Geography and Development, Trade

Welcome, everyone.

Today we are going to begin a new unit.

We are going to be talking about
geography and development.

And by geography, I mean the relatively
immutable and constant features,

things like location, topography, climate,

including temperature,
rainfall, soil quality,

wildlife, especially parasites,

and the influence of all of these
on development.

This is obviously a big topic,

so today we are just going to focus on
geography and trade.

So I want to begin by
giving two perspectives on trade.

The first is the Ricardian perspective.

So Ricardo said, when 2 countries
specialize in their comparative advantage,

that is, they specialize in
producing the good,

which they can produce
at lowest opportunity cost,

and then they trade,

both nations are better off.

Now, notice that innovation
is not the focus of Ricardo.

So Ricardo says, "There already are
two goods, wine and cloth.

We can get more of both goods
if Portugal specializes in producing wine,

England specializes in producing cloth,
and then they trade."

So for Ricardo,

trade is about improvements
in static efficiency.

Notice also that in Ricardo,
market size is really not a key variable.

The situation is very different
in Adam Smith.

Adam Smith has a
completely different theory of trade.

Let's take a look at that.

Smith lays out his theory of trade
in a chapter in the Wealth of Nations

called The division of labor is limited
by the extent of the market.

And Smith makes this remarkable
and very deep insight.

He says, "As by means of water-carriage,"
that is by ship and boat,

"a more extensive market is opened
to every sort of industry

than what land-carriage alone
can afford it.

So it is upon the sea-coast,
and along the banks of navigable rivers,

that industry of every kind

naturally begins
to subdivide and improve."

So what Adam Smith is saying is that
when you're along in sea coast

you have access to a larger market.

You can sell your goods
in a larger market.

And because of that, --

you get economies of scale but, also,
you get specialization of knowledge.

You get people learning more as
they produce more.

This creates improvements.

So for Adam Smith,
trade is a dynamic growth story.

Trade, means larger markets.

Larger markets means more specialization.

It means more improvements in knowledge,
and therefore it means more growth.

So let's take a look at
Adam Smith's theory

and see if we can see it today.

So what we have here is
a map of GDP density,

that is, the amount of GDP
produced per square kilometer.

And what you can see from this map
is that Smith was absolutely correct.

So what you can see is that
where GDP is, where civilization is,

it's along the coast.

Here's the coastal United States

and, along these navigable rivers,
the Great Lakes region.

You can also see Western Europe,
all along the coast,

all of this coastal area,
Western Europe, highly developed.

Over here, Japan,

and, of course, it's the coast of China

which is rapidly developing
all due to those export markets.

Here again, the coast of Australia.

Now, in fact, what you can also see

is that even in places
where there are great institutions,

where they have
institutions of law and order,

property rights, and incentives,
and so forth,

that we can still have low GDP
per square kilometer.

So take a look at Canada.

So most of Canada,
it's like the Sahara Desert, --

in terms of GDP.

Canada, where Canada is developed,

it's along the coast and
along navigable rivers

close to the United States.

Even in the United States,

there are entire regions
which really are bereft of GDP

which are almost as barren
as is the Sahara Desert.

So if you are looking
just at institutions,

you might say,
"Well, even in the United States,

where we have these
great institutions,

there's plenty of places
where there isn't much GDP,

so it must be something else,

and geography, --

particular closeness to rivers
and closeness to sea coast

is an important element of this.

By the way, economists really
used to ignore geography.

And it's due to Jeff Sachs
and some of his co-authors,

particular John Gallup
and Andrew Mellinger

that a lot of this work
started to be done.

In addition to the article
which I've noted here, --

these three authors have a review article
in Scientific American, 2001,

called The Geography of
Poverty and Wealth,

which I recommend.

Now, if being close to rivers,

if being close to the sea coast
is important

then what is the worst thing?

Well, the worst thing that can happen
is if you are landlocked.

Let's take a look.

So what we're showing here
is GDP per capita in countries

which have access to the coast over here,

compared to countries
that are landlocked over here.

And what you see immediately
is that countries which are landlocked

have half, actually,
a little bit less

than half the GDP of countries
which have access to the coast.

