SUMMARY ON FUNDAMENTAL CAUSES:

GEOGRAPHY, INSTITUTIONS, AND CULTURE

UB Bachelor Degree in International Business

2021-2022

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The Main Question

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 GDP per capita PPP, in 2021

. >$60,000 $50,000 - $60,000 $40,000 - $50,000 $30,000 - $40,000 $20,000 -

$30,000 $10,000 - $20,000 $5,000 - $10,000 $2,500 - $5,000 $1,000 - $2,500
Huge Differences in Development!
YEAR Norway Niger
2019

Gross national income (GNI) per capita, PPP $ 66,494 1,201

Expected years of schooling 18.1 6.5

Life expectancy at birth 82.4 62.4

Why Niger ≠ Norway?

Y= F(?)
 Physical Capital?
Y=F(K)

g_y= a_k * g_k

1.9%= 0.25*1.3%+?

g_y= a_k * g_k + g_A

 Physical and Human Capital?
Y=F(K, H)

g_y= a_k * g_k + a_h * g_h

1.9%= 0.25*1.3%+0.75*0.7%+?

g_y= a_k * g_k + + a_h * g_h+ g_A´

 Add Externalities?
Y=F(K*, H*)

g_y= (a_k+ e_k) * g_k + (a_h+e_h) * g_h

1.9%= (0.25+ 0.5)*1.3%+(0.75+0.5)*0.7%+?

Externalities should be unreasonably large

g_y= (a_k+ e_k) * g_k + (a_h+e_h) * g_h+ g_A’’

 Economic
Growth

K* H*

EFFICIENCY
 Proximate Causes

These are just Proximate Causes of Economic Growth

Physical capital

Human capital

Technological innovation / Efficiency

 The real question is…

Why are some much more efficient /

more able to create technology than

others?
 Theories of Growth

Why are some countries rich and others poor?

Differences in human and physical capital.

What causes differences in capacity to accumulate human and physical

capital?

Technological innovation/efficiency

Human and physical capital accumulation are not causes of growth…they ARE
growth!

What causes differences in capacity to innovate / efficiency?

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Deep Determinants of Economic Development

INCOME

INSTITUTIONS CULTURE

GEOGRAPHY

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 Let’s Define Things…

Geography: environmental constraints, natural endowment

– Disease environment, climate, natural resources, location…

Institutions: formal «rules of the game»

– property rights, form of government (democracy or dictatorship), labor institutions (free

workers or slaves), taxation, market regulations, legal system...

Culture: informal «rules of the game», preferences, social capital endowment

– trust, individualism versus collectivism, family ties, morality, attitudes toward work and
the perception of poverty…

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Evidence in Favor of Geography

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 Geography

Goegraphy matters because…

…. it shapes the feasible set of opportunities

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 Climate

Sachs (2001), “Tropical Underdevelopment”.

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 Biodiversity and Orientation of Continents
Diamond, 1997; Olsson and Hibbs, 2005; Putterman, 2008

Biogeographical variables:
1. Biodiversity
2. Orientation of continents
® Timing of transition to sedentary farming
® Determines long-term development.

• Geography and biogeography account for nearly half of the variance in

1997 log income per capita.

• An idea for why the Neolithic Revolution matters: persistence of

technology Comin, Easterly and Gong (2010)

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 Domesticable Species

Source: Olsson and Hibbs (2000), “Biogeography and Long-Run Economic Development”.19
 Continental Axis

Vertical axis continents: less diverse agricultural systems, lower population density,
and less diffusion of technology (states, innovations...)

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Diseases: Malaria Prevalence

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Tranport Costs

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 Natural Resources

Source: Sachs and Warner, 2001

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Rainfall Shocks and GDP Growth

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 Geography Can Affect Institutions:
Rain and the Democratic Window of Opportunity

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Evidence in Favor of Institutions

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 Institutions

Institutions matter because…

…they shape incentives

(to invest in physical and human capital and provide public goods)

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Presence of States: State Antiquity and Modern Income

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Source: Acemoglu et al. (2005), “Institutions as the Fundamental Cause
of Long-Run Growth”
 Political Institutions, Property Rights, and the Rise of
Europe

North and Weingast (1988) “Constitutions and commitment: the evolution of

institutions governing public choice in seventeenth-century England”

Constitutional changes after the Glorious Revolution (1688) paved the way for
England's growth: secure property rights, protection of wealth, elimination of
confiscatory government.

