if it allocates more resources to innovation, but what determines this is essentiallypreferences and properties of the technology for creating ‘ideas’.
1
Though this theoretical tradition is still vibrant in economics and has provided manyinsights about the mechanics of economic growth, it has for a long time seemed unable toprovide a
 fundamental 
 explanation for economic growth. As North and Thomas (1973, p.2) put it: “the factors we have listed (innovation, economies of scale, education, capitalaccumulation etc.) are not causes of growth; they
 are 
 growth” (italics in original).Factor accumulation and innovation are only
 proximate 
 causes of growth. In North andThomas’s view, the fundamental explanation of comparative growth is di
ff 
erences in
institutions 
.What are institutions exactly? North (1990, p. 3) o
ff 
ers the following de
nition:“Institutions are the rules of the game in a society or, more formally, are the humanlydevised constraints that shape human interaction.” He goes on to emphasize the keyimplications of institutions since, “In consequence they structure incentives in humanexchange, whether political, social, or economic.”Of primary importance to economic outcomes are the
 economic institutions 
 in soci-ety such as the structure of property rights and the presence and perfection of markets.Economic institutions are important because they in
uence the structure of economic
1
Although some recent contributions to growth theory emphasize the importance of economic poli-cies, such as taxes, subsidies to research, barriers to technology adoption and human capital policy, theytypically do not present an explanation for why there are di
ff 
erences in these policies across countries.
1

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