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What Makes Countries Rich or Poor?

Gary Knight/VII
Women in Darfur returning from Kutum market to the Fata Borno camp for internally displaced persons under the protection of African Union soldiers, January 2007; photograph by Gary Knight from Questions Without Answers: The World in Pictures by the Photographers of VII. The book has just been published by Phaidon.

The fence that divides the city of Nogales is part of a natural experiment in organizing human societies. North of the fence lies the American city of Nogales, Arizona; south of it lies the Mexican city of Nogales, Sonora. On the American side, average income and life expectancy are higher, crime and corruption are lower, health and roads are better, and elections are more democratic. Yet the geographic environment is identical on both sides of the fence, and the ethnic makeup of the human population is similar. The reasons for those differences between the two Nogaleses are the differences between the current political and economic institutions of the US and Mexico.

This example, which introduces Why Nations Fail by Daron Acemoglu and James Robinson, illustrates on a small scale the book’s subject.* Power, prosperity, and poverty vary greatly around the world. Norway, the world’s richest country, is 496 times richer than Burundi, the world’s poorest country (average per capita incomes $84,290 and $170 respectively, according to the World Bank). Why? That’s a central question of economics.

Different economists have different views about the relative importance of the conditions and factors that make countries richer or poorer. The factors they most discuss are so-called “good institutions,” which may be defined as laws and practices that motivate people to work hard, become economically productive, and thereby enrich both themselves and their countries. They are the basis of the Nogales anecdote, and the focus of Why Nations Fail. In the authors’ words:

The reason that Nogales, Arizona, is much richer than Nogales, Sonora, is simple: it is because of the very different institutions on the two sides of the border, which create very different incentives for the inhabitants of Nogales, Arizona, versus Nogales, Sonora.

Among the good economic institutions that motivate people to become productive are the protection of their private property rights, predictable enforcement of their contracts, opportunities to invest and retain control of their money, control of inflation, and open exchange of currency. For instance, people are motivated to work hard if they have opportunities to invest their earnings profitably, but not if they have few such opportunities or if their earnings or profits are likely to be confiscated.

The strongest evidence supporting this view comes from natural experiments involving borders: i.e., division of a uniform environment and initially uniform human population by a political border that eventually comes to separate different economic and political institutions, which create differences in wealth. Besides Nogales, examples include the contrasts between North and South Korea and between the former East and West Germany. Many or most economists, including Acemoglu and Robinson, generalize from these examples of bordering countries and deduce that good institutions also explain the differences in wealth between nations that aren’t neighbors and that differ greatly in their geographic environments and human populations.

There is no doubt that good institutions are important in determining a country’s wealth. But why have some countries ended up with good institutions, while others haven’t? The most important factor behind their emergence is the historical duration of centralized government. Until the rise of the world’s first states, beginning around 3400 BC, all human societies were bands or tribes or chiefdoms, without any of the complex economic institutions of governments. A long history of government doesn’t guarantee good institutions but at least permits them; a short history makes them very unlikely. One can’t just suddenly introduce government institutions and expect people to adopt them and to unlearn their long history of tribal organization.

That cruel reality underlies the tragedy of modern nations, such as Papua New Guinea, whose societies were until recently tribal. Oil and mining companies there pay royalties intended for local landowners through village leaders, but the leaders often keep the royalties for themselves. That’s because they have internalized their society’s practice by which clan leaders pursue their personal interests and their own clan’s interests, rather than representing everyone’s interests.

The various durations of government around the world are linked to the various durations and productivities of farming that was the prerequisite for the rise of governments. For example, Europe began to acquire highly productive agriculture 9,000 years ago and state government by at least 4,000 years ago, but subequatorial Africa acquired less productive agriculture only between 2,000 and 1,800 years ago and state government even more recently. Those historical differences prove to have huge effects on the modern distribution of wealth. Ola Olsson and Douglas Hibbs showed that, on average, nations in which agriculture arose many millennia ago—e.g., European nations—tend to be richer today than nations with a shorter history of agriculture (e.g., subequatorial African nations), and that this factor explains about half of all the modern national variation in wealth. Valerie Bockstette, Areendam Chanda, and Louis Putterman showed further that, if one compares countries that were equally poor fifty years ago (e.g., South Korea and Ghana), the countries with a long history of state government (e.g., South Korea) have on the average been getting rich faster than those with a short history (e.g., Ghana).

An additional factor behind the origin of the good institutions that I discussed above is termed “the reversal of fortune,” and is the subject of Chapter 9 of Why Nations Fail. 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, mentioned in Chapter 12, is the diamond boom in Sierra Leone, which contributed to that 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 squeezed between two thin slices of richer countries in the north and south temperate zones.

In the New World the two north temperate countries (the US and Canada, average incomes respectively $47,390 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 tropical countries of mainland Central and South America (incomes 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 (see map).

Mike King

While institutions are undoubtedly part of the explanation, they leave much unexplained: some of those richer temperate countries are notorious 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. Second, 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.

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, crop 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 institutions praised by economists, 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 geographic 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 coast 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 semilandlocked 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 fifteen 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.

  1. *

    Full disclosure: I provided a book jacket quote of praise. I co-edited one book and co-organized two conferences with James Robinson. 

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