Topic 3: Geography and Institutions

Question 1

What determines prosperity? Three standard economic answers.

Answer 1

• Physical capital differences (poorer countries do not save enough)
• Human capital differences (poorer countries do no invest enough in education and training)
• Technological differences (poorer countries do not invest enough in R&D and technology adoption, and do not organise their production efficiently)

Question 2

What does Acemoglu identify as the more proximate causes of poverty?

Answer 2

• Geography (exogenous differences in environment )

- Institutions (humanly devised rules shaping incentives)

Question 3

What is the geography hypothesis?

Answer 3

1) Idea that forces of nature act as a primary factor in determining the poverty of nations.
2) The geography, climate and ecology of a society shape trade opportunities, incentives and technology.

Question 4

What factors does geography determine?

Answer 4

• Agricultural productivity,
• Heath and disease burden,
• Natural disasters
• Trade costs,
• Diffusion of technology

Question 5

What did Montesquieu (1748) say?

Answer 5

• Geography determines human attitudes.
• The heat of a climate may be excessive as to deprive the body of all vigour and strength.
• Human attitudes determine economic performance.

Question 6

what two main geographical factors influence growth, according to Sachs (2001)?

Answer 6

• Latitude and Geographical isolation.

Question 7

What else does Sachs say about world geography and Africa?

Answer 7

• Economies in tropical ecozones are nearly everywhere poor, whilst those in temperate ecozones are generally wealthy.
• In terms of latitude, there are very few wealthy countries between the tropics of Cancer and Capricorn. The poorest countries are nearest the equator.
• Africa is poor due to disadvantageous geography. Because of this its climate, soils, topography and disease Africa suffers from low productivity, high disease burdens and low levels of international trade.

Question 8

What does Sachs describe as the economic effects of geography?

Answer 8

• Tropical diseases: Malaria for example - this increases mortality rate and impacts the general health of the population and population structure.
• Intense heat: Makes outdoor labour such as farming and construction challenging.
• Rainfall volatility: Combined with soil quality, pests and parasites - this effects agricultural productivity and stable production.

Question 9

What do Bloom and Sachs (2001) say about Malaria?

Answer 9

• Malaria alone reduces the annual growth rate of sub-Saharan African economies by 26% a year.
• Had Malaria been eradicated in 1950, income per capita would be double what it is presently.

Question 10

Why do poorer economies have a lack of access to trade and outside influences?

Answer 10

• Lack of technological innovation.
• High transportation costs, distance to markets and poor infrastructure.
• Bad economic institutions because of power and colonial rule legacy.

Question 11

What are the policy implications to the geography problem?

Answer 11

• Solutions need to integrate ecology and economics.

- Solutions need to target specific country conditions.

Question 12

What are some of the criticisms of Sachs’s arguments?

Answer 12

• if geography is bad for growth its effect should surely have been constant over time? Societies in the tropics historically have not always been poor e.g. Egypt, Aztecs etc.

Question 13

What is the reversal of fortune (Acemoglu 2002)

Answer 13

• Took place at the end of the 1700s.
• Caused by colonisation and by the different institutions established in the colonies depending on existing wealth and population:
• Relatively better institutions emerged in places that had favourable conditions and were sparsely settled - e.g. compare the United States vs. the Caribbean (slavery). -
• Geographical factors (natural resources, climate, distance from markets, etc.) were important in determining what types of institutions would be established.

Question 14

What is the institutional hypothesis?

Answer 14

Acemoglu - some countries have better institutions that facilitate investment in physical capital, human capital and technology. Others do not.

Question 15

How should institutions be defined?

Answer 15

• A set of humanly devised behavioural rules that govern and shape interactions of human beings, in part by helping them to form expectations of what others will do.
• Can be formal - Constitutions, laws, contracts etc.
• Can be informal - norms, customs, ideologies etc.

Question 16

What are inclusive institutions?

Answer 16

They are good institutions that:

• Enforce property rights (protection against expropriation risk) - correlates to higher investment and GDP.
• Promote law and order,
• Provide public services,
• provide regulation of markets and constrain the actions of elites.
• promote freedom of entry into markets and access to education - also promote innovation.
• Exploit the natural experiments of history for the better e.g. North/South Korea.

Question 17

What are extractive institutions?

Answer 17

• Designed by the politically powerful elites to extract resources from the rest of society.
• Colonial legacy - set up where conditions were not favourable to settlers.

Question 18

Why is there a link between colonial settlement and current economic performance?

Answer 18

• Where there was a lower mortality rate, European settlers established inclusive institutions that promote economic growth today e.g. USA, Australia
• High mortality rates = extractive institutions e.g. Nigeria, Gambia and Mali.
• The colonial state and institutions persisted even after independence.

Question 19

Why do institutions matter?

Answer 19

They have a large, casual effect on long-run growth.
- differences in institutions account for 3/4 of variation in income per capita today.
- Variables include colonial origin, legal origin, religion, disease and geography.
Limitations:
- institutions treated like a black box - limited direct policy relevance.

Question 20

How has colonisation and the slave trade impacted the development of Africa?

Answer 20

• Identity of coloniser matters e.g. British colonies governed by indirect rule today are more stable and have a better rule of law.
• Extractive institutions have led to weak property rights.
• Slave trade - the larger the number of slaves taken, the worse economic performance is today.

Question 21

How can direct and indirect effects of geography be summarised?

Answer 21

Two effects on income and growth:

• Direct/contemporaneous effect (Sachs)
• Indirect/through history and institutions (Acemoglu)

Question 22

What do Nunn and Puga (2007) argue?

Answer 22

Talk of terrain ruggedness:

• Negative contemporaneous effect: rugged terrain bad for irrigation, infrastructure and agriculture.
• Positive historical effect: rugged terrain offered protection against slave traders.