The Science of Everything Podcast - Episode 107: Cultural, Geographic, and Political Explanations of Poverty

Episode Date: June 15, 2020

In this fifth part of our series on economic growth and development, I examine the major factors that have been advanced as explaining differences in growth outcomes between countries. I provide a summary of the arguments and evidence for and against the importance of culture, dependency, democracy, geography, education, and institutions in accounting for differential growth outcomes, and conclude with a comparative empirical analysis in which I argue that institutional differences explain the majority of growth differences. The Recommended pre-listening is Episode 106: Economic Growth and Development Part IV. If you enjoyed the podcast please consider supporting the show by making a paypal donation or becoming a patreon supporter. https://www.patreon.com/jamesfodor https://www.paypal.me/ScienceofEverything

If you're listening to The Science of Everything podcast, episode 107, Economic Growth and Development, Part 5. Explanations of Growth Differences. I'm your host, James Fodor. So this is a fifth part of our ongoing series in economic growth and development. Recommended pre-listening is, of course, the previous episode, part four on growth theories. And really recommend you've listened to all the prior episodes in the series to really get the most out of what I'm going to be talking about today. So our topic for today's episode is, as I said, explanations of growth differences. And in this episode, what I'm going to look at is finally getting down to reasons of why some countries have experienced much better growth outcomes over the past few centuries compared to others.

So in the first episode, we went through various introductory concepts and talked about growth of poverty. The second episode in the series, we talked about the when and where of growth with a history of the world economy. in episode three we talked about the what of economic growth, which is about structural change and sort of what economic growth and development looks like. In the previous episode four, we talked about economic theories that model the process of growth without necessarily explaining why it happens in some places rather than others. In this episode, we're really coming to the nub of the issue by addressing a number of explanations that have been put forward to really explain why some countries do well and other

countries do worse. And I've grouped those under a number of different categories. So there are cultural explanations, dependency-based explanations, democracy, geography, education, and institutions. And I'm going to be talking about each of those in turn. Also, just before getting started, I originally built this series as an eight-part episode, but for a number of reasons, I've decided to restructure it into a six-part series, which will mean that the next episode is the final entry on this series, and I'm thinking of saving some of their content that's going to be left out for perhaps some future episodes covering some related but somewhat distinct issues. So that all being said, let's get started and talk about some of the major explanations

that have been put forward to explain growth differences. Remember here, we're really looking at explanations that can address the differences in growth outcomes from one country compared to another. Not just things that say these are the sorts of things that happen when a country experiences growth, or these are the sorts of factors that are important, like savings and technological progress and things like that. But why does some countries do well in other countries not? That's the core issue that we're addressing in this series, and it's really what we're coming to look at in this particular episode.

So let's start with culture. Now, the idea that cultural differences can explain differences in growth outcomes between countries is quite old. So Max Weber, the famous 19th century sociologists, talked about this extensively. More recently, David Landis, has also published. published on what he regards as cultural differences and their importance. So the basic idea is that cultural differences give rise to differences in growth outcomes between different countries.

So Max Weber famously promoted the idea of the Protestant work ethic. He published a book called The Protestant Work Ethic and the Spirit of Capitalism in 1904. He argued that Protestant ethics and values focusing on the importance of asceticism and saving and hard work gave birth to modern capitalism in the sort of 16th and 17th centuries, which was both the time when these ideas were spreading throughout these parts of Europe, and also when Europe began to surge ahead of the rest of the world. So there is a correlation there, and he draws a causal connection between those things. And there's other arguments that if you look at, you know, the regions of Europe, then the Protestant regions that generally historically have been wealthier and

had a bit of growth outcomes than the Catholic region, sort of more southern parts of Europe, Mediterranean countries. So there's various arguments that have been made on that front, and people still make to this day. More generally, there's an argument that certain cultural views or religious views focus more on mysticism or focus on the afterlife. It's argued that this reduces the focus on sort of the here and now. Some cultures despise commerce, whereas others place it in a higher regard. Some cultures or religious views have a higher regard for scientific research, whereas others tend to emphasize that less. And so the idea is that certain sets of values are more conducive for engaging in commerce and scientific research

and focusing on savings and work and focusing on getting ahead in this life. And obviously Max Weber thought that his idea of the Protestant work ethic was most consistent with these, but there's other arguments for this as well. A somewhat separate point, which is a little bit more widely discussed these days is that certain cultures promote or encourage corruption a lot more than others. So a classic example is the prevalence of the mafia and sort of communal or family-based connections in areas like southern Italy and Sicily, or in regions like especially in Nigeria as an example, but elsewhere as well, where kinship groups are emphasized over the common good. And obviously these have cultural antecedents.

And so there's an argument that had an effect on growth outcomes as well. So that's the basic idea that certain cultural values. are better for saving, for hard work, for focusing on this life, for scientific research, for innovation. Others impede growth through focusing on kinship groups over the public good, or focusing on mysticism, or the afterlife, or discouraging the importance of savings and things like that. Now, I don't find these cultural explanations very plausible, and I'd say many economists, so likewise, don't regard these explanations as very satisfactory. It's obviously not to say that culture doesn't matter. The question is in saying how it matters and whether it's the driving force of growth differences.

And there are many problems with cultural explanations in sort of serving as that starting point of an explanation. For instance, it's very difficult to describe precisely or certainly to measure what aspects of culture give rise to particular outcomes. So what you see is that some countries have different cultures or some regions have different cultures, like Italy compared to Germany, for example, or China compared to the US. So you see cultural differences and you also see growth differences. But you can't really say, oh, this particular aspect of a culture led to this improvement in growth or this change in growth. There's no way to separate those things. Culture includes many different elements.

Some of them are going to be good for growth and some of them are going to be not good for growth. Some of them are going to be good for the public good, some of them are not. And the trouble is that there's always a temptation to emphasize those aspects of a culture in a successful country that are going to be good for growth, whereas in an unsuccessful country we emphasize those aspects that are bad for growth. A classic example of this is that in the 60s and 70s in particular, certain scholars argued that, particularly in countries like China and other areas that had cultural with a sort of Chinese civilization, there was a culture of respect and devotion and obedience to authority, which led to a society and a culture in which there was little or much reduced desire for experimentation and for innovation, scientific curiosity, and people just sort of much more obedient and subservient to the authority. And that sort of society, of course, would be much harder to have growth in innovation occurring,

if that was the case. So people used to say that basically this was what was keeping China back in particular, the sort of Confucian ethics and subservience to authority and unwillingness to question, receive wisdom, and to innovate, and so forth. However, more recently, especially around the 90s and 2000s, when China really started growing rapidly, scholars have made the exact opposite argument. They've argued that Chinese culture and Confucianism has helped the nation's economic growth. And there's a number of people who have published papers on this,

focusing on the idea of the public good and of sort of rationality and a spirit of hard work and the importance of education and things like this. So this is a really good example of how you can look at one society and then focus on some aspects of it, which seem to be good for growth, and then other aspects of it that seem to be bad for growth, and just sort of emphasizing one or the other, depending on the situation. The thing is that most of that cultural heritage is still exist in China.

