How Does a Country's History Determine Income Level?

How far does the ancestry of a country’s citizens determine its income level and growth rate? Is it more important than where that country stood in 1500?

Introduction

While substantial evidence support that quality of institutions affect the development of a country, many literatures also suggest a role for ancestral factors in determining economic outcomes of a country. Spolaore an Wacziarg (2013) mentioned that history contributes to present outcomes through people inheriting certain characteristics that are influential to development over many generations, which implies a possible cultural impact on economies today. Several research also found that geographic factors influence current income level, either directly or indirectly affecting income and productivity (ibid.).

Furthermore, Acemoglu and Robinson (2002) recorded a possible ‘reversal of fortune’, where due to European colonisation, countries that were prosperous pre-colonisation in 1500 are presently underdeveloped and vice versa. Through examining the extent to which ancestral factors affect income level and growth rate and the validity of ­­­­­theory of ‘reversal of fortune’, this essay aims to show that cultural and geographical influences are more important in determining a countries income level and growth rate than its level of economic development in 1500.

Culture

The dual inheritance theory states that interaction of cultural and genetical factors affects the development of social norms and institutions, which implies an influence on economic outcomes (Spolaore and Wacziarg, 2013).

According to Nunn (2008), the underdevelopment of Africa can be attributed to its history. In addition to effects of colonisation on Africa’s economy, there was a high prevalence of slave trade from 1400 to 1900 which impacted its economic development (ibid.). Nunn (2008) found that the poorest African countries today are those in which slave trade were most prevalent. Slave trades perverted the political and legal system, and created a culture for enslavement (ibid.). False accusations of crime or witchcraft also became a common method to acquire slaves and the persistence of such actions deteriorates trust within the community (ibid.).

Nunn (2008) found a correlation of lower trust in a community where slave trades were prevalent in the past. Several literatures such as Knack and Zak (2001) have recorded trust to have a positive correlation with GDP. Guiso et al. also studied how trust affects international bilateral trade in goods, financial assets and direct foreign investments and found a positive correlation between trust and level of trade (Guiso et al, 2006).

Moreover, Tabellini (2005) sampled 69 European regions and examined the relationship between culture and economic development of those regions. Variables measured, including trust, respect, control and obedience were all found to be positively correlated with economic development (ibid).

In summary, culture seem to influence the development of economies today where economic underdevelopment may possibly be explained by undesirable characteristics inherited over generations and vice versa.

Geography

Spolaore and Wacziarg (2013) tested for a few geographic variables namely absolute latitude, the percentage of a country’s land area located in tropical climates, a landlocked country dummy, an island country dummy, found that these factors explain 44% of variation in income per capita, with absolute latitude as the most influential factor.

Furthermore, Sachs (2001) found underdevelopment to be more prevalent in tropical countries. In his paper, he developed several possible explanations for this phenomenon: Health, agriculture and construction technologies does not extend across ecological zones (ibid.). This may be due to factors such as soil erosion, pests and availability of water where high evapotranspiration is present (ibid). Due to ecological characteristics, technological productivity is also higher in temperate regions than tropical regions in areas such as health agriculture and use of energy (ibid.). The difference in development between temperate and tropical areas is further magnified due to more advanced technological innovation present in temperate areas and a lack of urbanisation and demographic transition in tropical zones (ibid.). Geopolitical influences such as military technology also contribute to the development gap (ibid.).

Sachs (2001) suggest that resource availability also affect development. Research proposed that in 1998 the majority of coal deposits, which was an extensively used resource, were located in temperate regions (ibid.). Out of the ten countries where 90.2% of coal was concentrated, only one – India, was in the tropical zone (ibid.). Moreover, James (2015) found that growth is slower in countries that are resource dependent, possibly because it causes market and institutional failure.

Sachs (2001) also included that health and disease impedes with economic development. Due to diseases, life expectancy and infant mortality rate is worse in tropical regions (ibid.). He argues that this is because poor health adversely affects productivity which affects income, physical and mental abilities (ibid.). Similarly, Gallup and Sachs (2011) found that reducing Malaria by 10% increases a countries growth by 0.3%.

However, Acemoglu and Johnson (2007) found no correlation between improved life expectancy and income per capita as research shows a convergence in health between more and less developed countries, but such convergence is absent for economic development.

