Countries produce high levels of output per worker in the long run because they achieve high rates of investment in physical capital and human capital and because they use these inputs with a high level of productivity. Our empirical analysis suggests that success on each of these fronts is driven by social infrastructure. A country’s long-run economic performance is determined primarily by the institutions and government policies that make up the economic environment within which individuals and firms make investments, create and transfer ideas, and produce goods and services.

Our major findings can be summarized by the following points:

1. Many of the predictions of growth theory can be successfully considered in a cross-section context by examining the levels of income across countries.

2. The large variation in output per worker across countries is only partially explained by differences in physical capital and educational attainment. Paralleling the growth accounting literature, levels accounting finds a large residual that varies considerably across countries.

3. Differences in social infrastructure across countries cause large differences in capital accumulation, educational attainment, and productivity, and therefore large differences in income across countries.

4. The extent to which different countries have adopted different social infrastructures is partially related to the extent to which they have been influenced by Western Europe. Using distance from the equator and language data, we conclude that our finding that differences in social infrastructure cause large differences in income is robust to measurement error and endogeneity concerns.