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Change in Parliament Activity

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Change in Public Goods

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 Institutions Can Explain
the Different Effect of Geography Over Time

• Acemoglu, Johnson and Robinson (2002) “Reversal of Fortune: Geography

and Institutions in the Making of the Modern World Income Distribution"
QJE

• If ex-colonies that are (relatively) poor today were (relatively) rich in the
past, then there are problems with the geography view.

• AJR's view: Colonization created an “institutional reversal”. Europeans

were more likely to introduce “extractive" institutions in more densely-
settled (richer) states / high settler-mortality that they could not settle.

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 Population density in 1500 and GDP in 1995

Source: Acemoglu, Johnson, and Robinson (2002)

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Colonial Institutions and Development:
Settler Mortality

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 Colonial Institutions and Development: Factor
Endowments

Correlation with modern economic development

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Institutions Can Mediate the Impact of Geography:
The Natural Resource Curse

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 Institutions Can Explain Differences at the Border:
Nogales-Sonora (Mexico) and Nogales-Arizona (US)

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Evidence in Favor of Culture

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 Culture

Culture matters because…

…it shapes preferences & informal incentives

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 Weber’s Theory

Max Weber (1905) provided an ethics-based theory for economic

development.

The Protestant Reformation was instrumental in facilitating industrial

capitalism in Western Europe.

The Protestant work ethic approved the accumulation of wealth and thus
provided the moral foundation for capitalist industrialization.

***Test: not ethics, but literacy /human capital accumulation

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 Strong Correlations Between Trust and Development
Trust correlates with economic development, individual performance,
financial development, participation in the stock market, trade, productivity,
innovation ...

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Inherited Trust and Growth

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 Culture Can Affect Institutions:
Work-Luck Beliefs and the Welfare State

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Comparing Theories

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 Geography’s Strong Points

– (More or less) exogenous and persistent

– Defines the framework where institutions and culture are developed

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 Geography’s Weak Points

– Maybe it matters only through culture and institutions?

– Cannot explain timing: why IR happened in 1800s and not before?

– Cannot explain reversal of fortune

– Cannot explain differences across borders

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 Institutions’ Strong Points

– Can explain what geography can’t (border differences, reversal of

fortunes, timing of economic growth)

– It is an optimistic view: poverty is not destiny

– The narrative about incentives “makes sense”

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 Institutions’ Weak Points

– Vague definition of institutions (just formal rules?) and difficult to

measure

– Endogenous to economic growth

– Has difficulty explaining why institutions which were abolished should

still have an impact

– Cannot explain subnational variations of development within the same

country (same formal institutions)

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 Culture’s Strong Points

- Can explain why the same formal institutions work differently (subnational
variation, culture mediates the effect of institutions)

- Could explain persistence of effects of institutions which disappeared

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 Culture’s Weak Points

– Even more vague definition than institutions (informal rules or

preferences/beliefs or social capital) and difficult to measure

– If we define culture as preferences, what is explanatory power?

– If we define culture as informal rules, is it just a specific type of

institution?

– Endogenous to economic growth

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Geography AND Institutions AND Culture

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 Slave Trade and Trust

Nunn and Wantchekon (2011) “The slave trade and the origins of mistrust in
Africa" AER

NW trace differences in trust across African ethnic groups to their differences

with the Atlantic and Indian Ocean slave trades.

They merge Afrobarometer data on trust with ethnicity-level data on slave

exports by ethnic group.

Greater slave exports predict reduced trust in the present.

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Slave Exports by Ethnic Group

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 Geography AND Institutions AND Culture:
The Example of the Slave Trade
Nunn (2008) find that the slave trade can (partly) explain current African
underdevelopment.

Slavery is an institution…

…but geography explains why the slave trade was established

- Low population density in Africa promoted indigenous slavery
- Plantation crops in the Americas required slave labor
- Ruggedness of terrain can affect the severity of the slave trade

…and culture can explain why the effects persisted after the slave trade was
abolished
- Slave trade had impact on trust

Causality: Y wouldn’t happen if it wasn’t for X

Maybe we need all three?
At the end of the day, it’s an empirical question... 55
 This is why it is a very hard question

INCOME

INSTITUTIONS CULTURE

GEOGRAPHY

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