Obviously, there are cultural changes over time, but it's not like that that's completely gone away in the past 20 or 30 years. So it doesn't seem that cultural change can explain the change that's occurred in Chinese growth outcomes in the 80s, 90s and 2000s compared to, you know, in the 50s and 60s and 70s. So that's one problem,

that basically culture is very large and amorphous and people tend to cherry-pick the aspects that they think sort of support their case, but it's basically impossible to separate them out or to kind of weigh different cultures up against each other in this respect. But as I touched on before, I think that the biggest problem with culture as an explanation is just that it doesn't account for growth miracles. So rapid improvements in growth in South Korea, China, India, Botswana, these all occurred over the course of a few years or a decade at most.

But culture does not change that rapidly and has not changed that dramatically in these countries. Culture, of course, does change over time, but it doesn't change nearly as rapidly as we have examples for very rapid changes in growth outcomes. And I've talked about some of those in the previous episodes of this series. So for this reason, I think that we should reject cultural-based explanations as primary drivers of differences in growth outcomes, even if, of course, culture does affect growth. But it goes the other way as well. Societies change as they develop and become richer and industrialize and urbanize and so forth. So you can't just look at cultural changes and say that they're causing all of the growth changes because we know that there's a lot of feedback that goes in the other direction as well.

So let's move on from cultural-based explanations and talk about dependency theory. So this is often associated with a neo-Marx scholar called Emmanuel Wallerstein. So the basic idea of dependency theory is that it describes the idea of resources flowing from the poor countries to the rich countries. So rich countries are rich because they exploit poor countries. One description of this involves the notion of a periphery and a core. So the core are like the wealthy states in Western Europe and the US and Australia and a few other places, whereas the periphery would be Latin America, sub-Saharan Africa, probably Middle East, India and so forth. And the idea is that in the periphery, you have generally autocratic regimes which are kind of either directly subsidized or at least aided in staying in power by Western governments. and those Western governments then ensure that natural resources and also sometimes cheap manufactured goods are exported from the periphery to the core.

So the idea is wealth goes from the periphery to the core, especially through natural resource extraction and also through cheap labor. And in this way, the core benefits at the expense of the periphery. There's also an idea that the core focuses on high-skill capital intensive production, so particularly manufactured goods or high-tech manufacturing. and they export that and they export their expertise and modern technologies and so forth to the periphery in such a way that it only benefits a small elite in the periphery and then helps to facilitate more efficient extraction of those resources in the periphery. So the periphery never really develops. It might get a bit richer because improved technology and more efficient extraction of resources,

but that only benefits the core that gets advantage of those natural resources. and is able to use them plus some cheap labour to fuel its own economy and to maintain its living standards. The idea is that these dependency relations are deeply historical. So they were established during the colonial period in the 16th, 17th, 18th, and especially the 19th century, mostly through direct colonization, but also through indirect protectorates or unequal treaties, such as occurred with the Qing dynasty in China. It's argued that although nearly all of these colonies have achieved independence since, then that the overall pattern of the neoliberal enforced policies of free trade, free capital flows,

foreign investment, as well as political interference in third world governments and restrictions on what they can do, maintain this basic economic structure. So this fits into another set of theory, it's called post-colonial theory, which is the basic idea that official colonization has ceased, but the structure of the world economic system hasn't dramatically changed, and it's still been established and is perpetuated in a way that maintains the interest of the core at the expense of the periphery. So the idea is that the periphery is kept in a subordinate and dependent relationship with the core. So it's providing natural resources and cheap labor. It's domestic industries and high-tech manufacturing and education

and so forth is unable to develop or is impeded by inability of these countries to put up trade barriers or enact other policies that would help that. And also because corrupt governments are are propped up because they're beneficial politically or economically for the core Western powers. One specific example of this is that the developed world continues to protect their own domestic agricultural sectors through US farm subsidies, the EU common agricultural policy, Japan's protection of its rice farmers, which hurts agricultural exports of the Third Wales because this would be a way for them to develop export earnings. The argument is that it's in the core's interest to maintain this situation because it's a way for them to extract resources from the

developing world. There's also an argument that this system of dependency maintains or is responsible for the dual economy. If you recall, we've talked about that in previous episodes where there's a fairly wealthy and modern economy in many poor countries, but it's only a small sector of the economy and is only accessible to a small local elite plus foreigners. And then most of the rest of the economy is low skill, low wage, low technology using traditional techniques. So the idea is that these dual economies exist so that the MUN techniques will be, and industries and so on are owned by foreigners, and they use high-tech techniques that employ low-skill labor, and then export the products overseas for Western consumers and then also the profits go overseas, and very

little benefit is had by the local economy, most of which doesn't participate in that Mons side of the economy. So these ideas are much more popular in fields like sociology and political science than they are in economics. It's undeniable that some of the the narrative aspect of these phenomena that are described, such as past colonial practices or modern agricultural protection or Western interference in governments in the developing world, and world trade organization having an influence in what policies the governments can enact and so forth. It's undeniable that these things occur. The question is, though, whether they give rise to and maintain income differences and gross differences between the different countries and world regions.

And from my point of view, these theories don't really do a very good job at that. There's a few ways that we can look at this. One is to understand how some countries have been successful in transitioning, seemingly, from the periphery to the core, or at least a long way towards the core. So South Korea, Taiwan, Singapore, Malaysia, more recently, China, India and also Chile, have experienced quite rapid growth in the last few decades. Most of these countries have attained high income or near high income levels. not China and India yet, but they have developed quite considerably. China's now a middle-income

country. It's unclear how they would have been able to achieve this in the context of dependency theory, especially because China wasn't really stuck in Western economic or geopolitical sphere and has not been since the end of the Civil War with a victory of the communist in 1949. Indeed, it seems to be the exact opposite of what dependency theory would predict. dependency theory would seem to say that they would be much better off outside of that sphere, which they were in the 50s, 60s and 70s, and that once they moved into incorporating and integrating into the global economy a lot more, which they did from the late 1970s onwards, that that would make them worse off. But the exact opposite seemed to have occurred. Likewise for these other countries that I mentioned.

Furthermore, there's another way we can look at dependency theory, and we can look at it more in a historical context and see where the countries that have experienced longer periods of colonialism have experienced worse economic outcomes, because dependency theory focuses a lot on historical effects, effects of the past on the present, and how effects of colonial institutions and potentially colonial exploitation still has an effect on today. However, when you do an analysis of similar countries, comparing those that were colonized with those that weren't colonized or those that were colonized only very briefly, it's not obvious that there's substantial differences. Now, it's very hard to do this rigorously because you've got to say, well, what's a comparable country and so forth? And so there's no

perfect way to do this. But looking at a few examples, I think it becomes a bit hard to see that there's much of a difference. So dependency theory would seem to predict that countries that were able to more or less stay outside, or at least to stay more removed from Western interference, should do better. So there's two possible reasons for this. It could be either because during the period in which countries were colonized, the colonizers basically stripped them of wealth, and therefore un-colonized countries should have ended up much richer than countries that experienced colonization. Another possibility is that perhaps the colonial process didn't directly impoverished a country, but it disrupted and degraded its institutions such that since decolonization,

growth in previously colonized countries has been a lot slower than in uncolonized countries. However, if you look at some examples, it's really unclear whether either of the is the case. And in fact, I don't think there's any evidence for this at all. So just consider a few examples. Ethiopia was never colonized. It was briefly occupied by Italy around the Second World War, but never colonized. Whereas Kenya, which is a direct neighbor of Ethiopia, was colonized by Britain for over 60 years. At independence in 1963, its GDP per capita was about $1,800 compared to Ethiopia at the same time, $762. And since then, both countries have experienced fairly poor growth outcomes. Kenya is about 3,000. Ethiopia today is about 1800. So they're both grown a little bit,

