The geography versus institutions debate o geography

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The geography versus institutions debateogeography affects institutions through the colonization strategy and institutions affect economic developmentoAcemoglu and Robinson favor institutions over geographyE.g. They argue that if geography, climate or culture is the answer, then why are the economic performances of e.g. North and South Korea; North and South America, East and West Germany so starkly different despite similarities in geography, climate, and culture?Also, empirical work in this area shows that institutions are the principal determinant of differences in long term incomes across countries – Geography has only an indirect effect Section 4: Classic Theories of Economic Growth1.The Harrod Domar Growth ModeloKey assumptions: The Fixed-Coefficient Production Function – A fixed capital labour ratio K/L is used to produce a given level of output => isoquants are L shapedoImplications: Growth rate is directly proportional to savings rate and inversely proportional to capital-output ratioCapital output ratio is a measure of a) capital intensity and b) the efficiency with which capital is used (lower c implies higher productivity of capital)oStrengths: Simplicity- little data requirements – easy to estimateApplication in estimating the capital requirements of developing countries to achieve a targeted level of economic growth- E.g. If domestic savings do not equal the desired savings – there is a ‘financing gap’ that is sought to be filled through foreign aid. Underscores the significance of savings rate in economic growtholimitations Rigid assumptions of fixed capital-output ratio and of capital-labor ratio offering little flexibility – Capital output ratio may change over time in response to policy changesAssumes that capital is the only binding constraint in facilitating economicgrowth in developing countriesNo role of factor productivity in economic growth or on reducing the capital output ratioAssumes saving is always equal to investment 2.The Lewis Two-Sector Model of Economic DevelopmentoKey assumptions:
Presence of two sectors: a traditional agriculture sector and an urban industrial sectorPresence of surplus labor in agriculture sector that moves to modern industrial sector that offers higher wagesDue to unlimited supply of labor, the wages in industrial sector are fixedEntrepreneurs make profit by charging a price higher than the wage rateThese profits are reinvested in the businessoImplicationsostrengths Valuable as an early conceptual portrayal of development processFits the historical description of the development process of some developing countries such as ChinaolimitationsModel ignores differences among countries in process of growthThe model seems to ignore the balance in growth between agriculture and industrial sector and the backward and forward linkages between the twoAssumption of fixed wages in the industrial sector also unrealistic – e.g.

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