WHY DONT POOR COUNTRIES CATCH-UP - A CROSS-NATIONAL TEST OF AN INSTITUTIONAL EXPLANATION

Early neoclassical analyses predicted that poor countries would grow f aster than wealthy countries, because of technological advances and di minishing returns to capital in the latter. The reverse has occurred: poor countries are falling back rather than catching up. We suggest he re that deficient institutions underlie this divergence. Employing var ious indicators of institutional quality, including the rule of law, t he pervasiveness of corruption, and the risk of expropriation and cont ract repudiation, we show that the ability of poor countries to catch up is determined in large part by the institutional environment in whi ch economic activity in these countries rakes place.