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2.2 Determinants of Economic Growth and the Commonwealth Caribbean
The varying differences in economic growth and development seen across countries, especially LA and East Asia countries, during the second half of the twentieth century has given rise to a new debate amongst economists. What really explains the different levels of economic growth and development? As stated by Banerjee, Bénabou, and Mookherjee (2006):
Poor countries, such as those in sub-Saharan Africa, Central America, and South Asia, usually lack functioning markets, have poorly educated populations, and possess outdated or non-existent machinery and technology. These are, however,
only proximate causes of poverty, in turn begging the question of why these places don't have better markets, human capital, machinery, and technology. There must be some fundamental causes of poverty leading to these outcomes and, through these channels, to poverty. (p. 19)
In trying to answer this phenomenon, economists have drawn four sources -
geography, culture, luck, and institutions, which they classify as the “fundamental sources of economic growth” or the “deep determinants of economic growth” and which they argue are the main explanations in the difference of patterns of growth amongst developed and
developing countries. Over the years, they have all been widely debated.
Geography
The geography hypothesis as stated by Banerjee et al. (2006) “maintains that the climate, geography, and ecology of a society's location shape both its technology and the incentives of its inhabitants.” They argue that each one of these components significantly shapes a country’s economy. Depending on their geographic location, countries are forced to adapt agriculture systems which suite their climate. We all know that plants grow and bear fruits depending on the climate they have. With this in place, to increase productivity and trade, farmers will be obliged to adapt new and expensive innovative technologies according to their climate. However, due to the high cost in purchasing and maintaining these
technologies, especially in tropical climates, may result in very few farmers adapting them.
Consequently, failing to adapt newer innovative technologies would result in failure or low agriculture production.
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On their study Gallup, Sachs, and Mellinger (1999) analysed the role a country’s geographic location (land area, location of country (tropics), population (within 100 kilometres of the coast, population within 100 kilometres of the coast or ocean-navigable river, percent of population in landlocked area), and a country’s proximity to core markets in Europe etc.) has on the economies (GDP per capita) of 150 countries whose population was greater than 1 million in 1995. They found strong evidence supporting the hypothesis that geography plays an important role in the development of countries. They noted that countries near the tropics, especially countries in Africa and Central America and the Caribbean, are less developed and prone to many challenges. Countries in the Tropics are very distant of advanced economies (Europe) for trading, have high temperatures that challenges agriculture production, have high population growth rates, and are more vulnerable to diseases such as malaria which hinders the healthiness of their population. Therefore, they concluded that:
Location and climate have large effects on income levels and income growth through their effects on transport costs, disease burdens, and agricultural productivity, among other channels. Geography also seems to affect economic policy choices. Many geographic regions that have not been conducive to modern economic growth have high population densities and are experiencing rapid increases in population. (p. 179) Rodrik (2002) also contends the importance of latitude and proximity to navigable waters as important components of the geography hypothesis, especially as it relates to access to the water for easy access to other markets for international trade. With the easy movement of people and money, there is certainly an increase in flow of new and innovative ideas.
Producers tend to travel across the globe in search of better facilities and mechanization to improve the quality and efficiency of their products. There is also an exchange of knowledge, both at the technological and research levels. Moreover, Rodrik (2002) posits that a country’s geographic location “plays a direct and obvious role” in determining a country’s income. For countries, whose main dependence is natural resources (agriculture, oil, diamonds, and copper) they need to be competitive on the international market. Thus, the only way to be competitive in the international market is to have high quality natural resources. However, he states, “the quality of natural resources depends on geography.”
Rodrik, Subramanian, and Trebbi (2004) further empathized the role geography plays on a country’s economic growth and development:
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Geography is a key determinant of climate, endowment of natural resources, disease burden, transport costs, and diffusion of knowledge and technology from more advance areas. It exerts therefore a strong influence on agriculture productivity and quality of human resources. (p. 132)
Providing a contrary to the geography hypothesis is Acemoglu and Robinson (2013, Chapter 2). Acemoglu and Robinson (2013) state that the geography hypothesis, cannot explain the difference between North and South Korea, Chile and Bolivia or even that of the Nogales. As per these examples, these places both share the same geographical location and climate, but different governments.
