Economics Growth/Macroeconomics 1

Geography

Geography

Geography and location is in economics of great importance. Where a country is placed in the world
can define if it is destined to become rich or poor. At the same time it is the one factor that is fully
and irreversibly exogenous.

One factor should be integrated in the study of the effect of geography in economic terms. That is
that the role of geography is diminishing as a factor in deciding growth and wealth. The reason for
this is as the technological development reach new levels. Many of the factors that earlier was of first
order importance in deciding if a country prospered or not from geographical factors are becoming
second order factors. One example is the railroad and how that invention in transportation made the
importance of having coastal lines less important, before the railroad a nation lacking a coastal line
was in many way stuck in poverty as access to rivers and oceans was needed to be able to transport
goods. Sweden during the era the country was a great power shows this as the empire was centered
around the Baltic sea. An example from this era and transportation is that it took as long a time to go
from Stockholm to Riga as it took to go from Stockholm to Karlstad.

The same geographical blueprint can be seen in the Roman Empire 2 000 years before. The Roman
empire was built around the Mediterranean sea, again for the same reasons the Swedish empire.
Looking at any country and colonization the pattern is the same up until the railroad. French, Spanish
and British colonies where all before the railroad centered around rivers and coasts. After the
railroad the colonization went inland. As well as economic growth from areas in Europe with no
direct access to waterways, for example railroads made the Swedish forests accessible which created
the base from where Sweden industrialized. At this time the demand was high from need to build
cheap housing and the supply was low as the more easily accessible forests in central Europe had
been cut down in earlier times.

Another factor that has seen reduced importance is location. It has gone from being almost
everything in deciding prosperity to be of some importance for potential growth. For example Venice
that was placed so it was between Arabia and Europe, as sea transportation was the cheapest way to
transport goods this gave Venice a prime position and created great wealth for the city state from
being the intermediary. When Portugal found a waterway to Asia and Spain started exploiting the
Americas trade patterns shifted and left Venice and other Italian city-states bankrupt. Again changes
in more recent time have not had the same effect. For example the Suez-canal and the Panama-canal
did not create total shifts in trade as the one during the renaissance where in historical terms
overnight trade shifted from the Mediterranean to the Atlantic.

The ability to control diseases is another example where the Geographic influence on a nations
ability to grow have diminished. From giving a great advantage and a great disadvantage the ability
to control a populations health is more depending on the amount of resources that goes to
healthcare then geographic location. For example malaria which was spread north as far as to Spain
and the Southern states of the United States has been in full exterminated there. It is still a problem
in great parts of the African continent but would if the resources where there be possible to
exterminate in full.
 Economics Growth/Macroeconomics 2
Geography

As an advantage it had a greater role in previous centuries then now, NB this is from an economic
point of view, the comparably high population density in Europe combined with the great variety of
domesticated livestock meant that bacterial epidemics was a common event. In time this led to a
buildup of immunity that was devastating for the natives of the Americas and Australia who lacked
this. A situation like this would not occur again as healthcare advances and the contact between
continents has made humans equally vulnerable or invulnerable to diseases. Any epidemic today
would hit equally across the globe.

Many of the formerly imperative geographical conditions are in the modern world obstacles that are
possible to overcome. This does not mean that geographical location is indifferent to potential
growth only that its importance has diminished over time.

Geography and its meaning to economics can be divided into a few topics that will be expanded on
below

Location
The absolute base point and fully exogenous, a location can have its population move. Capital can be
destroyed or moved. Natural resources can be depleted. Even climate can in some ways be
controlled with intent, as in clothing, construction, watering, cooling or heating, or unintentionally as
with global warming. But a location is a location, even if over millennia there are changes occurring
they are not manmade and happen in a phase that stretches the long run far beyond its economical
meaning. So this factor is the base.

Looking at economical development there is a significant relationship between a countries position in

relation to equator. The further away a country lays from the equator the higher the GDP/Capita in
that country is.

The graph in the chapter displays the same result as the above. But I changed it in favor of the
presented one as this one not only shows the distance from the equator but also the populations and
continents. The x-axis displays the distance in latitude and the circles represent the population. As
seen the correlation is more or less equal across continents. Even when looking at a poor continent
 Economics Growth/Macroeconomics 3
Geography

as Africa the further the distance is to the equator the richer the country is relative to other countries
at the same continent that are close to the equator.

