In this blog post, we examine how institutions and geographical conditions influence economic growth.
Many economists have long believed that the development of institutions is a key driver of economic growth. This has become a central argument because institutions provide the legal and political framework for society, thereby ensuring predictability and stability in economic activity. For example, it is argued that well-developed property rights institutions ensure that investments and innovations are adequately rewarded, thereby contributing to economic growth. Such institutional development enhances overall social trust and lays the groundwork for market participants to make long-term plans. In particular, in societies with high institutional stability, firms can allocate more resources to developing new technologies or activities that boost productivity, and such innovation acts as a key driver of economic growth.
However, proving this is not easy. Even if there is a correlation between the level of institutional development and income levels, it is difficult to determine causality because institutions can influence economic growth, but they can also be influenced by economic growth. For example, there is a possibility of a virtuous cycle in which a country, as it becomes economically wealthier, gains the capacity to establish better institutions, which in turn leads to better economic performance. Thus, the relationship between institutions and economic growth is complex and multifaceted, making it difficult to explain through a single cause-and-effect relationship.
Furthermore, understanding the relationship between institutions and economic growth becomes even more complex given that the development of institutions can vary depending on a country’s historical background, cultural characteristics, and political stability. For instance, countries that have experienced colonial rule find that this experience deeply influences their current institutional environment, which can lead to distinct trajectories of economic growth. In this context, it is important to view institutions not merely as a single variable, but as outcomes shaped by historical processes. However, recent statistical evidence has shown that income levels across countries are closely correlated with geographical conditions such as latitude and climate. Unlike institutions, geographical conditions are not influenced by income levels. Consequently, the interpretation that geographical conditions affect economic growth through direct channels—such as people’s health or productivity—has gained traction. In particular, unfavorable geographical conditions—such as high disease rates in tropical regions or poor soil—are often cited as major factors hindering economic development.
Economists who emphasize institutions have noted that if geographical conditions were the direct cause, countries with geographical conditions more favorable for economic growth should have higher income levels both historically and today; however, there are many cases where this is not the case. They argue that to explain both the “correlation between geographical conditions and income levels” and this “reversal of income levels,” we must view institutions as the direct cause of economic growth, while geographical conditions are related to economic growth through an indirect channel that influences the direction of institutional development. In other words, geographical conditions are not the direct cause of current economic growth. Rather, they influenced a historical process known as “institutional reversal,” in which institutions developed in a direction that was disadvantageous to economic growth in regions that were previously more prosperous, and advantageous in regions that were previously less prosperous.
Scholars who emphasize the direct influence of geographical conditions now acknowledge the existence of indirect pathways. However, they remain steadfast in their view that direct pathways exert a more significant and enduring influence on economic growth. This position is persuasive because, as evidenced by past and present cases, geographical conditions play a crucial role in shaping the overall economic structure of society. Furthermore, an integrated perspective—which recognizes that institutions and geographical conditions interact to contribute to economic growth in complex ways—is gaining increasing importance. These complex relationships require more sophisticated analysis to understand the economic growth trajectories of specific countries or regions. Rather than reducing the factors of economic growth to a single element, multifaceted research is needed to examine how institutional and geographical factors influence one another.
