Economıc Growth and Development (ENG) — Ünite 5 Soru-Cevap

In this chapter, we will identify and discuss the role of three fundamental causes of long-run economic growth and development. These are institutions, culture, and geography.

Economists typically assume that there are three fundamental causes of long-run growth and development. These are;


• geography (including climatic conditions and natural resources),

• culture (including belief systems, traditions, values, and preferences), and

• institutions (including laws, regulations, property rights, and policies).

In various domains of inquiry, ranging from philosophy and law to political science and economics, scholars and thinkers underlined the significance of each of these deep-rooted factors for economic development. Examples include Montesquieu for the role of climate, Max Weber for the role of Protestantism, and Adam Smith for the role of free markets.

A critical juncture can be defined as any major historical event that occurs suddenly and creates a long-term (or persistent) effect on the course of a system’s evolution. When we apply the term in economics and social sciences more generally, events that may count as critical junctures include wars, revolutions, technological breakthroughs, geographical discoveries, epidemics and pandemics, etc.

The COVID-19 pandemic is perhaps the most recent global event that may influence growth and development patterns globally as a critical juncture in the upcoming decades.

In economics, we solve this problem by assuming that institutions are “the rules of the game.” The term game here refers to any economic action that we perform on a daily basis or for once in our lifetimes, regardless of whether the action is strategic or not.

Institutions are the rules devised by humans to create incentives for certain actions and constrain the decision-making process to
create disincentives for certain other actions.

The diverging paths of South Korea and North Korea show us that, even with the same culture and same geography, institutions of two different states may play a crucial role for long-run growth and development patterns after a critical juncture creates almost entirely different institutional starting points or frameworks.

A central principle of liberal economic thinking is private ownership. When individuals and firms are allowed to have private ownership of goods and assets, they are incentivized to use these goods and assets for their own benefit, i.e., utility and profit. In this case, these decision makers would search for the best strategies to benefit from their ownership of these useful resources. In ideal conditions, these best strategies lead to efficient allocation of scarce resources. More generally, the possibility (or feasibility) of personal gain encourages risk-taking, innovation, and entrepreneurship.

Political institutions are mainly about (i) the judiciary system, including laws, regulations, and the constitution as well as the system of courts, (ii) the government, or the executive branch of the state, and (iii) the legislative body, or the assembly of the citizens’ political representatives, i.e., the parliamentarians.

Inclusive economic institutions are certain ownership structures, market systems, and contractual arrangements that allow each and every person in a country to benefit from his or her efforts in various economic endeavors. More generically, an inclusive economic institution is any economic system, mechanism, or framework that promotes equitable opportunities, access, participation, and benefits for all individuals, communities, and enterprises, regardless of their circumstances and identities. A worker-owned firm or a cooperative enterprise can be taken as micro-level examples of inclusive economic institutions.

Building on this understanding of political institutions and following Acemoglu and Robinson (2012), we can now formulate a list of key political institutions as well. This list would include;

(i) the political regime prevailing in the country (or, more specifically, whether the regime is democratic or not),
(ii) the electoral processes specifying how the representatives, the governments, and the members of the judiciary are elected,
(iii) whether the state is powerful and capable enough to perform well in serving the people, and
(iv) whether the society is powerful and capable enough to control the state and the political system so that elected or appointed public servants are not able to abuse the political power they receive from the citizens.

Extractive economic institutions are the ones designed and controlled by small powerful groups to extract resources, income, and wealth from other members of the society. These economic institutions typically limit economic opportunities (including education, entrepreneurship, investment, etc.) for less powerful segments of the society. Hence, under extractive economic institutions, economic incentives are destroyed for ordinary citizens and only elite groups, powerful and well-connected individuals, prosper. A labor market system with slave labor and a colonial trading company can be seen as generic examples of extractive economic institutions.

The concepts of de jure power and de facto power enter the picture when we need to understand the historical persistence of institutions. De jure, a phrase of Latin origin, literally means “by law” and describes a system, a practice, or a framework that is legally recognized. De facto, also of Latin origin, means “in fact” and thus describes which systems, practices, or frameworks apply in reality. Hence, de jure is independent of the actual situation, and de facto is not concerned with legal recognition.

One of the most famous theories on the long-run economic effects of culture is the one developed by German sociologist and economist Max Weber (1864-1920). In his The Protestant Ethic and the Spirit of Capitalism, first published in 1905, Weber argued that the historical rise of modern industrial societies in Northern Europe is causally associated with the adoption of Protestant religious beliefs in those
countries. Protestantism comes with a unique set of beliefs and ethical teachings that are more tolerant to or supportive of secular (or worldly) economic activities. These include education, hard work, trade, entrepreneurship, and wealth accumulation. Weber used these categories to draw a rationalist picture of what he calls the “spirit” of capitalism. According to this picture, the Protestant belief system encourages a type of rationality that is in line with the functioning or the logic of a capitalist economic system.

In economics, risk is typically defined with reference to at least one random variable, and we assume that we know how the probability distribution of this random variable is affected by our choices.

That geography is a destiny over which we humans have no control whatsoever is an appealing idea for economists and those studying long-run economic growth and development issues.

There are also positive externalities associated with location. Countries that achieved high levels of prosperity tend to locate within geographical clusters of other similarly prosperous countries (Weil, 2012). European countries, especially in Northern and Western Europe, provide a good example in this respect, however,there are other examples of country pairs such as the United States and Canada. These two large economies in North America are among the richest and most developed countries across the globe. A plausible argument for the positive externalities created by geographical clusters of wealthy countries is that not just labor and goods but also technology and human capital move much more easily between geographical neighbors.

A country’s location on the globe is the main determinant of whether that country is more likely to be seriously affected by natural disasters such as hurricanes and earthquakes.