Institutions, Integration, and Geography: in Search of the Deep Determinants of Economic Growth

The spectacular gap in incomes that separates the world's rich and poor nations is the central economic fact of our time. Average income in Sierra Leone, which is the poorest country in the world for which we have data, is almost 100 times lower than that in Luxembourg, the world's richest country. Nearly two-thirds of the world's population lives in countries where average income is only one-tenth the U.S. level (Figure 1).1 Since the starting points for all these countries were not so far apart prior to the industrial revolution, these disparities must be attributed almost entirely to differences in growth rates of per-capita income. The world is split sharply between countries that have managed to sustain economic growth over long periods of time and those that have not. How do we make sense of this? The economics of growth has come a long way since it regained center stage for economists in the mid-1980s.2 The early focus on theoretical models that generate self-sustaining growth and endogenous technological advance has been increasingly replaced with attempts to shed light on the diversity of experience with economic growth.3 On the empirical front, the search for correlates of growth has gone beyond economic variables (such as physical and human capital, and price distortions) to examine “deeper ” determinants of economic 1 These figures refer to per-capita gross domestic product, adjusted for differences in purchasing power parity. Th