The Great Wall: Institutions and Growth

We just published a short note in the most recent issue of Harvard Business Review about our research on the link between institutions and growth. In recent years, economists have emphasized the link between institutions (both economic and political) and economic growth. The chart below shows that there is indeed a strong link between the quality of institutions (on the vertical axis and as measured by governance indicators produced by the World Bank) and income per capita (horizontal axis). What is more interesting is that the relationship is weak for low levels of development and it only becomes strong (and positive) for higher levels of income per capita. 

Our interpretation is that countries can grow fast at low levels of income per capita even if the quality of their institutions is not high (and China could be an example). But once you get to levels of income per capita around $12,000, it is impossible to grow unless institutions improve. We call this level "The Great Wall". We have seen in the past countries approaching this level of development and getting stuck because of the lack of proper institutions ("they hit the wall"). Only countries that improve their institutions manager to join the ranks of rich economies ("they climb the wall"). 

We elaborate these thoughts on a teaching note (it is not an academic paper) that we have posted on our web site. The HBR article can be found on their site.

Antonio Fatás and Ilian Mihov