Geography and Development, Trade

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Taxes can reduce trade but so can mountains! What do we learn about trade and growth by paying attention to geography? This video also contrasts the different

Taxes can reduce trade but so can mountains! What do we learn about trade and growth by paying attention to geography? This video also contrasts the different theories of trade offered by David Ricardo and Adam Smith. Ricardo is in the textbooks but Adam Smith's arguments may be more important.

 

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Show 1 Answer (Answer provided by Alex Tabarrok)
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Landlocked countries have lower GDP per capita on average, not in every single case. Lots of things determine GDP per capita and Switzerland has many advantages that can overcome this one disadvantage.

GDP per capita is really the best measure of a country's standard of living. China has a high GDP because it is large but a low GDP per capita. Real GDP is GDP corrected for inflation within a country over time. So, if we wanted to know how much living standards had increased between 1990 and 2010 in the US we would look at real gdp per capita.

Real GDP PPP adjusted is used when we are comparing two different countries and need to take into account differences in prices within those countries. It's best for comparing living standards across countries.

Countries with low GDP per capita (PPP adjusted) have low wages but this makes only some things cheap, primarily simple services like a haircut, prostitution or manual labor other goods with more complex services or requiring manufacturing will be the same price more or less everywhere.

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Show 1 Answer (Answer provided by Alex Tabarrok)
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The video does not say geography is the only reason for development.

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I grew up in Derbyshire, and I learned at school that by building canals, the local coal mines and factories could connect to bigger marketplaces, and later on railways that could carry more goods more quickly, and that these were important to the region's growth success back in the day. So I agree that even inland communities can use technology to forge better trade links. I viewed the video as being about the natural advantage that could give a coastal town a growth headstart. Without that geographical advantage, a landlocked community must spend money to build road and rail networks to establish its trade links. Especially in Africa, I imagine the size of the continent makes this an expensive proposition.

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Max's point about tariffs is well taken, but we can go further. Countries tend to have fewer non-tariff trade barriers within the countries (i.e. standardized measurements, inspection codes, cultural/linguistic norms, etc). I think Smith's argument would proceed along these lines: all else being equal, Africa as a whole would have a larger economy than it does now, if it were one country. (Now of course Africa as one country would be a tremendously difficult thing to maintain, but let's set that aside). I'm sure Ethiopia would prefer to have it's own ports, rather than shipping through Djibouti or Eritrea. I think you could also look at the Bolivian experience after their defeat in the Pacific War as what happens to countries that BECAME landlocked after previously having sea access.

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Well, 'mountains can reduce trade but so can taxes', and international tariffs certainly play a role in reducing trade. An alternative argument would be the one that Paul Collier in 'The Bottom Billion'. He gives evidence that land-locked countries with good infrastructure links to their coastal neighbours don't suffer as poorly as land-locked countries without such links. Perhaps the key is transport costs; having a comparative advantage is no use if it's negated by the costs of exporting your products. Your example of e-commerce doesn't greatly suffer from this problem, but it's an atypical good.

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Yes, I have a hard time with this nationalistic approach to economics. Think about the landlocked states like Switzerland (was mentioned) or Texas and many other US states, French provinces, German states and so on (were not mentioned). Does it matter that they have no access to the sea? Nope.

If we did that chart again using sub-national regions, I think the argument would fall apart.

I'm not sure I agree. Of the 10 poorest states in the US by 2011 household income, 6 are landlocked (West Virginia, Arkansas, Kentucky, Tennessee, Oklahoma, and New Mexico, ). Two others have relatively small coastlines (Mississippi and Alabama) although one of these enjoys an inland, navigable river.

Texas actually has a rather large coast on the Gulf of Mexico. Oklahoma and Texas would be quite an interesting comparative study as both enjoy some of the same natural resources (oil), have a similar culture and history (primarily: participated on the same side of the Civil War).

Further, check the graph that showed GDP development per capita. Seemed fairly convincing.

Sorry about Texas. I should have checked the map first without guessing. (And now, who claims that Americans are bad at geography? :))

For example, in Germany, if you don't count the city states, the richest states do not have a coastline. http://www.statistik-bw.de/VolkswPreise/Indikatoren/VW_wirtschaftskraft.asp

It is important not to confuse inland counties with land-locked countries. Germany and France have plenty of navigable rivers, Loire, Garonne, Seine, Rhone, Rhine, Danube, Elbe, Oder etc.

Germany's richest and oldest cities are up and down the Rhine. Southern Germany has Rhine and Danube. Google maps shows most Bavarian cities are connected to the Danube.

The video clearly makes the point that Africa lacks coast line AND rivers.

Actually, Arkansas borders the Mississippi river, as does Tennessee. Even eastern Tennessee has access to the Mississippi through the Tennessee (with a brief stretch of the Ohio River in between). Kentucky borders the Ohio River and thus has navigable access to the Mississippi. West Virginia borders the Ohio too, but I'm not sure how navigable the Ohio is on their border.

One thing to consider is that the United States is basically one big free trade zone. If a landlocked nation cannot trade with its neighbors due to artificial trade barriers then they may have a lower GDP even if they have good institutions. Conversely, if a nation is landlocked but does not face artificial trade barriers then it has a higher chance of success.

Would imagine that being a landlocked province in a country with coastline is better than being a landlocked country because of lesser trade barriers to get to the sea / cheaper access to the coast.

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There is one major point missing in the video - most revenue generating natural resources tend to be located along sea coasts and in the surrounding continental shelves (1). There are other windfall profits arising from owning a sea coast, such as access to fishing grounds or ability to deal with other coastal regions without an intermediary. So yes, all else being equal, sea coast still matters.

(1) http://en.wikipedia.org/wiki/File:USGS_world_oil_endowment.png

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Actually, GDP Density is calculated by multiplying GDP per capita by the number of people per square kilometer. So it seems to be a valid measurement.

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I think the GDP density chart made one important point: it shows independent of population where economic activity takes place. Inside the US there is much less of it, just like in Africa's interior.

Of course, Americans have the good sense not to live in these places and that is because there is no economy there. BUT, given a realistic choice, most Africans wouldn't choose to live where they live either. They are literally stuck in landlocked countries with high birth rates. That is the point the chart makes.

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Mercator projections are like placing a bulb inside a globe and projecting on a cylinder. Remember on the 2D map north pole is a full line same length as the equator. While in reality it's a point. Hence farther you are from equator, larger is the illusion

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