The Role of Institutions in Economic Growth

Institutions, defined as the rules of the game that govern human behavior, play a crucial role in determining economic growth and development. Recent research highlights a significant shift in focus from proximate determinants, such as physical and human capital, to deeper determinants, emphasizing institutions' importance in explaining why some countries are rich while others remain poor. This change underscores that factors like geography and culture, while important, are secondary to the institutional framework that shapes the economic landscape. For example, countries with strong legal systems and enforcement of the rule of law typically enjoy higher levels of investment and economic stability compared to those without.