“An estimated 766 million people, or 10.7 percent of the world’s population, lived in extreme poverty in 2013.” (World Bank 2017, p. 1) As if these numbers itself weren’t enough sign of the great inequality in incomes after centuries of prosperity, following the World Income Indicators, more than half of the people living under these circumstances originate from one region, Sub-Saharan-Africa. Maybe as long as growth has been observable, controversies about the causes and its inherent erratic distribution flourished. Over time, many hypotheses have been proposed, discussed and rejected. Two of the ones that managed to establish themselves are subject of this essay. More specifically, what their key arguments and empirical support are. One the one hand, the institutional theory of growth promoted most notably by Acemoglu and fellows (2012; 2005). On the other hand the geographic theory of growth, proposed by Sachs et al. (1998; 1999).
Plan of the essay is as follows. Chapter II will describe the institutional theory of growth as described in Acemoglu and Robinson (2012). Chapter III assesses the key factors and their empirical support of the institutional and geographic growth hypotheses respectively. Followed by Chapter IV, which gives insight on surrounding literature. Chapter V discusses the main problems of each line of argument, concluding that the institutional model offers more consistency.
Table of Contents
I. Introduction
II. The Institutional Theory of Growth and its Contractants
III. Institutions vs Geography
IV. Literature context
V. Concluding discussion
Objectives and Topics
This term paper examines the fundamental determinants of global economic growth by evaluating and contrasting two prominent academic theories: the institutional hypothesis, primarily associated with Acemoglu and Robinson, and the geographic theory of growth, championed by Sachs et al. The primary objective is to assess the empirical support for each model and to conclude which framework offers a more consistent explanation for the observed long-term variations in international income levels.
- Institutional theory as a driver for economic growth
- The geographic hypothesis and its limitations
- Comparative analysis of growth determinants in former colonies
- Empirical challenges: endogeneity and data volatility
- Evaluation of contemporary literature and instrument validity
Excerpt from the Book
II. The Institutional Theory of Growth and its Contractants
When assessing a theory explaining economic growth based on institutional endowments, there is one fundamental point to be clarified at the outset, the understanding of institutions that prevails in the following context. Going along with the interpretation Acemoglu, Johnson and Robinson (2005) emphasized in their main work (to which I will resort often as AJR in the course of this essay) presenting this approach to growth theory, one can think of institutions as “[…] constraints that shape human interaction[…]” and thus “[…] structure incentives in human exchange, whether political, social, or economic” (North 1990, p. 3).
But in how far do these institutions matter? Resorting to Chapter 2 of Acemoglu and Robinson (2012), they are key in explaining the current erratic income distribution around the world, whereas Western Europe and its former colonies with high proportions of European settlers exhibit the highest per capita GDP in U.S. $ in 2008, while all other regions lack behind. Especially the countries from the Sub Saharan region with average pc. GDP below $2,000, only curtly outperformed by most of Latin America as well as Central and South East Asia (pc. GDP between $2,000 and $ 7,500). Of course, these regions are not uniform, but also show clear income rankings among them. (Compare Map 1)
Summary of Chapters
I. Introduction: This chapter outlines the global problem of income inequality and introduces the two competing growth theories under investigation: the institutional and the geographic approach.
II. The Institutional Theory of Growth and its Contractants: This section defines institutions as constraints on human interaction and explains their role in shaping economic incentives and historical income distributions.
III. Institutions vs Geography: This chapter provides empirical evidence comparing the institutional hypothesis with the geographic theory, focusing on historical examples and cross-country regression results.
IV. Literature context: This section critically examines recent scholarly contributions that challenge or refine the institutional arguments, focusing on data quality and instrument validity.
V. Concluding discussion: The paper concludes by evaluating the empirical inconsistencies in both theories and suggests that, while institutions remain a vital explanatory factor, they should be viewed through a dynamic framework.
Keywords
Economic Growth, Institutional Economics, Geographic Hypothesis, Income Inequality, Settler Mortality, Colonization, Regression Analysis, Endogeneity, Multicollinearity, Economic Development, Public Health, Transport Costs, Property Rights, Human Capital, Global Income Distribution
Frequently Asked Questions
What is the core subject of this paper?
The paper investigates the causes of global income inequality, specifically analyzing whether institutional quality or geographic factors are more significant in determining long-term economic growth.
What are the central thematic fields?
The central fields include development economics, institutional theory, economic history, and the empirical critique of growth models through cross-country regression analysis.
What is the primary research question?
The paper asks which theoretical framework—institutional or geographic—better accounts for the dramatic variations in national wealth and provides a more consistent empirical explanation for global economic discrepancies.
Which scientific methods are employed?
The author uses a comparative literature review and a critical meta-analysis of existing econometric studies, specifically focusing on the validity of instruments used in growth regressions.
What topics are covered in the main part?
The main body examines the definitions of institutions, the empirical support for the institutional versus geographic hypothesis, critiques of settler mortality data, and the role of historical trade influences.
Which keywords best characterize this work?
Key terms include economic growth, institutional economics, settler mortality, empirical development studies, and growth regressions.
Why is the "settler mortality" instrument controversial?
Critics, such as Albouy, argue that the data is highly volatile and based on questionable transformations, leading to weak instrument validity and making it difficult to generalize findings beyond specific colonial samples.
What conclusion does the author draw regarding the geographic hypothesis?
The author concludes that the geographic hypothesis lacks empirical robustness due to significant problems with endogeneity and multicollinearity, suggesting that its explanatory power is secondary to institutional framing.
- Quote paper
- Johannes Simon (Author), 2018, Why Nations Fail. Key Arguments and Empirical Support of the Theories, Munich, GRIN Verlag, https://www.hausarbeiten.de/document/476723
