Fundamental Causes of Growth

Question 1

What is the main driving factor behind sustained economic growth?

Answer 1

Total factor productivity (technological progress)

Question 2

What is the relationship between capital and growth

Answer 2

Capital and growth are correlated but not a causal relationship

Question 3

What are the fundamental causes of growth?

Answer 3

Luck
Culture
Geography
Institutions

Question 4

How can we assess luck as a fundamental cause of growth?

Answer 4

Luck is likely to be more influential in the short run since in the long run luck is likely to level out

Question 5

Culture

Answer 5

A set of values shared by a group of people

Question 6

How does culture influence decision making?

Answer 6

Shared values and beliefs help us coordinate with others to make complicated decisions

Question 7

Explain how Protestant culture led to Protestants being well educated

Answer 7

• each person was thought to have a calling which could only be answered in work so this promoted hard work
• Protestants were expected to read the bible so they had to learn how to read

Question 8

How does culture impact trust?

Answer 8

• trust behaviours are learnt through parents and surroundings so culture helps promote similar expectations of eachother and therefore greater trust
• the more trust in a transaction, the better
• there is a strong relationship between trust and GDP per capita

Question 9

What is the argument for geography being an intrinsic fundamental cause of growth

Answer 9

The tropical climate is fundamentally negative for growth due to low productivity in agriculture end poor health which stunts growth

Question 10

Why is productivity lower in tropics?

Answer 10

• tropical souls are more fragile and poorer in nutrients
• water availability is more discontinuous and irrigation is more costly
• hot climates favour pests and parasites

Question 11

How does poor health reduce productivity?

Answer 11

• it reduces incentive for people to invest in developing technology, accumulate physical and human capital
• there is a correlation between high malaria exposure and low test scores and therefore low education

Question 12

How were tropical countries easily colonised?

Answer 12

They had low growth and therefore a weak army so were easy to colonise. Colonial policies were detrimental to growth

Question 13

Conclusion of the inherent tropical curse

Answer 13

• some tropical countries like Colombia have had large increases in agriculture yields
• in africa there are lots of other factors which may impact growth
• people don’t buy bed nets due to behaviours, state capacity and corruption in health programs

Question 14

Conclusion of historical tropical curse

Answer 14

• tropical climate did lead to historically poorer nations with lower military power so they were easy to colonise
• the chain of events is complex and it’s not only due to lack of military power

Question 15

Why did Europeans have better technology earlier on?

Answer 15

They started agriculture first rather than a Hunter gatherer technique. They also had more plants and animals to domesticate since Eurasia has an east-west orientation which means the climate doesn’t change much and similar crops and animals exist here.

Question 16

Institutions

Answer 16

Humanly devised constraints that structure political economic and social interactions. They consist of both formal rules and informal constraints

Question 17

Informal constraints

Answer 17

Taboos (a social custom prohibiting a particular practice) e.g most countries don’t eat horse meat

Question 18

Formal constraints

Answer 18

Justice system e.g the average prison sentence for robbery varies a lot over developed European countries

Question 19

Why have institutions emerged?

Answer 19

To decrease the uncertainty in transactions, for example currencies

Question 20

Example of positive relationship between GDP per capita and an institution

Answer 20

Property rights and GDP per capita

Question 21

Inclusive economic institutions

Answer 21

They allow and encourage participation by the great mass of people in economic activities that make the most of their skill

Question 22

Extractive economic institutions

Answer 22

They discourage participation in economic activities e.g and very code didn’t allow slaves to work, plant corn or keep animals

Question 23

Inclusive political institutions are when the government is…

Answer 23

• plural- not concentrated in one person
• contestable- politicians can be voted out of power if they don’t perform
• accountable to a wide range of interests
• constrained by the rule of law, and by a series of checks and balances

Question 24

Virtuous cycle

Answer 24

The virtuous cycle arises because inclusive political institutions tend to support inclusive economic institutions. This leads to a more equal distribution of income, empowering a broad segment of society and making the political playing fiend even more level.

Question 25

Vicious cycle: the law of oligarchy

Answer 25

Extractive political institutions mean certain groups have restricted access to power. This causes privileged groups to have favoured access to economic opportunity and the formation of oligarchy. There is pressure to limit access to power.

Question 26

Iron law of oligarchy

Answer 26

Leaders overthrowing old extractive ones will bring nothing more but the same because it is beneficial for them to do so

Question 27

Institutionalist

Answer 27

Someone who emphasises institutions as the central fundamental determinant of growth

Question 28

Critical junctions

Answer 28

Major events that disrupt the existing political and economic balance in one or many societies

Question 29

How is the Black Death in europe a critical juncture

Answer 29

• before the Black Death, the feudal system was in place. This was an extractive institution where all the power lies with the landed aristocracy
• Black Death kills a lot of the population making labour more scarce. This gives more bargaining power to peasants
• in Western Europe the feudal elite was less powerful than elsewhere
• in Eastern Europe, peasants had less power than before

Question 30

How did the east west Europe divide cause a change in technology

Answer 30

The west had higher wages which incentivised labour saving technology which catalysed structural transformation

Question 31

How was Atlantic trade a critical juncture?

Answer 31

Parliaments emerged due to a division of power and increased accountability of the sovereign. More constraints were imposed and there was a rise in the merchant class.

Question 32

Bill of rights 1689

Answer 32

• parliamentary sovereignty: no person of body outside of parliament can set rules
• limits power of monarch especially in matters of tax, fines and forfeitures

Question 33

The little divergence

Answer 33

Atlantic trade had a positive impact on growth in Britain in terms of institutions. On the other hand it reinforced the power of the ruling class in Spain and Portugal

Question 34

Reversal of fortunes

Answer 34

• on average places that were more urbanised and more wealthy in 1500 are now less wealthy
• developed places in 1500 had extractive institutions, less developed places had inclusive institutions

Question 35

Why did China become less successful over time?

Answer 35

• China failed to use sailing technology in Atlantic trade because the emperor thought it might bring new ideas and he could be overthrown.
• leaders focused on building string states to control and tax people rather than incentivise private profit

Question 36

Why was the industrial revolution not chinese?

Answer 36

• Britain had secure property rights, a fair and efficient judiciary as well as contestable markets
• Britain had relatively high price of labour so labour saving methods were incentivised (Allen 2012)
• europe had superior access to natural resources thanks to colonial empires

Question 37

What is a good way of forced institutional change?

Answer 37

Small changes may be more successful since big changes often lead to more extractive institutions.