Critique:
Does the geography hypothesis explain the economic difference amongst Commonwealth Caribbean countries? I believe the geography hypothesis falls short in answering this question. The geographic location of the Commonwealth Caribbean countries ensure all countries share multiple geographic characteristics. Frist of all, they all share the same type of tropical climate and all are located in the Atlantic Hurricane Belt making all of them prone to hurricanes every year. Severe weather such as drought, excess rain, hurricanes and storms significantly affect the economies of countries, but all these countries are adapting newer and similar technologies to confront these weather phenomena and produce quality goods and services. Secondly, with most countries being islands countries (exception of Belize and Guyana) all other countries share similar type of terrain and land area. Sharing the same type of terrain means that these countries possess abundance of natural resources and minerals. For example, Belize has little mineral resources, but abundance of arable land and beaches that attract tourism, while Jamaica and Trinidad and Tobago possess abundance of mineral resources. Thirdly, located between North American and South America gives the Commonwealth Caribbean countries every advantage to trade with these countries as all Commonwealth Countries have access to navigational water. Belize and Guyana are to benefit the most since both are situated mainland, which gives them access to both land and water trade routes.
With these characteristics and more, we can observe how the geography hypothesis falls short in explaining the different economic growth patterns amongst the Commonwealth Caribbean Countries.
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Culture
Globalization has created a more inter-connected planet enabling easier and faster mobility of people. This inter-connectedness has created a “melting pot” of culture, history, religion, and ideas for 7 billion people. However, despite this inter-connectedness and many external pressures, there are countries and societies that have still maintained their cultures intact. Granato, Inglehart, and Leblang (1996) defined culture as “a system of basic common values that help shape the behaviour of the people in a given society (p. 608).”
The culture hypothesis states that a country’s culture (beliefs, preferences and values) rather acts as a catalyst towards economic growth. For example, the values passed on within the family can influence the choice of profession a person may undertake. In the case of a women who has been grown in a very conservative home where the idea is that the “women belongs in the kitchen” greatly hinders her professional development. This then limits her job preferences and thus results as a hindrance which keeps her from embracing a profession she would like to obtain, and rather follows a profession which her family and society think fits her perfectly. Scholars Granato et. al (1996) further supported the culture hypothesis in their study. The argued, “Cultural attitudes toward achievement and thrift have a positive effect on economic growth.” Conducting an empirical analysis based on data of 25 countries to
measure the correlation between culture and economic growth and using various variables as measurement of culture, they found robust correlation. They stated:
That is, controlling for human and physical capital investment, poorer nations grow faster than richer nations; (2) investment in human capital (education spending) has a positive and statistically significant effect on subsequent economic growth; and (3) increasing the rate of physical capital accumulation increases a nation's rate of economic growth. (p. 616)
Granato et. al (1996) further elaborated on the findings by arguing that in countries and societies where thrift and savings are encouraged contribute to economic growth. That is, these mechanisms further lead to investment and, a country’s economy is highly dependent on investments.
Acemoglu (2008) argues that one of the major difference between cultures is religion.
“Differences in religious beliefs across societies are among the clearest examples of cultural differences that may affect economic behaviour (Acemoglu, 2008).” Granato et. al (1996)
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also support this argument by endorsing Weber’s (1904-1905) argument that religion plays a role in economic growth through the fuelling of capitalism:
Protestant Europe manifested a subsequent economic dynamism that moved it far ahead of Catholic Europe. Shifting trade patterns, declining food production in Southern Europe and other factors also contributed to this shift, but the evidence suggests that cultural factors played a major role. Throughout the first 150 years of the Industrial Revolution, industrial development took place almost entirely within the Protestant regions of Europe, and the Protestant portions of the New World. It was only during the second half of the twentieth century that an entrepreneurial outlook emerged in Catholic Europe and in the Far East. Both now show higher rates of economic growth than Protestant Europe. (p. 610)
Studying other cultural factors that influence economic growth, Marini (2004) analysed the role of ‘achievement motivation’ and ‘trust syndrome.’ The “achievement motivation” as stated by McClelland (as cited by Marini, 2004) is “wanting to do well, with respect to standards of excellence.” They further elaborated that wanting to excel in life pushes people out of their comfort zone to be independent. This idea then leads to economic growth, as the individual grows, so does the economy.
