The Sunday commentary of the last week ended with the following questions: Why are there such significant income gaps between different countries? How did some countries close rapidly the income gap between them and developed countries while some others put themselves into more bitter situations? How did Turkey manage to make no progress?

The mentioned commentary provided two graphs on which these questions were based on. I will interpret the graphs in one short table and things will become clearer. Table 1shows the per capita income as the ratio of per capita income in the USA. National income data are comparable as was adjusted in line with purchasing power parity. The table examines four countries that were not covered in the graphs: Ethiopia, Egypt, Poland, and Greece.

The figures the table represents have a meaning beyond the exchange rate. If the issue was interest rate, exchange rate, Greece's public debt or Turkey's budget deficit, there would be no need to repeat it over and over. But these figures are quite striking. Nobel Prize winner economist Lucas once said, once you start to think on income gaps between countries, you cannot think about anything else.

He is among the leaders of the mainstream economic theory which argues that the market is all mighty and that governments do not need to do develop a policy to tackle recession and unemployment. The lack of regulation in the shadow financial markets was one important reason for the global crisis. There lies a mainstream economic approach within this institutional background. So, you start wishing that a smart mind like Lucas always studied on income gaps and development economics.

I have talked about a book on growth before: Daron Acemoğlu's Modern Economic Growth published in 2009 by Princeton University press. This book also starts with income gaps between countries. This is in fact one of the main questions growth theory seeks to answer. Because of the importance of the issue, I will repeat some important points: in 1960, Ethiopia and Nigeria were richer than China. Over the last five decades, they became poorer and poorer. While China become relatively richer. Argentina also witnessed a significant deterioration over the last five decades. Brazil has faltered: it was about to get richer but then have turned back to square one. On the other hand, Ireland and Korea have demonstrated a breakthrough. And for Turkey, I believe the phrase 'going round in circles' fits the case.

Models developed in the framework of the growth theory explain the income gap between countries with the differences in the level of technology, in the skills of the labor force, in capital stock or in savings rates. However these are not sufficient to completely explain the gap; we need to go down further as the following questions are still waiting to be answered: How did China make progress in terms of education level, the technology employed and capital stock while Nigeria failed? Why did Turkey fail to increase the capital stock, renew the technology, change the operational systems, improve the savings rate and generalize and improve the quality of education at the extent that Ireland or Korea did?

Acemoğlu says that in order to provide satisfactory answers to these questions, one should go down deeper. He calls the reasons lying at deep as the 'fundamental' reasons and argues that there are four possible reasons: geographical differences, cultural differences, the luck factor, and differences in institutional structure. Acemoğlu states that examination of the differences in institutional structure can make is possible to provide satisfactory answers to the abovementioned questions adding that the other three factors are not the main reason though important.

With institutional structure, he refers to a wide range of concepts from the legal system to political system. Economist Douglass C. North won the Nobel Prize in economics with his studies on the role of institutions in economic development. Famous book of North published in 1990 begins with the following sentence: "Institutions are the rules of the game in a society, or more formally, the humanly devised constraints that shape human interaction."  We should note in North's definition that if institutions are humanly devised, they can also be abolished by humans. Reforms are also such phenomena.

Table 1: Per capita income compared to per capita income in the USA (%, by purchasing power parity)

This commentary was published in Radikal daily on 21.02.2010