Economic structures, institutions and economic performance

1 Background Why are some countries rich and others poor? Since Solow (1956), the tentative answer has been differences in capital accumulation and technical change, but this was unsatisfactory since the theory failed to explain what accounts for these differences. Endogenous growth theories (Aghion and Howit 1992; Grossman and Helpman 1991; Romer 1990) emerged to answer the faithful call and argue that differences in research and development and human capital lead to differential growth in technical change and accumulation. Still, why do some countries invest more in education and innovation? North (1990), Acemoglu and Robinson (2013) and other new institutional economists contend that differences in institutions can explain the differences in economic performance across time and space. Institutionalists posit that economic growth is a function of economic and political institutions. This article argues that new institutionalists are guilty of the same sin committed by early growth theorists. The latter have overlooked the role of institutions in the growth process, and new institutional economists ignore the role of economic structures in the dynamics of growth. In our view, it is not institutions that cause growth; rather, it is a country’s economic structure that is the fundamental cause of economic performance. Therefore, differences in economic structures across time and space can explain the differences in economic Abstract The contention that “inclusive” institutions are the deep determinants of economic growth remains unsatisfactory. This paper develops an alternative theoretical and empirical case that economic structures are the fundamental cause of economic performance. Economic structures determine the rate of structural learning, affect institutional performance, influence the distribution of income and establish the direction of political transitions, thereby, economic performance. The paper highlights the feedback loops among institutions, political power and economic structures, thus, markets on their own will not ensure growth-enhancing transformations. The workings of this framework are illustrated using a USA case study, and it exposes the structural origins of the financial crisis.