The role of Institutions and Geography in Economic Growth

This activity is appropriate for a principles macroeconomic course which covers basic growth concepts. Prior to its implementation students would have already been introduced to the role of investment and economic growth. They should understand the term "institutions" and be familiar with some examples– property rights, good governance, democracy. (Also, recognize that education or innovation are not institutions)

The following questions could be assigned along with the podcast to focus and structure what students glean while they listen.  Students submit responses BEFORE CLASS online in the LMS for you to see (perhaps not other students) prior to the class to help lead pre/post activity discussion

An effective technique for this sort of pre-class work is "Just in Time Teaching" 

1. What was the reason behind the differences in original settlement patterns in places like Peru and Bolivia?
2. According to Dell, how did those settlement patterns lead to differences in the economic development we see today? Give examples of specific institutions.
3. Connect material from the podcast to the terms we studied in class. What are some examples of:

-Institutions

-Factors of production

-Incentives

Overview

Students must make connections between historic events and modern development outcomes by understanding the importance of institutions like property rights for economic growth.

Expected Student Learning Outcomes

After completion of this activity, students should be able to:

• Articulate how historical activity can affect modern day economic growth. 
• Explain the link between institutions, incentives,investment, and economic growth. 

Information Given to Students

The NPR  podcast "The Persistence of Poverty" describes persistent differences in economic development in parts of South America that can be linked to historical events and activity over four hundred years ago.

Say you are a policymaker who has studied this history and would like to boost economic growth in these underdeveloped areas of Peru and Bolivia. Which of the following solutions would you focus on?

A. Provide seeds, fertilizer, irrigation and other agricultural resources to farmers

B. Demand compensation from the Spanish government for past colonial actions and their extraction of silver

C. Strengthen property rights in those areas so that farmers will not feel confident in investing in their land 

D. Accept that the colonial history is too persistent and encourage households to migrate to richer parts of the country

E. Build railroad and other infrastructure that will will allow farmers and other businesses to transport their goods to market

• Students hear about a vivid example that shows how distant historical events shape institutions that persist and affect growth and development even today. This would also be an excellent way to discuss systemic racism in the U.S. and its impact on income and wealth.
• While most principles texts feature some discussion of the Solow model, some don't link accumulation of capital to institutions.  In this case discussion of the link between history, geography ⇒ institutions ⇒ incentives to investment ⇒ factors of production, technology may be useful (Cowen and Tabarrok's flow chart "The Causes of the Wealth of Nations in Chapter 7 is great)
• Some notes on the available options for students:

Option A: If students remember the end of the podcast better, they may choose this option because corn farmers unwillingness to produce corn is used as an example. But remind students that it is not necessarily that the farmers don't have the resources like seeds or fertilizers, they don't have the incentive to use them.

Option B: Students with a social justice mindset may gravitate towards this option and it could lead to energetic debate. You can remind students that reparations may be part of the solution, it will not fully remedy the basic issue of lack of public goods.

Option C:  There is some ambiguity in this choice because it is not clear whether lack of property is still the problem today in these areas. In any case, the discussion of property rights as an institution and how it affects investment and public goods is valuable.

Option D: The least correct choice, though this is not an unrealistic outcome. Households' decision to migrate and the ensuing drain of human and physical capital leads to poverty traps and stagnation. 

Option E: This would be the most pragmatic choice but even students who choose this should be reminded that in this particular case, investment in infrastructure is driven by historical lack of investment which arose from perverse incentives created by extractive institutions.

Q1) Which best describes the growth process from its ultimate to its immediate causes?

1. incentives institutions  factors of production  real GDP per capita
2. institutions  incentives  factors of production  real GDP per capita (correct)
3. factors of production  incentives institutions  real GDP per capita
4. factors of production  institutions incentives  real GDP per capita

Q2) Countries with high per capita GDP have institutions that make it in people's self-interest to invest in:

1.  physical capital.
2.  human capital.
3. technology.
4. all of the factors of production. (correct)

Q3)  Institutions:

1. are not important in market economies.
2.  structure economic incentives. (correct)
3. matter only when backed by law.
4.  are important only in market economies.