Sunday, February 14, 2016

Why are landlocked countries poorer?

Because trade is more difficult than to countries located on a body of water.  It is as if landlocked countries pay a higher tariff (tax), and as we all know, taxes destroy wealth by deterring wealth creating transactions.


3 comments:

  1. Stan Fernandes
    ESC Managerial Economics Spring 2016
    February 14, 2016
    The video posted about geography and its impact on economic growth was very enlightening. As I watched the video, I was a bit skeptical because I knew that the African continent was very poor, but I had assumed that it had a vast coast line. It was very interesting to see how the actual linear length of the coastline was less than that of Europe. The key lesson of Chapter 2 is that businesses must “devise ways to profitably move [low-valued assets] to higher-valued ones.” (Froeb, McCann, Shor, & Ward, 2016) Water transportation is a cost effective method to move large quantities of goods over long distances.
    One of the other points mentioned in the video was that areas with abundant natural resources also had an economic advantage. This is especially true when combined with a readily accessible coastline. However, Africa is blessed with natural resources such as oil, gold, uranium, and other minerals. So, why isn’t Africa experiencing more economic growth and activity? It is a combination of historical factors such as colonialism, apartheid, and repressive governments. While the natural resources can be mined and harvested by large companies, they don’t need to employ many workers to do the job. Many Africans are unemployed, poor, and with little prospects of improving their lot in life.
    In order to achieve true economic growth, even in the land locked countries of Africa, there needs to be an underlying foundation of a social and economic infrastructure. Education for the poor, proper healthcare, roads for transportation, reliable sources of water and energy, each of these are necessary to achieve full economic growth. However, the struggle for the African nations is to break free of the social and cultural bonds that hold them back.
    Stan.
    References:
    http://themarcusgarveyinitiativeagency.com/the-big-debate-in-south-africa-does-mining-benefit-africa-video-3242013/
    http://www.wsj.com/articles/for-a-growing-africa-hope-mingles-with-fear-of-the-future-1448632865

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  2. I found the video and the concept of there being a correlation between countries GDP size and abundance of coastline is very interesting. I was surprised to see that their linear length of coastline was smaller than Europe’s. I always think of Africa as a huge continent and assumed they had much larger coastlines that the rest. Africa has a large land mass with many rich natural resources but their size, shape, and other factors have held them back from being an economic powerhouse. Since Africa is at a natural hindrance due to their smaller coastlines, they have cost a disadvantage when compared to other countries. This up-front cost of doing business makes it more expensive to do business with Africa. The article is very accurate in comparing the landlocked status to a tax because it has the same effect on business. The landlocked factor increases the cost of the transaction which decreases the chance of the transaction taking place because competitors may not have to overcome this cost. Significant savings can be realized from efficient transportation. Africa appears to have a need for infrastructure to quickly and easily move products from inside the continent to the shores. The optimal situation would be for the government to realize this need for transportation infrastructure and develop solutions. It would be a win-win for everyone.

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  3. I found this video to be very interesting on how there is a correlation to coast line and the stronger and wealthier economies. That being said I feel there are definitely other variables that have created challenges in economic growth for some countries, especially African countries.

    Africa’s countries have always based their economies on commodities, an as those commodities have gone, so has their economy. All the way back to the slave trade days, countries in Africa used commodities to fuel growth, it’s sad to say but even humans as slaves were a commodity which brought great wealth to some nations. For many decades, commodities have shaped Africa’s economic growth. When prices were high, growth was good; when prices dipped, so did the continent (C.W., 2015). Africa’s economy is heavily dependent on crude oil, as the cost of oil has gone down in recent years it has caused major issues for some of the African countries. Take Algeria for example, oil revenues make up 97 percent of the country’s hard currency earnings and 60 percent of the government’s budget (AP, 2014). This heavy dependence on single commodities will cause extreme challenges for any nation, no matter if they are a coastal country or not.

    Another challenge for African nations is the level of civil unrest that has happened for many decades. When countries are in continuous fighting and civil war economic growth and investment becomes secondary to funding military actions and supporting political agendas. As these countries exit the conflicts it gives them an opportunity to start pushing towards economic prosperity versus internal conflict. Take Rwanda for example, which 20 years ago, was in the throes of a civil war, is now a better place for investors than Italy. When people with money believe that their time will not be wasted or their cash stolen, they will invest. After two decades of stagnation, Africa’s total investment as a percentage of GDP increased after 2000. Foreign investment into Africa rose by 5% in 2012 and 10% in 2013 (C.W., 2015).

    While coastal barriers do cause challenges for landlocked countries, I feel how a country structures its economic strategy is much more impactful then access to water. 250 years ago, when the sea was the primary way to travel, water was critical, this is why huge urban centers are around water sources. When countries with small populations and heavy economic dependence on commodities try to match large population centers with industrialized economies they have no chance to match up. These countries need to create incentives for the industrialized countries to move industry to their nations, create jobs for their citizens, and build the foundation to grow the local economy organically. Putting 90% of the economy into a single commodity like oil is just asking for trouble down the road.

    References:

    Associates Press. The New York Times. Algeria, Dependent on Oil, Feels the Pinch as Prices Decline. December 20, 2014. https://www.nytimes.com/2014/12/21/world/africa/algeria-dependent-on-oil-feels-pinch-as-prices-decline.html?_r=0

    C.W. The Economist. Why Africa is Becoming Less Dependent on Commodities. Jan 11, 2015.
    http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-5?zid=295&ah=0bca374e65f2354d553956ea65f756e0

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