Future avenues
In this chapter we have proposed a framework for thinking about why some countries grow faster and are richer than others. We emphasized, following North and Thomas (1973), that most economic growth theory focuses only on proximate determinants of prosperity.
Although this body of work has been useful in helping us understand the mechanics of growth, it fails to provide a satisfactory account of why some countries grow while others do not. Even more recent analyses which have emphasized market institutions and imperfections, and even political economy, have not provided convincing explanations for why countries differ in their equilibrium set of institutions. A major research goal must now be to get beyond the neoclassical growth model and its modern extensions, and search for the deeper causes, i.e., the fundamental determinants of growth.We argued that the available evidence is consistent with the view that whether or not a society grows depends on how its economy is organized - on its economic institutions. We then proposed the outlines of a theory of institutions and illustrated it through a series of historical examples. We emphasized that a theory of why different countries have different economic institutions must be based on politics, on the structure of political power, and the nature of political institutions. Much remains to be done. First, the framework we outlined was largely verbal rather than mathematical, and thus, by its very nature, not fully specified. Constructing formal models incorporating and extending these ideas is the most important task ahead. Although some of our past work [e.g., Acemoglu and Robinson (2000a, 2001), Acemoglu (2003b)] formalizes parts of this framework, the full model has not been developed yet.
There are also many important issues left out of our framework, which appear to offer fruitful areas for future research.
First, though we know that institutions, both economic and political, persist for long periods of time, often centuries (and sometimes millennia), we do not as yet have a satisfactory understanding of the mechanisms through which institutions persist.Second, and closely related, although institutions do generally persist, sometimes they change. We have important examples of societies which have radically changed their political and economic institutions. Some do so for internal reasons, such as France after the Revolution of 1789, and some do because of external pressures such as Japan after the Meiji restoration or Russia after the Crimean War.
The important point here is that both institutional persistence and institutional change are equilibrium outcomes. Approaches positing institutional persistence as a matter of fact, and then thinking of institutional changes as unusual events will not be satisfactory. Both phenomena have to be analyzed as part of the same dynamic equilibrium framework.
One type of institutional change, consistent with the examples we discussed in this chapter, takes place when those who benefit from the existing set of institutions are forced to accept change, either because they are the losers in a process of fighting or because of the threat of internal revolution (another possibility is that they might accept change because of the threat of external invasion). However, institutional change can also take place because the set of economic institutions that is optimal for a particular group with political power may vary over time as the state variables in the system and economic opportunities evolve. One example may be the end of slavery in the British Empire and another may be the economic and political changes introduced by Mikhail Gorbachev in the Soviet Union in the 1980s. We need more research on the dynamic mechanisms at work [see Tornell (1997) for a model of such a process].
Finally, it is important to understand the role of policy and interventions in changing the institutional equilibrium.
Though social science research is of intrinsic interest, one would hope that a convincing fundamental theory of comparative growth based on institutions would lead to policy conclusions that would help us improve the institutions and thus the lives and welfare of people in poor countries. It should be obvious that, at the moment, we are a long way from being in a position to draw such conclusions. In a world where political choices are made rationally and are endogenous to the structure of institutions, which are themselves ultimately endogenous, giving policy advice is a conceptually complex issue [see Acemoglu et al. (2003) for reflections on this]. Recognizing our current ignorance on this topic in no way diminishes its importance, and its role as the Holy Grail of political economy research, however. And we believe that better and empirically more realistic theoretical frameworks in the future will take us closer to this Holy Grail.Acknowledgements
We thank the editors for their outstanding patience and Philippe Aghion, Robert Barro, Avinash Dixit, Leopoldo Fergusson, Herschel Grossman, Pablo Querubin and Barry Weingast for their helpful suggestions.
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