Institutional Transformation and the Origins of World Income Distribution
Abstract: This paper presents an attempt to quantify institutional changes and examine the respective effects of institutions on the path of long-run economic growth and development for a large panel of countries in the period 1810-2000. Using principal component analysis, latent indices of de jure and de facto political institutions are constructed by exploiting several existing institutional datasets. The empirical evidence consistently suggests that societies with more extractive political institutions in Latin America, South Asia, Middle East and Eastern Europe have achieved systematically slower long-run economic growth and failed to catch-up with the West. The evidence confirms the primacy of de facto institutional differences over de iure institutions and human capital in causing differential growth and development outcomes over time. It also explains why highly concentrated political power and extractive political regimes inhibited the path of economic growth by setting persistent barriers to the engagement in collective action. In the long run, institutional differences account for up to 90 percent of within-country development path and up to 70 percent of cross-country income differences.