The “trust syndrome” is defined as having trust in the people and society around you.
Having their trust and vice versa, promotes economic growth through the implementation of new modern advances. Marini (2004) exemplifies by comparing “traditional societies” versus
“modern societies.” He states that:
Traditional societies were neither better nor worse than modern ones, but that the absence of modern technologies led to a ‘limited-good’ syndrome, where each family, at war with the other, tries to maximize its own material advantage (amoral familism).
This restricted range of sociability constitutes an obstacle to economic progress, because economies, to work properly, need trust among impersonal agents. (p. 769) In his empirical study, Marini (2004) found strong support for his argument that both factors, ‘achievement motivation’ and ‘trust syndrome’, are highly correlated with economic growth and as such are necessary for the advancement of economies.
Critique:
However, contrary to the arguments of these scholars, Acemoglu & Robinson (2013) argue that the other cultural elements - religion, value and ethics - are not explanatory
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variables for understanding poverty and inequality and thus explaining the difference in economic growth amongst countries. The authors argue that the culture hypothesis cannot explain the different level of prosperity between the high-income countries of Argentina and Chile versus the low-income countries of Bolivia and Peru. Interestingly, these four countries share the same Spanish-language, Latino culture and to some extent same history (Acemoglu
& Robinson, 2013).
Looking at the Commonwealth Caribbean countries, the culture hypothesis cannot hold. Given their historical background, Commonwealth Caribbean countries have very similar culture characteristics. As British Colonies, Commonwealth Caribbean countries share similar colonial histories and all have English as their official language. Additionally, the majority of their populations are Christians and all are composed of diverse races including a small size of indigenous people, giving them similar traditions and believes. To this, it would be deceitful to accept the culture hypothesis in explaining the different
economic growth trends amongst Commonwealth Caribbean countries.
Luck
Acemoglu (2008) states that the luck hypothesis as:
Set of fundamental causes that explain divergent paths of economic performance among otherwise-identical countries, either because some small uncertainty or heterogeneity between them have led to different choices with far-ranging
consequences, or because of different selection among multiple equilibria. (p. 110) Acemoglu (2008) further elaborates that the multiple equilibria countries are faced with and the choices they make, is what explains the different level of economic growth.
Despite having similar characteristics, the choice countries take have different economic impacts. For those whose choices had positive impacts, he calls them luck. For example, a country may decide to adopt technology. Those who adapt technology are faced with human and physical investment, which are good for a country’s economy.
Calvo and Mendoza (1999) and Spilimbergo (1999) (as cited by Jadresic & Zahler, 2000) hypothesised that Chile’s rapid economic growth in the 1990s was due to the luck hypothesis. “This accomplishment was to a large extent the result of a favourable external environment, characterized by abundant capital inflows due to a temporary decline in industrial-country interest rates, and allegedly favourable terms of trade. (p. 1)”
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In their study, analysing the economies of countries after taking into account the polices and external shocks that affect a country’s economy, Easterly et al., (1993) found that some countries are really fortunate or “lucky” to experience economic growth despite the shocks. The external shocks countries receive not always positively impacts the economies of countries. “Shocks, especially terms of trade shocks, statistically explain as much of the variance in growth rates over l0-year periods as do country policies (p. 481).”
