Why Rich Countries Got Rich And Poor Countries Stay Poor?

Abstract

International analysis of economic growth has confirmed the theoretical assumption that international variations in per capita income can to a large extent be explained by differences in the accumulation of physical capital, human capital and by differing rates of technological progress. However, these results do not provide an answer to the question as to what causes trans-national variations in accumulation rates and technological progress. In searching for the ultimate drivers of economic growth, four competing lines of explanation have emerged. The geography-hypothesis which assumes that economic growth is ultimately determined by geographical characteristics whereas the institutions-hypothesis which views the quality of institutions as a fundamental driver of growth while the culture-hypothesis which focuses on the relevance of culture for economic growth. The policy-hypothesis which emphasizes the importance of economic policy. This paper provides an overview over these four hypotheses and revisits the debate over their empirical relevance. Comparing the four approaches leads to the conclusion that it is the quality of institutions that matters to create long run economic growth differences among nations. Hence, the reason that rich countries got rich is their inclusive institutions and poor countries stay poor is because of their extractive institutions they established. Furthermore, the other hypotheses such as geography, culture and policy hypotheses have indirect effect on economic growth but are indeed interconnected and complementary.

Keywords: inclusive, extractive, institution, hypothesis (geography, culture, policy)

DOI: 10.7176/PPAR/12-2-02

Publication date:March 31^st 2022