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Growth and Development Notes 19

In this lecture, we look at the critiques of the institutional, culture,


geography and luck argument.
Institutionalists view on other arguments
Supporters of the institution argument such as, Acemoglu and
Robinson, use the example of North and South Korea to explain why
Institutions is the fundamental cause of growth and not culture or
geography. Korea was a single country until 1945, when it got its
independence from Japan. It was then divided into North Korea and
South Korea, which were under the influence of Soviet and USA
influence respectively.
Today, South Korea is one of the worlds richest countries, whereas
North Korea is relatively poor. Everyone immediately south of the
border is rich, whereas everyone immediately north of the border is
poor.
They say that this difference in wealth could not have been due to
geography or culture, because both North Korea and South Korea have
the same geography and culture. And thus this differences must have
been because of the differences in institutions, where South Korea
adopted good policies which promoted growth whereas North Korea
didnt. Acemoglu and Robinsons say that this was not due to bad luck,
but rather due to the influence that North Korea had from the Soviet,
which encouraged it to implant bad institutions, which gave power to a
small group of elites.
Institutionalist view on Jeff Sachs argument
Jeff Sachs argument was that growth is harder at the topics because of
the poor health conditions and poor soil quality. Supporters of the
institution argument such as Acemoglu and Robinsons say that it is not
true that tropical climate causes a lack of growth. They argue that
there have been many countries with hot climates have have managed
to grow and become rich such as Hong Kong, Malaysia, Singapore and
Botswana.
Second, they suggest that countries at the tropics have not always
been poorer than temperate countries. In 1500, Mexico, Bolivia and
Peru were richer than North America; in 1700, India were richer than

Australia and New Zealand; until 1800s the tropical parts of Africa were
richer than South Africa.
Thirdly, they argue that it is not because of diseases that Africa is in
poverty but it is African poverty that causes diseases. They say that
even England had many diseases in the 19th century but it had
eradicated these diseases by improving sanitation and Africa could do
the same if they became richer.
Finally, they argue that poor agricultural productivity in Africa is not
caused by a poor quality of the African soil: rather it is the
consequence of the of the poor institutions such as non-secure
property rights and the poor incentives it creates for farmers to invest
and improve the land.
So how do Acemoglu and Robinson explain the fact that temperate
areas grew much faster than tropical areas after 1820? Well, they say
that, in the centuries that preceded 1820, temperate areas were more
sparsely populated and had less malaria and yellow fever than tropical
areas. That implied that Europe sent settlers and implanted good
institutions in the temperate areas, it implanted bad institutions in the
tropical areas; and that, not geography, can explain their different
growth performance.
Institutionalist view on Culture argument
Supporters of the institutions view dont think that religion matters for
growth. According to Acemoglu and Robinsons, the Middle East is not
poor because Islam is bad for growth but because it inherited bad
institutions from the Ottoman Empire.
Finally, supporters of the institution argument do think that trust is
important for growth. But they believe that trust is a result of the type
of institutions a country has. They argue that if institutions such as the
judiciary is corrupt and not efficient, then people will not be likely to
trust one another as contracts are not always guaranteed to be
protected by the law.
First Critique of the institution view
There are two main critiques of the institution argument for a
fundamental cause of growth. The first one being that, people have
criticized the reasons the institution argument puts forward for the

industrial revolution being British. In Particular, according to Bob Allen


who said the reason why the industrial revolution was British was
because Britain had one of the highest relative prices of labour (wages)
versus capital (interest rate). On top of this, Britain had easy access to
vast amount of coal, which was the main source of energy at the tie.
This meant that, in Britain it was very expensive to hire workers,
however, it was cheap to invest in machines and there was plenty of
energy to fuel these machines. Whereas, in other countries the relative
price of labour (wages) versus capital (interest rates) was very low.
This meant that in other countries, it was cheaper to hire workers than
to invest in capital and new machines and providing the energy for
these machines was very difficult and costly too.
This meant that only in Britain, was it profitable and worthwhile to
invest in capital and substitute out expensive labour for cheap capital.
Thus, it was only in Britain that in entrepreneurs had an incentive to
accumulate machines, and inventors had an incentive to invent it. That
is why the industrial revolution was British.
Second Critique of the Institution argument
The second critique of the institution argument is that institutions are
sometimes not easily distinguishable from culture and that the two
evolve together. And because of this it is hard to see the separate
effects of each one on growth. Furthermore, supporters of the culture
argument have created experiments where they look at the culture
within different regions in the same country. The studies have shown
that regions with better culture are also richer than the regions where
the culture is not so great. This argument suggest that culture is
important and fundamental cause of growth because different regions
in the same country must have the same institutions.
The second point is that, institution arguments tends to rationalize
every single growth experience in terms of changes in institutions, but
other factors such as geography, culture or luck are also have likely to
have played a role.