Why Many Developing Countries Just Aren't

Abstract

Annual income/capita varies across countries of the world by a factor of almost 100. Past literature has often associated income with culture, geography, history, and religion, but these cannot be easily changed. We seek to uncover mutable determinants of income. There is good news. More than 80% of the cross-country variation in per capita income can be explained by mutable determinants. Among these are property rights, black market activity, regulation, civil liberties, press freedom, government spending, trade barriers, inflation, and political rights. Data for five recent years 1995-99 were used in this determination. To check that these factors were causes and not the effects of high income, the trajectories of income before and after democratic and anti-democratic events were traced using data over the past half century. After a democratic event, income rises on average dramatically while the reverse is true after an anti-democratic event. We conclude that countries can develop faster by enforcing strong property rights, fostering an independent judiciary, attacking corruption, dismantling burdensome regulation, allowing press freedom, and protecting political rights and civil liberties. These features define a healthy environment for economic activity. Trade per se is not causative, but rather follows after the establishment of these conditions.