Intitutions As The Fundamental Cause Of Long-Run Growth

Institutions as the Fundamental Cause of Long-Run Growth
Daron Acemoglu Department of Economics, MIT Simon Johnson Sloan School of Management, MIT James Robinson Departments of Political Science and Economics, Berkeley April 29, 2004

Prepared for the Handbook of Economic Growth edited by Philippe Aghion and Steve Durlauf. We thank the editors for their patience and Leopoldo Fergusson, PabloQuerub´ and Barry Weingast for n their helpful suggestions.

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Abstract This paper develops the empirical and theoretical case that di erences in economic institutions are the fundamental cause of di erences in economic development. We rst document the empirical importance of institutions by focusing on two ““quasi-natural experiments”” in history, the division of Korea into two parts withvery di erent economic institutions 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 about why economic institutions di er across countries. Economic institutions determine the incentives of and the constraints on economic actors, and shape economic outcomes. As such, they are socialdecisions, chosen for their consequences. Because di erent groups and individuals typically benet from di erent economic institutions, there is generally a conict 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. Politicalinstitutions 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 a ect the distributionof 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 e ective 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.

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1.1 The question

Introduction

The most trite yet crucial question in the eld of economic growth and development is: Why are some countries much poorer than others? Traditionalneoclassical growth models, following Solow (1956), Cass (1965) and Koopmans (1965), explain di erences in income per capita in terms of di erent paths of factor accumulation. In these models, cross-country di erences in factor accumulation are due either to di erences in saving rates (Solow), preferences (Cass-Koopmans), or other exogenous parameters, such as total factor productivity growth. More recentincarnations of growth theory, following Romer (1986) and Lucas (1988), endogenize steady-state growth and technical progress, but their explanation for income di erences is similar to that of the older theories. For instance, in the model of Romer (1990), a country may be more prosperous than another if it allocates more resources to innovation, but what determines this is essentially preferencesand properties of the technology for creating ‘‘ideas’’.1 Though this theoretical tradition is still vibrant in economics and has provided many insights about the mechanics of economic growth, it has for a long time seemed unable to provide a fundamental explanation for economic growth. As North and Thomas (1973, p. 2) put it: ““the factors we have listed (innovation, economies of scale,...