Economic Growth: Geography and Institutional Factors
Key Questions in Economic Development
Proximate and Ultimate Factors in Development
Ultimate factors are deep, underlying causes of development differences—things that shape history over thousands of years. Proximate factors are the immediate mechanisms through which these ultimate factors influence outcomes.
Examples of Ultimate Factors:
- Geography (climate, animals, crops)
- Continental orientation
- Disease environment
Examples of Proximate Factors:
- Technology
- Institutions (property rights, rule of law)
- Education and human capital
The Link: Ultimate factors → shape institutions → influence proximate factors → determine economic outcomes.
Continental Orientation and Agricultural Spread
Why did Eurasia experience a faster spread of agriculture than the Americas? Eurasia is oriented east–west, meaning regions share similar latitudes, resulting in similar climates, rainfall, and seasons. This allowed crops, livestock, and technologies to diffuse easily across thousands of kilometers.
The Americas are oriented north–south, meaning movement across diverse climates (tropics → deserts → temperate → polar). Agriculture spread slowly because species were poorly adapted when moved across climatic zones. Thus, continental orientation explains why Eurasia advanced agriculturally much quicker than the Americas.
Geographic Luck and Long-Run Prosperity
“Geographic luck” (as proposed by Jared Diamond) refers to being born in regions with domesticable plants and animals, fertile land, and favorable climates that accelerated early agriculture. It was largely luck because early humans did not choose their geography. Societies with wheat, barley, cows, and horses advanced faster than those without such species.
However, long-run prosperity is not only luck; institutions, technological adoption, and human choices shape outcomes later on. Geography sets the stage, but institutions determine whether a country stays rich.
Settler Mortality and Institutional Development
How did settler mortality affect the type of institutions established in colonies? Where settler mortality was low, Europeans settled permanently and created inclusive institutions (property rights, rule of law, constraints on elites). Where mortality was high, settlers avoided living there and created extractive institutions designed to extract resources at low cost. These institutions persisted after independence, causing long-term divergence in growth.
Case Study: Singapore vs. the DRC
If geography explains wealth, why is Singapore rich and the DRC poor? Geography alone cannot explain these differences. Singapore has few natural resources yet is rich, while the Democratic Republic of Congo (DRC) is resource-abundant yet poor.
- Singapore: Strong, transparent institutions, anti-corruption measures, open trade policies, and investment in education and human capital.
- DRC: Extractive colonial institutions, political instability, corruption, and weak rule of law and property rights.
Conclusion: Institutions determine whether geography is utilized effectively. Singapore turned its location into an advantage; the DRC’s institutions prevented it from doing the same.
Policy Trade-offs: Inequality and Income Growth
Should policymakers reduce inequality or raise income? There is a trade-off: reducing inequality may slow growth if redistribution reduces incentives. Raising income without addressing inequality may worsen welfare and mobility. An optimal policy raises income while ensuring opportunities are equal, especially via education, skill development, and safety nets.
The Britain–China Divergence
What does this show about technology and distribution? Technology is not neutral; it benefits those who can adopt it. Countries without the institutions or capacity to adapt fall behind. Distributional outcomes depend on who controls capital and skills during technological change.