Macroeconomics 2 L 1032

Essay

Candidate Number: 12902

Question 2 Why are tropical countries so poor?

Overview Why are there such large differences in productivity across countries? Tropical countries are typically much poorer than countries with temperate climates. Why? Is there something intrinsic to the climate or geography that can explain this? Or is it because these countries have unsuitable political and economic institutions that have their roots, perhaps, in colonial history? Assessing the relative importance of geography and institutions matters for development policy. The emphasis placed on good governance by institutions such as the World Bank, rests on the view that institutions matter a great deal. If it could be shown that this was wrong, and that the direct effects of geography mattered most, then more emphasis on mitigating these effects would be justified (e.g. mosquito nets or, in the limit, migration).

Why are there such large differences in productivity across countries? The textbook answer would be: it is because of accumulation of capital and technological progress. But if we go one why further it becomes more complicated. Why certain societies managed to accumulate capital and gain technological progress faster than others? We are going to focus on the two main theses on this matter, geography and institutions. Is only one valid? Do they grow as pairs? Have the same importance? We will first study geography, looking if it does or not impact on economic development, and if it does by what means. We will adopt the same reasoning for institutions. It is important to define what we mean by tropics since it does not fit the strict geographical sense. Sachs (2001) explains it very well: More useful definitions of the tropics rely on ecological or climatic characteristics as opposed to latitude. Of course there are a large number of alternative classification systems, based on temperature, precipitation, growing season, natural vegetation cover, and other characteristics. In general, tropical zones are defined by high year round temperatures and the absence of winter frost. A simple look to a GDP per capita map is telling. With few exceptions (that can be explained easily through recent history) most of the temperate countries are rich while most of the countries in the tropics are poor. On average an individual living in a temperate country is 4.5 times richer than his fellow human being
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living in a tropical country (Sachs, 2001). This disparity can even be noticed within countries, with the most temperate part having an edge on its subtropical/tropical counter-part (China, Brazil, United-States etc.) (Sachs, 2001).Starting with these basic observations, what geography features gave some countries an edge, and how these features have unfolded through human history to create this gap between temperate and tropics? The geography thesis is probably the oldest one. It was thought that the land and, more importantly, the labor force were inherently less productive in the tropics (Montesquieu, 1750). This approach seems simplistic and dangerous nowadays. Indeed this thesis can be considered racist Approach the south, you will think you are leaving morality itself, Montesquieu (1750), and is, therefore, tackled with precaution. The geography thesis regained a lot of popularity with the publication of the bestseller Guns, Germs and Steel: The Fates of Human Societies (1997) by Jared Diamond. It totally denied the racist idea, while giving an all-in-one answer from the birth of human societies to nowadays. It is explained that the difference in wealth between countries is due to geography. Thanks to better climate, better domesticated animals and crops, more fertile soils some societies had an initial food production advantage. The ones with temperate climate and on the Eurasian continent were able to have food surplus, allowing some members of society to not be only farmer but to specialize on more advanced tasks. The results of this food production advantage was the presence of specialists within the society, a bigger population and a higher density (increasing returns-to-scale) that helped these temperate based societies to unlock techniques and technologies that pushed them ahead from the tropical ones still struggling with food. Apart from the food, the other key aspect of demographic growth is health. Direct geography played an important part in this health burden tropical societies have had to carry throughout history. Germs blossom in warm, high humidity areas such as the tropics, leading to many virulent diseases in these regions that kept the societies in underdevelopment. Sachs (2003) studied the link between malaria and development. He found a direct correlation between GDP per capita and the risk of malaria transmission.We saw that tropical societies had a heavier drawback than temperate societies because of diseases. But the inequality doesnt stop here. Thanks to many different domesticated animals the Europeans and other temperate societies developed immunities against many diseases (Diamond, 1997) which other societies stayed vulnerable to. Many processes led this initial advantage to overwhelming world domination from western countries during more than three centuries. Diamond (1997) gives an explanation using three key concepts. Europeans managed to
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assert dominance on the rest of the world thanks to guns, germs and steel. With this military dominance the Europeans amplified the gap with tropical countries, and even advanced civilizations such as China. With extractive policies they were able to abduct resources and/or labour from tropical countries. Even without straight military conquest it is still the case in recent history and even nowadays (natural resources in Africa, oil before OPEC). After World War II there was the belief that poorer countries would play catch up as a result of technological diffusion. It was and is still not the case, specifically in tropical countries, one the main reasons being that some technologies cannot diffuse across ecological zones (Sachs, 2001). Nobody is arguing that geography has no impact in development, but there is debate concerning the degree of this impact. Is it overwhelming and can decide the economical fate of a country? Or is it secondary and can be counter balanced by efficient institutions? If geography is really what matters, how come countries ecological-alike like North Korea and South Korea (Acemoglu, D., S. Johnson and J. Robinson, 2004) are in such different economic situations? At the time of the separation both Koreas shared the same income per capita (Maddison , 2001). In 2011 North Koreas GDP per capita PPP was approx. 2,400 $ (Foreign and Commonwealth office) while South Koreas was approx. 32,000 $ (IMF). If this disparity doesnt lie in geography we need to look for other factors. What we are looking for are institutions. This term regroups multiple and complex concepts but we will simplify it to human construction: economic, political and cultural. Economic institutions regroup a wide range of economic structures within a society such as a system of property rights, competitive markets or a banking system. Economic institutions matter for economic growth because they shape the incentives of key economic actors in society, in particular, they inuence investments in physical and human capital and technology, and the organization of production. ( Acemoglu, Johnson and J. Robinson, 2004) In the introduction we stated what created growth: technical progress and capital accumulation. They cannot happen without investment. And what is the nemesis of investors? Uncertainty, instability, not being able to anticipate. Good geography does not solve this problem, only good economic institutions can. They are no incentive to invest in your farm to increase production if another man can take it from you whenever it pleases him. Same goes for innovation,
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and thus the idea of patents. Without competitive market and a solid set of economic institutions even the most geographically gifted country can fail economically because it is wasting its resources. Acemoglu (2004) shows a reversal in colonized country before and after colonization. Europeans tended to adopt extractive policies where it was maximizing their benefit, areas with resources and rules by an autocracy of Europeans aiming to maximize their rent. In regions like North America or Australia, the Europeans soon became an important part of the population, therefore willing to set up propriety rights and economic institutions to insure prosperity for themselves. Acemoglu, Johnson, Robinson (2001) also linked the type of economic institutions the Europeans chose with the mortality rate they were facing in their colonies. With high mortality rates Europeans chose extractive, with a take all the resources and get out of here mentality. What is interesting is that in almost every case, the institutions set up by colonizers kept on going after they left and seem to condition the economic situation of the colonized even nowadays. It means that Europeans chose extractive policy partly because of geography (mortality rate linked to diseases) but its not due to geography that these countries had a path of underdevelopment. They simply had a bad set of extractive institutions that slowed them down. It is hard to always distinguish political and economic institutions because of the numerous links that bind them together. In any case, the political power and institutions are the one setting up the economic institutions and have the charge to enforce its citizens to abide by them. Political institutions are the result of a constant fighting between groups differing in their values and interests. Capitalism, and its economic institutions offspring is the result of the rise of the bourgeoisie over the aristocracy in the XVIIIth century in Europe, and the belief that capitalism was going to benefit the bourgeoisie. In 1917 the proletariat led by Lenin took over the tsar and established a socialist economy which the proletariat was supposed to benefit from the most. Democracies have an excellent record in economic development. Instead of an elite who choses by itself what is best for their own interests, democratic governments have to make compromises to satisfy the greater number leading, most of the times, on more efficient institutions.

