1. Chapter Four: Transition from Stagnation to Growth/Development Introduction Despite intermittent growth in some parts of the world during certain epochs, the world economy was largely stagnant until the end of the eighteenth century. This stagnation had multiple aspects. These included  low productivity,  high volatility in aggregate and individual outcomes,  largely rural and agricultural economy, and  increases in output were often accompanied by increases in population, thus having only a limited effect on per capita income.

2.  Many societies grew for certain periods of time and then lapsed back into depressions and stagnation. But this cycle stagnation was changed at the end of the eighteenth century. Then after countries are started to takeoff in economic activity, and especially in industrial activity, that started in Britain, Western Europe, United States and Canada. The nations that are rich today are precisely those where this process of takeoff originated or those that were able to rapidly adopt and build on the technologies underlying this takeoff. A study of current income differences across countries requires understanding why some countries failed to take advantage of the new technologies and production opportunities.

3. Inequality in the world economy was negligible till the 19th century. However, after 19 th century there was dramatic changes in the distribution of income and population across the globe. Some regions have excelled in the growth of income per capita, while other regions have been dominant in population growth. As a result, the ratio of GDP per capita between the richest group (Western countries) and the poorest region (Africa) has widened which creates inequality in the world economy. Forexample, look at the table below. Therefore, through a Gradual process, countries are transformed their economy from stagnation to growth/takeoff.

4. Table 4.1 The ratio of GDP per capita between the richest region and the poorest region in the world YearThe ratio of GDP per capita between richest (western countries) and poorest region(Africa) 10001.1:1 15002:1 18203:1 18705:1 19139:1 195015:1 200118:1

5. Source of Exogenous Takeoff/ Economic Growth According to Acemoglu, in his book ‘’ Introduction to Modern Economic Growth” source of economic growth can be categorized in two ; 1. Approximate sources of economic growth 2. Fundamental source of economic growth He also classified approximate sources of economic growth in to three These are :  Technology,  Physical capital, and  Human capital

6. He believe that, the difference of investment on these technology, physical capital and human capital cause cross-country per capita income difference as well as difference in living standard. He also classified the fundamental sources of economic growth or takeoff in to four category of hypothesis. These are:  The luck hypotheses  The geographical hypotheses  The culture hypotheses  The institution hypotheses

7. The Luck hypotheses By luck, we refer to the set of fundamental causes that explain divergent paths of economic performance among countries. This can be either because of some small uncertainty or heterogeneity between them have led to different choices. Recent empirical work by Jones and Olken (2005) shows that leaders seem to matter for the economic performance of nations. Thus luck could play a major role in cross-country income and growth differences by determining whether growth-enhancing or growth-retarding leaders are selected. Jones and Olken (2005) point out that leaders seem to matter for economic growth only in countries where institutions are non-democratic or weak. In democracies and in societies check on the behavior of politicians and leaders, the identity of leaders seems to play almost no role in economic performance.

8. The example of China may be even more telling here. China was stagnated under communism until Mao’s death. The changes in economic institutions and policies that took place by new leaders thereafter have led to very rapid economic growth. However, when we see example of Nigeria still adversely affected by the extreme corruption of politicians, bureaucrats and soldiers that have enriched themselves at the expense of the population at large.

9. The Geography hypotheses The geography hypothesis is, about the fact that not all areas of the world are created equal. “Nature”, that is, the physical, ecological and geographical environment of nations, plays a major role in their economic experiences. Geographic factors can play this role by determining both the preferences and the opportunity set of individual economic agents in different societies. There are at least three main versions of the geography hypothesis, each emphasizing a different mechanism for how geography affects prosperity. These are:  Regarding to the impact of climate  Agricultural productivity and  related to helath The first and earliest version of the geography hypothesis goes back to Montesquieu (1989). He, convinced that climate was among the main determinants of the fate of nations.

10. He believed that climate, in particular heat, shaped human attitudes and effort, and via this channel, affected both economic and social outcomes. The second version, which emphasizes the impact of geography on the technology available to a society, to improve in agriculture, is more palatable and has many more supporters. This view is developed by an early Nobel Prize winner in economics, Gunnar Myrdal (1968), who wrote that the climate and its impacts on soil, vegetation, animals, humans and physical assets, which deters agriculture leads to unsuitable living conditions. More recently, Jared Diamond, espouses this view and argues that geographical differences between the Americas and Europe or Eurasia have determined the timing and nature of settled agriculture (1997). The economist Jeffrey Sachs (2001) has been proponent of the importance of geography in agricultural productivity, stating that temperate-zone technologies were more productive than tropical-zone technologies.

11. The third variant of the geography hypothesis, which has become particularly popular over the past decade, links poverty in many areas of the world. Sachs (2000) stated that the burden of infectious disease is higher in the tropics than in the temperate zones. Bloom and Sachs (1998) and Gallup and Sachs (2001) claim that the prevalence of malaria alone reduces the annual growth rate of sub-Saharan African economies by as much as 2.6 percent a year. The World Health Organization also subscribes to this view and in its recent report shows, poor health has particularly harmful effects on economic development in sub-Saharan Africa, South Asia, and pockets of high disease and intense poverty elsewhere. This third version of the geography hypothesis may be much more plausible than the first two, especially since it is well documented in the microeconomics literature that unhealthy individuals are less productive and perhaps unable to learn and thus accumulate human capital.

12. The Culture hypotheses By culture, we refer to beliefs, values and preferences that influence individual economic behavior. Differences in religious beliefs across societies are among the clearest examples of cultural differences that may affect economic behavior. Differences in preferences, for example, regarding how important wealth is relative to other status-generating activities and, how patient individuals should be, might be as important as or even more important than luck, geography and institutions in affecting economic performance.

13. Broadly speaking, culture can affect economic outcomes through two major channels.  First, culture can affect the willingness of individuals to tradeoff in different activities or consumption today versus consumption tomorrow. Via this channel, culture will influence societies’ occupational choices, market structure, saving rates and their willingness to accumulate physical and human capital.  Second, culture may also affect the degree of cooperation and trust among individuals, which are important foundations for productive activities in societies.

14. The Institution hypothesis By institutions, we refer to rules, regulations, laws and policies that affect economic incentives and thus the incentives to invest in technology, physical capital and human capital. In a true economic analysis, individuals will only take actions that are rewarded. Institutions, which shape these rewards, must therefore be important in affecting all three of the proximate causes of economic growth.

15. A more natural starting point for the study of the fundamental causes of income differences across countries is related with economic institutions, which comprise  the structure of property rights,  the presence and functioning of markets, and  the contractual opportunities available to individuals and firms. Economic institutions are important because they influence the structure of economic incentives in society. Without property rights, individuals will not have the incentive to invest in physical or human capital or adopt more efficient technologies. Economic institutions are also important because they ensure the allocation of resources to their most efficient uses, and they determine who obtains profits, revenues and residual rights of control. When markets are missing or ignored gains from trade will unexploited and resources are misallocated. Therefore societies with economic institutions facilitate and encourage:  factor accumulation,  innovation and the efficient allocation of resources.

16. What distinguishes institutions from geography, luck and culture they are social choices?  Institutions are social choices.  The laws, policies and regulations which included under a society are the choices of the members of that society. If the members of the society collectively decide to change them, they can change them.  Institutions can be potentially reformed so as to achieve better outcomes. But such reforms may not be easy, they may encounter a lot of opposition.  Institutions are endogenous, since they are equilibrium choices made either by the society at large or by some powerful groups in society.  while luck, geography, and culture are exogenous fundamental souses of economic growth. In the sense that they are not equilibrium choices of society in the same way as institutions are.