Reconciling Acemoglu and Sachs: geography, institutions and technology.

• Author: Veiseh, Nima
• Position: ANDREW WELLINGTON CORDIER ESSAY - Essay

This paper attempts to reconcile two models for sustainable economic growth in developing countries. I develop an empirical and theoretical case for how the geographic landscape of a country determines the ease with which it can assimilate foreign technologies and establish institutions favorable to economic growth, I explore the threshold between the seemingly conflicting geographic (Sachs et al.) and institutional (Acemoglu et al.) theories, and economic growth. I do this by developing a technologically determinant, intermediate bifurcation where growth shifts from being geographically to institutionally driven after enough technology has been assimilated. My analysis finds that the rate of technological assimilation is determined by the landscape of a country. As the technology level increases, income level converges toward the level of developed countries. After reaching a certain threshold, however, the primary driver of economic growth appears to shift from geography to institutions.

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The goal of economic development is to ensure that people enjoy prosperity and opportunity, leading productive lives without worrying about survival. Once-poor countries that experienced economic growth were those that successfully assimilated and incorporated technology into their economies. (1) This is because an economy that effectively utilizes computer, mechanical and other technologies is better positioned to have a competitive advantage. Technology is a predominately non-excludable good that helps workers become more productive. Given two workers with the same human and physical capital allocations, the worker with better access to technology should be more productive. As demonstrated by American economist and Nobel Laureate Robert Solow, economic growth cannot be achieved purely by an influx of physical capital because of the diminishing returns of capital toward income. Solow insists that technology is the means to raise the permanent income level of an economy (2) Robert Barro and Xavier Sala-i-Martin found that most of the technology that helps developing countries converge to the income level of developed countries is technology created in the developed world and then diffused into the developing world. (3) With these two themes in mind, the general question of "Why do some countries develop faster to enjoy higher levels of income?" becomes "What helps a country adopt technology faster than others, thus stimulating growth?"

While the technology level of a country can be an endogenous factor, explaining why some countries converge more quickly than others, the theories of Solow, Barro and Sala-i-Martin provide no clear explanation as to why certain countries acquire technology and put it to use in their economies faster than others.

Two existing theories may provide an explanation: the institutional theory, broadly associated with Daron Acemoglu, Simon Johnson and James Robinson, and the geographic theory, broadly associated with Jeffrey Sachs and John Mcarthur. The institutional theory attributes economic growth to the legal and economic institutions already established within a country. (4) Conversely, the geographic theory, while acknowledging the important role played by institutions, asserts that the geography of a country (e.g., resource endowment and climate) is the direct, dominant factor in its development. (5) While on the surface the two theories appear conflicting, they are not incompatible. The empirical analysis below demonstrates a bifurcation between the two theories, wherein a country develops and economic growth goes from being largely driven by geographical factors to being largely driven by institutional factors. This dynamic threshold, incorporating both Acemoglu and Sachs, corresponds to a switching model that I explore in this paper.

What role do institutional and geographic theories play in the assimilation of technology for the sake of economic growth? As mentioned, the ability of a developing country to converge with its developed counterparts is largely a function of how well it can assimilate technology. I assert that the rate at which technology is assimilated is determined by the landscape of the country: the more geographically disadvantaged the country's landscape, the more difficult it is to bring in new technologies and the less likely it is to develop quickly. As the technology level increases within a country, the income level converges toward the level of developed countries. (6) However, after reaching a certain threshold, economic growth appears to shift from being geographically driven to institutionally driven.

BACKGROUND

There is little debate that good governance and the rule of law are key to maintaining a prosperous economy. Fair institutions are essential to the management of a thriving economy. (7) As acemoglu states, "good economic institutions provide 'secure property rights' for a broad cross-section of society." (8) Proponents of the institutional theory assert that institutions established during the colonial era are largely responsible for the current plight of many countries and that these effects dominate geographic factors? Places that were not conducive to settlement did not accumulate large enough amounts of human capital to establish healthy institutions. However, the institutional theory of growth attempts to draw direct linkages between economic growth and institutions established nearly two hundred years ago and may discount the current importance of geographic factors, On the contrary, the geographic theory asserts that geographic factors are the direct linkage to economic growth and dominate institutional factors in its promotion or limitation. (10)

However, neither the institutional theory nor the geographic theory appear complete. The geographic theory does not explain the recent economic prosperity experienced by areas that previously suffered from what were considered geographic disadvantages such as land-locked Botswana and desert economies like Dubai. Likewise, Acemoglu admits that even the institutional theory lacks "crucial comparative static results" to explain why equilibrium economic institutions differ. (11)

Although geography may not directly determine aggregate economic level, it may set the tipping point for when an economy will transform from an agrarian economy to a sustainable manufacturing and service-based one. This is because geography can dictate the level of difficulty associated with incorporating technology into the economy. Examining this tipping point--if one exists--may provide a quantifiable threshold at which economic systems go from unfavorable to favorable behavior or, in this case, from stagnant to positive growth. Such a threshold could have significant policy implications, which will be discussed later.

This paper explores when and how an economy uses technology to transition from a developing country to one with a standard of living and life expectancy largely indistinguishable in the middle of from wealthier, more developed countries.

HISTORICAL ANALYSIS AND LINKAGES

Countries that used to be geographically and/or institutionally disadvantaged have risen to the path sustainable growth despite their historical endowments. I will explore two examples to illustrate the economic case.

The first question is, how does a land-locked country such as Botswana overcome its geographical disadvantage and reach a path to sustainable growth? Second, how can a city in the middle of a desert, such as Dubai, rise from the sands to become an economic epicenter? In each case, investment in technology helped overcome geographical challenges.

The geography of a territory or, more specifically, the landscape of a territory, is a key factor in determining how quickly healthy institutions are likely to be established for economic growth. Geographic landscape is defined as the terrain of the territory that can be characterized by exogenous factors such as access to waterways and coastline. However, my analysis shows that after a certain threshold of development, countries previously dependent on geographic factors to explain income level shift to a model of income...