Institutions as the fundamental cause
Differences in income between countries are caused by differences in the rules governing property, entry and power, and those rules were largely set long ago by whether a place was settled or extracted from.
Douglass North, Daron Acemoglu, Simon Johnson, James Robinson · Credits and sources ↓
What it says
The argument begins by dismissing the usual candidates. Geography, culture and policy ignorance each fail to explain why two halves of one city, or two sides of one border, diverge. What is left is institutions: whether property rights are secure for most people, whether entry into business and politics is open, and whether power is constrained.
Acemoglu, Johnson and Robinson made this testable with a strategy rather than a correlation. Where Europeans could settle, they built rules that protected their own property and those rules persisted. Where disease made settlement lethal, they built extractive machinery to move resources out, and that persisted too. Settler mortality in the colonial period therefore predicts institutions today while having no plausible direct effect on income today, which is what an instrument requires.
The companion finding is the reversal of fortune. Among places colonised by Europeans, the ones that were densest and richest around 1500 tend to be the poorer ones now, which is the opposite of what a geographic explanation predicts and exactly what the extraction story predicts: a rich, dense place was worth setting up extraction in.
Why Nations Fail generalised it into inclusive and extractive institutions, with critical junctures where a small institutional difference gets amplified. The claim is not that rules matter, which nobody disputes, but that they are the fundamental cause and that geography, culture and policy operate through them or not at all.
Drawn one step at a time
The theory as a graph, revealed a layer at a time. Use the buttons, or the left and right arrow keys. Each step adds the boxes that step introduces and the arrows into them.
- Starting condition
- Mechanism
- Outcome or policy
Four placements, and the reason for each
The four scores are editorial. They run from -3 to +3, they were assigned by the ImpactMojo editorial team from the theory's own texts, and each theory page shows the sentence that justifies its placement so the placement can be argued with. They are a way of arranging a shelf, not a measurement.
Markets, but only inside rules the state has to supply and enforce. The theory is about the conditions under which a market works rather than about the market itself.
Growth-leaning, with the caveat that inclusive institutions are partly a distributional condition: a rule that protects only elite property is what the theory calls extractive.
Institutions are read through elites and the excluded rather than through caste or gender specifically, which is the gap Indian applications of it have had to fill.
Elites, at critical junctures, under pressure from broad coalitions. Not planners, and not experts: the theory has notoriously little to say about what a reformer should do on a Monday.
The theory against the record
Each entry takes one claim the theory makes and reports what the evidence says about it, with a named source and a year. This section is the reason the library exists; a catalogue of positions without it is a reading list.
The claim Colonial institutions still explain outcomes within a country.
The strongest Indian test supports it. Abhijit Banerjee and Lakshmi Iyer compared districts where the British collected land revenue through landlords with districts where they collected from cultivators directly, an assignment driven substantially by the date of conquest rather than by district characteristics. Landlord districts show significantly lower agricultural investment and productivity after independence, and worse health and education outcomes, more than four decades after the tenure system itself was abolished.
Abhijit Banerjee and Lakshmi Iyer, 'History, Institutions, and Economic Performance', American Economic Review · 2005
The claim Settler mortality is a valid instrument for institutions.
Disputed on the data rather than the logic. David Albouy showed that the mortality rates for a large share of the sample were not observed in the country concerned but assigned from elsewhere, and that the results weaken considerably under alternative and arguably more defensible assignments. The authors contest this. The exchange has not been settled, and the wider institutional literature has largely moved to other identification strategies.
David Albouy, American Economic Review, and the reply by Acemoglu, Johnson and Robinson · 2012
The claim Institutions, rather than human capital, are the fundamental cause.
Contested from within the same literature. Glaeser, La Porta, Lopez-de-Silanes and Shleifer argued that what settlers brought was themselves and their schooling, that the standard institutional measures are outcomes describing how governments have behaved rather than constraints on how they may behave, and that human capital predicts subsequent growth better. The disagreement is about what the historical variation is picking up, and both sides accept the historical variation is real.
Edward Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, 'Do Institutions Cause Growth?', Journal of Economic Growth · 2004
The claim Extractive institutions cannot sustain growth.
China is the standing problem and the authors address it directly, arguing the growth is catch-up under extractive institutions and will not last. That prediction has now run for three decades without resolving, which makes it the kind of claim that is not yet wrong rather than the kind that has been confirmed.
Acemoglu and Robinson, Why Nations Fail, chapter 15 · 2012
What this does not settle
The category is doing a great deal of work and is hard to pin down, which is the criticism that has stuck. Inclusive institutions are defined partly by their consequences, so the claim that they produce growth is difficult to separate from a definition, and the theory has no account of the sequence by which a country acquires them. It is also close to silent on the hierarchies that operate inside a formally inclusive arrangement: India has had universal franchise, secure formal property and open entry since 1950, and the Banerjee and Iyer result sits alongside caste-based exclusion that the inclusive and extractive categories do not describe.
How it landed here
The colonial land tenure result is the most useful thing this literature has produced about India, because it identifies a persistent institution that is specific, dated and mapped, and traces it to outcomes a century and a half later. It also gives the sharpest available answer to a question the growth theories on this shelf mostly avoid, which is why the same national policy produces such different results across Indian states: they did not start from the same rules, and the difference in rules was largely decided before 1857.
One that agrees, one that does not
The dominant proprietary classes
Both explain outcomes by the arrangement of power rather than by policy choice, and both expect an arrangement that benefits its holders to persist past its justification.
Dependency and unequal exchange
Same colonial history, different residue. One says the damage is the extractive institution that stayed behind; the other says it is the trading relationship that is still running.
Whose theory this is
Douglass North 1920–2015
Defined institutions as the humanly devised constraints that shape interaction, and made the distinction between the rules and the organisations that play by them.
Daron Acemoglu born 1967
With Johnson and Robinson, turned the claim into an empirical strategy and then into a general history. Shared the 2024 Nobel for it.
Simon Johnson born 1963
James Robinson born 1960
What ImpactMojo added
The causal diagram, the four placements and the notes justifying them, and the evidence section: what each claim predicted and what the record shows, with a named source and year for every entry.
ImpactMojo · content CC BY-NC-ND 4.0 · code MIT
Start with these
- Daron Acemoglu, Simon Johnson and James Robinson, The Colonial Origins of Comparative Development (2001). American Economic Review. The settler mortality strategy, and the paper the rest of the literature argues with.
- Abhijit Banerjee and Lakshmi Iyer, History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India (2005). The Indian test, and the clearest within-country evidence in the literature.
- Daron Acemoglu and James Robinson, Why Nations Fail (2012). The general statement, written for a wide readership. Chapter 15 is where China is dealt with.
Open access, in Development Discourses:
- The Origins of State Capacity: Property Rights, Taxation, and Politics — Timothy Besley, Torsten Persson (2009)
- The Long-Term Effects of Africa's Slave Trades — Nathan Nunn (2008)
- State Capacity and Economic Development: A Network Approach — Daron Acemoglu, Camilo Garcia-Jimeno, James A. Robinson (2015)