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Introduction to Modern Economic Growth LUX USA L o g G D P p e r ca p ita , P P P , in 9 SGP HKG QAT AUS 10 ARE ISR BHSBHR KWT BRB MYS SAU MEX OMN LBY MUS TTO ITA ESP NZL KORGRC PRT MLT ARG CHE AUT BEL FRA NLD DNK DEU GBR IRL CZE SVN HUN SVK CHL URY ZAF FJI THAKNA BRA CRI BWA IRNTUN VEN PAN DOM DZA PER LCA PRY GUY NAM SWZ PHL GRD DMA EGY SLVGTM JAM MAR CHN JOR BLZ LKA SYR IDN ECU BTN VCTHND NIC BOL LSO IRQ PNG ZWE IND PAK VNM MRT GHA CMR SEN CIV CAF TGO BGD NPL CPV HTI KEN GIN MMR STP UGA GMB SDN LBR BEN BFATCD MOZ COG NGA GNB MWI NER DJI ZMBMLI MDG YEM AFG AGO COM RWA TZA ZAR BDI ETH SLE SOM GAB COL JPN NOR CAN ISL SWEFIN EST POL BLR LTU RUS LVA TUR ROMKAZ BGRHRV GEO TKM UKR AZE MDA ARM UZB YUG BIH TJK Latitude Figure 4.2 Relationship between latitude (distance of capital from the equator) and income per capita in 1995 depicted in Figure 4.1, and for that matter that shown in Figure 4.2, not necessarily reflect causal relationships As we pointed out in the context of the effect of religion or social capital on economic performance, these types of scatterplots, correlations, or their multidimensional version in ordinary least squares regressions, cannot establish causality How can we overcome the challenge of establishing a causal relationship between (economic) institutions and economic outcomes? The answer to this question is to specify econometric approaches based on convincing identifying restrictions This can be done by using estimating structural econometric models or by using more reduced-form approaches, based on instrumental-variables strategies At the moment we not know enough about the evolution of economic institutions and their impact on economic outcomes to be able to specify and estimate fully-structural econometric models Thus as a first step, we can look at more reduced-form evidence that might still be informative about the causal relationship between institutions and economic growth One way of doing so is to learn from history, in particular 180