The importance of institutions for eco-nomic development and growth has long been understood―emphasized, for example, in the writings of Adam Smith and, more recently, David Landes (1998), and recognized in the 1993 Nobel Prize awarded to Douglass North. In the past few years, however, there has been a resurgence of interest in this subject, including research into the sources of institutional differences across countries, the channels through which institutions may affect economic performance, and the quantitative importance of these links. Motivating much of this work is the renewed attention to the enormous cross-country differences in incomes (Table 3.1). Not only are the extremes of this global income distribution striking―GDP per capita ranging from about $100 a year in Ethiopia, for example, to over $43,000 in Switzerland―but so also is the uneven dispersion of incomes. It is notable, for example, how few countries have what could be viewed as an "intermediate" level of income, between about $6,000 and $16,000 per capita, and how many―including most of sub-Saharan Africa―have incomes of well under $1,000 per capita. Furthermore, while subsequent improvements in macroeconomic policies may have helped reverse the overall stagnation of per capita incomes among developing economies that set in early in the 1980s, these countries continue to face large and persistent income gaps relative to advanced economies (Figure 3.1).
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