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What makes countries rich or poor? Part III

As for agricultural productivity, it averages lower in tropical than in temperate areas, again for several reasons. First, temperate plants store more energy in parts edible to us humans (such as seeds and tubers) than do tropical plants. Second, diseases borne by insects and other pests reduce crop yields more in the tropics than in the temperate zones, because the pests are more diverse and survive better year-round in tropical than in temperate areas. Third, glaciers repeatedly advanced and retreated over temperate areas, creating young nutrient-rich soils. Tropical lowland areas haven’t been glaciated and hence tend to have older soils, leached of their nutrients by rain for thousands of years. (Young fertile volcanic and alluvial soils are exceptions). Fourth, the higher average rainfall of tropical than of temperate areas results in more nutrients being leached out of the soil by rain.

Finally, higher tropical temperatures cause dead leaves and other organic matter falling to the ground to be broken down quickly by microbes and other organisms, releasing their nutrients to be leached away. Hence, in temperate areas soil fertility is on average higher, crops losses to pests lower, and agricultural productivity higher than in tropical areas. That’s why  Argentina in South America’s south temperate zone, despite its conspicuous lack (for most of its history) of the good institution praised by economist, is the leading food exporter in Latin America, and one of the leading ones in the world.

Thus, geographical latitude acting independently of institutions is an important geographical factor affecting power, prosperity, and poverty. The other important geographic factor is whether an area is accessible to ocean-going ships because it lies either on the sea or on a navigable river. It costs roughly seven times more to ship a ton of cargo by land than by sea. That puts landlocked countries at an economic disadvantage, and helps explain why landlocked Bolivia and semi-landlocked Paraguay are the poorest countries of South America. It also helps explain why Africa, with no river navigable to the sea for hundreds of miles except the Nile, and with fifteen landlocked nations, is the poorest continent. Eleven of those landlocked African nations have average incomes of $600 or less,; only two countries outside Africa (Afghanistan and Nepal, both also landlocked) are as poor. The remaining major factor underlying wealth and poverty is the state of the natural environment. All human populations depend to varying degrees on renewable natural resources-especially on forests, water, soils, and seafood. It’s tricky to manage such resources sustainably. Countries that excessively deplete their resources-whether inadvertently or intentionally-tend to impoverish themselves, although the difficulty of estimating accurately the costs of resource destruction causes economists to ignore it. It helps explain why notoriously deforested countries-such as Haiti, Rwanda, Burundi, Madagascar, and Nepal-tend to be notoriously poor and politically unstable.

These, then, are the main factors invoked to understand why nations differ in wealth. The factors are multiple and diverse. We all know, from our personal experience, that there isn’t one simple answer to the question why each of us becomes richer or poorer: it depends on inheritance, education, ambition, talent, health, personal connections, opportunities, and luck, just to mention some factors. Hence we shouldn’t be surprised that the question of why whole societies become richer or poorer also cannot be given one simple answer. Within this frame, Acemoglu and Robinson focus on institutions that create them. In their words “while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.” In particular, they stress what they term inclusive economic and political institutions. “Inclusive economic institutions … are those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish.” For example, in South Korea but not in North Korea people can get a good education, own property, start a business, sell products and services, accumulate and invest capital, spend money in open markets, take out a mortgage to buy house, and thereby expect that by working harder they may enjoy a good life.

Such inclusive economic institutions in turn arise from “political institutions that distribute power broadly in society and subject it to constraints … Instead of being vested in a single individual or a narrow group, (Inclusive) political power rests with a broad coalition or a plurality of groups.” South Korea recently, and Britain and the US beginning much earlier, do have broad participation of citizens in political decisions; North Korea does not. Inclusive economic and political institutions provide individuals with incentives to increase their economic productivity as they think best. Such inclusive institutions are to be contrasted with absolutist political institutions that narrowly concentrate political power, and with extractive economic institutions that force people to work largely for the benefit of dictators. The ultimate development of inclusive political institutions to date is in modern Scandinavian democracies with universal suffrage and relatively egalitarian societies. However, compared to modern dictatorships and absolute monarchies widespread in the past, societies (such as eighteenth-century Britain) in which only a minority of citizens could vote or participate in political decisions still represented a big advance toward inclusiveness.

From this striking dichotomy, the authors draw through-provoking conclusions. While absolutist regimes with extractive economic institutions can sometimes achieve economic growth that growth is based on existing technology, and is nonsustainable and prone to collapse; whereas inclusive institutions are required for sustained growth based on technological change. One might naively expect dictators to promote long-term economic growth, because such growth would generate more wealth for them to extract. But their efforts are warped, because what’s economically good for individual citizens may be bad for the political elite, and because economic growth may be best promoted by political institutions that would shake the elite’s hegemony.          
Source: DIGEST, January 2014   

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