From Correlates to Fundamental Causes
The correlates of economic growth, such as physical capital, human capital and technology, will be our first topic of study. But these are only proximate causes of economic growth and economic success (even if we convince ourselves that there is a causal in element the correlations shown above).
It would not be entirely satisfactory to explain the process of economic growth and cross-country differences with technology, physical capital and human capital, since presumably there are reasons for why technology, physical capital and human capital differ across countries. In particular, if these factors are so important in generating large cross country income differences and causing the takeoff into modern economic growth, why do certain societies fail to improve their technologies, invest more in physical capital, and accumulate more human capital?Let us return to Figure 1.8 to illustrate this point further. This figure shows that South Korea and Singapore have managed to grow at very rapid rates over the past 50 years, while Nigeria has failed to do so. We can try to explain the successful performance of South Korea 22
and Singapore by looking at the correlates of economic growth—or at the proximate causes of economic growth. We can conclude, as many have done, that rapid capital accumulation has been a major cause of these growth miracles, and debate the role of human capital and technology. We can blame the failure of Nigeria to grow on its inability to accumulate capital and to improve its technology. These answers are undoubtedly informative for understanding the mechanics of economic successes and failures of the postwar era. But at some level they will also not have answered the central questions: how did South Korea and Singapore manage to grow, while Nigeria failed to take advantage of the growth opportunities? If physical capital accumulation is so important, why did Nigeria not invest more in physical capital? If education is so important, why are education levels in Nigeria still so low and why is existing human capital not being used more effectively? The answer to these questions is related to the fundamental causes of economic growth.
We will refer to potential factors affecting why societies end up with different technology and accumulation choices as the fundamental causes of economic growth. At some level, fundamental causes are the factors that enable us to link the questions of economic growth to the concerns of the rest of social sciences, and ask questions about the role of policies, institutions, culture and exogenous environmental factors. At the risk of oversimplifying complex phenomena, we can think of the following list of potential fundamental causes: (i) luck (or multiple equilibria) that lead to divergent paths among societies with identical opportunities, preferences and market structures; (ii) geographic differences that affect the environment in which individuals live and that influence the productivity of agriculture, the availability of natural resources, certain constraints on individual behavior, or even individual attitudes; (iii) institutional differences that affect the laws and regulations under which individuals and firms function and thus shape the incentives they have for accumulation, investment and trade; and (iv) cultural differences that determine individuals’ values, preferences and beliefs. Chapter 4 will present a detailed discussion of the distinction between proximate and fundamental causes and what types of fundamental causes are more promising in explaining the process of economic growth and cross-country income differences.
For now, it is useful to briefly return to South Korea and Singapore versus Nigeria, and ask the questions (even if we are not in a position to fully answer them yet): can we say that South Korea and Singapore owe their rapid growth to luck, while Nigeria was unlucky? Can we relate the rapid growth of South Korea and Singapore to geographic factors? Can we relate them to institutions and policies? Can we find a major role for culture? Most detailed accounts of post-war economics and politics in these countries emphasize the role of growth-promoting policies in South Korea and Singapore—including the relative security of property rights and investment incentives provided to firms. In contrast, Nigeria’s postwar history is one of civil war, military coups, extreme corruption and an overall environment failing to provide incentives to businesses to invest and upgrade their technologies.
It therefore seems necessary to look for fundamental causes of economic growth that make contact with these facts and then provide coherent explanations for the divergent paths of these countries. Jumping ahead a little, it will already appear implausible that luck can be the major explanation. There were already significant differences between South Korea, Singapore and Nigeria at the beginning of the postwar era. It is also equally implausible to link the divergent fortunes of these countries to geographic factors. After all, their geographies did not change, but the growth spurts of South Korea and Singapore started in the postwar era. Moreover, even if we can say that Singapore benefited from being an island, without hindsight one might have concluded that Nigeria had the best environment for growth, because of its rich oil reserves.[2] [3] Cultural differences across countries are likely to be important in many respects, and the rapid growth of many Asian countries is often linked to certain “Asian values”. Nevertheless, cultural explanations are also unlikely to provide the whole story when it comes to fundamental causes, since South Korean or Singaporean culture did not change much after the end of WWII, while their rapid growth performances are distinctly post-war phenomena. Moreover, while South Korea grew rapidly, North Korea, whose inhabitants share the same culture and Asian values, had one of the most disastrous economic performances of the past 50 years.This admittedly quick (and perhaps partial) account suggests that we have to look at the fundamental causes of economic growth in institutions and policies that affect incentives to accumulate physical and human capital and improve technology. Institutions and policies were favorable to economic growth in South Korea and Singapore, but not in Nigeria. Understanding the fundamental causes of economic growth is, in large part, about understanding the impact of these institutions and policies on economic incentives and why, for example, they have been growth-enhancing in the former two countries, but not in Nigeria.
The intimate link between fundamental causes and institutions highlighted by this discussion motivates the last part of the book, which is devoted to the political economy of growth, that is, to the study of how institutions affect growth and why they differ across countries.An important caveat should be noted at this point. Discussions of geography, institutions and culture can sometimes be carried out without explicit reference to growth models or even to growth empirics. After all, this is what many non-economist social scientists do. However, fundamental causes can only have a big impact on economic growth if they affect parameters and policies that have a first-order influence on physical and human capital and technology. Therefore, an understanding of the mechanics of economic growth is essential for evaluating whether candidate fundamental causes of economic growth could indeed play the role that they are sometimes ascribed. Growth empirics plays an equally important role in distinguishing among competing fundamental causes of cross-country income differences. It is only by formulating parsimonious models of economic growth and confronting them with data that we can gain a better understanding of both the proximate and the fundamental causes of economic growth.
1.8.