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Claudio Agostini, Manuel Willington, Jul 16, 2014
In the nineteenth century, John Stuart Mill stated that societies are economically successful when they have good economic institutions, and that it is these institutions that lead to prosperity. History has proved him right as both theory and the empirical evidence show that differences in economic institutions strongly explain the differences in growth and prosperity among countries.
While it is not easy to define economic institutions, there is consensus on the aspects primarily concerned with the ground rules and, in particular, with the structure of property rights and the existence of competitive markets. These latter definitions, which are more specific, make it possible to better understand the importance of economic institutions. On the one hand, property rights play the role of generating incentives to invest in both physical capital and technology, as well as in human capital. On the other hand, and complementarily, truly competitive markets allow for an efficient allocation of resources. Thus, the existence of a strong competition policy has positive effects on the economic growth of a country and helps its development.
Along these lines and considering evidence for different countries, Edward Prescott & Stephen Parente argue—in the book Barriers to Riches—that large income differences among countries are mainly due to the lack of fre…