Why Don't Poor Countries Catch Up? A Cross‐national Test of an Institutional Explanation

Early neoclassical analyses predicted that poor countries would grow faster than wealthy countries, because of technological advances and diminishing returns to capital in the latter. The reverse has occurred: poor countries are falling back rather than catching up. We suggest here that deficient institutions underlie this divergence. Employing various indicators of institutional quality, including the rule of law, the pervasiveness of corruption, and the risk of expropriation and contract repudiation, we show that the ability of poor countries to catch up is determined in large part by the institutional environment in which economic activity in these countries takes place. (JEL O00, O10)