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Do development gaps depend on geography and culture?
We should not be fed up with presenting this table that shows development gaps between countries; because it is quite impressive. It successfully summarizes the performance of the present generation and that of the previous generation starting with 1950s. It also indicates that the generations following us should behave differently since it underlines that Turkey did not achieve a relative progress in comparison with developed countries over the last five decades. It shows that the gap between the former and the latter did not change at all; and in short that Turkey went round in circles.
Therefore, I am re-presenting the table of last week with a reduced version that involves countries which achieved what Turkey failed to do. The previous table showed countries the status of which deteriorated relatively, too. Under such circumstances you might thing that there is nothing much to worry about. However, managing to avoid deterioration should not count as an achievement given the successful examples.
Table 1: Per capita income compared with USA per capita income (%, purchasing power parity)
And a reminder: In order to make a healthy inter-country comparison national income figures should be corrected so that it reflects the purchasing power of people in each country. Otherwise, development gaps can reach unusually high. This is not realistic. And the correction to be made depends on the method to be used. The data used in the table were retrieved from the database 'Penn World Tables' which is accessible by anyone. The database is used extensively for this type of comparisons. Another source to apply is World Bank's World Development Indicators, which also reflects a similar picture. The percentage ratios given represent the ratio of per capita income corrected in accordance with purchasing power parity for a particular country to the per capita income in the USA also calculated with the same method.
Daron Acemoğlu's book 'Modern Economic Growth' begins with a chapter which shows the evolution of income gaps between countries in time. The chapter underlines that 'fundamental' reasons must be examined to understand the income gaps. He defines four possible reasons: geographical differences, cultural differences, luck, and differences in institutional structures. For instance, some researchers state that geographical conditions might restrain the use of some certain agricultural technologies. However, the income differences between countries become this striking only with industrialization. Poor countries of today are mainly non-industrialized countries. Moreover, a number of countries that has gone beyond a threshold level in terms of agricultural productivity failed to ensure industrialization later on. Researchers also argue that there can be a relationship between geography and epidemic diseases and thus you might not be able to leave behind the diseases and make progress. Here, Acemoğlu points out that the causality here might be in the opposite direction. He underlines that European countries also struggled with epidemic diseases over the seventeenth and eighteenth century and stresses that they managed to create the environment to overcome the diseases through the economic progress they achieved. To put it differently, he underlines that they created the means to overcome these diseases via the economic development they achieved. He thus argues that it is more reasonable that epidemic diseases could not have been coped with due to the lack of economic growth and the means that come along with it than that economic growth could not have been achieved due to epidemic diseases.
Discussions on geography are more related with explaining the underdevelopment of tropical regions in comparison with countries in cold climate regions. Another explanation for income gaps between countries is based on cultural differences. For instance Max Weber argues that Protestantism created a more suitable environment for the development of capitalism when compared with Catholicism as the former attached higher importance on hardworking, economical, and productive. Of course religion is not the only item examined under culture. Also, there are anthropological studies revealing that standards of judgment in some societies hinder cooperation. The studies that focus on geography and culture fail short in explaining many issues. For instance, North Korea and South Korea share the same culture, religion, history, and geography. When the country was separated, level of per capita income was quite similar in the South and in the North. However, currently, South Korea is almost twenty times richer than the North Korea. Another example: China made extraordinary progress over the last five decades: So, did they change their culture or geography? Of course the same can be argued for South Korea and Ireland, too.
Thee explanation based on luck is a more technical one. In short it reads as follows: Even economic foundations are the same, two potential equilibrium might occur: one 'good' and one 'bad'. Which side you will stand at can for instance depend on coincidental shocks. The author refers to luck in this sense. We can note that such models can easily be employed in some areas. For instance, Greece currently has to follow a tight fiscal policy. If the government manages to build confidence about the policy, the economy can approach the 'good' equilibrium where real interest rate and budget deficit is lower and growth is higher. But, if they fail to build confidence, the equilibrium goes toward direction - high interest rates, low growth, and high public deficit.
Acemoğlu emphasizes that multiple equilibrium approaches of this type fails to explain the income gap between countries. He maintains that attributing both the wealth of the USA and the poverty of Nigeria to the luck factor and arguing that the former reached the 'good' equilibrium while the latter reached the 'bad' equilibrium is nonsense. So, the discussion eventually locks at the differences in institutional structure. We will continue next Sunday.
This commentary was published in Radikal daily on 28.02.2010