1. See also North and Thomas (1973 North, D.C. and Thomas, R.P. 1973. The Rise of the Western World: A New Economic History, Cambridge: Cambridge University Press. [Crossref] , [Google Scholar]).

2. Furubotn and Richter (2005: 560 Furubotn, E. G. and Richter, R. 2005. Institutions and Economic Growth, , 2nd ed, Ann Arbor: The University of Michigan Press.  [Google Scholar]) define an institution as ‘a set of formal or informal rules, including their enforcement arrangements (the “rules of the game”), whose objective is to steer individual behavior in a particular direction’.

3. Hasan et al. (2007 Hasan, R., Mitra, R. and Ulubasoglu, M. 2007. Institutions and policies for growth and poverty reduction: the role of private sector development. Asian Development Review, 24(1): 69–116.  [Google Scholar]) and Breton (2004 Breton, T. R. 2004. Can institutions or education explain world poverty? An augmented Solow model provides some insights. Journal of Socio-Economics, 33: 45–69. [Crossref] , [Google Scholar]) provide a more complete discussion on the links between weak institutions and poverty.

4. The subjective measures of institutions are mainly assembled by private companies such as the International Country Risk Guide (ICRG), Transparency International (TI), Business Environmental Risk Intelligence (BERI) and based on an assessment of perception. These companies conduct perception surveys of ‘economic agents who make growth-relevant decisions’ (Grogan and Moers, 2001 Grogan, L. and Moers, L. 2001. Growth empirics with institutional measures for transition countries. Economic Systems, 25(4): 323–344. [Crossref] , [Google Scholar]: 326). Glaeser et al. (2004 Glaeser, E. L., La Porta, R., Lopez-de-Silane, F. and Shleifer, A. Do institutions cause growth?. NBER Working Papers 10568. Cambridge: National Bureau of Economic Research.  [Google Scholar]) criticise the use of subjective institutional measures in growth related empirical analysis, arguing that such variables ‘measure outcomes, not some permanent characteristics’ (Glaeser et al., 2004 Glaeser, E. L., La Porta, R., Lopez-de-Silane, F. and Shleifer, A. Do institutions cause growth?. NBER Working Papers 10568. Cambridge: National Bureau of Economic Research.  [Google Scholar]: 8) of a society's institutions. Conversely, it has been argued that these institutional measures provide relevant information about growth-promoting institutional arrangements, and that the mere existence of organisations such as the ICRG and BERI and the considerable price that entrepreneurs are willing to pay for this kind of data provide evidence on the accuracy of such institutional measures (Mauro, 1995 Mauro, P. 1995. Corruption and growth. Quarterly Journal of Economics, 110(3): 681–712. [Crossref], [Web of Science ®] , [Google Scholar]; Grogan and Moers, 2001 Grogan, L. and Moers, L. 2001. Growth empirics with institutional measures for transition countries. Economic Systems, 25(4): 323–344. [Crossref] , [Google Scholar]).

5. For discussion and definition of these variables see Knack and Keefer (1995 Knack, S. and Keefer, P. 1995. Institutions and economic performance: cross-country tests using alternative institutional measures. Economics and Politics, 7: 207–227. [Crossref] , [Google Scholar]), La Porta et al. (1999 La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. 1999. The quality of government. Journal of Law, Economics and Organization, 15(1): 222–279. [Crossref], [Web of Science ®] , [Google Scholar]), and Acemoglu et al. (2001 Acemoglu, D., Johnson, S. and Robinson, J. 2001. The colonial origins of comparative development: an empirical investigation. American Economic Review, 91(5): 1369–1401. [Crossref], [Web of Science ®] , [Google Scholar]).

6. Chong and Calderón (2000b Chong, A. and Calderón, C. 2000b. Institutional quality and poverty measures in a cross-section of countries. Economics of Governance, 1(2): 123–135. [Crossref] , [Google Scholar]) use five alternative measures of institutions including Repudiation of contracts, expropriation risk, corruption, Law and Order Tradition, and bureaucratic quality.