but not very much. The point is Ethiopia, the country that was not colonized, was both poorer then and still poorer now than Kenya was. And so it's not really clear how this would fit with dependency theory, which would seem to predict the opposite. And we see a similar story occur when you compare, for example, Myanmar or Malaysia to Thailand. So Myanmar's done very poorly. generally Malaysia's done a lot better and Thailand's sort of in the middle of those it's not sort of obvious that Thailand's had any particular advantage even though it was

not colonized whereas Malaysia and Myanmar were both colonized. If you compare Iran which was never colonized to Iraq or Jordan, both of which were colonized well first by the Ottomans and then by the British they all have fairly similar growth outcomes today. Not great growth

but they've experienced some growth since the 50s roughly when they achieved independence. There's no clear advantage of Iran over the others. A very good example is Haiti, which achieved independence over 200 years ago, just after the French Revolution in 1804. Compare that to Jamaica, which only achieved independence from Britain in 1962. At the independence of Jamaica in 1962, Jamaica was about two to three times as rich as Haiti, whereas today Jamaica is about four times as rich, or four or five times as rich as Haiti. So Haiti's actually got poorer since the 60s. The growth outcomes have just

been awful, even though it's been independent for over 200 years. And yet another example in West Africa is comparison of Liberia and Sierra Leone, which are neighbors. Liberia was never colonized. It was established. It was sort of settled by freed slaves from America, where Sierra Leone was a British colony for over 150 years. And they've both performed almost identically poorly over the past 50 years or so. So obviously you can argue with the case studies and talk about differences and similarities here, but at a broad level, it just doesn't seem to be that there's much of a difference when you look at similar cases of countries that were colonized for a long time, or those that were never colonized. And this doesn't really seem to jive with what dependency theory would predict that that colonial and post-colonial heritage should be really damaging for economic growth.

So it doesn't really seem to explain why some countries do better than others. And I think, finally, the real problem with dependency theory is that they tend to often, implicitly to treat wealth as if it's a fixed quantity that's sort of taken from one place and then move to another. This is very similar to a theory known as mecantilism, which I may have mentioned episode two, the history of the world economy, which is basically this idea that wealth is a fixed amount, and to get more of it, you have to take it from someone else who then have less of it. The idea here being that the core, the Western countries get rich by extracting wealth from the periphery. And although that may occur in some instances where, for example, companies go in and

extract resources and cause environmental damage, so that can occur. But I would argue in most cases, it certainly does not occur. Indeed, it can't be the explanation for most of the West's wealth, because the world as a whole has gotten many times richer than it ever was in the past. That wealth didn't come from somewhere. It was created. It's created through innovation and investment and production and trade. And dependency theories just don't really have anything to say about how this occurs or why it occurs better and more efficiently in some places than others. and in some times than others. So although dependency theory does emphasize a number of important facts about history

and the way the world economy is not a level playing field and is biased in many ways in favor of the West, I don't think it provides really any good explanations as to why some countries have been able to do much better than others. So let's now move on to talk about democracy. Now this is an increasingly popular idea. The idea that democracy is beneficial for development was famously discussed by economist Amartis Sen. There are a number of arguments that people have put forward as to why democracy might be beneficial for economic development. One argument is that there's a clear relationship between economic development and democracy. In fact, essentially all developed countries are democracies of one form or other.

If, of course, you exclude the oil exporting countries like Saudi Arabia. So it does seem that there's some relationship going on, but the question is whether that's causal or not. Just because rich countries are generally democratic, doesn't mean that democracy. causes growth. It could well be the other way around that as a country gets richer, it's better able to sustain democratic institutions. And there does seem to be a lot of evidence for this, that there are many countries that first developed and then democratized. So South Korea and Taiwan are recent examples of this, but this also happened in Eastern Europe with a breakdown of communism. They had already developed to some degree during the communist period, and then

following that, they democratized when they'd already at least achieved sort of middle-income status. there are also examples of countries that have been democratic for a long time and still at least until very recently not achieved very good development outcomes so an example there would be india which has been democratic since independence in 1947 quite unusual in a developing country being able to sustain genuine democratic institutions for that long despite until very recently having a very poor growth record so the empirical evidence is kind of mixed but at least there might be something going on there. So there's other arguments that economists have put forward as to why democracy might be beneficial. It's argued that democracy can lead to larger and also more equal investments in

education and more investment in public goods, lower corruption, and better economic institutions, basically because these things are beneficial for society as a whole, whereas in non-democracies, there are many policies like restricted investment in education, less investment in public goods and also corruption or many laws and institutions that benefit just special interests to keep them rich at the expense of the populace. The argument is that democracies do better in providing benefits that are useful for everyone rather just for small elites or the military or the religious groups or whoever it is that keeps them in power.

There's the basic argument, of course, that leaders need to retain popularity in order to get re-elected, and they're also more accountable to the public because of the need to get votes and become re-elected and through oversight, through Parliament and free press and so forth, and therefore they're more likely to invest in social programs and education and other things that have benefits for the economies a whole. There's also an argument that democracies are better at instituting and enforcing a rule of law and secure property rights, which provide better incentives to invest. We'll talk a lot more about those later. So these are some of the proposed benefits. The empirical evidence is very mixed, so I won't go into much detail about that. There's

some people who think that democracy has robust effects on growth. There are some people who don't. I don't really think the evidence is particularly strong either way. The main problem with democracy is an explanation is simply that many of the clearest success stories of recent, that is post-war economic development, began as non-democratic, and only after they achieved fairly high levels of development, then transitioned to democracy. So the cases we have here are Hong Kong, Taiwan, Singapore, South Korea, and Chile. all of these now, except for Singapore, are democracies, but they only became democracies after they developed.

Democracy can also lead to populist policies that undermine economic development. So classic example of this is Hugo Chavez in Venezuela, or Peyron in Chile. So democracy can kind of go both ways, especially in poorer countries in which democratic institutions aren't necessarily as stable or robust as they tend to be in wealthier and more established democracies. So my view is that there's not really clear evidence that democracy has benefits for growth, and theoretically there's sort of arguments for and against as to why it would. There's many cases in which democracies can be very short-sighted or very unstable, especially in developing countries. Democracy hasn't clearly helped India, at least not until very recently.

There's some countries that succeeded. I've just mentioned South Korea and Taiwan and so forth that were not democratic until they already were developed. So overall, I don't think democracy does act. is a very compelling explanation. That's not to say it doesn't have an effect, but it's just that I don't think the evidence is in and it's very hard to tell, and the theory is kind of ambiguous. So so far we've talked about culture, dependency, and democracy. And I've said that sort of none of them are particularly compelling, even if they all do focus on real phenomena. They don't really do a very good job in explaining why this country and not that other country has been successful.

I'm now going to transition into the final three factors. which are geography, education, and institutions, which I think are more important, although as we'll see, I think that the most important by far is institutions, but we'll talk about that in a bit. So let's start with geography. So geography has been a very old area to look at when people are trying to find differences between countries

and their growth outcomes. Probably the big advantage of geography, it's really the only thing that is truly exogenous. And that means it's outside of the influence of sort of economics and politics. So culture, democracy, education, institutions, all of these things are affected by the same processes that affect economic development. So it's hard to say which one causes one or which one causes the other. Whereas geography is, unless you're in the Netherlands or a few other cases, it's not really affected by anything that humans do to a significant extent.

