Global Issues. Kristen A. Hite
in the world recessions of 2008–2009 and the economic shocks from Covid‐19.
We are also seeing an increase in nationalism and protectionist measures. Many nations are not so happy about losing some of their national autonomy to multilateral institutions such as the International Monetary Fund, World Trade Organization, World Bank, and regional trade organizations. While the world has enjoyed an unprecedented era of economic growth fueled by aggressively expanding the volume of goods and services traded as well as development finance that supports enhanced trading infrastructure, we are also seeing some backlash. By the end of 2018, there had been a big uptick in protectionist measures.54 Several free trade agreement negotiations had either fallen apart or got renegotiated. And the United States and China had taken significant measures against each other’s exports.
Geography and Wealth, Geography and Poverty
Adam Smith had a second theory of why some nations are rich and some poor. Modern economists usually ignore this part of Smith’s writings. Not only did Smith believe that a free market economy would lead to wealth, but he also believed that nations bordering a sea would usually be richer than inland, landlocked countries. Recent research shows that geography does matter. Nations with access to the sea by coastal ports or by navigable rivers and those in the temperate climate zone have historically been the wealthiest nations. Those nations landlocked and in the tropical zone or mainly desert or mountainous have had less access to trade routes and perhaps not surprisingly have had lower GNPs on average.55
Why does geography matter? The reasons are not hard to discover. First, shipping and receiving goods by sea is cheaper than shipping by land or air. For example, shipping a container to a major coastal city can cost only a fraction of the cost of shipping to a remote landlocked area (for example it might cost $3,000 to ship a container to the Ivory Coast and $10,000 more to send a similarly sized container to landlocked Central African Republic). Also, people and new ideas often arrive in coastal areas first. Second, tropical climates are plagued by infectious diseases, such as malaria, which debilitate the workforce. An estimated hundreds of millions of new cases of malaria occur each year, nearly all of them in the tropics. Winter is the great natural controller of many diseases. In tropical countries many diseases flourish all year long, making them difficult to control. And recognizing the economic wealth in many tropical countries is relatively limited, thereby limiting opportunities to profit commercially, pharmaceutical firms have tended to prioritize economically lucrative conditions such as erectile dysfunction over more critical health needs such as malaria.
Agricultural production is also usually higher in temperate and subtropical climates than in tropical climates. For example, a hectare of land in the temperate zone produces about 6 tons of corn or maize, while the same amount of land in the tropics produces about 2 tons. Rich countries spend much more on research to help their farmers in the temperate zone increase production than on research that would better serve many of the world’s poorest and most vulnerable farmers, who are more concentrated in poorer tropical countries.
Geography alone does not explain why some countries are wealthier than others. While nearly all the wealthiest countries are in the temperate zone, such as North America, Western Europe, and Northeast Asia, the economic system they follow is also important. For example, the former Soviet Union and Eastern Europe are still struggling economically to overcome their socialist pasts. This fact is shown even more dramatically by looking at present and past countries with the same geographical characteristics, but which have or had different economic systems and vastly different wealth: South Korea and North Korea, West and East Germany (before unification), Austria and the Czech Republic, and Finland and Estonia. In each case the first‐mentioned state in the comparison followed a market system and greatly outperformed the second, originally socialist state.56
In addition to the difficulties caused by climate and lack of access to the sea, many landlocked countries face economic difficulties caused by borders with their neighbors that restrict the easy flow of goods, capital, and people.
According to Ricardo Hausmann, professor of the practice of economic development at the John F. Kennedy School of Government at Harvard University: “If current trends persist, countries that face high transportation costs and a high dependence on tropical agriculture will be left far behind, mired in poverty and income inequality. Will the rest of the world find this outcome morally acceptable?” Hausmann believes that the world has tried to help these countries, but its efforts have been insufficient, as shown by the widening gap between the rich and poor. He calls for more “globalized governance.” By this he means more international agreements to make borders less of a barrier to people, goods, and capital. He also calls for international support for development projects that improve the transportation systems within and between countries, and, lastly, he calls for international aid in health and agricultural technology that benefits the tropical world.57
Conclusions
The market approach to development places emphasis on the seemingly strong motivation individuals have to acquire more material goods and services. When people are freed from external restraints, the market allows them to use their initiative to better their lives. The release of creative energy that comes with the market approach is impressive. At the beginning of the twenty‐first century most countries throughout the world were following it, at least to some degree, as the Western capitalist countries became the models to imitate. While the economic recession at the end of the first decade of 2000 has caused many countries to question a complete market approach, the model nevertheless is employed by many nations today.
With the collapse of communism and the breakup of the former Soviet Union, the state approach to development received a serious blow. The reliance on the state to create wealth was discredited. Yet in no country of the world is a state without some significant state functions relating to the economy. Within the capitalist world there is a debate among nations regarding how much involvement government should have in directing and guiding the economy. Traditionally, Japanese and European capitalism relied on more government involvement than did capitalism in the United States.
This debate became of upmost importance in 2008 when the US market system nearly collapsed and a depression in the United States was prevented only by massive financial support by the national government of parts of the banking and insurance industries and automobile corporations. Alan Greenspan, the head of the Federal Reserve that monitored the economy and that had been given credit for the unprecedentedly long period of economic growth the United States had gone through, admitted to Congress that the model of the market economy he was following had an unknown flaw in it. This admission was rather shocking. If the chief “overseer” of the US economy didn’t really understand how it worked, who did? Greenspan, who had favored loose government regulation of the economy, went from being a laissez faire economist to one who now called for much tighter government regulation of the economy. As mentioned in this chapter, the unprecedentedly deep recession in the United States spread throughout the world and slowed the efforts to help millions of people escape from extreme poverty. Yet as the chapter’s section on the UN’s Millennium Development Goals shows, economic growth was still strong enough in the developing world to enable the United Nations to meet the goal of halving extreme poverty to 15 percent by the year 2015.
Even after the seemingly total victory of the market approach over the state approach in the 1990s, the state approach is not dead; what is dead is the total or near total reliance on it as the best way to create wealth. But the economic crisis of 2008–2009 indicated that the world is still struggling to find the right balance between the market and state systems.
Today’s globalization is still driven by market forces focusing on economic growth. That growth has done much to reduce world poverty. But large and vocal protests at international