In this blog post, we will look at how institutional and geographical conditions affect economic growth.
Many economists have considered the development of institutions to be an important cause of economic growth. This has become an important issue because institutions provide the legal and political framework of society, ensuring the predictability and stability of economic activity. For example, a well-developed property rights system helps economic growth by rewarding investment and innovation. Such a system increases the overall level of trust in society and provides a foundation for market participants to make long-term plans. In particular, in a society with high institutional stability, companies can devote more resources to developing new technologies or increasing productivity, and such innovation acts as an important factor in promoting economic growth.
However, it is not easy to prove this. Even if there is a correlation between the level of development of a system and the level of income, it is difficult to determine the causal relationship because a system can affect economic growth but also be affected by it. For example, as a country becomes wealthier, it may be able to afford to establish better systems, which may lead to a virtuous cycle of better economic performance. As such, the relationship between institutions and economic growth is complex and multifaceted, making it difficult to explain with a single cause and effect.
In addition, the relationship between institutions and economic growth is further complicated by the fact that the development of institutions can vary depending on the historical background, cultural characteristics, and political stability of a particular country. For example, countries that have experienced colonial rule may be affected by that experience in their current institutional environment, which may lead to different trajectories of economic growth. In this context, it is important to view institutions not as a single variable, but as the result of historical processes. However, recent statistical evidence suggests that the income level of each country is closely correlated with geographical conditions such as latitude and climate. Unlike institutions, geographical conditions are not affected by income levels. This has led to the interpretation that geographical conditions affect economic growth through direct pathways such as people’s health and productivity. In particular, unfavorable geographical conditions such as high disease rates in tropical regions and poor soil are often cited as major factors hindering economic development.
Economists who emphasize institutions have noted that if geographical conditions are the direct cause, countries with more favorable geographical conditions for economic growth should have higher income levels than they do now, but this is not the case in many cases. They argue that to explain this “reversal of income levels” along with the “correlation between geographical conditions and income levels” at the same time, the system should be seen as the direct cause of economic growth and geographical conditions as having a relationship with economic growth through indirect pathways that affect the direction of the development of the system. In other words, geographical conditions are not the direct cause of current economic growth. Rather, geographical conditions have influenced the historical process of “system reversal,” in which systems have developed in a direction that is unfavorable to economic growth in regions that used to be better off and favorable in regions that used to be worse off.
Now, even scholars who emphasize the direct impact of geographical conditions have come to acknowledge the existence of indirect pathways. However, the position that direct pathways have a more important and lasting impact on economic growth remains unchanged. This is convincing because geographical conditions play an important role in shaping the economic structure of society in both the past and present. In addition, an integrated perspective that considers how institutional and geographical conditions interact and contribute to economic growth in complex ways is becoming more important. This complex relationship requires more sophisticated analysis to understand the economic growth path of a particular country or region. Rather than understanding the factors of economic growth as a single factor, it is necessary to conduct a multifaceted study of how institutional and geographical factors influence and affect each other.
