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Invited to Develop: Institutional Belonging and the Counterfactual Architecture of Development

Diego Vallarino

TL;DR

The paper asks how belonging to global institutional networks shapes long-run development, arguing that domestic endowments alone cannot explain divergent paths. It develops a generative counterfactual framework using a Wasserstein GAN with Gradient Penalty to estimate the Expected Developmental Shift (EDS) from alternative institutional embeddings, applied to Spain and Uruguay with an 80-country panel (1960–2020). Empirical results show Spain would have faltered under a Latin American regime, while Uruguay would have gained under a European one, highlighting development as a relational outcome tied to network position and coherence. The work introduces a novel methodological link between economic complexity and institutional theory, offering policy-relevant insights that access to dense governance architectures may be crucial for sustaining complexity and resilience in middle-income economies.

Abstract

This paper examines how institutional belonging shapes long-term development by comparing Spain and Uruguay, two small democracies with similar historical endowments whose trajectories diverged sharply after the 1960s. While Spain integrated into dense European institutional architectures, Uruguay remained embedded within the Latin American governance regime, characterized by weaker coordination and lower institutional coherence. To assess how alternative institutional embeddings could have altered these paths, the study develops a generative counterfactual framework grounded in economic complexity, institutional path dependence, and a Wasserstein GAN trained on data from 1960-2020. The resulting Expected Developmental Shift (EDS) quantifies structural gains or losses from hypothetical re-embedding in different institutional ecosystems. Counterfactual simulations indicate that Spain would have experienced significant developmental decline under a Latin American configuration, while Uruguay would have achieved higher complexity and resilience within a European regime. These findings suggest that development is not solely determined by domestic reforms but emerges from a country's structural position within transnational institutional networks.

Invited to Develop: Institutional Belonging and the Counterfactual Architecture of Development

TL;DR

The paper asks how belonging to global institutional networks shapes long-run development, arguing that domestic endowments alone cannot explain divergent paths. It develops a generative counterfactual framework using a Wasserstein GAN with Gradient Penalty to estimate the Expected Developmental Shift (EDS) from alternative institutional embeddings, applied to Spain and Uruguay with an 80-country panel (1960–2020). Empirical results show Spain would have faltered under a Latin American regime, while Uruguay would have gained under a European one, highlighting development as a relational outcome tied to network position and coherence. The work introduces a novel methodological link between economic complexity and institutional theory, offering policy-relevant insights that access to dense governance architectures may be crucial for sustaining complexity and resilience in middle-income economies.

Abstract

This paper examines how institutional belonging shapes long-term development by comparing Spain and Uruguay, two small democracies with similar historical endowments whose trajectories diverged sharply after the 1960s. While Spain integrated into dense European institutional architectures, Uruguay remained embedded within the Latin American governance regime, characterized by weaker coordination and lower institutional coherence. To assess how alternative institutional embeddings could have altered these paths, the study develops a generative counterfactual framework grounded in economic complexity, institutional path dependence, and a Wasserstein GAN trained on data from 1960-2020. The resulting Expected Developmental Shift (EDS) quantifies structural gains or losses from hypothetical re-embedding in different institutional ecosystems. Counterfactual simulations indicate that Spain would have experienced significant developmental decline under a Latin American configuration, while Uruguay would have achieved higher complexity and resilience within a European regime. These findings suggest that development is not solely determined by domestic reforms but emerges from a country's structural position within transnational institutional networks.

Paper Structure

This paper contains 33 sections, 10 equations, 4 figures, 2 tables.

Table of Contents

  1. Introduction
  2. Theoretical Framework
  3. Institutions and Structural Change
  4. Economic Complexity and Capability Accumulation
  5. Institutions and Complexity as an Integrated System
  6. Toward a Relational Concept of Developmental Belonging
  7. Methodology
  8. Model Design: Generative Counterfactual Framework
  9. Data and Variables
  10. Estimation and Validation
  11. Interpretation and Scope
  12. Results and Discussion
  13. Counterfactual Developmental Trajectories
  14. Structural Embeddings and Counterfactual Shifts
  15. Distributional Effects of Institutional Belonging
  16. ...and 18 more sections

Figures (4)

  • Figure 1: Observed and counterfactual development trajectories, 1960–2020.
  • Figure 2: Structural embedding map with counterfactual re-embeddings.
  • Figure 3: Distribution of Development Index (real vs. counterfactual).
  • Figure 4: Institutional alignment and structural interaction effects ($\Delta$Development = Counterfactual – Real).