And therefore, we can regard it as exogenous or as outside the system. So we can see a clear difference. Well, if two countries have different geographies and then have different growth outcomes, obviously the growth outcomes didn't determine the geography. It was clearly the other way around. That doesn't reduce all of the problem of determining causal effects, but it does significantly reduce it. And that has been something that's, I think, drawn a lot of thinkers to look at the effects of geography. People who have argued for the importance of geography recently include Jeffrey Sachs and Jared Diamond, who you may have heard of and have written extensively about what they regard as the importance of geography. So what are some of the arguments as to why geography

might be important for determining growth outcomes? Well, one argument that's been made is that navigable rivers help facilitate trade and also governance over wide areas. So Jared Diamonds argue this, for example. Well, landlock ridge is impede trade, especially in African countries, and also make it harder for governments to expand over larger areas, which have economies of scale and allow for trade over wider areas and sharing of technology, which has benefits that we've talked about, in previous episodes. So that's one argument. Another argument is that being closer to the equator, so basically more equator, is bad for crops and also bad for disease. So this is empirically demonstrable in that, well, first of all, there are many more transmissible disease in tropical areas,

and that's a big problem that has a big health burden on these areas. But interestingly, if you just look at the correlation between GDP per capita and distance from the equator, absolute distance from the equator, it's very strong. You can Google this if you're interested to see a plot of this, but it's surprising that basically all of the rich countries are located in temperate zones are fairways away from the equator. There's a couple of exceptions like Singapore, but almost all of them are a decent way away from the equator, whereas most of the poorest countries are right around the equator in Latin America, sub-Saharan Africa, and sort of Southeast Asia, South Asia. even within Europe we see

the richest part of Europe is the northern Europe and then southern Europe like Spain and Italy is rich but not quite as rich and then North Africa is kind of middle income and then sub-Saharan Africa is poor so it's almost like it goes down in bands and then actually if you go down to South Africa that's like South Africa Botswana

that goes up to middle income it's the same in South America the very poorest countries in Latin America are in around Central America and then there's countries like that are a bit further north, like Mexico or Brazil, a bit further south, that are a bit richer. And then the richest countries in the Americas are like Canada and the US, up north, and then further south, Chile and Argentina and the Uruguay, relatively richer, the further south. So I don't

want to say it looks like perfect. There are obviously exceptions, but it's surprising how well this works. And it's been argued that the big effect here is that, first of all, there's less tropical disease in temperate regions. And second of all, you have more effective soils and climates for growing crops to support large urban populations. Another argument that's put forward in the favor of the importance of geography is the presence of natural resources. Now the big one that people like to focus on are coal reserves in Britain in the 18th century being essential or at least very helpful for facilitating the industrial revolution. It's obviously not as relevant now because you can buy coal from anywhere, but the idea is that readily accessible coal deposits in,

particularly the north of England, helped to fuel the provide the energy that was needed, to build factories and run trains and so forth that got the industrial revolution going in the UK and then it spread to the rest of Europe. Whereas China, although it also had high levels of technology and institutional forms and so forth around the same time, didn't have, it had cold deposits, but they weren't as readily accessible and as easy to mine. So the argument goes. Pomerance has written a lot about this.

The idea is Britain also had other advantages like being an island where there was easy to navigate from one place. to another, either using rivers or just along a coastline, and it was protected from external invaders that was less politically disruptive, unlike China, which was invaded many times by the tribes to the north. So a combination of these factors, so it's argued, contributed to the rise of the Industrial Revolution in Britain and not elsewhere. And similar things, it's argued, also help some countries succeed over others today, although natural resources are very controversial, as we'll talk about a bit later. Finally,

Darad Diamond in particular has argued that Europe's geography favors Balkanization, which means breaking up into small states. I mean, if you look at a map of Europe, it kind of makes sense. There's the Iberian Peninsula. There's Italy. There's Greece. There's Scandinavia which splits off, and then there's the British Isles. Plus, there's a few mountain ranges through the continent. So it kind of makes sense that it's going to split up into a bunch of states. Whereas if you look at China, there's many fewer peninsulas.

and especially in sort of the east of the country, there's several large plains based on like the Yellow River and the Oxy River. Not to say that there's not mountains and so forth, but it's just not nearly as broken up and divided as Europe is. The argument there being that this favors the formation of large states in China and smaller states in Europe. Now, the relevance of that is that the small states then competed against each other in technology and warfare and trade and so forth, whereas in China you had less of that and you

had more attempts by the single authoritarian state to restrict technological changes that they thought would be disruptive or to ban trade when they thought it wouldn't be helpful. So, for example, in 1432, the Chinese emperor outlawed the building of large ocean-going ships because they thought it was too expensive and it was a waste of time. Whereas in Europe, even if one state thought it was a waste of time, then, you know, you go to Portugal or you go to Spain or you go to Genoa or you go to Holland or there was always a state that would be interested in funding a project or in allowing you to publish something or so forth. So the idea is that that facilitated economic and technological and cultural change

that didn't occur in a more homogenous single state like in China. So these are some of the arguments that people give, just to recap, navigable rivers, being away from the equator, natural resources, and kind of separating out into smaller states rather than all conglomerating into one big state. Now, we have to separate out, I think, some of these arguments which are more historical, that is why historically Europe developed an industrial economy and China or India did not, compared to modern explanations as to why are some countries able to industrialize another? I'm going to say a lot less about historical-based explanations because they're not as directly

relevant to the question we're asking in this podcast, which is why in the past couple of centuries since the Industrial Revolution, some countries have been able to develop and not others. And clearly those aren't because you can't get coal because you can always buy coal if you've got something to export. Likewise, you don't have to have different states competing to develop technology. When the technology is already existing, you just have to start using it. But in many developed countries, they are underdeveloped countries, they still don't use latest technologies we've seen. So the point is the explanations are going to be different for different things.

And so most of the geographic-based explanations are more applicable historically than in the present day. The main one that's still relevant is location near the equator. And I think the real problem with this is, although the correlation is very robust and very interesting. There's so many other differences between these states as well. Obviously, countries in sub-Saharan Africa and in Latin America have a very different history than countries in north-central Europe or China or Japan do. So there's a lot of confounded variables that go along with just looking at geographic location, basically because shared location often goes along

with shared history and culture, and so it's not necessarily just the effective geography that you're seeing there. Nevertheless, I do think this effect is interesting and should be studied further, but I think that it can be oversold a lot, especially because, at least for the last hundred years or so, agriculture has become increasingly less important for industrialized developing countries. And even many poorer countries, like China, for example, have an agricultural sector that's way smaller compared to its industrial and service sectors than it used to be. And so explaining differences on the basis of how efficient agriculture is, doesn't seem to be entirely persuasive. Although, as we did talk about in last episode, agriculture

productivity may act as a spur to industrialization. So it's a complex issue, but it's hard to see how it does all of the work. There is a very large variation, so there are countries around the equator that have succeeded. Malaysia and Singapore are two of the best examples of this, and there are some others. Panama, for example, and Costa Rica have done relatively well, despite being near the equator. And Indonesia has done much better than many other countries, despite being near the equator. India, despite being near the equator, has grown quite rapidly in recent decades. So there are enough exceptions to cast down on the idea that it's extremely important, even though it does seem that there's something to this equator idea.

