Institutional changes, inequality and long-run economic development: Theory and empirics

Abstract

This paper reviews theoretical and empirical literature on long-run economic development, institutional dynamics, and their interplay. Special attention is given to papers that explore the reasons why pro-growth reforms and institutional changes may be blocked. Among these reasons, over the past years the literature has increasingly focused on inequality in the distribution of wealth and political power as a key factor. This review is structured around two major theoretical approaches that illuminate the reasons behind the transition from stagnation to growth and cross-country income divergence: the unified growth theory (UGT), and the theory of endogenous institutional change. Using the empirical evidence on divergence between European and Middle Eastern economies, as well as the divergence within Europe, the paper demonstrates the value of these approaches in explaining the observed patterns of cross-country long-run development. The paper concludes with outlining several promising directions for future research.