Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development

Abstract

We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Our results indicate that the quality of institutions "trumps" everything else. Once institutions are controlled for, conventional measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the "wrong" (i.e., negative) sign. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.The views expressed in this paper are the authors' own and not of the institutions with which they are affiliated. We thank three referees, Chad Jones, James Robinson, Will Masters, and participants at the Harvard-MIT development seminar, joint IMF-World Bank Seminar, and the Harvard econometrics workshop for their comments, Daron Acemoglu for helpful conversations, and Simon Johnson for providing us with his data. Dani Rodrik gratefully acknowledges support from the Carnegie Corporation of New York.

Can Africa Reduce Poverty by Half by 2015?

“…5 The sustainability of growth and persistence of poverty There is abundant empirical research trying to explain Africa's poor economic performance. A wide range of factors have been identified, from macroeconomic instability (caused by external or domestic shocks) to a set of initial conditions, such as geography (Sachs and Warner, 1997), ethnic fractionalisation and conflict (Collier and Hoeffler, 1998), 'bad' policies (Sachs and Warner, 1997;Easterly, 2000), poor governance (Barro, 1997), weak institutions (Acemoglu et al, 2003;Rodrik et al, 2002), and low human capital. Recently, Sachs et al (2004) have argued that there are three types of poverty traps in Africa: the savings trap, the demographic trap, and the low capital-threshold trap.…”

Ruling Elites' Rotation and Asset Ownership: Implications for Property Rights

“…One of controls is GDP per capita -according to the "development hypothesis", economic development brings about better institutions (Glaeser et al, 2004); vice versa, secure property rights create enabling conditions for economic growth (see e.g. Rodrik et al, 2004). Other controls are the level of education, measured by school enrolment (the same "development hypothesis" suggests that education strengthens the demand for sound institutions and advances reforms establishing such institutions); population (according to Spolaore (2006), it is easier, ceteris paribus, to create and maintain good institutions in more populous countries); and natural gas and oil rents as a percentage of GDP (natural riches cause the resource curse, which adversely affects the quality of institutions, including property rights -see Robinson et al (2006), and Mehlum et al (2006)).…”

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