Why Some Countries are Rich While Others are Poor
By Dallin Overstreet
Abstract This paper examines various determinants of whether a country is rich or poor. Since Adam Smith, countless economists have attempted to explain the differences between wealthy and poor nations. Many policy makers and governments across the globe have attempted to address these differences, but the wealth gap continues to widen between wealthy and poor nations. While research reveals many factors are at play, this paper seeks to show that an abundance of trade and the presence of strong institutions are powerful predictors of good economic development in countries throughout the world. GDP growth and trade are strongly and positively correlated. As exports as a percentage of GDP rise in a country, GDP growth usually follows. In addition, strong institutions, including both formal and informal, can have drastic effects on the economic development of a country. Without an abundance of trade and strong institutions, a country may be mired in poverty for decades.
Why Some Countries are Rich While Others are Poor
Introduction
Adam Smith (1723-1790) explained why some countries were rich while others poor in his 1776 seminal book The Wealth of Nations. Since Smith, and despite efforts by economists and government to explain differences between wealthy and poor nations, the wealth gap continues to widen. Several factors may determine to some degree the wealth of a nation. These include, but are not limited to decentralization, corruption, democracy, education, trade, and institutions (Werlin 2003). While these factors may influence economic development and wealth levels in a country, an abundance of trade and the presence of strong institutions may be the most powerful predictors of good economic development.
Background
Studies show decentralization of power away from a centralized government entity increases economic growth drastically. Iimi used cross-country data from 1997 to 2001 and found that fiscal decentralization has a significant positive impact on per capita GDP growth (Iimi 2005). Other researchers have found that government decentralization in general has a significant and positive impact on economic growth in countries across the globe (e.g., Lin & Liu 2000; Rondinelli 2006). Exceptions of course abound. The “tiger” economies of South Korea and Singapore, Japan, and China since Deng Xiaoping, are a few examples.