In summary, the underdevelopment of tropical regions may be due to geographical factors such as ecology, resource availability, and health and disease which suggest a possible role for geography in influencing a country’s development.

Persistence in economic outcomes

The ‘geography hypothesis’ was developed to explain how geography, climate or ecology shapes economic outcomes (Acemoglu et al, 2002). While there are varied versions of the theory that highlights different ways in which economies are affected by geography, the theory suggests that economic outcomes persists from the past (Acemoglu et al, 2003); Countries that were rich in 1500 should also be relatively prosperous today.

However, comparing economic prosperity in 1500 and today through the analysis of urbanisation and population density, Acemoglu et al. (2002) found a ‘reversal of fortune’, where countries that were prosperous in 1500 are now poor and poor countries in 1500 are now rich. Results suggest a negative correlation between urbanisation in 1500 and GDP per capital today in the ratio of 1 to 10, which means every 1 percent lower urbanisation in 1500 approximately equates to 10 percent higher GDP per capita today.

A version of the geography hypothesis – ‘the temperate drift hypothesis’ attempts to explain this and argues that agricultural technologies such as crop rotation systems and high-yield crops, advanced in temperate regions due to colonisation while it was tropic regions that had the original advantage (Acemoglu et al, 2002). Yet, the theory and the reversal does not match in terms of timing and nature. The reversal seemed to not be related to any geographic features of the countries but their prosperous state and population density. Furthermore,the reversal took place after the period when European agricultural technology diffused to the colonies (ibid.).

Acemoglu et al. (2002) argues that institutional development, due to European colonisation, is the main cause for the reversal. Colonies settled in areas with lower population and inclusive institutions were established in these less developed areas which are now more economically developed, while extractive institutions were established by colonialist in originally prosperous areas to profit from them. This results in a reversal in incomes in these regions.

However, the method used in Acemoglu et al. (2002) was criticised by Bandyopadhyay and Green (2012). The main criticism was on the accuracy of the data used and the effect of reversal was insignificant when the observation sample was extended to include Africa (ibid.). Yet, the paper still agrees that the reversal theory should not be disregarded as there are substantial evidence of reversal documented in other literatures (ibid.).

The above analysis suggest that the current economic status of a country is not determined by how developed it was in the 1500 but by geography and historical events that may have possibly shaped culture.

Conclusion

This essay aimed to examined the extent to which cultural and geographical factors affect current economic outcomes. The theory of ‘reversal of fortune’ was also discussed to examine the level of persistence in economic outcomes. Culture was found to have influence on economic outcomes through people inheriting characteristics from the past. The example on slavery reveals that impact of historical events may still affect society today. Geographical factors in different regions of the world may also explain variations in the level of development; certain features such as soil and water availability may be aspects that can perhaps hinder growth. Further, there seem to be substantial evidence supporting the reversal of income since 1500 and the main argument for this is due to institution. This therefore supports that economic outcomes do not persist from the past but are rather influenced by historical events. Economic development may also be affected by other aspects such as biological factors that are not examined but purely from the perspective of this essay, culture and geography does play a role in affecting economic development and a country’s level of development in the past does not determine where it stands today.

References

Acemoglu, D. and Johnson, S. (2007). Disease and Development: The Effect of Life Expectancy on Economic Growth. Journal of Political Economy, 115(6).

Acemoglu, D., Johnson, S. and Robinson, J. (2003). Understanding Prosperity and Poverty: Geography, Institutions and the Reversal of Fortune.

Acemoglu, D., Johnson, S. and Robinson, J. (2002). Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution. The Quarterly Journal of Economics, 117(4).

Bandyopadhyay, S. and Green, E. (2012). The Reversal of Fortune Thesis Reconsidered. Journal of Development Studies, 48(7).

Gallup, J. and Sachs, J. (2011). The Economics Burden of Malaria. American Journal of Tropical Medicine and Hygiene, 64.

James, A. (2015). The resource curse: A statistical mirage?. Journal of Development Economics, 114.

Nunn, N. (2008). The Long-Term Effects of Africa’s Slave Trades. The quarterly Journal of Economics.

Sachs, J. (2001). Tropical Underdevelopment.

Spolaore, E. and Wacziarg, R. (2013). How Deep Are the Roots of Economic Development?. Journal of Economic Literature, 51(2).