Geography vs. Institutions: Understanding Economic Disparities in the Gulf

683 Words 4 min read Jun 12, 2024

Daron Acemoglu’s article “Root Causes” explores the gaps in living standards and development levels between rich and poor countries. While there are many proximate causes of poverty within countries such as a lack of education or outdated technology, Acemoglu focuses on the fundamental causes.

The article provides two fundamental hypotheses to explain the gaps: the geographical hypothesis and the institutional hypothesis. The geographical hypothesis states that the underlying causes for differences in prosperity come from a country’s geography, climate, and ecology. These factors shape a society’s technological advantage and influence the incentives of its inhabitants. For example, a country with fertile soil may have an incentive to excel in agriculture and develop advanced technologies for harvesting. However, while nature does have an impact on economic well-being, it is shown that human influence is stronger. Segwaying into the institutional hypothesis, which focuses on the human factors impacting prosperity.

Institutions play a crucial role in determining a country’s economic success. A “good institution” exhibits these key characteristics. Firstly, property rights are enforced which provides individuals with confidence that their assets are protected under the law. This confidence encourages investment which contributes to economic development. Secondly, constraints are placed on the actions of powerful individuals, such as elites and politicians. This ensures a sense of equality throughout the society which encourages broader participation in economic activities. Unfortunately, many countries nowadays lack these good institutions, with individuals lacking

confidence to invest due to inadequate protection of property rights and excessive control of the economy by elites.

The concept of reversal of fortune challenges the notion that initial advantages within a country always lead to long-term economic success. European colonization is a prime example of this, where initially rich societies such as the Aztecs and the Incas were subjected to a reversal of fortune. The institutions imposed by colonizers show the significance of the reversal of fortune. For example, Belgian colonizers exploited the Congo, a country rich in resources, for their own benefit. Property rights were disregarded as Congolese were forced into slavery and elite power was allowed to go unchecked. Their colonization resulted in a significant divide between the rich and the poor, leading to economic distress. This demonstrates that when the idea of a “good institution” is neglected, the gap between prosperity and distress widens.

Institutions must be implemented in a way that meets the needs of all members of society, rather than serving the interests of a select few. The concentration of power among the elite often leads to abuse. For meaningful institutional change, those in power must be willing to act for the benefit of everyone. Failing to do so perpetuates economic inequality and hinders development.

Recognizing the importance of institutions in economic development means implementing necessary barriers and reforms to support the disadvantages and educate the elite on responsible use of their power. By addressing these fundamental causes, societies can work towards reducing disparities and fostering sustainable economic growth.