On the role of institutions for economic development: literature review and stylized facts

Abstract

The main objective of this study is to evaluate, the validity of the institutional, geographical, cultural, and ignorance theories in explaining enormous global inequalities, using stylized facts. The analysis is based on a rigorous examination of four emblematic case studies: South Korea and North Korea, Chile, Botswana, and European colonization. The results invalidate the geographical, cultural, and ignorance assumptions and highlight the superiority of the institutional thesis. They conclude that economic prosperity is fundamentally determined by the quality of institutions. Furthermore, this institutional choice is a combination of several elements, the most prominent being the colonial legacy, the nature of pre-colonial and post-colonial institutions, and the incentives and interests of elites. Similarly, the transition of societies from extractive to inclusive institutions is always possible. However, this requires strong political will from stakeholders. Finally, we can argue that inclusive institutions are a necessary and prerequisite for the success of economic policies.