Development Economics – GIDS, LSE

Mphil Development Studies

GEOGRAPHY HYPOTHESIS

Ahmad Nawaz
anawaz@gwdg.de

Fall 2013
Outline
1. Introduction
2. Some theoretical approaches linking
geography and growth
3. Empirical linkages of geography and
growth
4. Some policy implications
5. Critique to the geography approach
1. Introduction

• Geography, climate and natural resources are

potential determinants of growth that are
immune to the problem of endogeneity!
2. Some theoretical approaches linking
geography and growth
4 major areas of research:
• Transport costs
• Human health
• Agricultural productivity
• Proximity and ownership of natural
resources
(a) AK model with transport costs

In this model growth differences across countries

depend on several parameters:

1. Underlying TFP (A), which may differ for fundamental

geographic reasons
2. Transport costs
3. National saving rate (and implicitly government
economic policies)
• Q = AK
• (pop is normalized to 1, i.e. Q is
output per capita)
• dK/dt = I – δK
• sQ = PI ·I, with
• s fixed national saving rate
• PI relative price of investment goods to final output

Hence, the growth rate γ of the economy is given by:

• γ = 1/Q · dQ/dt = 1/K · dK/dt ⇒
-
• γ = (sA)/PI - δ

+ -
• I = I(Id,Im) like I = (Id)α(Im)1- α
⇒Under CD it follows that the price index of
investment goods is a geometric average of the
price of domestic investment goods and foreign
investment goods.

• Setting PId=1, one gets:

PI=a(Pm)1- α, where a= α α(1- α)1- α.

• Pm = τPm*, where τ is the cif factor (τ>1).

( A/ ) (Pm*) (1 α) (1 α) δ
• Average cost of transporting imports,
expressed as a ratio to the total value of
imports (CIF/FOB):
3.6% USA
4.9% Western Europe
9.8% Asia
10.6% Latin America
19.5% Sub-Saharan-Africa

Source: Gallup, Sachs and Mellinger (1998)

(b) A model with intermediate goods

• Q = min[Ak,N/µ], where N are intermediate

imported goods.

With such a setting one can show, that relatively

small transport costs can have huge effects on
output and growth, when the share of
intermediate inputs in final demand is large.
(c) Divergence, convergence and poverty
traps
• If the AK-model was valid, we would not have
diminishing returns to capital and observe convergence.

• Then countries having underlying advantages in:

– Saving rates
– Efficiency
– Transport costs or
– Rates of Depreciation
… will display permanently higher growth rates.

• Initial advantages (which later disappear) such as lower

transport costs, could lead to convergence in growth
rates but not in levels (when same A, s and δ).
(d) Geography and policy choices

Hypothesis:
When growth is inherently low because of adverse
geographical factors, the “revenu-maximizing
sovereign” will impose high rates of taxation –

When economy is inherently productive, low rates

of taxation will be imposed –

⇒ Natural differences in growth potential tend to

be amplified by the choice of economic policies
(“quick gain vs. future loss” (Sachs et al.)).
3. Empirical linkages of geography and
growth
• Transport costs

• Transport costs and “cities as engines of growth”

• Prevalence of infectious disease
• Climate and agricultural output
Climate acts on agricultural productivity

• Heavy rain vs. moderate rain vs. no rain

• Short days in winter and long days in summer is better

than constant days throughout the year

• Frost kills insects and micro-organisms

(see Masters and McMillan, JEG, 2001)

• Agricultural productivity negatively associated
with “tropical ecological-zone”, controlling for
labor, tractors, use of fertilizers, irrigation and
other inputs.
• Geography and levels of per capita
income
• Geography and growth of per capita income
General conclusion from the growth
equations
– Policy and geography matters
– Tropics negative effect
– Coastal population positive effect
– Distance from core markets no effect
– Tropical effect mainly via Malaria (may be
proxy for a range of tropical diseases)
– Access to cost positive effect (also via
agglomeration)
Some policy implications

• More attention to the special problems of landlocked

countries

• Reallocate aid: Tropical health and agriculture are prime

examples of international public goods (capability
(Cogneau & Naudet) vs. efficiency (Collier & Dollar))
5. Critique to the geography approach
• Most of the empirical results are based on simple cross-
section regressions. Regressions using Panel-data and
GMM show that the Africa dummy is small and
insignificant: there are no African fixed effects to explain
and so African location cannot be very important.

• Policy matters more than geography. Gallup et al. (1998)

argue that policy is endogenous to geography:
landlocked countries have less incentive to adopt good
policies. Indeed some evidence, however, all five of the
worst policy environments on the WB’s ratings are
coastal, but among the 26% of the low-income
population living in adequate policy environments, 2/3
are landlocked.
• Obviously geography is exogenous, but poor agricultural
productivity is not a natural outcome of Africa’s
geography. It is an outcome of geographical facts in the
context of a given agricultural technology in a
challenging institutional environment.

• Only the combination of ‘bad’ geography with systematic

failures of insurance, capital markets and agricultural
research prevents the creation of extraordinary complex
farming systems.

• Public health in Africa is itself largely determined by

poverty and poor growth prospects (and thus is
endogenous in a growth regression).
• Institutions-Hypothesis (Tutorial)