Cultural beliefs may not be institutions stricto sensu yet, they shape them. The political power (whatever the form of government it may be) applies its
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cultural values to its policy. In a democracy it is supposed to be the values of the majority (eg. Following polls indicating a majority of French being against the exploitation of shale gas President Hollande recently stated that he will suspend their exploitation). It can be shale gas, slavery, tax policy, welfare state etc. All of which depend on the values a society believe as superior, and have a direct impact on political and economic institutions. Among cultural beliefs religion has played a crucial role and its influence on societies throughout History has been tremendous. The case of Protestantism versus Catholicism is well known, and has been studied by Weber (1904). The values of Protestantism such as the earth is meant to be exploited by men, advocating hard work or living a frugal life (saving) were a fertile soil for innovation and capital accumulation. It partly explains the lag of, lets say, France on Britain during the industrial revolution. Tropical countries started with an initial disadvantage due to geography that strongly negatively influence their institutions. Followed, for a lot of them, by exogenous processes such as colonization that had as well negative long term effects on their institutions. Nowadays geography matters less -even if some technologies are not transferable from temperate to tropic- and institutions, or the lack of stable institutions, are what is restraining tropical countries. But what the IMF or the WTO promote: free trade, privatisation and overall aggressive capitalism is not the kind of institutions developing countries primarily need. They need economic institutions that protect their interests, especially their agriculture and their growing industries (e.g. Cocoa crisis in Ivory Coast). But more importantly the institutions they need are political and educational. With a stable democratic regime and an educated population I believe tropical countries may have the tools to catch up with developed countries.

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Bibliography:
Acemoglu, D., S. Johnson and J. Robinson (2001), The Colonial Origins of Comparative Development: An Empirical investigation., American Economic Review, 91, December. Acemoglu, D. ( 2003), Root Causes: A historical approach to assessing the role of institutions in economic development. Finance and Development, Vol. 40, No. 2, pp. 27-30. Acemoglu, D., S. Johnson and J. Robinson (2004), Institutions as the fundamental causes of Long-Run Growth NBER working paper no. 10481 Diamond, Jared (1999) Guns, Germs and Steel: The Fates of Human Societies. New York: W.W. Norton. Easterly, W and R. Levine (2002), Tropics, Germs and Crops: how endowments influence economic development, NBER working paper no. 9106.

McArthur, John W. and Jeffrey D. Sachs (2001). Institutions and Geography: Comment on Acemoglu, Johnson and Robinson (2000). NBER working paper no. 8114 Montesquieu (fr: 1748, eng: 1750). The Spirit of the Laws Rodrik, Dani and Arvind Subramanian. 2003. Th e Primacy of Institutions (and what this does and does not mean). Finance & Development, Vol. 40, No. 2, pp. 31-34. Rodrik, Dani, Arvind Subramanian and Francesco Trebbi (2004) Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development. Journal of Economic Growth, Vol. 9, pp. 131-165 Rodrik, D. (2011) The Future of Economic Convergence, Harvard. Available free online at: http://www.hks.harvard.edu/fs/drodrik/research.html Sachs, J. D. (2001). Tropical Underdevelopment, NBER working paper no. 8119 Sachs, J. D. (2003) Institutions Dont Rule: Direct Effects of Geography on Per Capita Income, NBER working paper no 9490