Factor endowment
Encyclopedia
In economics
a country's factor endowment is commonly understood as the amount of land
, labor, capital
, and entrepreneurship
that a country possesses and can exploit for manufacturing
. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all other things being equal. The development of sound institutions to access and equitably distribute these resources, however, is necessary in order for a country to obtain the greatest benefit from its factor endowment.
Nonetheless, the New World economies inherited attractive endowments such as conducive soils, ideal weather conditions, and suitable size and sparse populations that eventually came under the control of institutionalizing European colonists who had a marginal economic interest to exploit and benefit from these new discoveries. Colonists were driven to yield high profits and power by reproducing such economies’ vulnerable legal and political framework, which ultimately led them towards the paths of economic developments with various degrees of inequality in human capital, wealth, and political power.
(the United States
and Canada
) around the turn of the century
. It is commonly argued that these countries benefited greatly by borrowing many of Britain
's institutions and laws. While North America undoubtedly gained from this borrowing, this does not fully explain why the rest of the New World
(which also enjoyed a large factor endowment and access to British institutions) did not develop in a similar way. In fact, data shows that connection between the prosperity of the colonizing and the wealth of the colony was weaker than many thought. The future United States and Canada surpassed several British established colonies in the Caribbean, such as Barbados, Jamaica, Belize, and Guyana. In fact, the United States converged on the world economic leader, measured in GDP/capita, the UK. In 1910, the United States overtook the UK and began to diverge from it until about the 1950s. This shows that there must have been another explanation as to why the future United States and Canada developed at a faster rate than other colonies in the region.
Kenneth Sokoloff
and Stanley Engerman
argue in their article "History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World" that the difference between North America and the rest of the New World was not just in institutions but in the nature of their respective factor endowments. Countries like Brazil
and Cuba
had an extremely large yet concentrated factor endowment that tended toward exploitation
, a hierarchical social system and exhibited economies of scale. Cuba and Brazil primarily grew lucrative products such as cotton, coffee, and sugar, which required hand picking and most efficiently picked when picked by hands in unison, whereas the United States was generally a wheat producer. The true advantage of the United States and Canada lay in a more equitable distribution of factors that could not be exploited on an extremely large scale. This distribution led to a more open and opportunistic economy, and eventually to long-term prosperity. For example, because wealth and power were distributed relatively equally in the United States and in Canada, these two countries led the rest of the Americas in providing education on a broader scale. Education is an important factor to improve technology in order to boost productivity, which is the reason that US and Canada surpassed the others. Greater access to education allowed for greater investment in human capital, which increases productivity and contributed to the United States and Canada's economic growth. According to Sokoloff and Engerman's article "History Lessons: Institutions, Factors Endowments, and Paths of Development in the New World," not only the United States had relatively equal distribution of wealth, it had relatively homogeneous population, political power and human capital. United States and Canada's relatively equal distribution of wealth, amount of human capital and political power utimately affected development of institution, extent of franchise, and public education that persist and influence growth of the country. The open franchise in the United States and Canada was possibe due to the large voting body of middle class and small elites. The open franchise brought elimination of wealth and literary requirement by 1940 in Canada and the United States (literacy requirement was still enforced in US southern regions only). Again, the open franchise was possible because the United States endowed a land suitable for wheat growing thus had a large body of middle class unlike Brazil and Cuba where they exhibited small elites, some overseers and large slave population. United States, then, outgrows other New World countries and eventually diverged from Cuba and Brazil in late eighteen and early nineteen century.
Sokoloff and Engerman hypothesize that in societies founded with greater inequality, the elites gained more power to influence the choice of legal and economic institutions. In those countries which are inequal, small elites restrict majority people's rights, such as education and votes, to perpetuate the social structures and continue to make themselves "elites." The U.S. began its economic growth largely through slave labor and trade of the output of that labor. As the elites enacted policy to generate more economic equality, for example by increasing literacy rates, the U.S. GDP per capita pulled ahead of other long-since established countries along with the literacy rates. It is essential to note that factor endowments played a crucial role in shaping the colonies institutions and economic growth; colonies with a richer quality of soil grew cash crops such as sugar, coffee, and cotton, which were most efficiently grown using plantation systems. As such, the demand for not only slave labor but also peonage
within these colonies grew. Due to the vast inequality that the society developed due to a small elite population in comparison to the vast laborer population, they were able to maintain the wealth and power within the elite class via establishing a guarded franchise. The inequalities within the cash crop colonies resulted in their economy not being able to expand and grow as fast as the U.S and Canada, due to restrictive policies. Those policies in inequal countries curb the intellectual development of most people who are only required to do simple manual jobs; however, US and Canada encourage their people to take part in education. As a result, US and Canada excel with higher productivities which are supported by advanced technology.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
a country's factor endowment is commonly understood as the amount of land
Land (economics)
In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...
, labor, capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
, and entrepreneurship
Entrepreneurship
Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response...
that a country possesses and can exploit for manufacturing
Manufacturing
Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...
. Countries with a large endowment of resources tend to be more prosperous than those with a small endowment, all other things being equal. The development of sound institutions to access and equitably distribute these resources, however, is necessary in order for a country to obtain the greatest benefit from its factor endowment.
Nonetheless, the New World economies inherited attractive endowments such as conducive soils, ideal weather conditions, and suitable size and sparse populations that eventually came under the control of institutionalizing European colonists who had a marginal economic interest to exploit and benefit from these new discoveries. Colonists were driven to yield high profits and power by reproducing such economies’ vulnerable legal and political framework, which ultimately led them towards the paths of economic developments with various degrees of inequality in human capital, wealth, and political power.
