Nathalie Heidema, Chapter 13, Question #7

There are policies (and geographical endowments) that make the difference between rich and poor countries. First of all, effective government institutions are essential for a country to develop and grow. A country needs laws, courts, basic infrastructure, efficient collecting of taxes and so on. This, however, must be done in an honest, transparent way because corruption is what kills economic growth. Resources are allocated badly, innovation stifles and foreign investors are subsequently discouraged. Why are former Soviet countries doing so badly in comparison with Western Europe? For  sure the corrupt politicians have a lot to do with it. Another thing is property rights. Providing formal property rights makes countries most valuable assets (land) more productive and it encourages work. Next, human capital is what makes us productive, which subsequently determines our standard of living- wealth. Increases in education and training of labor forces is what has a major impact on countries growth and growth in income, it also improves public health and decreases infant mortality. Also, geography plays a role in wealth too just 2 out of 30 rich countries lie in the tropics. The weather can be attractive but it is bad for the food production and spreading of diseases is easier (malaria). Trade is also crucial for domestic businesses and industries in order to face international competition and thus grow stronger, which makes the economy stronger. The government should conduct responsible monetary and fiscal policy (not heavily over-borrowing) but avoid excessive regulations. Other points (but not less important) are democracy, gender equality and no wars. Natural resources might seem to some as determiners of wealth, however, why do resource-poor countries like Japan or Switzerland have far better economies than Russia or oil-rich Middle Eastern countries? Creating wealth is taking inputs like human capital and producing things of value. Poor economies are not organized to do that. That's why 2 billion people live on less than $2 a day.