Coastal lines are another deciding factor or were until the emergence of cheap land transportation in
the form of railroads. The reason as described above is that the only real economically viable option
for transporting large amounts of goods was by water. One reason to the European advantage can be
the comparably long coastlines and rivers not blocked by waterfalls. This is also the case with China
that during the renaissance era equaled Europe in prosperity. The fairly long coast and the red and
yellow river with a canal build in the 15th century combining the two made most parts of China
accessible to waterways.

In Africa that is a continent 8 times larger than Europe the coastal line is only half that of Europe.
Even though the river system is vast most of the potential waterways are blocked by natural
obstacles. The only river that is mostly without natural obstacles is the Nile. This can also be seen in
the countries along the open part of the river. Egypt and the northern part of Sudan is and where
among the most prosperous parts of Africa. Especially when looking at ancient times the major
reason that Egypt became a superpower of its time was fertile dirt beside the Nile and lucrative trade
with the Greeks and Phoenicians. Even today the vast majority of the population in Egypt lives in
close proximity to the Nile.

Another factor that might explain the reason that while Europe went from its 15th century GDP level
to its 20th century GDP levels while China that was on par with Europe during the 15th century in GDP
posted about the same GDP/Capita in 1970 as in 1500 might be in the fragmentation of Europe. One
would think that a single big central government and state would be preferred to a massive number
of small states. A big state means a big market for products, a stable political climate and free access
to all markets. Where fragmented state structure means many small markets, high cost in the form
of tariffs to reach outside markets, political instability from many wars and an unstable political
situation. Population centers in China along the yellow and red river and the coast was well
connected and integrated. In Europe there where many “Islands” of population centers spread out
over the continent. This led to a centralization pull in China and a decentralization pull in Europe.
That there where many states in constant conflict with other nations the environment didn’t allow a
ruler to oppose reform or progress. Nor could they omnipotent as they where push the populace to
hard as they could then just move. The rulers refusing progress where quickly overtaken by a more
advanced neighbor. So in a way the competition for survival could be the reason to why Europe
eventually caught up, equaled and eventually passed China. One example is gunpowder that in China
was used for fireworks, in Europe to create weapons. Which in turn made the conquest of the
Americas possible, a conquest which in turn was motivated to get competitive advantage vis-à-vis
other states. Germany as a late nation in Europe called it getting “a place in the sun”.

Another more modern effect from a nation’s geographical location is if it’s located close to a richer
nation. Rich nations tend to be close to each other and poor nations close to rich ones tend to
become rich. Western European countries close proximity to countries formerly in the Soviet
controlled sphere seems to have affected those countries growth positively. Former DDR as the most
significant example as it was directly incorporated into a West European state BRD and creating a
single German state again.
 Economics Growth/Macroeconomics 4
Geography

Mexico another where its proximity to the United States has created a prosperous zone as
manufacturing has moved there for cheaper labour. Mexico has not until very recent history been
seen as a politically stable country that is a viable place to invest, this is not geography but belongs in
the political realm but is worth mentioning as United States borders two countries. Canada to the
north has grown with the United States and prospered with it.

Having a rich neighbor is helpful even if not salient for a country to prosper. It’s a little like having a
restaurant in a rich or poor neighborhood. If the cook is good and the raw materials of high quality
you will benefit from locating in the rich area more than in the poor. But if the cook is a kook and the
raw materials bad location will not help.

Looking at the regions in the world there is a connection between transportation costs where coastal
lines play a major role as transport by sea is still the cheapest way to transfer goods. Railroads and
roads have significantly lowered the inland cost of transport. But to create a physical infrastructure
massive investments are needed, first in building it and secondly in maintaining it. So as described
below in the cost of protecting against cold and against heat, where one is a lot less resource
demanding than the other the same can be said about transportation. In this case having a coastal
line is cheap and constructing a harbor along this line is a much less resource demanding investment
than to build an infrastructure. Average transport costs as ratio to total imports are 3.6 % for the
United States, 4.9 % for Western Europe, 9.8 % for Eastern Asia, 10.6 % for Latin America and 19.5 %
for Sub-Saharan Africa. Also the further away from a developed region, every 1000 km away
increases transportation costs by 1 %. Increasing the distance between two countries with 1 % lowers
the trade relative to GDP with 0.85 %

Climate

Looking at the climate geographers has divided it into 12 different zones each of them with different
characteristics. These are in turn grouped into groups. Three of the zones are defined as tropical. In
the tropical part of the globe 24.3 % of the global population lives, it is a poor part of the world the
population in the group has a per capita income of 43 % of the world average.

