Why are some countries richer than others?

The first part of my new MFin elective Understanding the World Economy and Financial System next term will explore the question, why are some countries richer than others?

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One of the most important, interesting but hotly contested questions in economics is, why are some countries richer than others? The world is astonishingly unequal; the life chances of a child born today depend overwhelmingly on the country of birth. One way of seeing this is to look at the earth sky at night. The variation in light broadly correlates with economic development (as well as relatively unpopulated areas of course).

Source: NASA https://www.nasa.gov/topics/earth/earthday/gall_earth_night.html

 

A more conventional map of GDP per head is shown below, using World Bank data in the very useful website Our World in Data.

Source: https://ourworldindata.org/economic-growth#gdp-growth-since-1950

The question is contentious because it can easily turn into a debate about racial or cultural superiority, or encourage deterministic theories of long term development. Equally, it seems unsatisfactory to say the current unequal outcome is an arbitrary result of random historic “stuff”. Any theory needs also to account for change – the “west” (Japan doesn’t fit very well into that label) has dominated global economic power for a century and a half but there is a steady shift eastwards currently going on.

There isn’t a single, satisfying grand theory, but we can find a lot of causal explanations, which are not mutually exclusive, under the headings: geography, history and contingency (or sheer luck, if you prefer).

Geography

The idea that the physical facts of a country or region, including climate, botany and the type of animals present, explains destiny, is a very old one. It would be surprising if geography had no role to play. But it’s too simple to say that this or that feature is good or bad for development. Rather, geography intersects with other forces.

Jared Diamond’s brilliant Guns, Germs and Steel argues that there is a good reason why civilisation developed mainly in the Eurasian land mass rather than in the Americas or in Africa. The reason is a combination of the geographic orientation (east-west turned out to be more helpful than north-south) and in the luck of which animals and plants could be domesticated. Early civilisation required fertile river basins, the right climate and suitable plants for turning into agriculture. This happened in what we now call the Middle East (Mesopotamia and Egypt), China and India, all on the Eurasian lateral land mass. It also happened in central America and Peru (long before these names were coined of course), in New Guinea and in the eastern Sahara.

Diamond argues that it was much easier for ideas and technology to spread along similar climatic zones, which favours east-west. The problem for north-south continents is that travel north or south inevitably means hitting much warmer or colder regions where the domesticated crops might not work. Eurasia was also lucky to have easily domesticated animals such as horses, a crucial source of industrial and military power. Africa had the zebra (related to the horse), which turned out not to be easy to domesticate.

That might explain the long arc of development after the last ice age, 20,000 years ago. More recent development might have other geographical causes. In the period of early “western” civilisation (where the roots were in the Middle East but spread via the Persian and later Ottoman Empires to western Europe, the main source of power was inland. The remote Atlantic coasts of the UK, Spain and Portugal were originally undeveloped and at a disadvantage. But as sea-borne trade became important in the 16th and 17th centuries, crucially bringing access to the Americas, those remote regions became vastly richer than the former Middle Eastern regions.

Similarly in China, the original source of wealth was in the valleys and floodplains of the Yellow and Yangzi (called in Chinese, “long river” – 长江) rivers. But later trade along the coast and with other regions became important. Today, coastal China is much richer than inland China because of international trade.

Rivers matter not only for civilisation based on agriculture but for early industrial development, because they offer a cheap form of transport. It is a great geographic fluke that the US has a wonderfully extensive river system which flows south into the Gulf of Mexico (see map below). Early US agricultural then industrial development benefited greatly from its rivers.

Source: Wikipedia

By contrast, Russia’s geographic bad luck is that its rivers largely flow north into the icy Arctic Circle, which makes them much less useful for transport.

Source: Wikipedia

In his wonderfully rich book Why the West Rules – For Now, Ian Morris argues that the “west” and “east” developed largely independently over the last 10,000 years. The west developed domestication of plants and animals about 2,000 years earlier but the east caught up and overtook the west, the two separate regions broadly following the same “social development” index to cope with the pressures of growing populations. Each suffered setbacks from climate change, disease (the Black Death killed a third of the European population in the 14th century) and invasions from the central Asian steppes.

But what we really want to explain is why the west pulled ahead with industrialisation, the consequences of which still dominate the global distribution of economic power today.

History

Much of the global distribution of income can be explained by the history of industrialisation and European imperialism. Perhaps the most important single question in modern history is, why did the industrial revolution start in England? From that fact and the spread of industrialisation to the rest of Europe, arose European economic power and imperialism. There is little doubt that the path of relative economic power, especially for India, which was badly held back by British rule, was changed dramatically. The 21st century is seeing a gradual catching up of the major Asian economies to where they used to be before European industrialisation.

One theme in the historical explanation is the role of institutions in economic development. Acemoglu and Robinson’s justly famous Why Nations Fail is a wonderfully interesting compendium of success and failure among nations, driven by the importance of institutions (there is an excellent blog too). The authors argue that some nations have inclusive institutions which encourage wider wealth creation beyond the existing elite. Extractive institutions are where the state is parasitic and merely takes from the majority to the benefit of a minority. Since incumbent elites typically prefer to stop competition from new prosperous classes, they are often the root of the problem of development (there are depressingly many cases in Africa). They see institutional explanations as different from historical or geographical.

