Taking Stock

This chapter has emphasized the differences between the proximate causes of economic growth, related to physical capital accumulation, human capital and technology, and the fundamental causes, which influence the incentives to invest in these factors of production.

When we turn to the institutions hypothesis, which we have argued in this chapter that the available evidence favors, the role of theory becomes even more important. As already pointed out above, the institutions view makes sense only when there are groups in society that favor institutions that do not necessarily enhance the growth potential of the economy. They will do so because they will not directly or indirectly benefit from the process of economic growth. Thus it is important to develop a good understanding of the distributional implications of economic growth (for example, how it affects relative prices and relative incomes, and how it may destroy the rents of incumbents). This theoretical understanding of the implications of the growth process than needs to be combined with political economy models of collective decision-making, to investigate under what circumstances groups opposed to economic growth can be powerful enough to maintain non-growth-enhancing institutions in place.

In this chapter, our objective has been more limited (since many of the more interesting growth models will be developed later in the book) and we have focused on the broad outlines of a number of alternative fundamental causes of economic growth and had a first look at the long-run empirical evidence relevance to these hypotheses. We argued that approaches emphasizing institutional differences (and differences in policies, laws and regulations) across societies are most promising for understanding both the current growth experiences of coun­tries and the historical process of economic growth. We have also emphasized the importance of studying the political economy of institutions, as a way of understanding why institutions differ across societies and lead to divergent economic paths.

4.9.