The Role of Institutions in Growth and Development

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.