ROLE OF INSTITUTIONS, GEOGRAPHY AND CULTURE IN ECONOMIC GROWTH

Economic Policy
Iuliia Steksova, Group E
Africa is home to a grand variety of natural resources, including gold, diamonds, oil and copper. Yet,
despite being one of the most resource rich continents on earth, many African nations have been
fighting a losing battle with poverty and underdevelopment. This paradox raises a crucial question:
how important are economic institutions relative to geography and culture in terms of relative levels
of prosperity and long run economic growth? This essay will argue that economic institutions - such
as laws, policies, and government structures - have a more significant role in determining long term
economic development than geography, which merely provides a foundation. To support this
statement, the essay will touch on and examine the distinct effects of inclusive and extractive
institutions on economic development; the impact of culture on the development of Asian countries
and the comparison between the economic trajectories of Africa and Singapore.

Economic development is mainly shaped through man-made institutions that influence investment,
innovation, and production. The “Rule of Law,” omnipresent in developed nations, has been strongly
linked to economic growth through several key mechanisms. These mechanisms include personal
security, protection of property rights, enforcement of contracts, restrictions on government
overreach, and safeguards against corruption and exploitation. Fundamentally, the rule of law
establishes frameworks that ensure market predictability, security and protection and, thereby,
create an environment which encourages investment and trade. This stability also helps to attract
foreign investment, bringing capital, technology and employment opportunities. It is relevant to
point out that inclusive institutions, characterized by adopting more features of the rule of law,
historically have led to higher levels of development than extractive institutions. As pointed out in
the well known book “Why Nations Fail: The Origins of Power, Prosperity and Poverty” (Acemoglu,
Daron, and James A. Robinson, 2013), inclusive institutions are those that encourage broader
participation with decisions that benefit the majority; property rights, allowing citizens to engage in
economic activities and economic opportunities. On the other hand, extractive institutions are
characterized by limited participation with concentration of power in the hands of a narrow elite;
insecure property rights and economic inequality. These systems deter foreign trade and may create
cycles of crisis that prevent long term growth. The influential study 'The Colonial Origins of
Comparative Development' (Acemoglu, Johnson, and Robinson, 2001) found that regions governed
by inclusive institutions during colonial times achieved significantly higher long-term economic
prosperity than those subjected to extractive institutions. This argument is supported by the
economic trajectories of Peru and the United States. While U.S. institutions fostered inclusivity, broad
participation, and stable governance, Peru remained characterized by inequality and political
instability. Today, this divergence is reflected in their respective GDP per capita: approximately
$74.600 in the U.S. (World Bank) compared to $7,906 in Peru (World Bank). Thereby, we see that,
despite having access to global trade routes and favorable climates, many Latin American countries
were not able to achieve economic growth due to the prevalence of oppressive and weak
institutions. This striking contrast highlights the profound impact of institutions on economic
development and overall quality of life.

However, Peru and the United States are not the only example that demonstrates the crucial effect of
institutions on economic development. The case of North and South Korea further demonstrates
how institutional choices are what shapes economic outcomes. Following the Korean War, an
armistice agreement divided the Korean Peninsula into two separate states. Despite sharing a similar
geography and natural resources, their current economic conditions could not be more different.
After the separation, Kim II Sung established a command economy in North Korea, allowing the
government to exercise full control over resources and policies. The regime prioritized military
spending over education, infrastructure and foreign trade, which led to stagnation of growth and
economic difficulties. At the same time, South Korea initially faced multiple economic challenges,
with fewer natural resources than its northern counterpart and a workforce mainly engaged in
small-scale agriculture. However, under the leadership of Park Chung Hee, South Korea adopted
ambitious economic policies that stimulated foreign trade, industrial development and technological
innovations. Despite lacking natural oil reserves, the country has been able to compensate through
trade agreements, investment in education and innovation focused policies. Eventually, this approach
fostered a skilled workforce and was able to ensure long term economic growth. As of today, South
Korea is a highly developed nation with a GDP per capita of approximately $33,121 (World Bank), a
strong industrial sector, high literacy rates and modern infrastructures. On the other hand, North
Korea struggles to provide basic necessities for its population, with a GDP per capita of only $1,217,
food shortages and limited access to healthcare. This disparity in development - often referred to as
the “Korean Experiment” - strongly supports the argument that institutions are of a higher relevance
for long term economic development than geography or resource availability. Even though South
Korea initially possessed fewer resources, its inclusive institutions, democratic government practices
and strategic economic policies allowed it to achieve remarkable growth and surpass its northern
neighbor in less than a century.

