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October 11, 2017

Kip’s Commentaries

Read the latest commentaries by Kip Beckman, Principal Economist, World Outlook

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Why Is Canada Rich While Other Countries Are So Poor?

Kip Beckman
Principal Economist
World Outlook

The celebration of Canada’s 150th birthday was a time for Canadians to reflect on how lucky we are to live in a wealthy country. There were certainly no guarantees way back in the 19th century that Canada would develop into a rich country. For instance, in the late 1800s, Canada and Argentina had roughly the same standard of living and shared many characteristics. Yet, in the past few decades, as Canada flourished, Argentina has lurched from one crisis to another and has a standard of living far below ours.

Why have some countries, like Canada, succeeded while others have failed? This question has fascinated economists for centuries. Not surprisingly, there is far from unanimous agreement on the factors behind the wealth of nations.

The renowned development economist Jeffrey Sachs contends that the tropical climates of Africa and elsewhere have held back economic development.1 People living in the tropics suffer from higher rates of infectious diseases such as malaria compared with other parts of the world. Also, either rainfall is relentless or drought conditions persist, depending on the distance from the equator, and this makes agriculture far more challenging.

Canada’s more temperate climate has managed to avoid many of these problems that can hurt economic development. Yet the climate and location explanation of wealth and poverty has numerous contradictions. Two African countries, Mauritius and Botswana, have managed to succeed despite having tropical climates. Also, Canada is a far more successful country than Russia, even though they have similar climates.

The presence of natural resources has helped Canada become wealthy because the rest of the world needs our resources. Yet, in many developing countries, resources are more a drain than a blessing, as diverse groups fight over the spoils. Also, the benefits from natural resources rarely seem to help workers since the elites monopolize the financial rewards for themselves. The ongoing civil wars in the resource-rich Democratic Republic of the Congo (DRC) provide ample evidence of the “curse of natural resources.”

Some economists point to the presence of strong institutions that protect the rule of law to explain Canada’s success at managing its natural resources, while the DRC and other African countries have failed. In these countries, the rule of law is largely absent, which enables rulers to ignore or change a country’s constitution and remain in power.

However, the institutional view on economic development runs into difficulties when considering the situation in China. Institutions that protect the rule of law are weak in China, as governments routinely expropriate people’s land to make way for development. Also, Canada had an advantage in its development—it inherited strong institutions from the British. However, the former British colony of Barbados had these advantages as well, but has a standard of living far below Canada’s.

The most intriguing theory behind Canada’s success is linked to factor endowments. Economists define factor endowments as the conditions in a country at its earliest stages of development. These could be favourable mineral deposits, supply of labour, quality of the land, and the initial education levels of the population.

The economists Stanley Engerman and Kenneth Sokoloff studied the different environments where Europeans set up their colonies in the New World to support their contention that factor endowments have played a crucial role in solving the mystery of economic development.2 At the time, the European colonies with the best economic prospects were in Latin America, while Canada and the United States were viewed far less favourably.

The countries in the New World growing sugar cane and coffee beans using slave labour—Barbados, Cuba, Jamaica, and Brazil to name a few—had the wealthiest economies in the region. These countries’ economies were eventually dominated by large slave plantations and, not surprisingly, this made the distribution of wealth extremely unequal. In turn, the huge discrepancy between rich and poor contributed to the development of institutions that looked after the interests of the elite members of society, such as the plantation owners, who naturally had significant political influence.

Canada and the United States, especially the northern part of the latter, had different factor endowments compared with countries in Latin America. These land masses had climates and soil conditions that didn’t provide settlers with a comparative advantage in growing crops with slave labour. Economic development was, consequently, driven mainly by settlers of European descent. Wealth was distributed in a more equal fashion compared with Latin America because there were few economic advantages for large plantations to grow the grains and hay prominent in the Middle Atlantic and New England regions, as well as in British North America.

Sokoloff contends that the different initial conditions present in Latin America, compared with Canada and the United States, resulted in huge differences in wealth and political power. The institutions evolving from these initial conditions tended to protect the power of the elite landowners in Latin America. The landowners were then in a better position to set up a legal framework that provided them with a greater share of political power. This, in turn, enabled the wealthy to establish laws and policies that protected their positions of power.

The fascinating aspect of this line of thinking is that the underlying power structures in society that developed many centuries ago persist to this day, as seen by the economic and political difficulties that many Latin American countries continue to struggle with. Even as countries in this region have evolved into democracies, the elite members of society still can suppress badly needed reforms because the rule of law isn’t as strong as in the U.S. and Canada. Developments in Venezuela attest to the absence of the rule of law even though the country is a democracy and holds elections and referendums.

The factor endowment theory on economic development is controversial, as it links Canada’s success to developments many centuries ago. However, given the struggles that many countries in the world have experienced for many decades, and even centuries, there may be something to it.

Ultimately, no single theory answers why Canada is rich. It is likely that the nation’s success has been a confluence of luck, resources, institutions, and policies.

 

1    David Bloom and Jeffrey Sachs, Geography, Demography and Economic Growth in Africa (Cambridge, Massachusetts: Harvard Institute for International Development, 1998).

2    Engerman and K. Sokoloff, “History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World,” Journal of Economic Perspectives 14 no. 3 (Summer 2000).


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450,000 Immigrants Per Year: Assessing the Economic Impact of Higher Immigration Levels in Canada
The Conference Board of Canada, October 17, 2017 at 02:00 PM EDT


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International Economics Team

Kip Beckman

Kip Beckman
Principal Economist