As to the importance of navigable rivers, again, there's almost certainly something to this. Navigable rivers were very important in the past when sending goods across large distances was by far cheaper over water than over land, and obviously there was no air travel. However, there are many navigable rivers around the world, such as the Nile in Egypt and Sudan, and the Congo River in many parts of Africa, not all of which is navigable, but many parts of it are, the Ganges and Indus rivers in India, and of course the Yellow and the Yontera rivers in China. These rivers have all been extremely important historically, and yet those regions, most of them are still fairly poor or have only recently started to industrialize.

So it's not really clear why navigable rivers, say, like the Rhine or the Danube or various rivers in France and Britain are so important, or the Mississippi, for example, in the US and others. whereas those in these other regions were not important for development, or at least didn't seem to kickstart development in the same way. There's also an idea which I didn't explicitly mention, but goes along with the navigable rivers argument, that landlocked countries have a significant disadvantage, especially if they're in mountainous regions, because it's much harder for them to trade, and they're sort of cut off from surrounding regions, and it's more expensive for them to import technology and so forth. And while there may be something to this, and many of the poorest countries today are landlocked,

there are also high-profile exceptions. So Switzerland is actually the richest country in the world, excluding very small states and the oil exporters, and it's a resource-poor, small, ethnically diverse, landlocked country in Central Europe. I didn't mention ethically diverse, but that's another positive thing that makes it harder for countries to agree on things and provide public goods and so on. So Switzerland kind of breaks all of the rules about what should work for a rich country. But you might say, well, Switzerland is weed in like almost every category, so maybe that's just like the exact. that proves the rule. But there are other examples as well. So Botswana is landlocked and has actually very large natural resource deposits, but it's done quite well. Japan is an island, but has very, has quite low natural resource deposits generally, and is quite mountainous along much of its

region, and yet has done very well economically. And Bohemia, current day sort of Czech Republic, is also landlocked and mountainous, but really for a long time it's actually been quite wealthy. is not the richest part of the world, but has done fairly well and much better than most regions. So the point is there's a great variation in terms of geographies and resource endowments and what can succeed and what can fail. In terms of the importance of resource endowments, there's a very intense literature debate these days about whether natural resources help or hinder. There's an idea called the resource curse,

which is basically that some of the worst performing countries in the world have some of the richest natural resource endowments. So a class example of this is the Democratic Republic of the Congo, which is about as poorer countries you can possibly get, and yet has immense deposits of minerals and other valuable materials as well, but has not been able to exploit those in order to benefit most of the people in the country. And there are other examples of this as well, such as Libya, which has huge oil deposits, but has, well, these days it's very poor because it's undergoing a civil war,

but even prior to that was not particularly well as a result of them. Venezuela has the largest oil deposits in the world, and is undergoing economic collapse. So there's many examples of countries that whether they be mineral deposits or oil or other natural resources have done very poorly. And the argument for this is that basically these ready, these are sort of ready-made exploitable revenue sources for corrupt governments or military regimes or rebel groups or whoever it is that just come and sort of tap that source of money and then don't have to provide public goods, don't have to pay attention to what people want, don't have to innovate, don't have to innovate, don't have to. have to provide infrastructure because they've got their money ready there that they just have to protect. Plus, it promotes fighting because different people want to access to that resource. So the idea is that resources are actually, at least certain types of resources that are easy to

extract and easy to export are actually detrimental to a country. But of course, there are counter examples because Botswana has huge diamond deposits and it's done very well and it's managed to use that whilst to benefit the citizens of that country. Likewise, some oil-rich countries have done quite well, at least for the citizens of their country. There's many foreign workers who don't benefit, but say Saudi Arabia or United Arab Emirates or Malaysia have done quite well in developing and using oil wealth to facilitate that. So again, the resource curse or the resource benefit, depending on the way you're looking at it, does seem real, but doesn't seem a one or the other thing. It seems that in some cases it goes well and some

cases it goes poorly. So as you might have guessed, I'm a bit of a skeptic about the importance of geography, though there's no denying that things like natural resources and navigable rivers and distance to the equator do matter, but how they matter and whether they matter and the extent to which they matter varies a lot between different countries. And so I think that by themselves, geography doesn't explain, can't explain the majority of growth outcomes. I should also mention, although it should be obvious by now, geography obviously can't explain any country that experiences rapid changes in growth outcomes over fairly short periods of time, which is actually the norm in many regions of the world, like South Korea and Taiwan and China and Chile and more recently

India and parts of Europe earlier in the century. So obviously geography doesn't really change, but growth outcomes change a lot. So again, that's another aspect that's lacking there. Let's move on then to talk about education. And one of the big proponents of the importance of education for driving economic growth is Robert Barrow, who is an educational economist. What is the argument for education? The argument, one of the arguments is, that high levels of education, especially for women, results in better health and education outcomes for their children, due to improved knowledge about health, due to literacy, understanding the benefits of education, basic numeracy skills, understanding disease, and a whole host of factors like

that. And in turn, better childhood health and educational outcomes improve that child's productivity in the future and their ability and desire to gain work and their understanding of the sort of opportunities that might be available and sort of what life is like outside of the village. The idea that you need a basically educated, basically literate population in order to go from an agricultural to an industrial society is quite plausible and does sort of occur in some of the issues that we talked about in previous episodes such as Rostow's stages of growth and some of the history of the world economy. So in places like Britain and the Netherlands, we did see increases in literacy and education occurring over the course of the 17th and 18th century prior to the Industrial Revolution. So these arguments do seem plausible. Furthermore, education can sometimes provide skills directly that enable workers to be more productive in either agriculture or in industry, basic numeracy and literacy skills, basic knowledge about just the sort of operation of modern societies and how to get by and how to do things, things that we take for granted.

People who are living, who are illiterate living in an agricultural village and have very little access to the modern world don't really know. More and more of these people do have basic access to education and technological devices like mobile phones, for example. I don't want to overstate the process, the case for this, but there are still people who don't have that access, and especially in decades past, the access was diminished. So the point is that in order to industrialize and modernize, it really helps if you have these basic skills in the population. At the other end of the scale, there's also an importance of tertiary education, university level, which provides expert and elite skills and knowledge necessary for innovators,

civil servants and entrepreneurs who were also essential for the growth process, as we've talked about in previous episodes. So you kind of need the basic primary level and also the tertiary education and furthermore a secondary sector to connect the two together. A number of empirical studies have focused on the effects of education and like everything else here they're controversial. It's difficult to measure education. So you can measure it in just years of education or you can measure it in like primary school or secondary school completion rate. But that just measures the quantity of education. And unfortunately in many developing countries, the quality of education is very In particular, absentee rates for teachers are very high, and often schools lack basic equipment,

like books, for instance, that students need. In some countries, many students go to school hungry or sick, and that's obviously not going to help you to concentrate very well. As a result of these differences, it's important to compare educational quality by using, for instance, standardized international tests of mathematics, reading, and science, which have become more widespread over the past few decades. Obviously, standardized tests have their problems, but at least they're probably better than just looking at the number of years a student spends sitting at a desk. Now, these empirical studies tend to show strong correlations between educational levels and rates of growth. However, the problem with that is, like nearly everything else, is education causing the

growth, or is the growth causing more investment and more focus on education? Obviously, because if an economy is growing and industrializing, there's going to be a higher payoff to get a education and so more people are going to focus on that. So it may be that the growth is leading to the education, or it could be there's more money available to fund education when the economy is getting larger. So although the correlation is fairly strong, it's hard to say whether it's causal. It's hard to deny that it's not at least a bit causal, but more education is not helping in some ways, but it's hard to say really how much. In addition to that, there are other problems with education as an explanation of growth.

