Root Causes. A historical approach to assessing the role of institutions in economic development

• Author: Dar on Acemoglu
• Position: Professor of Economics at the Massachusetts Institute of Technology
• Pages: 27-30

Page 27

TREMENDOUS differences in incomes and standards of living exist today between the rich and the poor countries of the world. Average per capita income in sub-Saharan Africa, for example, is less than one-twentieth that in the United States. Explanations for why the economic fortunes of countries have diverged so much abound. Poor countries, such as those in sub-Saharan Africa, Central America, or South Asia, often lack functioning markets, their populations are poorly educated, and their machinery and technology are outdated or nonexistent. But these are only proximate causes of poverty, begging the question of why these places don't have better markets, better human capital, more investments, and better machinery and technology. There must be some fundamental causes leading to these outcomes, and via these channels, to dire poverty.

The two main candidates to explain the fundamental causes of differences in prosperity between countries are geography and institutions. The geography hypothesis, which has a large following both in the popular imagination and in academia, maintains that the geography, climate, and ecology of a society shape both its technology and the incentives of its inhabitants. It emphasizes forces of nature as a primary factor in the poverty of nations. The alternative, the institutions hypothesis, is about human influences. According to this view, some societies have good institutions that encourage investment in machinery, human capital, and better technologies, and, consequently, these countries achieve economic prosperity.

Good institutions have three key characteristics: enforcement of property rights for a broad cross section of society, so that a variety of individuals have incentives to invest and take part in economic life; constraints on the actions of elites, politicians, and other powerful groups, so that these people cannot expropriate the incomes and investments of others or create a highly uneven playing field; and some degree of equal opportunity for broad segments of society, so that individuals can make investments, especially in human capital, and participate in productive economic activities. These good institutions contrast with conditions in many societies of the world, throughout history and today, where the rule of law is applied selectively; property rights are nonexistent for the vast majority of the population; the elites have unlimited political and economic power; and only a small fraction of citizens have access to education, credit, and production opportunities.

Geography's influence

If you want to believe that geography is the key, look at a world map. Locate the poorest places in the world where per capita incomes are less than one-twentieth those in the United States. You will find almost all of them close to the equator, in very hot regions that experience periodic torrential rains and where, by definition, tropical diseases are widespread.

However, this evidence does not establish that geography is a primary influence on prosperity. It is true there is a correlation between geography and prosperity. But correlation does not prove causation. Most important, there are often omitted factors driving the associations we observe in the data.

Similarly, if you look around the...