If we look over here,
at the landlocked countries,

you can see there's actually
a few landlocked ones in Europe:

Austria, Czech Republic, Hungary,
of course, Switzerland.

But, equally true, these countries
are actually quite close to the coast

and they are close
to other rich countries.

If you take those countries out,
the differences become even more stark.

Among the landlocked nations,

the richest outside of Europe
is actually Botswana,

which has diamonds.

Pretty lucky for them.

What you also notice is that
all of these countries here,

they are all in Africa.

In fact, Africa has more
landlocked countries

than any other continent.

Let's take a close look
at why this is the case.

Okay, here is a standard-looking
map of the world

you probably all seen it before.

It's not obvious from this map
why Africa should be

particularly landlocked.

But there's also something funny
about this map, something odd.

Take a look at Greenland.

Greenland on this map looks huge,

it looks almost as big as Africa.

And, yet, when you check the statistics,

what you find is that Greenland is,
in fact, 1/11 the size of Africa.

What's going on?

Well, this is actually an illusion.

It's an illusion created by
the particular projection we've used,

the Mercator projection, --

to project a 3D surface,
namely a globe, onto 2 dimensions.

Whenever you take a 3D surface
and you map it in 2 dimensions,

you are bound to get some illusions.

And in this case,
we get the illusion of size.

Let's take a look at
a different projection.

This is the Albers Projection,

which maintains equal sizes areas.

We are going to get some illusions
about the shape of continents,

but we are going to get
the right equivalent sizes.

And on this projection
what you see, quite correctly,

is that Greenland
is much smaller than Africa.

What you also see is that Africa is huge.

Africa is an enormous continent.

Let's also show that in a different way.

Okay, here's another way
of looking at Africa

and what you can see,
again, Africa is big.

You can fit the entire United States,
excluding Alaska, into Africa.

You can put China as well into Africa.
India can go into Africa.

Eastern Europe, most of Europe;

here's Italy, Germany, France,
and Spain, and so forth.

Now, remember that chunk
in the United States,

which is inland,
which had low GDP,

well, just map that into Africa.

You can see what is going on.

Here's another way of looking at this.

Let's go back to our projection.

Take a look at the coastline of Africa.

Here's the coastline of Africa.

Now compare with the coastline of Europe.

Well, in Europe you've got
all these nooks and crannies

and inlets and seas.

Here's the Black Sea
over here and so forth.

In fact, what you'll find if you do this,
if you measure the coastline,

is that the coastline of Europe,
is 2-3 times longer

than the coastline of Africa.

2-3 times, by the way,

because it can actually differ
depending upon

how you measure those fjords
and so forth in Europe.

The fractal nature of coastline makes it
a little bit arbitrary to measure.

Basic point however is,

Europe is much smaller than Africa,

and, yet, the coastline of Europe,

the access to the ocean,
access to the seas,

to navigable rivers,
much much larger.

So Europe has much more access to trade

than does Africa.

So let's review briefly.

From Adam Smith, we have that
sea coast and navigable rivers,

that leads to trade to larger markets.

Larger markets that means
more specialization

and improvements in knowledge,

and improvements in
knowledge lead to growth.

In contrast with this,
if you are landlocked,

you don't get those trade,
you don't get trade,

you don't get larger markets
you don't get that specialization,

you don't get
that improvement in knowledge,

and, instead, you get stagnation.

Now, again, let's apply this to Africa.

Adam Smith in fact had the theory
and application done in 1776.

He says, "There are in Africa
none of those great inlets,

such as the Baltic
and Adriatic seas in Europe,

the Mediterranean and the Black Sea
in both Europe and Asia [...]

to carry maritime commerce into
the interior parts of that great continent:

and the great rivers of Africa
are at too great a distance from one another

to give occasion to
any considerable inland navigation."

So Adam Smith nailed in 1776
one of the key connections

between geography,

between access to the coast,
access to navigable rivers,

and development.

Amazingly, it wasn't until
some 200 or so years later

that Jeff Sachs and others
really began to pick this up

and bring it back into the growth story.

One reason to remember
our history of economic thought.

Okay, we'll be looking more
at development and geography,

in particular malaria and other parasites
and things like that,

and their influences in the next lecture.

Thanks.