The second zone encompasses the areas with a temperate climate. In this area 34.9 % of the world’s
population lives. The per capita income in this area is 1.94 times the world average.

Last group of interest is the Desert and desert like areas. 24.8 % of the world’s population live here
and the per capita income is 62 % of the world average.

Looking at a geographical explanation the first reason to the difference can be traced to the ability to
produce food. Until the end of the 19th century farming was across the world the most important
part of the economy. The temperate areas show the biggest variation in both domesticated livestock
and crops. The climate in the temperate zone also reduced the amount of parasites as most of them
cannot survive periods of subzero degrees. So the temperate zones were able to produce more food
with less labour creating an environment that opened up for labour to be used in other areas. This
not being possible in other more uninhabitable zones meant all available labour was needed in
producing food. Outside the richer countries farming is still the largest employer. Moreover the
situation is still such that countries further away from the equator have a more productive
 Economics Growth/Macroeconomics 5
Geography

agricultural sector. Only a small percentage of the working populations in developed countries are
employed in agriculture. A reason for the enormous difference in productivity today is likely more
derived from the advanced and more capital intense methods that farmers in the developed world
employ than the productivity of the land itself. This meaning that should the same methods be
employed in the countries close to the equator as in the countries further away the production gap
would be smaller or perhaps eliminated. So in this regard there can be reason to question the
causality, is it the proximity to the equator or the technology employed that causes the differences?
This differing from the above topic of location where causality is clear in that a location cannot
relocate.

Another explanation to why the temperate zones have been more prosperous is that protecting from
cold is easier than protecting from heat. Clothing is the most basic technology to protect from cold,
housing is another, both which are basic technologies and where early inventions.

Protecting from heat is a much harder task and a more technologically advanced task. For example
air conditioning is a recent technology and an expensive one. To see the effects from cold and heat
looking at the United States gives a good example. The country has since creation been a comparably
rich country but only after the second world war has the southern part started catching up with the
rest of the country and still the poorest states are in the south. Much of the reason is the living
conditions that existed. Malaria was a common disease until 1930s, since the period after WWII and
the introduction of cooling technologies the living conditions have improved greatly. United States is
a nation that can afford the resources needed for cooling technology.

Apart from being less technology intense the costs of creating heat in a cool climate is far less than
the opposite. This means that poor countries in cool climates have an advantage in comparison with
poor countries in heated climates. An example can be Sweden that underwent a rapid
industrialization when the railroad made the inland resources available and labour to extract the
resources could by fairly cheap means be adequately protected against the climate.

Another example is the coal extraction in Great Britain and China. Coal was important as a way to
create steel from iron ore by the Bessemer process as well as heating. With the Steam Engine coal
became an even more strategic asset, coal can be said to be the oil of the 19th Century world. Britain
and China had the biggest easily accessible deposits of this strategic resource. With one big
difference as the coal was extracted in pits in Britain these pits where cold and damp workplaces and
needed heating to make extraction possible. The Chinese problem was the opposite as the coal
deposits where in hot arid fields where spontaneous combustion of the coal was a great risk. The
heat meant problems with the ability for the workforce to extract the resource.

It is a lot easier to heat a cool pit then to cool a hot one so the British coal was in comparison to the
Chinese, easier, cheaper and more accessible.

Natural capital and natural resources

A Nation having inside its borders a deposit of a resource in demand should make this country richer
then if it ceteris paribus did not have this resource. But this is not always the case some nations have
had their growth hampered and their competitiveness lost.
 Economics Growth/Macroeconomics 6
Geography

The reason to why some nations gain from having natural resources or looses from it cannot be
explained economically by geography alone. In this area economic geography and political economy
is highly correlated. A stable nation tends to use its natural resources in a way that advantages
outweigh disadvantages, whereas unstable political situations can cause major disturbances. One
example of 2010 would be diamonds, the World Bank estimate that about 70 % of the diamond
production today is done by slave labour in areas controlled by local warlords more often than not
using children as labor and soldiers.

