Scale Effects Development and the Flattening of the Globe

Economic growth can be viewed from two angles. For many decades, economists had put primary importance on factor endowments, good economic policies, and democratic institutions, as the main determinants of economic development. Some economists though refused to accept the hypothesis which states that “economic development is the only measure of institutional efficiency and real potential growth. They argued that some variables, like climate and geography, can have significant bearing on the developmental course of a country (hence, the term “scale effects development” is used to describe the degree or extent of regional variables used as a measure of economic growth). Hence, it is possible that these variables actually dictate the general framework of the economic policies of a country. Alternative Hypotheses Masters and McMillan (2001) tested this hypothesis by looking at a sample of 90 rich and poor countries.

The authors concluded that one factor differentiating developed countries from poor ones is the frequency of winter frosts. Winter frosts reduce borne diseases and kill plant parasites. Frosts also allow agricultural lands to experience a seasonal buildup of organic matter, leading to rich, fertile topsoil. In short, frosts boost economic development Acemoglu et al (2001) argued that countries with low mortality rates experienced economic development.

Investigating a variety of 17th to 19th century European colonial strategies, the author found that where settler mortality was low, because geography and climate were conducive to health, Europeans moved in and established good institutions. Places where settler mortality was high, because of bad geography and diseases, Europeans stayed away and created bad institutions. Whether the institutions are good and bad, it was noted that geography and climate has a significant bearing on the pattern of world distribution of income.

Countries with good institutions (as a result of good geography) have high levels of income; those with bad institutions (as a result of bad geography) have low levels of income. International Trade, Resource Availability and Land Use International trade has resulted to the smoothing of economic transactions among countries with different socio-politico-economic systems. This ‘smoothing’ process can be seen as the overall end of the modernization process. Modernization requires the removal of trade barriers, privatization of government corporations, and most importantly, the establishment of an efficient resource base.

Modernization can be an effective mode for economic development if all countries adopt its basic principles. In addition, the platform of modernization only works if the factor endowments of a particular country (land an, capital, and labor) are utilized efficiently and exchanged to other countries (comparative advantage). In short, modernization as a process makes the economic world smaller and vulnerable to market fluctuations. The World is Flat Friedman (2005) recounts a journey to Bangalore, India, after he realized globalization has changed core economic concepts.

He suggests the world is “flat” in the sense that globalization has leveled the competitive playing fields between industrial and emerging market countries (in terms of income and comparative advantage). In his opinion, this flattening is a product of a convergence of world economic integration and scale effects development. He termed this period as Globalization 3. 0, differentiating this period from the previous Globalization 1. 0 (which countries and governments were the main mechanisms for growth and development) and the Globalization 2. 0 (which multinational companies led the way in driving global integration).