There's a big problem in many developing countries, especially sort of middle-income countries that have higher levels of people who have a secondary and a tertiary-level education. The brain drain involves many of these people moving to rich countries, basically, so they get educated in developing countries, which pay for their education, and then once they have achieved that mastery of knowledge, then they move overseas and seek out jobs that are much better paying or more prestigious institutions, which then means that the developed countries reap most of the benefits of their education. So it's the poor countries paying and then the developed countries getting the benefits in terms of economic growth and tax and so forth. So that's

a huge problem. It doesn't imply that education is not important for growth, but it does undermine its effectiveness, especially at the tertiary level. Another problem is very high rates of unemployment of tertiary graduates observed in many developing countries, especially in the Middle East, I think it's a huge problem. Basically because some of these countries, Iran, I think, is a very good example here. the only one, of course, I think Egypt is another case, have done reasonably well, at least for some students that are providing good educational opportunities, particularly in certain sort of science and sort of technical areas. But the job opportunities for these candidates are almost non-existent or extremely limited. In some countries, there's basically the only job you can get

a certain small number of government positions, which generally you have to know someone or pay bribes to get. And so the best opportunities for these people are nearly always overseas. part of the problem is because the education that's provided is based on the curricular of developed countries, again, especially at the tertiary level, which may be much less relevant to the economic needs of poorer countries, although that's controversial because perhaps what they need is the most advanced science and technology. But as we've seen, poorer countries actually need to catch up, and you can't go straight from the poorest to the richest levels of technology. There's an importance in sort of transitioning gradually there. So that depends on how developed country is and other

factors. But it does seem that this is a big problem in some countries, that there's a mismatch between the skills and aspirations that graduates have and the opportunities available. A related problem is that in many developing countries, Latin America, and I think India historically has probably been the biggest culprit for this, there have been large political pressures that focus educational spending on elite schools and elite universities that benefit but mostly children from wealthy families, generally from urban areas, while primary and secondary education is underfunded and relatively neglected. This is very clear in the statistics if you look at India.

It's been better for the last couple of, it's been getting better for the last couple of decades, but certainly, but still to the case today and certainly before that, you look at primary school completion rates are very low, whereas tertiary graduation rates are quite high. Obviously, this is relative. You can't graduate university unless you graduate primary school. But in many developing countries, hardly anyone goes to university, whereas at least, you know, a decent number of people go to primary school. Whereas, again, for a long time in India, hardly anyone went to primary school. But if you went to primary school, it was often because you were from an elite family.

And many of those people would then go on to university. So there's a big skew between basically like quite a large tertiary sector and for a country of that size, a relatively small primary and secondary sector. And that's almost certainly not optimal for a country that's very underdeveloped, that you need more people with basic skills and not necessarily. so having such a sort of a top-heavy system. The reasons for this are very complicated, but there's certainly a big factor of political pressure that people who are most involved in the government and who are most articulate and who are physically closer and have better ability to influence it and are involved in key positions in business and the military and civil service and so on have an interest in wanting the schools that their children go to and the universities that they aspire to go to

be well-funded. So this is a widespread problem, and I think is a big, an issue with saying that education is a big driver of growth because plausibly a lot of education spending doesn't directly lead to the sorts of skills that are most helpful for growth. Nevertheless, because there are theoretical reasons to think that education is important, I do think that there is an important effect of education on development, although I don't think it's the driving force because of some of the problems that we've mentioned, and because of more complicated issues at looking at sort of the differences of different countries and where they succeeded over time, and it's not obvious that big change.

changes in growth have been due to big changes in education levels, such as from China and India more recently, for example, although that might be part of the story, but it's hard to say that it's the majority of the story. So I think that education is important, but it's not the biggest driving factor. Now, this leads us to the sixth and final course that I'm going to talk about in today's episode, which is institutions. And one of the biggest proponents in the contemporary day of the importance of institutions is Darren Ashimoglu, who is an economist. And I think that institutions are the single biggest reason for growth differences between countries. But what do we mean when we talk about institutions? Institutions are notoriously hard to define,

unlike most of the previous things that are, well, other than culture, I suppose, fairly easy to define. One influential definition of institutions, which comes from the economist Douglas North, is that institutions are the rules of game in a society, or more formally, they're the human-devised constraints that shape human interaction. That's a quote from North. Another definition from Samuel Huntington. Institutions are stable, valued recurring patterns of behavior. Another definition from Jeffrey Hodgton, institutions are integrated systems of rules that structure social interactions. So I don't know if any of these definitions are helpful. Probably the easiest way of explaining what institutions are is just to give some examples. The basic idea is that an institution

is something that structures human interaction in a sort of a predictable, stable way, so it's not just kind of anything goes. So there are economic institutions like protection of property rights, taxation, court systems, market interactions, prices. There's the family, which is the centre of a child's life in most cases, and that shapes the values and attitudes that children have. Marriage is a related institution. Religion is an institution. It's a set of practices, norms, values, and beliefs that affect how we see the world and our place within it and how we think about morality. And of course, there's churches and other institutions that fit within that.

The mass media is an important institution with all of the journalists and the about that and TV and now social media. There are all regularities and customs and organizations that shape how communication occurs within this, that shape people's beliefs and norms and also symbolic representations of what's important in a society. Education has many institutions, so there's schools, preschools, tertiary facilities like universities. There's academia, which has a host of institutions. So these are all examples of institutions. It doesn't have to be like an organization. It can be things like the family or market systems, which are decentralized institutions.

Many religions are also like this, but they can be centralized like the government. So the idea is that for people who think that institutions are important, the idea is that institutions of all of these sorts, especially political and economic institutions, shape the way people behave in society, and therefore they shape the economic decisions that people make that affect whether some countries succeed in investing and saving and innovating and bringing in new technology and so forth.

And then in other cases, that shape the decisions that lead countries and people in those countries not to do that. The idea that institutions are quite dominant in shape and growth outcomes is kind of the mainstreaming economics. I say kind of because there's plenty of people, like for example Robert Barrow and Jeffrey Sachs who focus on different things, and certainly people would say that education, geography and other things matter. But I say if many economists had to pick one, they would generally go for institutions. Again, not that you have to pick one, but just because multiple things are important doesn't mean that everything is equally important. And I,

definitely think that institutions are the biggest factor in explaining why some countries do better than others. So some of the evidence for this, one of the strong pieces of evidence for the importance of institutions relates to the study of migrants into the United States and other developed countries, who, when they move from, say, Mexico to the US or even more extreme cases from like Nigeria to the US, earn many multiples of what they earned in their native countries. I think in the most extreme cases, it could be 10 or 20 times what they earned. Again, this is just by moving country.

