Abstract
In this paper authors argue that the main determinants of differences in prosperity across countries are differences in economic institutions. To solve the problem of development will entail reforming these institutions. Unfortunately, this is difficult because economic institutions are collective choices that are the outcome of a political process. The economic institutions of a society depend on the nature of political institutions and the distribution of political power in society. As yet, authors only have a highly preliminary understanding of the factors that lead a society into a political equilibrium which supports good economic institutions. However, it is clear that it is the political nature of an institutional equilibrium that makes it very difficult to reform economic institutions. The authors illustrate this with a series of pitfalls of institutional reforms. The author's analysis reveals challenges for those who would wish to solve the problem of development and poverty. That such challenges exist is hardly surprising and believe that the main reason for such challenges is the forces authors have outlined in this paper. Better development policy will only come when authors recognize this and understand these forces better. Nevertheless, some countries do undergo political transitions, reform their institutions, and move onto more successful paths of economic development.
Highlights
The most important questions in social science concern the causes of cross-country differences in economic development and economic growth
Credible secure property rights necessitated a reduction in the political power of the monarch. These more secure property rights would foster economic growth, they were not appealing to the monarchs, who would lose their rents from predation and expropriation as well as various other privileges associated with their monopoly of political power
Though we cannot yet say under what circumstances political equilibria that lead to economic growth will arise, we can illustrate the power of the ideas we have developed by examining the issue of institutional reform
Summary
The most important questions in social science concern the causes of cross-country differences in economic development and economic growth. Economic growth is related to the ability of a society to increase its human capital, physical capital, and improve its technology In this context, technology is construed broadly; technological differences refer to differences in techniques available to the firms, and to differences in the organization of production, implying that some countries will be able to use their resources more efficiently. To develop more satisfactory answers to questions of why some countries are much richer than others and why some countries grow much faster than others, we need to look for potential fundamental causes, which may be underlying these proximate differences across countries. REVIEW OF ECONOMICS AND INSTITUTIONS, Vol., Issue 2- Fall 2010, Article 1 ex post understanding is not a substitute for policy, it is the first step towards the goal of knowing how to reform institutions
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