Factor endowments in the New World
A classical example often cited to emphasize the importance of institutions in developing a country's factor endowment is that of North AmericaNorth America
North America is a continent wholly within the Northern Hemisphere and almost wholly within the Western Hemisphere. It is also considered a northern subcontinent of the Americas...
(the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and Canada
Canada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
) around the turn of the century
Turn of the century
Turn of the century, in its broadest sense, refers to the transition from one century to another. The term is most often used to indicate a non-specific time period either before or after the beginning of a century....
. It is commonly argued that these countries benefited greatly by borrowing many of Britain
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
's institutions and laws. While North America undoubtedly gained from this borrowing, this does not fully explain why the rest of the New World
New World
The New World is one of the names used for the Western Hemisphere, specifically America and sometimes Oceania . The term originated in the late 15th century, when America had been recently discovered by European explorers, expanding the geographical horizon of the people of the European middle...
(which also enjoyed a large factor endowment and access to British institutions) did not develop in a similar way. In fact, data shows that connection between the prosperity of the colonizing and the wealth of the colony was weaker than many thought. The future United States and Canada surpassed several British established colonies in the Caribbean, such as Barbados, Jamaica, Belize, and Guyana. In fact, the United States converged on the world economic leader, measured in GDP/capita, the UK. In 1910, the United States overtook the UK and began to diverge from it until about the 1950s. This shows that there must have been another explanation as to why the future United States and Canada developed at a faster rate than other colonies in the region.
Kenneth Sokoloff
Kenneth Sokoloff
Kenneth Lee Sokoloff was an American economic historian who was broadly interested in the interaction between initial factor endowments, institutions, and economic growth...
and Stanley Engerman
Stanley Engerman
Stanley Lewis Engerman is an economist and economic historian at the University of Rochester. He received his Ph.D. in economics in 1962 from Johns Hopkins University. Engerman is known for his quantitative historical work along with Nobel prize winning economist Robert Fogel...
argue in their article "History Lessons: Institutions, Factor Endowments, and Paths of Development in the New World" that the difference between North America and the rest of the New World was not just in institutions but in the nature of their respective factor endowments. Countries like Brazil
Brazil
Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...
and Cuba
Cuba
The Republic of Cuba is an island nation in the Caribbean. The nation of Cuba consists of the main island of Cuba, the Isla de la Juventud, and several archipelagos. Havana is the largest city in Cuba and the country's capital. Santiago de Cuba is the second largest city...
had an extremely large yet concentrated factor endowment that tended toward exploitation
Exploitation
This article discusses the term exploitation in the meaning of using something in an unjust or cruel manner.- As unjust benefit :In political economy, economics, and sociology, exploitation involves a persistent social relationship in which certain persons are being mistreated or unfairly used for...
, a hierarchical social system and exhibited economies of scale. Cuba and Brazil primarily grew lucrative products such as cotton, coffee, and sugar, which required hand picking and most efficiently picked when picked by hands in unison, whereas the United States was generally a wheat producer. The true advantage of the United States and Canada lay in a more equitable distribution of factors that could not be exploited on an extremely large scale. This distribution led to a more open and opportunistic economy, and eventually to long-term prosperity. For example, because wealth and power were distributed relatively equally in the United States and in Canada, these two countries led the rest of the Americas in providing education on a broader scale. Education is an important factor to improve technology in order to boost productivity, which is the reason that US and Canada surpassed the others. Greater access to education allowed for greater investment in human capital, which increases productivity and contributed to the United States and Canada's economic growth. According to Sokoloff and Engerman's article "History Lessons: Institutions, Factors Endowments, and Paths of Development in the New World," not only the United States had relatively equal distribution of wealth, it had relatively homogeneous population, political power and human capital. United States and Canada's relatively equal distribution of wealth, amount of human capital and political power utimately affected development of institution, extent of franchise, and public education that persist and influence growth of the country. The open franchise in the United States and Canada was possibe due to the large voting body of middle class and small elites. The open franchise brought elimination of wealth and literary requirement by 1940 in Canada and the United States (literacy requirement was still enforced in US southern regions only). Again, the open franchise was possible because the United States endowed a land suitable for wheat growing thus had a large body of middle class unlike Brazil and Cuba where they exhibited small elites, some overseers and large slave population. United States, then, outgrows other New World countries and eventually diverged from Cuba and Brazil in late eighteen and early nineteen century.
Sokoloff and Engerman hypothesize that in societies founded with greater inequality, the elites gained more power to influence the choice of legal and economic institutions. In those countries which are inequal, small elites restrict majority people's rights, such as education and votes, to perpetuate the social structures and continue to make themselves "elites." The U.S. began its economic growth largely through slave labor and trade of the output of that labor. As the elites enacted policy to generate more economic equality, for example by increasing literacy rates, the U.S. GDP per capita pulled ahead of other long-since established countries along with the literacy rates. It is essential to note that factor endowments played a crucial role in shaping the colonies institutions and economic growth; colonies with a richer quality of soil grew cash crops such as sugar, coffee, and cotton, which were most efficiently grown using plantation systems. As such, the demand for not only slave labor but also peonage
Peon
The words peon and peonage are derived from the Spanish peón . It has a range of meanings but its primary usage is to describe laborers with little control over their employment conditions.-English usage:...
within these colonies grew. Due to the vast inequality that the society developed due to a small elite population in comparison to the vast laborer population, they were able to maintain the wealth and power within the elite class via establishing a guarded franchise. The inequalities within the cash crop colonies resulted in their economy not being able to expand and grow as fast as the U.S and Canada, due to restrictive policies. Those policies in inequal countries curb the intellectual development of most people who are only required to do simple manual jobs; however, US and Canada encourage their people to take part in education. As a result, US and Canada excel with higher productivities which are supported by advanced technology.