| News Story |
Why some nations are rich and others poor has been of on-going
interest for economists. In 1776 Adam Smith published An Inquiry
Into the Nature and Causes of the Wealth of Nations. Smith,
writing at the height of the Industrial Revolution, focused on free
markets and the division of labor. Other economists, writing after
Smith, have argued that a region’s natural endowments were of primary
importance. Still others have focused on institutional and human
factors including business, social and political leadership. Two
recent studies, one by Jeffrey Sachs and John Luke Gallup, and the
other by Paul Krugman, have set forth new theories.
Sachs and Gallup believe that weather and access to a navigable
waterway accounts for 50% of the income gap between rich and poor
countries. Countries grow wealthy by specializing in the production
of a few goods and then trading the surplus product for goods produced
in other countries. Trade, at least historically, has meant location
near a port or river. Firms attracted to port locations will induce
concentrations of workers, providing still further reasons for firms
to concentrate in certain locations, thus creating additional wealth.
According to Sachs and Gallup, a favorable climate increases productivity
and provides protection against the chances of severe disease. The
combination of good weather and favorable location translates into
higher income.
Another economist, Paul Krugman, noted widening gaps not only between
but also within countries. Krugman focused on economic processes
like economies of scale to explain the concentration of economic
activity in certain areas of a country. However, Krugman’s models
show that the process may be self-correcting. Beyond a point, diminishing
returns--in the form of congestion and high real estate prices--set
in, causing more rural areas to have a competitive advantage.
What are the implications of these findings for economic policy?
Sachs and Gallup’s findings suggest that policies such as deregulation
and free trade advocated by the World Bank cannot be completely
effective. Krugman’s arguments suggest that there is a role for
economic planning as a means of boosting a country’s economy.
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