SEASONAL FLUCTUATIONS AND ECONOMIC GROWTH

Abstract

The industrial revolution and the subsequent industrialization of the economies occurred first in temperate regions. We argue that this and the associated positive correlation between absolute latitude and GDP per capita are due to the fact that countries located far from the equator suffered more profound seasonal fluctuations in climate, namely stronger and longer winters. We propose a growth model of biased innovations that accounts for these facts and show that countries located in temperate regions were more likely to create or adopt capital-intensive modes of production.The intuition behind this result is that savings are used to smooth consumption; therefore, in places where output fluctuations are more profound, savings are bigger. Because the incentives to innovate depend on the relative supply factors, economies where savings are bigger are more likely to create or adopt capital-intensive technologies.Keywords: Absolute Latitude, Seasons, Endogenous Growth, Capital Using InnovationsJEL classification: N00, O00, O11, O31, O33(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONThe industrial revolution occurred first in temperate regions and, since then, the world has experienced a massive absolute divergence in the distribution of incomes across countries. Indeed, today there is a positive correlation between absolute latitude and GDP per capita. Moreover, only three tropical economies (Hong Kong, Singapore, and Taiwan) are classified as high-income by the World Bank, while all countries within regions zoned as temperate had either middle or high-income economies.We argue that climatic conditions affect incentives to save in primitive economies in such a way that economies located in temperate regions are more likely to become capital abundant. In primitive economies the main source of output fluctuations is climatic and these are bigger in places located far away from the equator. Indeed, both the harvest per year and the diversification of crops are higher in tropical countries (see Chang, 1997). During the frost days in winter there is no harvest, transportation is difficult, people need more energy and, in general, surviving demands much more work. The response of people to these natural forces is saving during the good days to make bad days better. The stronger the winter the higher the level of savings needed to survive during the frost days. Finally, economies where the savings are systematically bigger are more likely to both, create and adopt capital intensive technologies. Once an economy begins to use capital intensive technologies a process of capital accumulation and capital improvement starts. Capital abundance generates the incentives for capital-using innovations and capital-using technologies generate the incentives for capital accumulation.Many endogenous growth models predict poverty traps, that is, depending on the initial abundance of capital economies can present long run growth or be trapped in a steady state with no economic growth.1 In particular, according to the literature of biased technological change the incentives to innovate depend on the relative supply of factors: in capital abundant economies individuals have incentives to make capital-using innovations while in economies where capital is scarce there are no incentives for this type of innovation.2 These innovations increase the elasticity of output with respect to capital as well as the incentives to save, so a virtuous circle derives capital abundant economies to long-run growth. Models of factor saving innovations generally predict that both the elasticity of output with respect to capital and the capital income share must be higher in richer economies. However, in general these models do not try to explain differences in initial conditions. Among these lines, Peretto and Seater (2006) present a model where the saving rate is exogenous and prove that differences in this variable can explain long run income differences. …