Why Some Countries Are Rich: Factor Endowment

Why some countries are rich while others are poor

• The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2024 recognized Daron Acemoglu, Simon Johnson, and James A. Robinson for studies of how institutions are formed and affect prosperity.
• The book "Why Nations Fail" by Daron Acemoglu and James A. Robinson looks into the origins of power, prosperity, and poverty to answer why some countries are rich and others are not.

Reasons behind the economic success or failure of nations:

• Factor Endowment refers to the mix of resources a country has for economic activity: land, labor, and capital.
• Factor Endowment influences the types of economic activities that can thrive in a region.
• Environmental factors influenced resource availability and the development of institutions.
• Tropical/Hotter climates lead to a higher incidence of diseases.
• Cooler climates are more conducive to settle in.
• Tropical/Hotter climates are conducive for large-scale plantations like sugar, coffee, coconut, etc.
• Cooler Climates are conducive for small-scale production.
• Colonization is the process in which countries seize control over a foreign territory
• European powers were the most prominent colonizers due to advancements, navigation, military technology, and economic innovations.
• Colonization was designed to extract resources from the colonized country and transfer them to colonizing countries through settlement, resource exploitation, political control, and cultural imposition.
• Colonization legacy leaves countries wounded for decades.
• Countries are left weak, have a hard time recovering, and are underdeveloped.
• Factor Endowment and Colonial Origins affected the quality of institutions.

Institutions

• Institutions are formal and informal rules, norms, and structures that shape the behavior of individuals and organizations within a society and are mechanisms of social order and cooperation governing the behavior of a set of individuals within a given community.
• Economic Institutions are responsible for the management of economic activities - protection of property rights, market regulation, and regulatory frameworks.
• Political Institutions are responsible for governance, politics, checks and balances, and public policy.
• Colonizers established different types of institutions based on factor endowment and climate
• Extractive Institutions are structured to extract resources from the many by the few, at the expense of a broader population.
• Extractive Institutions are exploitive, abusive, promote inequality, corruption, and inefficiency.
• Inclusive Institutions are designed to include and empower a broad segment of the population, fostering economic and political participation, innovation, and development
• Inclusice Institutions are supportive with good governance, the rule of law, and offer economic opportunities with cooperation that all foster innovation and growth

Post Colonial Experience

• Many former colonies with extractive institutions struggled to transition to inclusive institutions.
• The entrenched elite had incentives to maintain the status quo, leading to persistent inequality, corruption, and weak governance.
• Regions with inclusive institutions at the time of independence were better positioned for sustained economic growth and political stability.

Current Challenges

• Colonization has ended, but the tragedy it caused a lasting scar leading to ongoing economic challenges.
• Exploited regions struggle with corruption, weak property rights, and political instability, which hindered economic development with institutional legacy, economic and political instability, social and cultural impact.

Dependency and Undevelopment

• Developing countries are poor and remain poor because of exploitation from colonization.
• Colonization destroyed production patterns and introduced unsustainable production practices.
• Colonies planted "cash crops" instead of "food crops" leaving colonized countries devastated after colonization.
• Neocolonialism defines countries that are free, but economically colonized.
• There is a cycle of unequal exchange and dependency.
• America is the core state, and the Philippines is the peripheral state. America exports raw materials to the Philippines, which they, in turn, process into a product because they are the ones who have capital. Then they sell it back.
• Poor countries are trapped in a vicious cycle of economic hardship and forced to have "cooperation" with their past colonizers that "helps" them.
• Dominance does not require direct military or political control.
• To make them poor, show that you are helping them, they will feel indebted, and they will follow.
• Education is a tool of neocolonialism to perpetuate foreign influence.
• Education even justifies colonialism controlling ideologies perpetuating Manipulation of knowledge, education which favors the elite, diminishes local appreciation, and alienation and lack of national identity
• The education system prepares students for economic roles (employment) rather than equipping them with the skills necessary for national development.
• During the time of colonization, colonizers utilized "locals'' to control the colonized population which is known as indirect control.
• The establishment of the entrenched elite, or the ruling class, sustained the exploitation and maintained the status quo.
• The ruling class became instruments for colonialization again.

Development

• Development is the freedom from unfreedom.