Institutions, Growth and Long-Run Development Paths

Abstract

The notion that institutions matter for long-run growth and development can scarcely be disputed. It remains less clear which institutions are the most important ones for sustained long-run development. This thesis empirically addresses the role and relative importance of different layers of institutions for long-run development. It focuses on three distinctive layers of institutions: de jure and de facto political institutions, transaction costs, and the economic institutions such as open markets and regulation. The thesis proves that the failure to establish broad-based and pluralist de jure and de facto political institutions, low transaction costs and inclusive economic institutions may be the three root causes of poverty and underdevelopment from the 19th century onwards. The variation in political institutions largely explains long-run development gaps across countries. The inability to establish a low-cost enforcement of contracts and property rights might be the critical constraint in the process of economic growth. It appears to be more important for economic growth than the role of production factors. The absence of economic institutions supporting open markets, efficient regulation, and the rule of law can hardly generate sustainable economic growth in the long run. The absence of these institutions could thus potentially explain the historical and contemporary underdevelopment outside of Western Europe, North America and East Asia.