To formulate effective development policy, it is crucial to understand the deep-rooted, or ‘fundamental’, causes of economic growth, rather than focusing solely on its immediate symptoms, or ‘proximate’ causes. An economy’s growth is often described by its accumulation of capital, its investment in education, and its technological prowess. Yet, as Nobel laureate Douglass North and Robert Thomas argued, these factors are not the root causes of growth; they are growth itself.

“The factors we have listed (innovation, economies of scale, education, capital accumulation etc.) are not causes of growth; they are growth.”

— North and Thomas (1973)

This distinction is central to understanding global inequality. Standard economic models identify three key proximate causes of prosperity:

• Physical Capital Accumulation: The stock of machinery, equipment, and infrastructure. Societies become richer by investing in and accumulating more physical capital for each worker.
• Human Capital Accumulation: The education, skills, and health of the workforce. A better-educated and healthier population is more productive and innovative.
• Technology: The efficiency with which physical and human capital are used. This includes not just engineering blueprints but also production techniques and organizational structures that allow a society to generate more output from its inputs.

This framework immediately raises a more profound question: if these factors are so critical, why do certain societies fail to improve their technologies, invest in physical capital, and accumulate human capital, while others succeed? Answering this question requires moving beyond the proximate causes to the fundamental causes that underlie them.

Economic research has advanced four main hypotheses to explain these underlying differences: Luck, Geography, Culture, and Institutions. This briefing makes the case that a rigorous analysis of historical and contemporary evidence demonstrates that institutions—the humanly devised rules and incentive structures governing economic life—are the most significant fundamental cause of the vast cross-country differences in prosperity we observe today. We will first evaluate the alternative hypotheses before presenting the affirmative evidence for the primacy of institutions.