One of the main reasons why some countries are poor is that they lack the physical and human capital that are necessary to produce. We consider the theory behind this and look at the evidence. We review how this has been modelled and what insight this gives us into the development process. We also discuss theory and evidence on how inequality affects economic performance through political processes and agency relationships. Institutional structure differs across rich and poor economies.
Poor economies rely much less on markets than rich economies.
We review how non-market resource allocation evolves in the development process and theories of institutional change. The role of the state in economic development has created much debate. We discuss different models of the state and the pathology of government intervention, particularly problems of corruption. We also discuss the relationship between political and economic development. Mechanisms for coping with risk vary tremendously across different economies.