An additional factor behind the origin of the good institutions that I discussed above is termed “the reversal of fortune”. Among non-European countries colonized by Europeans during the last five hundred years, those that were initially richer and more advanced tend paradoxically to be poorer today. That’s because, in formerly rich countries with dense native populations, such as Peru, Indonesia, and India, Europeans introduced corrupt “extractive” economic institutions, such as forced labor and confiscation of produce, to drain wealth and labor from the natives. (By extractive economic institutions, Acemoglu and Robinson mean practices and policies “designed to extract incomes and wealth from one subset of society (the masses) to benefit a different subset (the governing elite)). But in formerly poor countries with sparse native populations, such as Costa Rica and Australia, European settlers had to work themselves and developed institutional incentives rewarding work. When the former colonies achieved independence, they variously inherited either the extractive institutions that coerced the masses to produce wealth for dictators and the elite, or else institutions by which the government shared power and gave people incentives to pursue. The extractive institutions retarded economic development, but incentivizing institutions promoted it.
The remaining factor contributing to good institutions, of which Acemoglu and Robinson mention some examples, involves another paradox, termed “the curse of natural resources.” One might naively expect countries generously endowed with natural resources (such as minerals, oil, and tropical hardwoods) to be richer than countries poorer in natural resources. In fact, the trend is opposite, the result of the many ways in which national dependence on certain types of natural resources (like diamonds and oil) tends to promote bad institutions, such as corruption, civil wars, inflation, and neglect of education.
An example is the diamond boom in Sierra Leone, which contributed to the nation’s impoverishment. Other examples are Nigeria’s and the Congo’s poverty despite their wealth in oil and minerals respectively. In all three of those cases, selfish dictators or elites found that they themselves could become richer by taking the profits from natural resources for their personal gain, rather than investing the profits for the good of their nation. But some countries with prescient leaders or citizens avoided the curse of natural resources by investing the proceeds in economic development and education. As a result, oil producing Norway is now the world’s richest country, and oil producing Trinidad and Tobago now enjoys an income approaching that of Britain, its former colonial ruler.
Those are the main sets of institutional factors promoting power, prosperity, or poverty, and their roots. The other large set consists of geographic factors with direct economic consequences not mediated by institutions. One of those geographic factors leaps out of a map of the world in Why Nations Fail that depicts national incomes. On that map, both Africa and the Americas resemble peanut butter sandwiches, with thick cores of poor tropical countries squeeze between two thin slices of richer countries in the north and south temperate zones.
In the New World the two temperate countries (the US and Canada, average incomes respectively $37,390 and $43,270) and the three south temperate countries (Uruguay, Chile, and Argentina respectively $10,590, $10,120, and $8,620) are all richer-on the average five times richer-than almost all of the intervening seventeen countries of mainland Central and South America (income mostly between $1,110 and $6,970). Similarly, mainland Africa is a sandwich of thirty-seven mostly desperately poor tropical countries, flanked by two thin slices each consisting of five modestly affluent or less desperately poor countries in Africa’s north and south temperate zones.
Mainland Africa’s ‘peanut butter sandwich’ of national wealth. Tropical African countries constitute a thick core between two thinner slices of countries in the north and south temperate zones. All temperate mainland African countries except landlocked Lesotho in the south have average annual incomes above $2,400, ranging up to over $12,000. All except three tropical mainland African countries-Equatorial Guinea and Angola-have average incomes below $2,200, ranging down to as low as $170 9Brundi).
While institutions are undoubtedly part of the explanation, they leave much unexplained: some of those temperate countries for their histories of bad institutions (think of Algeria, Argentina, Egypt, and Libya). While some of the tropical countries (e.g., Costa Rica and Tanzania) have had relatively more honest governments. What are the economic disadvantages of a tropical location? Two major factors contribute to the poverty of tropical countries compared to temperate countries: diseases and agricultural productivity. The tropics are notoriously unhealthy. Tropical diseases differ on average from temperate diseases, in several respects. First, there are far more parasitic diseases (such as elephantiasis and schistosomiasis) in tropical areas, because cold temperate winters kill parasite stages outside our bodies, but tropical parasites can thrive outside our bodies all year long. Secondly, disease vectors, such as mosquitoes and ticks, are far more diverse in tropical than in temperate areas.
Finally, biological characteristics of the responsible microbes have made it easier to develop vaccines against major infectious diseases of temperate areas than against tropical diseases; we still aren’t close to a vaccine against malaria, despite billions of dollars invested. Hence, tropical diseases impose a huge burden on economies of tropical countries. At any given moment, much of the population is sick and unable to work efficiently. Many women in tropical areas can’t join the workforce because they are constantly nursing and caring for babies conceived as insurance against the expected deaths of some of their older children from malaria.
Source: GIGEST, January 2014