Take a look at the map above. At first glance, you might think it’s showing countries as warmer or colder; in reality, it is a map of countries by their income per capita. An unusual trend becomes obvious: warmer countries tend to be poorer. It is easy to point out the U.S. and Europe are colder and wealthier than Africa or India. But the trend continues the more you narrow down: Denmark is colder and wealthier than England, which is colder and wealthier than Spain.
Even within countries, the U.S. South is poorer (and warmer) than New England. Southern Italy is poorer (and warmer) than Northern Italy. Of course, there are exceptions, like Australia. But still, this unusual trend must be something more than a coincidence.
Inclusive Institutions vs. Extractive Institutions
One reason behind this phenomenon could be what academics call “inclusive institutions.” One might think that warmer areas, rich with fertile land, minerals, and cash crops, would translate into wealth. After all, humanity’s first civilizations started in warm areas where natural resources were abundant: Mesopotamia in the “Fertile Crescent” nested between two tame rivers, Egypt along the rich soil naturally irrigated by the Nile River, and the Indus Valley civilization around the Indus River.
However, Why Nations Fail, a book by economists Daron Acemoglu and James A. Robinson that explores the root causes of why some nations are poor while others become wealthy, finds that what truly differentiates poor and rich nations is not historical access to resources, trade routes or great human capital, but instead the development of inclusive institutions.
Institutions describe the rules that govern a society’s economics and politics and the state’s power to enforce them. Inclusive institutions describe societies where contracts and property rights are respected and enforced and have broad market participation. This is the opposite of extractive institutions, where elites have the most power and make self-enriching decisions to the detriment of the public.
The paradox of history is that resource-rich warm areas are far more likely to develop extractive institutions. Natural resources, such as oil, minerals, and fertile land, generate substantial revenues that are easy to centralize. Governments or ruling elites often find it more advantageous to control these resources directly rather than investing in broad-based economic development. This is often described in academia as the “resource curse” or the “paradox of the plenty.”
This trend is furthered by colonization: resource-rich areas in South Africa, India, Africa, and Southeast Asia became victim to highly exploitative practices, often turning native populations into slave labor to till land.
It is difficult for countries to evolve from their extractive institutions due to “institutional inertia,” which happens when elites can use their political influence to reinforce rules that allow them to maintain an economic edge.
How colder countries build wealth
The Netherlands, unlike their southern counterparts, faced significant challenges when they began settling in the 13th century. They had almost no natural resources, endured brutal winters, and contended with swampy land.
In Age of Revolutions, the journalist Fareed Zakaria explains that the country’s geography made it difficult for a single monarch or ruler to centralize power, the common trend in governance in the rest of Europe. As a result, the Netherlands became a collection of small, scattered states ruled by “free peasants” who tilled their own land.
Due to the scarcity of natural resources in cold climates like the Netherlands, economic power was widely distributed. The Dutch developed a trade system where peasants exchanged crops for fish. This eventually evolved into the world’s first public financing system when the Dutch East India Company sold shares to the public, which continued to trade openly. Consequently, the Netherlands emerged as the world’s first superpower and remains one of the wealthiest and most developed countries to this day.
Even today, nations economically dependent on their plentiful natural resources are more likely to see conflict. Sudan is amidst a brutal civil war, and the warring factions are constantly fighting for control over the country’s lucrative gum arabic supply. Sudan is one of the world’s largest suppliers of gum arabic, which is widely used in soft drinks like Coca-Cola, food, chewing gum and candy. Here we see the “resource curse” at play: developing a diversified economy with a well-educated populace and strong protections for patents and startups takes decades, whereas gaining military control over a resource to finance your side of the war is much faster but perpetuates exploitative institutions.
