Institutions and Convergence (Preliminary Version)

Institutional variables are the most important factor explaining real convergence. But what are institutions? This paper examines the relationship between institutions and policies, institutions and organisations, and formal and informal institutions. The concept of propelling and stabilizing institutions is introduced and used to explain differences in real convergence. Finally, issues of institutional changes are analysed based on an analytical framework which consists of initial conditions and two types of forces: collectivist and liberal. I first briefly present some basic facts about economic convergence and divergence over the last 200 years. I then discuss how the problem of long-run growth has been treated in the economic literature. Section 3 attempts to classify the concept of institutions – the key explanatory variable in the deeper analysis of the relative pace of development. In Section 4 I describe two types of institutions, propelling and stabilizing, and their relationship to economic growth. Based on previous sections and the empirical literature on convergence, I then formulate some broad propositions concerning why countries converge or diverge (Section 5). The explanation runs in terms of institutional variables. In Section 6 I go one level deeper and ask what explains institutional change