Institutions and the fortunes of territories

Abstract

Regions and cities face unceasing pressures to adapt in response to processes of globalization, changes in industrial production, and new patterns of migration and trade. At the same time, the dominant development policies are proving less than capable of providing answers to these challenges. Strategies based on a mix of physical and human capital and technology have not succeeded in dealing with growing territorial inequality and its treacherous economic, social and political consequences. There is thus an urgent need to understand why territorial divergence occurs and why there is what seems to be a growing decline in the returns of public intervention targeting economic development. In the search for answers, scholars have turned to the examination of institutions. But despite progress in our grasp of how institutions affect development, crucial knowledge gaps remain. This paper reviews recent progress in our understanding of the role of institutions for development, unveils the most important gaps, and proposes a series of avenues to improve how a better understanding of how institutions shape regional and urban development can lead to more efficient development policies.