Fundamental Causes Flashcards
What are the 4 fundamental causes of growth?
1) Luck
2) Geography
3) Culture
4) Institutions
Describe the ‘Luck’ fundamental cause
Divergent paths of otherwise identical economies occur due to :
- small heterogeneities have far-ranging consequences
- Being stuck in a poverty trap equilibria where nobody has an incentive to invest more.
Give the 3 factors that contribute to Geographical differences
1) Climate
2) vegetation
3) Resources
What impact does climate and vegetation have on growth?
- Agricultural output
- Disease burden
Describe the resource curse.
More natural resources should mean more development.
However, resource curse:
- Put all labour into extraction -> not in R&D
- Resource distribution across countries can cause civil war.
What is culture defined as?
Culture is what determines values, preferences, and beliefs. (most important one may be religion)
What did max Weber say about the impact of culture on growth?
- Protestant reformation and Calvinism as key factors of industrial revolution
- Protestants emphasize hard work and interpret economic success as being favoured by god
What is the definition of institutions?
North (1990): Institutions are the rules of the game in a society, more formally, are the humanly devised constraints that shape human interaction. In consequence, they structure incentives in human exchange, whether political, social, or economic.
How do institutions differ from cultural and Geographical factors?
- Geographical -> Can’t change
- Culture -> very slow to change
What can you say about North Korea and institutions?
After WW2, Korea was separated into North and South.
South became a democracy, whereas North became a socialist dictatorship.
Before the separation: very homogenous with respect to Geography, culture, and degree of industrialization.
GDP in 2000:
- North: $1000
- South: $16,000
Can you explain the colonial experiment for institutions (reversal of fortune)
Data shows that countries that were rich in the 1500s are now poor and many countries that were poor in the 1500s are now rich, this is known as the reversal of fortune.
This contradicts the notion that Geography is the most important fundamental cause when it comes to economic growth.
This reversal of fortune coincides with the colonization of poorer nations by Economic powers. From the early 15th century, European countries conquered many countries. When they did this, they improved the institutions of the countries they colonized.
Data shows that there is a negative correlation between property rights today and population density (wealth) in the 1500s. Therefore, a major instrument in the reversal of fortune for these countries is the impact that improved institutions had on their growth outcomes.
