Mideterm #2 - Global South

Proximate Causes of Economic Growth

The immediate, direct factors used in production: Physical Capital (K), Labor/Human Capital (L), and Technology/Total Factor Productivity (A). (Analogy: The engine, fuel, and wheels of a car).

Fundamental Causes of Economic Growth

The underlying, long-term factors that create conditions for growth, including institutions, geography, and culture.They influence the proximate causes and shape economic performance over time.

Solow Growth Model Production Function

Equation: Y=f(A,K,L)

Y = Total Output / Real GDP

A = Total Factor Productivity (Technology / efficiency)

K = Physical Capital stock

L = Labor force / Human capital

primary takeaway of the Solow Growth Model

Capital accumulation (KK) faces diminishing marginal returns, meaning adding more factories yields progressively less output over time. Therefore, capital alone cannot drive long-run sustained growth; technological progress (AA) is required.

Theory of Unconditional Convergence

The hypothesis that poorer economies will naturally grow faster than rich economies and eventually catch up in per capita income globally because poor nations have a higher marginal return on capital. (Note: Empirical evidence shows this does NOT hold true globally)

Conditional Convergence

The idea that poorer countries grow faster than rich ones only if they share similar structural characteristics (such as savings rates, population growth, human capital, and institutional quality). They converge to their own individual steady-state, not a universal one.

Current Evidence on Unconditional Convergence

fails globally (poor countries as a whole are not automatically catching up).

Current evidence on conditional convergence

Conditional convergence is supported by data when controlling for institutions and policies.

Current evidence on regional convergence

Regional convergence works well among homogenous groups (e.g., U.S. states or EU nations).

Four fundamental determinants

Luck / Accidents: Historical contingencies or random shocks.

Culture: Social norms, trust, and values affecting work ethic.

Geography: Climate, disease, natural resources, and trade access.

Institutions: Formal rules and informal norms governing society

How property rights make a good economic institution

Property Rights: Protect individuals/firms from arbitrary state expropriation or theft, incentivizing long-term investment

How bankruptcy laws make a good economic institution

Bankruptcy Laws: Reduce the penalties and costs of entrepreneurial failure, encouraging sensible risk-taking and efficient capital reallocation.

Exogenous Variable

A variable determined outside the model/system (e.g., historical settler mortality caused by climate/disease centuries ago).

Endogenous Variables

A variable determined inside the system that affects and is affected by other variables (e.g., modern institutional quality and current GDP).

How North and South Korea serve as a natural experiment for institutions

In 1945, a population with identical history, culture, and geography was split. North Korea adopted extractive command structures; South Korea adopted market-oriented inclusive institutions. Because geography and culture were identical, the massive income gap proves institutions drive growth.

Reversal of Fortune thesis AJR (2002)

Regions that were relatively rich and urbanized in 1500 (e.g., Aztec/Inca regions) are often poorer today, while sparsely populated regions (e.g., US, Australia) are wealthy. Reason: Europeans set up extractive institutions in densely populated areas and inclusive institutions in sparsely populated areas