Institutions as the fundamental cause of long run growth

NBER WORKING PAPER SERIES

INSTITUTIONS AS THE FUNDAMENTAL CAUSE OF LONG-RUN GROWTH Daron Acemoglu Simon Johnson James Robinson Working Paper 10481 http://www.nber.org/papers/w10481 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 May 2004

Prepared for the Handbook of Economic Growth edited by Philippe Aghion and Steve Durlauf. We thank the editors for theirpatience and Leopoldo Fergusson, Pablo Querubín and Barry Weingast for their helpful suggestions. The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research. ©2004 by Daron Acemoglu, Simon Johnson, and James Robinson. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permissionprovided that full credit, including © notice, is given to the source.

Institutions as the Fundamental Cause of Long-Run Growth Daron Acemoglu, Simon Johnson, and James Robinson NBER Working Paper No. 10481 May 2004 JEL No. N11, N13, N15, N16, N17, O10, P10, P17 ABSTRACT This paper develops the empirical and theoretical case that differences in economic institutions are the fundamental causeof 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 aboutwhy 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 asa 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. Economicinstitutions 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 historicalexamples. Daron Acemoglu Department of Economics MIT 50 Memorial Drive Cambridge, MA 02142 and NBER daron@mit.edu Simon Johnson Sloan School of Management MIT 50 Memorial Drive Cambridge, MA 02142 and NBER sjohnson@mit.edu James Robinson Departments of Economics and Political Science University of California, Berkeley Berkeley, CA 94720

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1.1 The question

Introduction

The most trite yetcrucial question in the field of economic growth and development is: Why are some countries much poorer than others? Traditional neoclassical growth models, following Solow (1956), Cass (1965) and Koopmans (1965), explain differences in income per capita in terms of different paths of factor accumulation. In these models, cross-country differences in factor accumulation are due either to differences in...