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Why have the income disparities between fast-growing economies and development laggards widened over the past five decades? How important is the role played by institutional barriers with relation to technology adoption? Using cross-country analysis, we find that more-severe institutional barriers in several representative lag-behind countries actually hinder the process of structural transformation and economic development, causing these countries to fall below a representative group of fast-growing economies despite having similar or even better initial states five decades ago. We also find that institutional barriers have played the most important role, accounting for more than half the economic growth in fast-growing and trapped economies and for more than 100 percent of the economic growth in the lag-behind countries. By conducting country studies, we identify that unnecessary protectionism, government misallocation, corruption, and financial instability have been key institutional barriers causing countries to either fall into the poverty trap or lag behind without a sustainable growth engine. (JEL O41, O43, O47)
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1INTRODUCTION
Over the past half-century, world income disparities have widened. The gap in real gross domestic product (GDP) per capita relative to the United States between advanced and poor countries has increased. For example, the ratio of average real GDP per capita among the top 10 percent of countries to the bottom 10 percent has increased from less than 20 in 1960 to more than 40 in 1990, and to more than 50 since the turn of the new millennium (Table 1). The huge disparities remain even if we exclude outliners such as oil rich countries in OPEC and former members of the Soviet Union and Yugoslavia. This important issue has induced numerous studies seeking to understand the causes and consequences of such disparities.
The conventional framework developed by Lucas (1990, 2000) and Prescott (1998) uses a neoclassical aggregate production function to explain relative income gaps. In addition to differences in per capita capital, the residual gaps are calibrated as measures of relative total factor productivities (TFPs). This tends to result in unreasonably large gaps in TFPs, thereby leading to further analyses extending the basic framework. Among others, various forms of institutional barriers are believed to play an important role. Such barriers could relate to physical capital investment due to financial...