The Role Of Geographic Distance Economics Essay ECO 340 Topic: Is geography the most important factor in explaining the current income differential of the world? Made by: Manana Kurtanidze Reg. No: F20111657 Introduction “Africa is the largest and the most complex development challenge facing the world today.” (Bloom and Sachs, 1998) However, it is well known that most of the African countries are the poorest in the world. But why they were and remain poor? What is the reason for differences in the current income of the world? A lot of economists are trying to answer these questions, but today there is no specific answer. The economists cannot come to the consensus. One say that poor countries remain poor because of bad governance and corruption, others say about institutions. But according to Redding and Venables (2003), there is a significant role of geography in shaping the evolution of the cross-country distribution of income. Main Body “The differential attributes of geography, climate, soil, physical environment and location, explain, in part, why some regions have lagged behind others in economic development – notably sub-Saharan Africa (SSA).” (Tang and Woods, 2008) This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Firstly, the location of the country plays an important role; “economies in tropical Eco zones are nearly everywhere poor, while those in temperate Eco zones are generally rich.” (Sachs, 2001) But there are countries that are in temperate eco zones and are poor. In this case, it means that the country was geographically isolated or was under the communism during the decades. “Among the 28 economies categorized as high income by the World Bank (with populations of at least one million), only Hong Kong, Singapore and part of Taiwan are in the tropical zone.” (Tang and Woods, 2008) It means that most of the poorest countries are located in tropical zone. When a country is in a tropical zone it becomes less productive in the areas of agriculture, health and energy utilization. A lot of people die because of infectious diseases, such as malaria, and stop being productive. That is why there are bad institutions in these countries. Another geographical reason for the country having low income is the lack of access to the sea. At the same time, in countries coming out to the ocean, the coastline is indented slightly, which is unfavorable for the construction of major ports. Generally sea-navigable regions are richer than landlocked. The countries that are in a temperate zone and sea-navigable achieve higher development rate, whereas the countries such as: Uganda, Niger, Mali, Mongolia and etc., that does not have sea access, suffer from not having trade access. Since African countries are heavily dependent on the world market, the lack of access to sea trade routes, seriously hampering their development. It is not accidental that all the landlocked countries belong to the poorest group. That is why, during centuries, there were wars between countries for sea access. It is vital for country to be close to the sea to make it easier to trade. Trade is the business that had started existence even Before Christ, and nowadays in our globalized world it is very important for countries to trade with each other. “Trade costs are a key element of new economic geography models. Without trade costs there is no role for geography. The size of trade costs crucially determines the strength of regions’ spatial interdependencies and thereby the relevance of market access.” (Bosker and Garretsen, 2010) Trade costs include: transport costs, tariff barriers, non-tariff barriers, and less tangible costs. Transport costs or other tariff or non-tariff barriers to trade mean that countries that are more distant, have difficulties in market access and pay additional costs on imported inputs. This means that firms in these countries can pay relatively low wages (even if their technologies are the same as that elsewhere). “There are many potential reasons for the reluctance of firms to move production to low wage locations, one of which is remoteness from markets and sources of supply. “(Redding and Venables, 2003) Unfortunately, this affects Foreign Direct Investments in poor countries. Also, Redding and Venables (2003) in their work mention that distance from the three centers (U.S.A., Japan, and European Union) of world economic activity both matters for income per capita and is important because it affects foreign market access. Hence, countries that are situated far from the centers have lower income per capita. For example, common borders between Germany and the Czech Republic and the United States and Mexico have substantial effects on predicted income per capita in the smaller countries. Thus, removing the common border gives a fall in predicted income per capita in the Czech Republic of 26%, and in Mexico of 27%. However, the effect of eliminating of a common border between low-income developing countries that trade relatively little with one another, such as Zimbabwe and Zambia, is small. This suggests that the gains from closer regional integration between low-income developing countries may be relatively small compared to those to be had from closer integration with high-income developed countries. The role of geographic distance and the influence of neighboring countries have largely been neglected in traditional growth theory which relies essentially on national characteristics, e.g. factor endowments and technological progress. Yet, the clustering of economic activities is a well-known phenomenon that raises questions about the extent to which the proximity to high-income neighbors matters for a country’s own income. The development process might indeed be hindered in countries that are distant from centers of economic activities. (Redding and Venables, 2003) The best example of a country that has all this geographical problems, preventing growth, is the Republic of South Sudan. After years of struggles, it finally gained its independence in 9th of July 2011. After gaining the independence, the relationship between Sudan and South Sudan remained unstable, because these countries cannot share between them the natural resources (e.g. the oilfields that are mainly located in South Sudan and current water rights on water from river Nile). Other neighbors of this country are mainly all poor and have political instabilities, what in my opinion prevents development of the country. Moreover, it is located far from the three centers, so it has difficulties in foreign market access. Also, South Sudan is one of the landlocked countries; it does not have a sea access, and hence they have high trade costs, because of transport costs and etc. Even though the river Nile passes through the whole South Sudan and cuts it into two parts, North and South Sudan need to share current water rights; what they are still trying to deal with. For now, the river causes inconvenience for the local population because in order to go from one part of the country to another, they need to cross the river and there is no other way. The life of people is difficult both because of the lack of the water and because of having water (river Nile). All these geographical factors that I mentioned above have direct relationship to the low current income of this country. However, it can be said that not only geography is the reason of poverty. For example, Acemoglu, Johnson, and Robinson, (2001) estimate large effects of institutions on income per capita. “There were different types of colonization policies which created different sets of institutions.” (Acemoglu, Johnson, and Robinson, 2001) In their research, they had found that some of the colonizer countries, like Belgium, used their colonies for transferring resources of their colonies to their country to become richer instead of creating good institutions. But what about the other European colonies, such as: U.S.A., Australia, New Zealand and Canada? Why do they have good institutions and hence, high income? They explain it as that “the settlers tried to replicate European institutions, with strong emphasis on private property and checks against government power.” The strategy of the colonization depended on the feasibility of settlements. In places where the disease environment was not favorable to European settlement, the cards were stacked against the creation of Neo-Europe’s, and the formation of the extractive state was more likely. (Acemoglu, Johnson, and Robinson, 2001) The great majority of European deaths in the colonies were caused by malaria and yellow fever. Although these diseases were fatal to Europeans who had no immunity, they had limited effect on indigenous adults who had developed various types of immunities. And therefore they say that these diseases are unlikely to be the reason why many countries in Africa and Asia are very poor today. However, I totally disagree with Acemoglu, Johnson, and Robinson, (2001) that say “Africa is poorer than the rest of the world not because of pure geographic or cultural factors, but because of worse institutions.” If we think logically though, we can understand that Africa has worse institutions because of the infectious diseases; fact that they cannot accept to say. But as I said previously, these diseases exist in there because of countries being in tropical eco zones; hence, geography matters! Conclusion Climate, trade costs, access to the sea, and distance from the foreign market- all these geographical factors are, in my opinion, the most important in explaining the current income differential of the world. Of course there are other factors that explain the current income differential, but in my point of view the most important one is geography. The positive thing is that the other factors can be changed but it cannot happen to geographical position of the country; unfortunately we cannot change the locations of poor countries.