DP3643 Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development

Author(s): Dani Rodrik, Arvind Subramanian, Francesco Trebbi
Publication Date: November 2002
Keyword(s): development, economic growth, geography, institutions, trade
JEL(s): O10, O40
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3643

We estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instruments for institutions and trade. Our results indicate that the quality of institutions 'trumps' everything else. Once institutions are controlled for, measures of geography have at best weak direct effects on incomes, although they have a strong indirect effect by influencing the quality of institutions. Similarly, once institutions are controlled for, trade is almost always insignificant, and often enters the income equation with the 'wrong' (i.e. negative) sign, although trade too has a positive effect on institutional quality. We relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.