In 1776, when Adam Smith wrote “the Wealth of Nations”, the richest country in the world was approximately four times wealthier than the poorest country. Today, if we follow the same exercise, the richest country in the world is now more than 400 times as rich as the poorest country. What separates them? This is a question that has been answered in many different ways, by different philosophers, academics, politicians and economists.
Since several decades ago, economists have done extensive research on the determinants of economic growth. As yet, there are few widely agreed-on results. The lack of consensus has not allowed for the formulation of a medical recipe to be prescribed to poor countries. Because every country has its own history, culture, context and peculiarities, it is virtually impossible to design a one type solution that would fit all. However, there are some elements that have been recognized as fundamental for the economic development of countries: technology and productivity; institutions and culture; geography and natural resources; freedoms and capabilities.
As economists suggest, many factors—economic policy, starting point, culture, and climate—can matter. There are few examples that have been observed in the last sixty year. One of the most representatives: North Korea and South Korea.
Facts: At the end of the Korean War in 1953, both North and South Korea were devastated. Both have harsh climates, and both initially had similar cultures. There was one big difference: North Koreans lived under communism and still do, while South Koreans lived under an economic system that allowed property rights; relatively open to trade; and relatively open to entrepreneurship.
Results: In 2013, North Korea’s GDP was about $40 billion, up from $11 billion in 1953. This implies an average annual growth rate of 0.8 percent, which is almost certainly an overstatement of the true North Korean growth rate because there is no good way to measure the value of output in a socialist economy. In 2013, South Korea’s GDP was about $1622 billion, up from about $13.8 billion in 1953. This implies an average annual growth rate of 2.7 percent, more than three times as much as North Korea’s official rate.
What has been the lesson? No matter if one is in favor or against open economies, it is an undisputed fact that we live in the era of globalization where countries need to adapt in order to play a role in this interdependent system trying to benefit from it as to foster economic growth and development. Designing the appropriate mix of policies in each country is fundamental to achieve such goal.