7. The proximal covariates are variables considered important to explain poverty such as income inequality, education, fertility rates, and so forth. However, these variables are determined by some other deep institutional factors. For more details on the deep variable/parameter refer to Hall and Jones (1999 Hall, R. E. and Jones, C. I. 1999. Why do some countries produce so much more output per worker than others?. The Quarterly Journal of Economics, 114(1): 83–116. [Crossref], [Web of Science ®] , [Google Scholar]) and Acemoglu et al. (2001 Acemoglu, D., Johnson, S. and Robinson, J. 2001. The colonial origins of comparative development: an empirical investigation. American Economic Review, 91(5): 1369–1401. [Crossref], [Web of Science ®] , [Google Scholar]).

8. The authors divide the legal systems into: British common law, French civil law, German civil law, Scandinavian civil law and socialist (Soviet Union) law.

9. Kauffman et al. (2007 Kaufmann, D., Kraay, A. and Mastruzzi, M. Governance matters VI: governance indicators for 1996–2006. World Bank Policy Research Working Paper No. 4280. Washington, DC: The World Bank.  [Google Scholar]) state that:

•  i) Regulatory Quality‘includes measures of the incidence of market-unfriendly policies such as price controls or inadequate bank supervision, as well as perceptions of the burdens imposed by excessive regulation in areas such as foreign trade and business development’.

• ii) Rule of Law includes ‘several indicators which measure the extent to which agents have confidence in and abide by the rules of society. These include perceptions of the incidence of crime, the effectiveness and predictability of the judiciary and the enforceability of contracts. Together, these indicators measure the success of a society in developing an environment in which fair and predictable rules form the basis for economic and social interactions and importantly, the extent to which property rights are protected’.

• iii) Control of Corruption‘measures perceptions of corruption, conventionally defined as the exercise of public power for private gain … . The presence of corruption is often a manifestation of a lack of respect of both the corrupter (typically a private citizen or firm) and the corrupted (typically a public official or politician) for the rules which govern their interactions and hence represents a failure of governance according to our definition’.

• iv) Voice and Accountability measures ‘the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.’v) Political Stability and Absence of Violence measure ‘perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including domestic violence and terrorism.’

• vi) Government Effectiveness measures ‘the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies’.

10. The measure of early human capital used in this paper is ad hoc and constructed based on data availability. In particular, Mitchell (2003a Mitchell, B. R. 2003a. International Historical Statistics: Africa, Asia & Oceania, 1750–2001, , 4th ed, New York: Palgrave Macmillan.  [Google Scholar], b, c) provides data on students enrolled in primary and secondary schools back to the eighteenth century for just a few countries. A representative cross-country sample can be only collected around 1920. Mitchell reports the number of children enrolled in primary and secondary schools for 68 countries in 1920 and for 52 countries around the 1930s. Therefore, combining the actual 1920 data with estimates of the number of students enrolled in 1920 based upon the 1930/1940 numbers produce a sample comprised of 120 countries. We use the geometric growth rates in the estimations. For instance, if a country has data on enrolment between 1930–1940, the geometric growth rate between these periods is utilised to estimate enrolment back to 1920. Albeit imperfect, this variable fits the idea that historical human capital accumulation is important in the shaping of current institutions.

11. We also examine the reliability of the results above and the existence of an eventual sample bias by estimating regressions of poverty rates using the national poverty thresholds data from the CIA world factbook. The CIA poverty data combined with other data generate a sample comprised of 89 countries (compared to the PPP $2 a day measure of 53 countries in Table 3). The results corroborate the findings above, suggesting that an eventual sample bias, if it exists, is not significant. One interesting point to note is that expropriation risk and political stability turn out to be significant at the one and ten per cent levels, respectively. The overidentification test for expropriation risk and political stability becomes significant too, indicating that the models are correctly identified. However, the AR test casts some doubt on the reliability of the estimates due to the presence of weak instruments. The results using the CIA dataset is available upon request.

12. Aixalá and Fabro (2007 Aixalá, J. and Fabro, G. 2007. A model of growth augmented with institutions. Economic Affairs, 27(3): 71–74.  [Google Scholar]) augmented the Solow model with country specific institutional quality (IQ) using an average measure of the same six Kaufman's Worldwide Governance Indicators.