The Interconnections of Geography and Institutions For Understanding Income Disparities Across Countries In the last class we discuss “catching up” and “club convergence” of per capita income levels through the lenses of endogenous growth theories emphasizing innovation and imitation In today’s class we will focus on other factors that may account for the huge per capita income disparities across countries and regions: 1) Geography 2) Institutions

1) Geography Average per capita income in sub – Saharan Africa is less than one twentieth of per capita income in the United States Geography hypothesis: Geography and climate of a society’s location main determinant of a) Work effort, incentives, and productivity b) Technology, especially in agriculture d) Tropical diseases

Some stylized facts may support the geography view Most of the poorest countries are located in tropical areas, in very hot regions (close to the equator), with periodic torrential rains Tropical areas do not have enough frost to clean the soil and suffer from soil depletion from heavy rains In tropical areas infectious disease abound And these stylized facts are supported by simple statistical association or correlation between geography and income per capita levels But these correlations do not prove causation, and there are often omitted factors which are driving such correlations (i.e., malaria)

Correlation between Latitude and Income per capita

2) Institutions Unlike the geography hypothesis that emphasizes the forces of “nature”, the institutions hypothesis focuses on man-made influences: a) Enforcement of property rights b) Constraints on the actions of elites c) Some degree of equal opportunity for broad segments of society

However, as in the case of the geography hypothesis, these three factors may simply be correlations. Take the case of property rights protection:

What distinguishes the geography from the institutions hypothesis then? Unlike the geography hypothesis, the institutions hypothesis is able to distinguish between the “before” and “after” colonization In other words: the institutions hypothesis conducts a controlled experiment for establishing causality In a nutshell: Countries that were “rich” before colonization became poor because of extractive institutions Countries that were poor before colonization became rich because of good protection of property rights (particularly after 1800s)

Rich countries today are highly urbanized

Rich countries before colonization were highly urbanized

Population density before colonization concentrated in countries that are poor today REVERSAL OF FORTUNE!!

Another source of divergence is settler mortality

Again, settler mortality

But the geography hypothesis should nevertheless be taken seriously: Geography and diseases matters for economic outcomes Geography is important historically Geography could have an effect via institutions Geography has a significant effect on social welfare → Next class: DR Chap 14 and AM (1995) Chaps 1 & 2 HAVE A GREAT COLUMBUS DAY WEEKEND!!!