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

The authors estimate the respective contributions of institutions, geography, and trade in determining income levels around the world, using recently developed instrumental variables for institutions and trade. Once institutions are controlled for, conventional 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. The authors relate our results to recent literature, and where differences exist, trace their origins to choices on samples, specification, and instrumentation.