Institutional barriers and world income disparities

Abstract

Why have the income disparities between fast-growing economies and development laggards widened over the past five decades? How important is the role played by institutional barriers with relation to technology adoption? Using cross-country analysis, we find that more-severe institutional barriers in several representative lag-behind countries actually hinder the process of structural transformation and economic development, causing these countries to fall below a representative group of fast-growing economies despite having similar or even better initial states five decades ago. We also find that insti-tutional barriers have played the most important role, accounting for more than half the economic growth in fast-growing and trapped economies and for more than 100 percent of the economic growth in the lag-behind countries. By conducting country studies, we identify that unnecessary protection-ism, government misallocation, corruption, and financial instability have been key institutional bar-riers causing countries to either fall into the poverty trap or lag behind without a sustainable growth engine. (JEL O41, O43, O47).