So they have the same skills and the same culture, presumably, that they brought with them and the same beliefs and everything else, but they've just moved country and exist in a different institutional environment, and they can earn many, many more times what they did previously. So this is, I think, strong evidence that the institutional environment in which they exist is playing a huge role in shaping their own incapacity. Another very powerful piece of evidence are a few natural experiments that we've seen recently in history, in which very similar cultural and geographical regions are subject by kind of arbitrary historical forces to very different types of institutions. So the classic cases here are eastern West Germany, North and South Korea, and mainland China versus Taiwan, Hong Kong and Macau. None of these regions were dramatically culturally separate prior to their division in all of these cases essentially due to Cold War, political forces. and there were some differences between east-west Germany, for example, but in general, the differences were relatively minor. And so none of the previous explanations of culture or dependency or democracy or geography would seem to make a big difference here.

But yet we see massive differences in the level of development. North-South Korea is the clearest example, but the others also important as one. Plausably, there's other cases too, although they're less clear cut. So it seems in these cases it just undeniable that the big factor that's different is institutions. and it doesn't just lead to like a 20 or 30% difference, but it leads to a many, many multiple difference in the income levels of different countries. Finally, I think the other key empirical piece of evidence

in favor of the importance of institutions is when you look at changes within a single country, institutional reforms that lead within a short period of time a few years to very large changes in growth outcomes. Examples include the reforms in Chile in the mid-1970s, in India, beginning in the mid-to-late 1980s and then especially in the 1990s, China, beginning in the late 1970s and continuing over the 80s and 90s, in post-Servient Eastern Europe in the 1990s. These are all some of the best documented cases of very rapid changes in growth.

And it's just clear that these changes in growth didn't occur because of an overnight cultural change or a sudden increase in democracy or education. In some cases, actually occurred with the reduction in democracy, like in Chile. But what seems to have changed is that very dramatic changes were made to the economic policies and institutional framework in which people made decisions in those countries. And so I think that that fairly clearly shows that institutions are a big driving force here. One of the weaknesses of institutions as an explanation for growth differences is it is such a vague term. What do you mean by institutions? Institutions can mean nearly anything, like institutions can be anything from the government through the market system to the family to the military.

So which of them are effective and why is that effective and what difference does it make? And so this is a challenge for institutional approaches to explaining growth differences. But I think there are things that can be said about which institutions are important for growth and sort of theoretically why we would expect them to have such an important difference. And I also think that the insight from theoretical approaches in economics is also a strong argument as to why we would think institutions matter. Because there's so many aspects of economic theory in terms of why people make decisions that come down to institutional differences, basically the incentives that shape human interaction. Many of these relate to institutions.

and so it makes a lot of sense as to why differences in these institutions between different countries shape the incentives, which in turn lead to different decisions, which in turn lead to differences in growth outcomes. One of the main types of institutions that's often focused on is property rights institutions. So property rights institutions are mechanisms that help to identify the rights of owners who have the rights to use, sell, and earn returns from their property, and also protect these owners from arbitrary, private or public expropriation of that property or the earnings of that property. There are many forms of property rights institutions. They can range from traditional communal protections right through to modern legal systems and intellectual property property. We'll talk a lot more about this in the next episode.

But a lot of the focus on institutions focuses on the importance of protecting property rights. Because basically, if you don't have protected property rights, the ability and incentives for people to invest in improvements in that property are much reduced. Another important type of institutions, important for growth, are contract enforcement institutions. So these are social, legal or even informal mechanisms to help ensure that commercial contracts between parties are enforced and honoured. This is also very important because without having ability to enforce contracts, it's very hard to ensure that people who pay for a good get that good delivered. And if that's not possible, then interactions are significantly reduced in the scale

that they can occur. In many industries, payment occurs at a different time to actual provision or manufacture of the good. and more complicated financial or commercial or information exchange or insurance transactions just become impossible without these sorts of contract law institutions. So a lot of the more complicated activities of more developed countries become impossible without proper contract enforcement institutions. Other institutions that are important for growth include trade liberalization, including abolition

of tariffs, quotas and other restrictions on trade. This can come through unilateral trade reform or through bilateral or multilateral trade agreements or free trade zones, such as the NAFTA free trade zone between Canada, the US and Mexico that was signed in 1994. That's generally thought to be helpful for promoting growth by encouraging greater trade specialisation and transfer of technology. Central planning, which I've discussed in previous episodes, involves direct government specification of what economic activity should take place by owning and controlling businesses

directly or forcing restrictions and regulations on private businesses, also through controlling prices. Generally, it's thought that central planning is a source of slowing economic growth. A clear examples of this include the Soviet Union during the 70s and 80s when their economy stagnated China from the 50s through to the 70s before its loosening of central planning and India during the period of the post-war period up to the beginning of reforms in the mid-1980s. Capital market regulations, which are taxes and other restrictions on the ability of people to invest, especially foreigners to invest in that country, and also sometimes restrictions on, say, the degree of foreign ownership that's permissible or requiring a lot of

licenses and complicated regulatory arrangements for larger investments. It's generally thought that these inhibit the formation of capital and investment and transfer of funds to new and innovative uses. Labor market regulations are similar except that they apply to the labor market, So laws that restrict employment, such as minimum wage laws, collective bargaining agreements, employment protection legislation, protection of labour contracts, and taxation of employment. This is a bit more controversial, though there are economists who think that these types of regulations make it more expensive for businesses to hire employees, thereby restrict the growth of, especially smaller businesses for whom these costs are more burdensome, thereby impeding

the growth of employment and innovation in the new startup firms. it's also argued that these types of restrictions cause more people to continue to seek employment in the informal sector, promoting the development of a dual economy. Another important type of institution relevant for growth is an effective judiciary, so this means a legal system of courts and bureaucrats who are able to enforce laws and regulations impartially and effectively with minimal corruption. So this includes judges, lawyers, police, administrative enforcement agents and civil servants. not only is the degree of corruption important and the general effectiveness and efficiency of this system,

but also how free of political bias and public pressure or influence these institutions are, because if they're highly susceptible to particular interest groups or pressure from political sources, then they're less likely to be able to execute the laws fairly and efficiently. The more irregular and unpredictable decisions like this are, then the more costly it is for firms to make investment decisions or for people to start up new firms or to make innovative changes, because it's unclear whether they're going to be restricted by the government in various ways or not. So some of these institutions are more well-established or more widely studied than others. The two that have studied most include property rights and contract enforcement.

Others are a bit more controversial, especially capital and labor market regulations. And I will talk about some of these a bit more in the next episode, but I just here wanted to highlight some of the institutions that we're talking about here without making a strong claim about necessarily which of them are the most important or whether some of them are significantly more important than others. So that's the idea of the importance of institutions for economic development. Now, having considered all six of the explanations for growth differences between countries, I just want to sort of summarise the situation by discussing the sort of overall empirical evidence, particularly for how important the different factors are. For this, I did a little bit of

novel analysis, which should be regarded with some degree of skepticism, but I also think it's the somewhat interesting approach that I took, because there are many ways of studying this, of course, and different studies found different things. One of the main weaknesses of existing empirical evidence, which I've mentioned before, is that many of them compare the growth of different countries only over short periods of time, especially they might compare changes in institutions or changes in policy or changes in education outcomes over time with changes in growth rates one year to the next or over short periods. And I don't think that's very meaningful because I think it's long-term growth that's really relevant.

there's a lot of noise in growth statistics. So instead, what I've focused on is long-term growth trends, so at least 20 years, and generally I prefer 25 to 30 years as representing a sort of a decent long-term growth trend. So I've been looking at the long-term growth rates of different countries over the period of 1986 to 2016. The main reason for that is because this is a 30-year period, so it's a long enough time span, I think, to make reasonable judgments, and it spans a number of business cycles, which is important. and also it overlaps the period that we have data on these other variables that I'll mention in a moment. So this is the period that we're talking about.