Critique:
Does the luck hypothesis explain the different economic growth patterns amongst the Commonwealth Caribbean? Although the luck hypothesis might explain the economic growth in countries such as Trinidad and Tobago that is rich in oil reserves, it does not explain why countries such as Guyana and Jamaica, which are also rich in gold and minerals, are struggling with their economy. While these three countries are fortunate to have natural minerals and oils, only Trinidad and Tobago has a GNI and GDP per capita. If the luck hypothesis were to hold, then we would expect that both Guyana and Jamaica have GNI and GDP per capita. This is not the case. On the contrary, countries such as Antigua and Barbuda, The Bahamas, Barbados, and St. Kitts and Nevis where natural minerals and oil is none existent have experienced significant economic growth, positioning them with a high GNI and GDP per capita. Therefore, it is very optimistic to conclude that the luck hypothesis can explain the different economic growth rate amongst Commonwealth Caribbean countries.
As it relates to external shocks as being the luck and help in explaining the different economic growth rate, this is not the case. On the contrary, as CARICOM and CSME member countries, all countries continue to equally enjoy the benefits of the different preferential trade agreements. And if shocks, like the 2007/2008 world financial crisis, were to repeat itself, this would have a negative impact on the economies of all countries. The economies of all Commonwealth Caribbean Countries were significantly affected. However, even after the shock countries still managed to recuperate. Since the Commonwealth
Caribbean countries all form part of the CARICOM and CSME blocks, any trade related shock would be felt across all countries.
Political Institutions
Lastly, yet another important determinant of economic growth are institutions.
Acemoglu (2008) defines institutions as “rules, regulations, laws and policies that affect
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economic incentives and thus the incentives to invest in technology, physical capital and human capital (p. 111).”
Acemoglu (2008) further elaborates that institutions act as channels through which economic growth and development be achieved. It is true, that in most, if not all countries, citizens are governed by rules and regulations, which they did not asked for. However, these indifferences amongst the population can function as an engine to bring about reforms and changes that would produce better outcomes. Citizen’s willingness to organise and demand reforms so that they are able to prosper. Thus, the role of institutions is to enforce these new reforms. Acemoglu (2008) further reminds us that we must be cognizant that not all reforms would produce good outcomes, but be happy that at least we may have a possibility of a good outcome.
Ogilvie and Carus (2014) state that even parliamentarians influence institutions. They elaborated on the case of England and the important role wealthy parliamentarians played in creating the perfect preconditions for the Industrial Revolution. They further posit that institutions do act as catalysts for economic growth. “Historical evidence suggests strongly that although markets are required for economies to grow, public-order institutions are necessary for markets to function (p. 404).” Ogilvie and Carus (2014) also briefly elaborated on the role of property rights as a mechanism for economic growth. They contend that property rights are the “single most important institutional influence on economic growth at least since medieval times (p. 405).”
Focusing on the Commonwealth Caribbean countries, does the British colonial rule explain the different ecnomic growth patterns? What are the long term effects of the British colonial rule on the institutions and ecnomic development of Commonwealth Caribbean post-independence? Acemoglu, Johnson, and Robinson (2001) and Kohli (2009) have all tried to answer this question. On their study Acemoglu, Johnson, and Robinson (2001) analysed the effect European colonizers had on institutions of their previous colonies across the world.
They theorized the idea of inclusive and extractive institutions.
Inclusive institutions or governments are more likely to be economically successful, as states would care for its citizens’ welfare. This means that inclusive institutions and government will invest more in public goods such as education and health amongst others.
They stated that “countries with better "institutions," more secure property rights, and less distortionary policies will invest more in physical and human capital, and will use these
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factors more efficiently to achieve a greater level of income (p. 1369).” Through this,
investment would then uplift the economic standards of the country as a whole. Inclusiveness is measured through the degree of democracy, popular participation of government, or
protection of human rights. Extractive institutions, on the other hand, are less concerned about the welfare of the society, but rather interested in self-gain, i.e. extracting the state’s wealth for personal benefits.
Kohli (2009) theorizes the idea of state capacity. Kohli (2009) argues that state
Kohli (2009) theorizes the idea of state capacity. Kohli (2009) argues that state