Firstly as natural resources are counted as part of the Capital Stock defining what in geography is
meant by capital is useful to understand what is meant. A railroad is for example part of the capital
stock as well as a mine or oil deposit. The term used is natural capital and that is the amount of
capital that remains if all accumulated capital is subtracted from the capital stock. Looking at an oil
well what accounts for accumulated capital is the well itself, roads or pipelines connecting it to a
refinery or a port etc. The natural capital is the deposit itself. In the same way looking at a macro
level what is left after you strip a nation of all roads, factories, railroads, ports, cities etc is the natural
capital. The natural capital does not only mean deposits of natural recourses but includes for
example forests. Taking the original Cobb-Douglas as example

𝑌 = 𝐴𝐿𝛼 𝐾 (1−𝛼) K is the capital part of the equation, this can further be divided into the amount of
accumulated capital and the amount of natural capital 𝐾 = 𝐾𝑛̅ + 𝐾𝑎 ; 𝑛̅ representing natural capital
and is exogenously given. For simplicity this is assumed to be a constant, in reality the natural capital
for some resources is depleted as they are harvested so that capital would be diminishing over time.
This is the case of most minerals and of course oil. Other types of natural capital can be renewed as
for example forests that after being cut down can be sown again, even if it takes about 60 – 70 years
for the trees to be available to cut down again this is in this context the short-run. Oil which is
produced from coal based dead animals and plants takes millions of years to transform. The a is in
this example assumed to be all accumulated capital. In simplicity anything made by Gods hand is
natural capital anything made by man’s hand is accumulated Capital. The Cobb-Douglas function
would in this case be 𝑌 = 𝐴𝐿𝛼 (𝐾𝑛̅ + 𝐾𝑎 )(1−𝛼) in this model this indicates that a country rich on
resources is also gaining from this. But also it encompassed the above mentioned fact that it is not
always as one would assume at a glance the case that resource rich countries are rich countries. The
Cobb-Douglas function takes into account variables as labour productivity, accumulated capital and
the multifactor A. This creates a base for understanding why natural capital affects nations so
differently.

From a general view it seems that the more diverse the natural capital is the easier it is for the
economy to gain from it. For example United States have many of the different types of natural
resources that are used in the modern economy. The same goes for Russia though which has not
prospered in the same way, but where the explanation in many respects can be found in her history.
As developed nations go Russia is a fairly new aspiring member, the same goes for China that
politically was backwards until recent history.

In political economy a vast single resource can cause overconsumption. Especially if the resource
during a period of time is in undersupply and cause prices to increase, a government assuming that
the price will stay high and at the same time do not try and diversify the economy. Can end up on the
losing side of the table when consumption of the resource go down for any reason. If the
 Economics Growth/Macroeconomics 7
Geography

government has engaged heavily in borrowing against future proceeds from selling the resource a fall
in prices can be devastating to the economy. This is the case in many nations that has ended up
poorer in the end with heavy debts. This can be explained in the Cobb-Douglas formulation.

(1−𝛼)
Country A find a resource of natural capital with a value of 𝐾𝑛̅ this leads to 𝑌𝑡+1 = 𝑌𝑡 + (𝐴𝐿𝛼 𝐾𝑛̅ )
if the economy is underdeveloped the impact from the natural capital finding will greatly affect the
total amount of capital employed. Should the value of the resource increase and government
assumes this higher value as steady state for the resource the discounted value of the natural capital
𝑟
will increase even more 𝐾𝑛
↑ . If the government issues bonds in this assumption a fall in prices will
̅
lead to a declined Y from the fall in value in the natural capital, the debt even if not increased will
increase as proportion of Y from this leading to a higher debt. As growth and inflation together with
actual repayment of debt are the ways towards a lower national debt, if the debt is in foreign
currency which is almost always the case for poor countries and growth turns into contraction a
failing economy has only the option to repay any debts, often with a currency in free fall. In short the
gold turned into sand.

Another less disastrous effect from finding a large natural capital asset is called the Dutch disease.
This is a situation when the economy as effect from finding a large deposit of natural resources
transforms the usage of capital in others sectors towards binding it to the natural capital. Building
oilrigs, refineries and other capital structures centered on the natural capital. This leads to
contraction of the rest of the industry. This is mostly a developed country problem hence the name
since underdeveloped economies often don’t posses any capital to divert.

Countries that successfully make use of natural resources are such that manage to create backward
and forward linkages. Backward linkage is when local industrial output is used as input in the
extraction of the natural capital. Forward linkage is when the output from the extraction is used as
input in local industry to create output. One example from this is the Iron Ore industry in Sweden,
coal was imported and used together with locally produced iron ore and copper ore to produce steel.
This made use of the natural capital assets that where available as input and from this produce steel.
The steel was/is then used in melting processes to create hardened steel or in cold steel plants to
create flexible steel. This is an example of both backward and forward linkage. Staying in Sweden the
export of lumber that was unrefined until late 17th century is an example of no linkage. The timber
was exported to primarily Great Britain where it was refined to tar or timber for shipbuilding, the
majority of the profit was in the refining so passed Sweden by. One of the reasons for Sweden to
control the ports in the Baltic was to prevent Russia to export timber. Export of wood did not reach
any significant levels until backward and forward linkage became a factor in the sector.