And what I do is I compare each country's growth performance to the maximum possible growth that I estimate that each country could achieve based on their per capita GDP at the start of that period. So that is in 1986. And that maximum growth rate in turn is basically based on the Solo Swan model idea that countries that are poorer can grow faster than countries that are richer. So to try to quantify that, what I did is compile a number of cases of sustained growth of at least 20 years, generally 25 to 30 years in most cases, of countries that experience very rapid rates of growth, mostly since World War II. I think there might be a couple that would before World War II and sort of plotted them on a graph against the initial GDP per capita of the country at the start of that growth period. So basically what you see on this is that, as expected, the poorer the country was, the faster it started growing initially. usually they slow down. But this then plots out a fairly well-fitting curve representing the

maximum rate of growth, or an estimate of the maximum rate of growth that countries historically at least have been able to sustain over a long period of time, given their levels of income. And in fact, the R-squared on that relationship is surprisingly strong. It's about 95%. And what that means is that the curve that's fitted through those points explains 95% of the variation. So it just means that there's a very tight fit between the maximum growth rate that I've been able to find through these different examples and the starting point of their GDP per capita. And this is exactly what the Solos 1 model predicts that when other things are equal, so when the institutions are aligned properly, incentives are aligned and the opportunities

available, countries can grow quite rapidly, and the rate at which they can grow is really dependent on their initial income, the poor they are, more rapidly they can grow. So using that series, which I think is quite a tight series, there's a total of, I think, about close to 20 observations in that. That gives me an estimate of the maximum rate each country can grow, given their initial GDP, and I compare that to how fast they actually grew to produce a what I call the growth difference. So this is a difference between how fast, hypothetically, they could have grown, and how fast they actually did grow. So for nearly all countries, this is negative, indicating that they can grow as fast as they could have, which is expected, because maximum possible is basically like

when everything goes just perfectly. There are some countries that grow a bit faster than the maximum growth. But again, it's not truly the absolute maximum. It's just kind of approximately the maximum based on what we've been able to observe in other countries. So obviously it's an estimate, but I do think it's quite meaningful, especially given the theoretical reasons from Solis 1 and then the very strong 95% R squared between the relationship. I think both of those give me confidence that this is a meaningful thing to do. At any rate, the important point is that when you compare this growth difference to measures of some of the factors that we've been talking about, you can get estimates for how important these factors are. So what I did is compare this growth difference.

Again, it's not actual levels of growth because you've got to adjust for how rich your country is to start off. So it's the growth difference. When you compare this against measures of democracy, geography, education, and institutions, you can get estimates of how important those things are. The measure of democracy is taken from a series called Positive 2, which is a widely used series that basically rates different countries to how democratic they are over time. Geography, a very simple measure is used as the absolute latitude of the capital city to indicate how far away from the equator it is, remembering that that's a, that's been found to be quite important. The education level is measured as the percent of people in that country who had no education

in 1990, so around the start of this period. And then the institutional quality measure was taken as an average of the index of economic freedom, which again is a widely used measure of institutional quality, many of the things that I just mentioned, like property rights and capital and market regulations and defective judiciary and trade liberalization on the stuff like that. And I've taken here the average over the period 86 to 2018, basically because the index changes over time, and it's a bit hard to know which value was the most relevant. Anyway, so the point is, we've got a measure of the growth difference, and then we've got measures of democracy, geography, education, and institutional quality. There's no real way to measure

cultural dependency, which are the other two explanations. So they're not included in this. So what are the results that I found? Well, overall, my model explained about two-thirds of all the variation, which means that these four things together can explain two-thirds of the variation in growth difference, which is really quite large for this sort of thing. But furthermore, we know that these different things, like especially democracy and institutional quality and GDP as well, really, are not measured really accurately. There's error in how they're measured. So that, through complicated reasons, it's an effect called attenuation bias. But the point is it tends to lead to underestimates in the actual relationship that you calculate. To adjust for that,

you need to make certain assumptions, which I won't get into. But basically, according to my guesses, I get the results of the following. When we look at the effects of institutional score by itself, we can explain about three quarters of the variation in gross differences. Latitude, which is the geography measure, explains about one quarter. Education by itself explains about half of the variation, and democracy explains about one third. Now, you can't just, of course, add all those because the variables relate to each other,

like education correlates with institutional score and with democracy and so forth. When we combine them together, according to my estimates, adjusting for attenuation bias and making for the assumptions that I won't go into detail of, here's my best guess. My best guess is about 60% of the variation in growth differences accounted for by institutional differences. About 15% is due to education, about 10% is due to geography, and roughly 0% is due to democracy. The main reason that I say roughly 0% is that, in what I'm, I've looked at, this variable is basically always insignificant when you control for the other factors.

So democracy is significant by itself, but then when you factor in institutions and education and so forth, it becomes insignificant. You can interpret this to mean that democracy by itself isn't doing anything. It just sort goes along with other changes like institutions and education. And then in addition to that, there's 15% left over for other factors, which would be. So mostly institutions, maybe 60%, I mean, obviously that's very rough. That seems about right to me based on what I've looked at. And then geography and education being maybe 10 to 15 percent and then 10 to 15 percent of other.

So I'll post up some of these graphs that I've generated and other results on the website, on the podcast website for you to have a look at. I'll see. I might just post all my notes up there because there's quite a lot that I put together for you to have a look at. At any rate, so that basically concludes this section. So what we've done is we've gone through the six main explanations for growth, that people have put forward over the years. We've talked about culture, dependency and history,

democracy, geography, education, and finally institutions, and then using an analysis, looking at growth differences over time, and also based on the theoretical evidence that we've talked about, I concluded that most of the differences is explained by institutions, with smaller proportions explained by geography and education, and also some other unknown factors. At this point, though, we haven't really got a compelling explanation

because we think, according to the this analysis, at least, that most of the difference in growth outcomes is caused by institutional differences, particularly economic and political institutions, but we haven't really said particularly what institutions or why some countries have better institutions than others. So we've kind of got an answer, but it's only pushed the question further back a bit as to trying to understand changes in institutions and how all that works. And that's what we're going to be talking about in the next episode. We're going to be talking about the institutions that are most important and the literature surrounding those, and also some of the criticisms of the importance of institutions

and looking at some case studies and sort of summarizing and combining some results from the previous five episodes. So make sure you tune in for that. It's going to be very exciting, so sort of bring everything together. If you enjoyed this episode, please consider liking the podcast Facebook page, which you can find by going to Facebook and typing the Science of Everything podcast. Also, if you wish to spread the news about the podcast, go into iTunes or the preferred aggregator of your choice and giving the podcast a favorable review, which helps other people to find the show.

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my address is fods12 at gmail.com. I always like to hear from my listeners. Thanks again for listening. and I'll talk to you next time.