Throughout history, the impact of culture on the economic development of a country has been
widely debated and, overall, culture has played quite an important role in influencing the economic
trajectories of different nations. Sociologist and political economist Max Weber argued that
economics should be a broader discipline, which focuses not only on economics, but also on non
economic factors that influence outcomes. This approach implies that cultural values, traditions and
societal norms play a key role in shaping the economic trajectory of a nation. Culture often
determines individual decision economics, which in turn influences economic structures on a
broader scale. In 1968, Gunnar Myrdal investigated the relationship between economic and social
development in South Asia in a study known as “Asian Drama: An Inquiry into the Poverty of Nation”
(Gunnar, 1968). In said study, he defended the idea that underdevelopment in Asia is not only an
economic issue, but is rather deeply rooted in social and institutional structures. He pointed out
factors such as gender discrimination and resistance to modernization as some of the main obstacles
to economic growth. Even though Mydal defended the relevance of cultural factors, he repeatedly
brought up the role of government institutions in shaping economic development. The concept of
the “soft state” was introduced, which described a government system that allows corruption and
fosters an environment where the rule of law is not truly applied. In such environments, cultural
norms - whether conducive to growth or not - go through dysfunctional institutions, limiting their
economic impact. Thereby, while culture influences long term economic development, it is ultimately
institutions that channel cultural values into economic policies and practices. It is important to point
out that Myrdal´s concept of a soft state remains relevant to this day, with many developing nations
struggling with widespread corruption and a lack of political resolve to implement policies necessary
for development and growth.
The economic trajectories of China, Taiwan and Hong Kong further demonstrate the importance of
institutional structures over culture for economic growth. Despite having a shared Chinese cultural
heritage, characterized by Confucian principles and an emphasis on the importance of hard work,
these regions experienced different levels of economic success due to the differences in their
institutional structures. During the 1960s, Taiwan went through a significant economic upswing
mainly due to the introduction of an open economy, which prioritized exportation. Similarly, Hong
Kong´s rapid financial growth can be greatly attributed to the establishment of a free market system
that promoted trade and investment while putting limitations on government interference in
economic activities. Nevertheless, China under Mao Zedong's rule implemented a command
economy, where the state took control of a large part of economic operations. During this period,
China experienced slow economic growth and multiple periods of stagnation. However, in 1979,
Deng Xiaping put forward a variety of reforms, establishing a free market that allowed enterprises to
operate freely and encouraged international trade. Following these reforms, China's annual GDP
growth increased to around 9.9%, according to the World Bank. This comparison between China,
Taiwan and Hong Kong demonstrates that institutional structures rather than cultural values are the
key determinants of economic growth. All three economies experienced an increase in economic
development following the introduction of inclusive, free market institutions.

As mentioned at the very beginning, Africa presents a paradox. It is a continent rich in natural
resources, however, it has struggled to achieve sustained economic growth. Even though some of the
economic challenges experienced by the continent can be attributed to certain health issues, such as
the widespread cases of malaria, and climate change, the driving force of its economic struggles are
weak government structures and poor institutional frameworks. During the colonial period, the
African regions that were occupied by white settlers were able to experience a certain degree of
economic development. Colonizers introduced their own market practices, which allowed them to
effectively make use of natural resources to obtain profit. However, after becoming independent,
many African nations faced significant economic crises, caused by excessive ambitions for
development, poor planning and weak government structures. The lack of strong institutions allowed
corruption, political instability and inept resource management to flourish, thereby preventing
African countries from taking full advantage of their natural resources to achieve an economic
upswing. Singapore can be presented as a counterexample, demonstrating that geography and
resource abundance are not the key determinants of economic success. Unlike Africa, Singapore has
limited natural resources and little climatic diversity. Despite these challenges, it has been able to
achieve great success, becoming one of the world´s most economically developed nations, currently
ranking highest in human capital development, according to the World Bank Human Capital Index.
This economic success was the result of the implementation of strategic government policies under
the rule of Lee Kuan Yew. During his leadership, the country implemented strict anti corruption
measures, promoted foreign investment and made education a priority so as to develop a highly
skilled workforce. All in all, Singapore's economic success was the result of strong institutions which
adhered to the rule of law and the adoption of an open market economy. The disparity in the
economic outcomes of Africa and Singapore serves as a compelling demonstration that geographic
advantages, such natural resources and a diverse climate, do not guarantee economic growth. It is
the presence of the appropriate institutions and effective government policies that allows a country
to transform its natural endowments into sustainable economic growth. Africa, despite having been
blessed with natural wealth, has so far been unable to transform said resources into long term
economic prosperity due to poor government policies and the abundance of corruption.

The unique economic trajectories of the nations examined clearly illustrate that while geographic
and cultural factors hold some significance in shaping economic development, institutional
structures ultimately determine the financial growth and long term prosperity of a country. The
empirical examples of North and South Korea, China vs. Taiwan and Hong Kong, and Africa vs.
Singapore all demonstrate that the prevalence of inclusive institutions, adherence to the rule of law
and stable government structures are the driving forces behind sustained economic growth. The case
of Singapore highlights that through strong institutional frameworks, geographic constraints such as
a poor climate and a lack of natural resources can be overcome and do not automatically hinder
economic progress. Likewise, the comparison between China, Taiwan and Hong Kong serves as
further evidence to support the idea that institutions, rather than culture, play the key role in
dictating national economic outcomes, as culture primarily influences individual behaviour rather
than determining systemic economic policies. The developmental trajectories of North and South
Korea provide further evidence that institutions and government policies are the ultimate
determinants of long term prosperity. Despite sharing the same geography, cultural heritage and
initial conditions, the implementation of inclusive institutions and market oriented policies allowed
South Korea to become a global power. In contrast, North Korea´s restrictive economic policies and
extractive institutions led to stagnation and poverty. This sharp divergence proves that institutions
are the decisive factors in the economic fate of a country. Ultimately, the earth provides us with
resources, but like pieces of a puzzle, their true value depends on how nations and their leaders
assemble them through policies and institutions, determining whether they lead to lasting prosperity
or become a lost opportunity.
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