Contents

Abstract 386

Keywords 387

1. Introduction 388

1.1. Thequestion 388

1.2. The argument 389

1.3. Outline 396

2. Fundamental causes of income differences 396

2.1.

2.1.1. Economic institutions 397

2.1.2. Geography 399

2.1.3. Culture 400

3. Institutions matter 402

3.1. The Korean experiment 404

3.2. The colonial experiment 407

4. TheReversalofFortune 407

4.1. The reversal among the former colonies 408

4.2. Timing of the reversal 412

4.3. Interpreting the reversal 412

4.4. Economic institutions and the reversal 414

Handbook ofEconomic Growth, Volume LA. Edited by Philippe Aghion and StevenN. Durlauf © 2005 Elsevier B.V. All rights reserved

DOI: 10.1016∕S1574-0684(05)01006-3

4.5. Understandingthecolonialexperience 416

4.6. Settlements,mortalityanddevelopment 417

5. WhydoinstitutionsdifTer? 421

5.1. The efficient institutions view - the Political Coase Theorem 422

5.2. The ideology view 424

5.3. The incidental institutions view 425

5.4. The social conflict view 427

6. Sources of inefficiencies 428

6.1. Hold-up 430

6.2. Political losers 432

6.3. Economic losers 434

6.4. The inseparability of efficiency and distribution 436

6.5. Comparative statics 437

6.6. The colonial experience in light of the comparative statics 438

6.7. Reassessmentofthesocialconflictview 439

7. The social conflict view in action 439

7.1. Labor markets 440

7.2. Financialmarkets 441

7.3. Regulation of prices 443

7.4. Political power and economic institutions 445

8. A theory of institutions 448

8.1. Sourcesofpoliticalpower 448

8.2. Political power and political institutions 449

8.3. A theory of political institutions 451

9. The theory in action 452

9.1. Rise of constitutional monarchy and economic growth in early modern Europe 452

9.2. Summary 457

9.3. Rise of electoral democracy in Britain 458

9.4. Summary 462

10. Future avenues 463

Acknowledgements 464

References 464