The deciding factor if natural capital will be a blessing or a curse is how it’s used and in which way it’s
integrated into the economy. It is also mostly decided by factors not in direct relation to geography.
Geography decides if it’s there or not, how to employ it is a policy question.

The resource itself don’t decide how it will make the locations economy develop. There are examples
where the exact same resource causes doom to a country as well as examples of a country taking a
short path to prosperity. Norway and Nigeria can be examples here. Nigerian oil extracted at sea go
via pipeline to the port of Niger to be immediately transferred to oil containers and shipped out. No
Nigerians work on the platforms or with the transportation of the oil, companies bring their own
 Economics Growth/Macroeconomics 8
Geography

employees in and out paying the Nigerian government royalties. Except for the royalties Nigeria gain
nothing from the oil, it could as well be anywhere. Norway’s take is the opposite the government
owns the concessions, owns large parts of the refining business and control most of the process.

Individual examples

One of the first known examples is the massive amounts of silver and gold that Spain got from
conquering a large part of Central and South America. The inflow meant that Spain could buy almost
infinite amounts of goods and shoot it straight into the position of the superpower of Europe.
Inflation was an unknown factor so even if the inflow of silver and gold held constant for almost a
century the amount of gold and silver in circulation caused inflation all over Europe centered in
Spain. The Spanish crown waged costly wars, as goods where bought from other nations the
manufacturing stalled and eventually stagnated. Eventually the Spanish crown had to borrow money
using its gold and silver as collateral eventually all the silver and gold arriving to Spanish ports was
used to pay for the enormous debt. When the silver and gold deposits were exhausted Spain went
into a series of bankruptcies. With no assets the Empire was impossible to maintain and eventually
Spain became one of the weakest nations in Europe. Even as it’s more than 500 years since the silver
and gold era the effects have survived into this day. Spain never industrialized in the same way as
most of Europe. The manufacturing base never recovered in full and only after Franco’s death did
Spain in earnest start catching up.

Norway is another example in the more positive way. After being one of the poorer European states
the finding and consequent extraction of oil in the North Sea has made it the richest nation on the
planet looked at per capita wealth. Even so the Norwegian state owned oil fund has kept a tight
control over the usage of proceeds, trying to stimulate the economy to diversify and saving much of
the proceeds for the day when the oil is depleted to have the means to restructure the economy.

Saudi-Arabia can be seen as the counterpart to the Norwegian way. Most of the oil proceeds have
gone into importing goods for consumption. The country has as many other oil states reserves but
not in the magnitude needed to adapt to a new economy and maintaining current level of living.
Much of the oil is sold unrefined so there is little of either backward or forward linkage. In what way
there is most of the labour is done by foreign nationals so any skills built up by the labour force will
likely be used in their home countries.

And as a final example Japan that proves that a nation can prosper even if it lacks any significant
amount of natural capital at all. Almost all of the raw materials needed in manufacturing are
imported used in manufacturing and then exported. So recourses are not a requisite for prosperity.

Conclusion

Geography plays a role in how nations develop. But as I said in the beginning this importance is
declining. With ways to transport cheaply overland the need for a coast becomes less. With ways to
control our climate by cooling or heating the locations climate becomes less important. Ways to turn
arid land into fertile soil with watering techniques increases the landmass that can be habitable.
 Economics Growth/Macroeconomics 9
Geography

Ways to control diseases do the same. And using natural capital more effectively means growth
potential for poor countries.

Even if geography is less a factor then in earlier days it is still an important factor. But of a bigger
importance is the way geography is used. Political stability with governments taking a long run view
is necessary to create an environment for prosperity. Law and property rights as well and equally
important there are no free lunches, investments are needed.

Today in theory Africa should be one of the richest continents in the world looking at the amount of
natural capital. In reality it the poorest the remedy to that poverty is not geography because it has
been kind to that continent. What is needed is a political stability most probably gained from
democracy. Dictatorships tend to turn ugly however benign they are in the beginning. Stable political
situations create a respect for law, this assuming its credible creates an environment for investments
and the ability for nations to take on debt to finance investments in infrastructure.