Chapter 5: Root Causes of Economic Development: A Unifying Framework
5. Root causes of economic progress: a unifying framework The evidence that I have reviewed so far does identify the important deep factors, namely institutions and diseases that can explain the longrun difference in living standards across nations. This also gives rise to the apparent conflict between the ‘institutions view’ and the ‘disease view’. The genesis of the conflict is the statistical significance of the institutional quality variable in a cross-country regression model estimated at a particular point in time when diseases and other geographic measures are used as controls. One possible reason behind this empirical result is perhaps that institutions and diseases are important at different stages of development and the cross-section regression model is incapable of taking this into account as it solely focuses on a particular point in time. It could very well be the case that diseases are important at an early stage of development and institutions become important at an advanced stage. Bhattacharyya (2009c) presents a case for the existence of stages of development in the cross-national data. Dividing the crossnational sample into LIEs and HIEs, he finds that diseases explain the majority of the variation in per capita income in LIEs (which are at an early stage of development), whereas institutions explain the majority of the variation in the same in HIEs (which are at an advanced stage of development). In this chapter, I make an attempt to build on that finding and explain the interrelationship between institutions, diseases and economic development by using...
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