One of the great debates in economics concerns the determinants of economic development, investment and growth. Most recently, this literature has focused on whether geography or institutions play the more decisive role in determining economic development. A major issue in this debate concerns the appropriate treatment of the endogeneity of the economic institutions themselves. Much of the literature has been concerned with finding valid instruments to control for this endogeneity, or with finding natural experiments in which institutions changed exogenously such as the fall of the Berlin Wall. It is probably fair to say that explanations centring on key institutions that enforce contractual arrangements and protect property rights from expropriation by the state dominate the literature at the present time. But recent work has made a persuasive case that both institutions and geography matter by studying the interaction of colonial history and geography to identify the partial effects of institutions and geographical endowments. An early concern of the growth literature was on how resources move from agriculture to a ‘modern’ manufacturing sector, and another recent theme takes insights on the importance of geography and institutions to return to that earlier issue of how resources move between sectors. With the importance of ‘clusters’ of institutions now generally accepted, another strand of the literature seeks to identify in greater detail the precise mechanisms through which particular institutions enhance economic activity.
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