The Curse of Geography: A View About the Process of Wealth Creation and Distribution

This paper presents an alternative view of why geography is a key determinant of the process of wealth creation and distribution of the countries. A new set of supporting evidence is also provided. The core ideas explored in the paper are: a) the exporting sector offers a picture (an x-ray) of a country’s underlying process of wealth creation and distribution. Efficient producers and therefore exporters of manufactures, for example, have high incomes and low levels of inequality while exporters of crops and raw materials have low incomes and unequal income distributions; b) the export mix of a country is largely determined by three fundamentals: resources, remoteness, and climate. Manufacturing, for example, likes cool climates, educated workforces, and locations close to high-wage marketplaces. Two are the suggested mechanisms linking geography to growth and inequality that are not present in the existing literature. First, because of high fixed costs, manufacturing requires operating the equipment at high pace for long hours, creating a distinct disadvantage for the tropics. Second, because the exchange of complex uncodifiable messages can only be done on a face-to-face basis, with the participants within a handshake of each other, the production of ideas and new products is firmly rooted where it has always been, in the economic centers of the globe. As a result, toys, apparel, and footwear are footloose. Machinery and pharmaceuticals are not. Links between physical geography and economic development have been proposed at least since Machiavelli (1519). More recently Gallup, Sachs, and Mellinger (1998) indicate four major areas where it has been suggested that physical geography may have a direct impact on economic productivity: transport cost, human health, agricultural productivity, and proximity and ownership of natural resources. In that paper, as well as in Sachs (2001), empirical evidence is provided supporting that geography indeed has direct, as well as indirect, effects on economic development. Hall and Jones (1999) and Engerman and Sokoloff (1997) argue that physical geography may affect economic development by shaping the countries’ institutions. Acemoglu, Johnson, and Robinson (2001), Rodrik, Subramanian, and Trebbi (2002) and Easterly and Levine (2002) go one step further Cuadernos de Economia, Ano 40, No 121, pp. 423-433 (diciembre 2003)