Yuri Pleskachev, Senior Researcher at Quantitative Analysis and Economic Effects Department of the Gaidar Institute, presented an analysis of the causes of per capita income disparities across countries. He emphasized the role of institutions as a backbone factor that largely determines the depth and persistence of these gaps.
The expert noted that international comparisons reveal huge differences in GDP per capita. However, varying physical capital stocks and levels of formal education account for only a limited number of these differences.
In order to interpret the remaining gap, the economic references employ the concept of "social infrastructure", which represents the institutional environment and economic policies that shape incentives for investment, human capital accumulation, innovation, and competition. More recent papers view this level as a set of fundamental structural prerequisites, i.e. the institutions, geographical characteristics, and cultural standards that set the framework for economic activity and considerably determine the efficiency of traditional growth factors, e.g. capital, labor, and technology.
The expert cited empirical findings showing that countries with similar geographic parameters but different historical pathways of institutional development exhibit major disparities in GDP per capita. A significant correlation was found regarding such factors as the risk of expropriation and the degree of ownership protection.
Furthermore, he stated that another set of studies, which concurrently assesses the contributions of institutions, geography, and trade openness, demonstrates that institutional indicators have the greatest explanatory power for cross-country income disparities compared to geographical and trade variables in multiple specifications and samples. However, the expert stressed that such conclusions rest on the methodology, the data, and the set of factors monitored.
The expert also focused on the data of composite governance quality indices, such as Worldwide Governance Indicators (WGI). They scrutinize six dimensions: accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. They highlight that high scores on the rule of law, government effectiveness, and control of corruption are inherent in high-income countries. Despite the well-known methodological limitations of such indices, the macro-level relationship between institutional quality and income level still persists.
In conclusion, Yury Pleskachev outlined the key mechanisms through which the institutional environment has a bearing on income levels:
- Ownership protection and contract enforcement determine the magnitude and timelines of investments.
- Quality of public administration and regulation influences the resource use efficiency, the level of transaction costs and the robustness of fiscal and monetary policies.
- Predictability of rules and procedures helps identify the planning horizon and the willingness of economic agents to take long-term risks, including investments in specific assets.
Thus, the presented analysis indicates that varying institutional conditions are a critical factor explaining persistent differences in cross-country economic maturity and population incomes.