The argument is partly based on refuting traditional explanations. For example, some (mostly British) historians argued that being colonised by the UK was good for a country’s development. This appears persuasive if we look at the US, Canada and Australia. But what about Nigeria or Sierra Leone? A counter-argument to that might be the “lazy tropical workers” view characteristic of European imperialists. But Singapore, Malaysia and Botswana all lie within the tropics and have varying degrees of economic success. (Tropical areas do sometimes suffer from poor quality soil but that’s less important for modern economic development).

Acemoglu and Robinson use stark comparisons of near idential geography with utterly different economic development: the two sides of the US/Mexican border, North and South Korea and East and West Germany. In each case it’s clearly not the physical features of the landscape, but something else which explains radically different development. They argue it is the institutions that are crucial.

Acemoglu and Robinson are not the first to argue that institutions matter. For example, the UK evolved institutions that were very good for capitalism (a strong but not too strong state which widely represented the owners of property, not just the landed rich, a good legal system, a creditworthy state). Much of this was a result of centuries of civil war and faction fighting that produced a workable compromise, reinforced by importing a lot of ideas from early-capitalist Holland. Geography matter too though: the UK’s island status provided both military security (compared with the endless turmoil in continental Europe) and a sea-faring tradition which helped the Royal Navy dominate much of the world’s oceans. The UK also had lots of coal and rivers to provide energy for industrialisation.

Brilliant though the book is, its argument is slightly circular – bad institutions arise from history (often from the “wrong” sort of imperialism) or contingency and then are very hard to change. And there is one glaring exception to the theory, which is China. China, according to the authors, lacks inclusive institutions (in particular the rule of law) yet has become the greatest case study in history of economic development. Of course it might all go wrong one day but so far China poses a challenge to conventional views on institutions and economic development.ontingency

Contingency

A lot that happens in history is apparently unpredictable – not necessarily random but hard to explain from geography or historical processes. Sometimes sheer luck matters – stuff happens.

One of the great what-ifs of history surrounds the decision of China’s emperor Kangxi to shut down contact with the west in the early 18th century. China had until then led the world in science and technology, as well as in large scale ships which China could have used (but chose not to) to create a global empire. But Europe began to catch up and overtake during that century, leading to China being invaded and humiliated by European powers in the 19th century. Kangzi was no fool – he was an intellectual and willing to take bold steps when needed (he led the campaigns which finally shut down the threat of invasion from the great grasslands to the north of China). But he feared the effect of Christianity, which was inspiring sometimes violent uprisings in other parts of Asia. It must have seemed safest to keep the west at arms length.

Morris argues that China didn’t develop the scientific revolution that powered the west’s economic and military power because it didn’t need to. The wider argument is that innovation comes from need as much as opportunity. Europe’s war-torn history has stimulated mathematics and science. China’s stability (at that time) made such progress unnecessary – maths was seen as a branch of classical studies. So the west invented calculus and China didn’t.

China’s more recent economic miracle is also to some extent contingent. It happened after the death of the founder of Communist China, Mao Zedong. His successor Deng Xiaoping allowed and then encouraged a greater role for the market and for private ownership which kicked off the great Chinese economic transformation. This might have started thirty years earlier if Mao hadn’t followed his disastrous collectivisation policies.

An extreme case of contingency – to the great misfortune of the people affected by it – is the divergence between North and South Korea following the war of 1950-53. South Korea has become one of the world’s richest nations and joined the OECD, the “club” of industrialised nations, in 1996. North Korea’s story is very different. The stark difference in development and standard of living is captured by the night sky photo below, where the border is almost exactly shown by black on one side and blazing light on the other. There is a small spot of light around North Korea’s capital Pyongyang.

Source: NASA https://eoimages.gsfc.nasa.gov/images/imagerecords/83000/83182/ISS038-E-038300_lrg.jpg

 

It’s obvious that this extreme difference can’t be explained by geography. Rather it reflects a mixture of history, luck and the particular way that the isolated Kim dynasty of North Korea has evolved, contrasted with the remarkably successful policies followed by South Korea. (In this blog I show the remarkable difference in economic fortunes between South Korea and Ghana since the early 20th century, when they had similar levels of income per head).

Conclusion: it’s complicated

Historians are suspicious of grand theories and monocausal explanations. Economists by contrast like a limited number of variables in their (preferably testable) models. Geography, history and chance intersect. But the pattern of economic growth has been remarkably persistent in the last century, so it’s very far from random. From a very long term point of view, Asia is returning to the historic dominance it had for most of the last 2,000 years. Africa remains the great opportunity, facing a huge increase in population over the next fifty years, which could be a boon or curse, depending on how policies develop. Climate change, the ultimate geographic constraint, may turn out to be the key factor in the next few decades.

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