Why some Countries Grow While Others Do not?

Questions are being asked, why do other countries grow while others do not? What determine the rate of growth of a country? Why do countries with similar geographical conditions or with same natural resources differ in growth?

Inputs of growth are Land (Natural Resources, soil, Climate, Minerals, and Hydrocarbons), Labor ( Human Resources, Putting unemployed to work, and Education) and Capital ( Financial Resources, Domestic savings,and Foreign Capital).

There are two different growth models, i.e Input Driven Growth and Productivity-Driven Growth.

The input-driven growth depends on 1)extracting natural resources which eventually, this hits a maximum rate; 2)Putting unemployed to work, eventually, everyone is working and; 3)mobilizing people's savings, eventually, all savings are mobilized.

In productivity-driven growth, when inputs are fully used, further growth can come only from higher productivity. Productivity-driven growth = more output per unit input. Therefore, to grow fastest:

Max: Output/Input

Why is Africa not growing?

There are three types of theories used to explain reasons for Africa's undergrowth. These are geographical theories, legacy theories and institutional theories.

Geographical theories suggest that Africa is not growing because it has bad climate, presence of many kinds of disease, isolation from coast, and poor soil quality.

Legacy theories suggest that Africa is not growing as a result of recent colonial history and effects of tribalism. Institutional theories suggest that the African continent is not growing due to inefficient courts, corruption and authoritarian governments, plus lack of adequate schooling.

But,what made Botswana different? Not geographical because the country is landlocked and arid. The Country has one of World's highest AIDS rates. Not colonial history because British colonialists left 12 km of paved road and 22 University graduates. Institutions of private property are what made Botswana different from other countries of Africa.

In Botswana, a broad cross-section of the people have effective property rights: rule of law, sanctity of contract, and minimal state or private predation; Relatively efficient, business-friendly bureaucracy; and Conservative fiscal policy.

Acemoglu, Johnson and Robinson careful statistical research in 2000-2002 suggests that good institutions lead powerfully to economic growth, i.e. accounts for 3/4 of the gap between rich and poor countries. Controlling for institutional quality, Africa is not an outlier.

According to Professor David O.Beim of Columbia Business School, Botswana got where it is today as a result of pre-colonial history of power sharing, good governments of Seretse Khama and Quett Masire, Orthodox economic policies, and Diamond (40% of GDP).

Natural Resources

Diamonds did not help Sierra Leone. On average, there is a reverse correlation of natural resources to growth. Extraction does not build economy and this can be clearly explained when one looks at an example of Indonesia Vs. Japan, and of Saudi Arabia. While Indonesia is one of the World's largest extractors of iron, Japan does not extract anything of significance, but the later is the world's second largest economy while the former is a developing country.

This can also be explained from an example of Saudia Arabia. While the Country is the World's number one producer of crude oil, it is not among the leading economies of the World.

Foreign Aid

Raghuram Rajan, Chief Economist at the International Monetary Fund ( IMF) in 2003-2006 concluded that foreign aid does not correlate with growth, but rather it does correlate with corruption. According to Rajan, what matters is a good private sector protected by a good government.

Free Financial Markets

High-return, value-creating projects accelerate economic growth. Free financial markets shower capital on high-return projects and snatch it away value destroyers.


Source: The Manager( Pilot Edition October/December 2009)