Week 3: How do Political and Social Institutions Impact National Economic Development?
Week 3: How do Political and Social Institutions Impact National Economic Development?
“Institutions… Natural resources… Education.. Political system.. Property rights..Corruption… Religion and culture… Companies… Parts 1 – 7 about institutions and systems…”
We’re not only asking why are some countries richer than others? We’re also asking, can a country that’s less well off over time increase its position? Do we have examples of that? And I think you might be surprised by what we can see from history and the data.
Most of you, if you’ve had a class in economics or studied this at all, have probably heard the phrase gross domestic product, GDP. And as you know, that means the total amount of products and services created by an economy in a given period.
You get the gross domestic product or the GDP. If you divide that by population, you get GDP per capita.
How can a country increase its economic wealth?
What would be the reasons or the factors that would, would, we could use to explain why these countries are wealthier than the ones at the bottom of the list?
Before we do that though, let me, let me make you aware that there are other ways of measuring other sources of of data on GDP per capita.
Where the list that we looked at first, it had a GDP per capita of over 100,000.
When you take into account purchasing power parity have an even higher GDP per capita.
But given difficulties in measuring things over time, GDP per capita or similar rankings is generally the most widely accepted way to look at things..
What is it that’s led to the very impressive growth in some countries’ GDP per capita? If we could capture that in a bottle, if we could discover that magic, we’d help a lot of people and the world would be a lot better off.
So if we look at our list at the top, we do see some countries that are endowed with some very rich natural resources; they’re set for life because they’ve got a great set of natural resources.
See if you can find a country that is wealthy despite not having a great portfolio, or a great abundance of natural resources; if you can think of a country like that, then you probably will have to really start to reconsider whether it really is natural resources that’s the answer to economic development.
A second question you might ask yourself is, can we think of an example of a country that is not very well-off, that is relatively underdeveloped economically, despite having an abundance of natural resources.
Natural resources does not even seem to be a necessary condition for economic wealth to develop because Japan is wealthy despite not having that abundance of natural resources; so we cannot say with any certainty that having natural resources is the answer to what makes a country rich, or richer than others or richer over time.
What I often hear from students is if it’s not natural resources, it must be something like education, and we’re talking about education, we’re talking about human beings.
It would be very enticing if education were the answer because it would simply be very easy for countries if they start to to invest much more in education.
How would we measure knowledge creation or education? There are a lot of ways to do that:
completion rates of primary, secondary, tertiary, or even higher education;
completion rates across countries;
simplest measure might be to look at like literacy rates.
As we look at this list we see some countries that report a 100%, or almost a 100%, of their citizens being able to read. And as you look at this list you see some countries that were not at the top of our other list of GDP per capita.
But we see less developed country, North Korea, with a high literacy rate, and we see a very well off country Norway, with a very high literacy rate.
We it were that simple if a country could just say, hey let’s teach everybody for free, but it is not.
Maybe it is the political system or the form of government that contributes to economic success?
As we look at this, there’s again, quite a bit of diversity across the top set of countries and their forms of government.
So far, we haven’t been able to come up with one particular form of government that seems to be correlated with economic success.
There is just too much diversity across nations to explain in a very simple manner, the development of wealth over time by the form of political government.
Each of the properties need a very clear definition of ownership and protection of that ownership or the rights of ownership in order for an economy to succeed.
If there is confusion or a mystery or an easily manipulated system of property rights shifting from one person or one entity to the other you won’t see economic growth.
In terms of property rights, we need a working judicial system, legal system, and a regulatory system that people have faith in (i.e. actually protects the rights of individuals and entities to own and develop property).
You’ll find across many economies with lots of different types of political systems and even economic systems, that property rights development is highly correlated with economic wealth.
And in order for a functioning property rights system to work, we need a functioning set of institutions to protect those property rights.
Countries have to create that system of investment protection or the protection of property rights in order for investors, whether local, individual entrepreneurs or, companies coming in from the outside to make those investments.
Religion: look at a world map and there is quite a bit of diversity across the world.
Religion is one aspect of culture, and different religions put different emphasis on family.
So some people have tried to hypothesize or suggest is that there’s a relationship in some countries between the religion or religious culture and economic wealth.
But the diversity suggests it can’t be that one particular type of religion or even culture is conducive or the most conducive or the best at producing economic wealth, and it can’t be that everybody should adopt one religion in order to become wealthy.
Successful countries produce successful companies, and successful companies come from successful countries.
All of those factors lead to an environment where companies or private entities can develop that will grow and help the economy grow even more.
On our list of wealthiest countries, we have 132 companies from the Untied States, we have 89 from a very rapidly growing China, and the other countries on this list including South Korea, Japan or countries that we saw at the top of our list of wealthiest nations in the world; we don’t see any countries listed here that aren’t very well off.
We see in many of our growing economies, like Brazil and Mexico, represented on this list and so, there does seem to be some correlation between an economy getting its wheels turning and becoming successful growing and developing companies.
Much of the economic growth on the part of companies will benefit the home country, hopefully the host country and also will be facilitated by the successful infrastructure that the home and host countries provide.
