Puzzle of Growth: Rich Countries and Poor Countries

Puzzle of Growth: Rich Countries and Poor Countries

[Alex] We now return to the core question
of this part of the course. Why are some countries rich
and other countries poor? I’m going to lay out various
pieces of the puzzle keeping in mind that it’s
it’s a complex question with many factors at play
which are still being debated. Let’s start with a simple example. How does a farmer goes from this to this? The most immediate reason that
some countries are rich is that their workers are very productive. So how do workers become productive? Well, they work with more and better
factors of production. That’s the first piece of the puzzle. Rich countries –
they have a lot of physical capital and a lot of human capital, and that capital is organized using
the best technological knowledge. By physical capital, economists mean
tools in the broadest sense: shovels, tractors
cell phones, roads, buildings… More and better tools
make workers more productive. Human capital is tools in the mind or the stuff in people’s heads
that makes them productive. Human capital – it’s not
something we’re born with. It’s produced by an investment
in education and training and experience. Technological knowledge is knowledge
about how the world works, such as an understanding of genetics,
soil composition, chemistry. This is the research that informs
the books that our farmer reads. The final factor, a factor which is often
taken for granted – is organization. Human capital, physical capital
and technological knowledge – they’ve gotta be brought together,
they’ve got to be organized in a way that produces valuable
goods and services. In a capitalist society,
it’s the entrepreneurs who bring ideas, people
and capital together in order to produce valuable products. So rich countries – they have
a lot of factors of production. But that’s a bit too easy. Why do the rich countries have
more factors of production? We’ve got to go back to the basics. Incentives matter. That’s the next piece of the puzzle. Let’s give an example. In China during the
Great Leap Forward of the late 1950’s and early 1960’s, private farms were confiscated and consolidated into collectives. Collective property
meant that the incentive to invest and to work hard was low. Imagine that if you invest
and you work really hard you can produce an extra
bag of potatoes in, say, a day. If you’re part of a 100 person collective, you don’t take home an
extra bag of potatoes, but only one, one-hundredth
(1/100) of a bag. What would be the incentives
to work hard, to invest? When effort is divorced from payment there’s very little incentive
to work productively. In fact, there’s a incentive not to work
and to free ride on the work of others. As a result of this and many other errors
on the part of the Chinese leadership, some 20 to 40 million
Chinese farmers and workers starved to death
during this terrible time. China did not begin to take off as an
economic powerhouse until farmers were allowed to keep the product
of their efforts. As one Chinese farmer observed, “You can’t be lazy when you work for your
family and yourself.” If you’re curious to learn more about
China, do check out our website. So, incentives are important. But now we’ve gotta ask, “Why?” Why do some countries
have good incentives? And the answer is that they
have good institutions. So which institutions create incentives
that spur prosperity? Well the good news here
is that there is considerable agreement about what the key institutions for
economic growth are. For example, if you buy a piece of land
and you build a farm, do you have an official deed of ownership? …one that will stand up in a court if someone tries to build, say, a corporate
headquarters on top of your farm? Property rights allow you
to protect your investment. Our farmer also has to think
about our government. She might have to bribe government
officials to get permits or worry about
the outright seizure of her farm. So honest government is
another key institution that allows our farmer to invest. In some places the legal
system is of such poor quality that it can be difficult
to resolve disputes, such as collecting on a debt,
or even determining the ownership of a piece of property. A dependable legal system lets our farmer enforce contracts
and borrow and lend money. But our farmer still needs more. Sometimes the problem isn’t
too much government but too little. Political instability and the threat of anarchy
are reoccurring problems in many countries. Who wants to invest in the future when
civil war threatens to wash away all of your plans? Political stability is needed to give
investors confidence to invest. We’re almost there now, but our farmer still has to worry about
inefficient and unnecessary regulations – regulations which can create monopolies
and impede voluntary cooperation. Competitive and open markets
let market signals do their work, and they let the farmer innovate
and grow her business. So we’ve covered the key institutions
that allow our farmer to prosper: property rights, honest government,
political stability, a dependable legal system, and competitive and open markets. But now we’ve gotta ask, “Well, why?” Why do some countries have
good institutions? This is perhaps the most
actively debated question in all of development economics. And here we must answer with a
mysterious combination of history, ideas, culture, geography,
even a little bit of luck. Take for instance the United States. The US Constitution was fortunately
written at a time when the ideas of John Locke and
Adam Smith were popular. And it inherited a tendency towards a market economy and
democratic institutions from its colonial parent,
Great Britain. An open frontier, and plenty of freedom
to try new ideas and new ways of living, to leave the old
ways behind and to go to the frontier. This idea of the frontier
perhaps influences America’s entrepreneurial culture
even today. And we were also very lucky that George Washington had the virtue
to stop at two presidential terms rather than trying to become the next king. So what makes some countries rich
and some countries poor? Well it’s complicated, and
the answer differs depending upon whether we want to look at the
immediate causes or the ultimate causes. And these processes are also interacting
in a dynamic and changing environment. We do know some of the things
that matter, however. And the example of growth miracles,
like China, Korea and Japan – that’s encouraging. It is possible for very poor
countries to grow very quickly and to reach their true potential once better incentives and institutions
are put into place. In the next section, we’re gonna dive deeper into
the factors of production in order to create a simple, but
useful model of economic growth. Thanks! [Announcer] If you want to test yourself,
click “Practice Questions.” Or, if you’re ready to move on, you can click,
“Go to the next video.” You can also visit MRUniversity.com
to see our entire library of videos and resources.


  1. Peter Pao says:

    No country is born rich.The western world did not get rich overnight.From the very early days they were like any other poor country.It is due to their intelligence,planning n fairness of governance that we see them as they are today.Everyone is given a chance.!

  2. AUNG M says:

    Awesome! Thank you for making this video. We must empower others in developing countries to adapt more forward thinking to move away from poverty.

  3. Mohamed Khaled says:

    Brilliant. Amazing. Wonderful. Everything positive. Thanks so much for this video.

  4. Sara Petersen says:

    The original settlers of America overcame incredible obstacles and built the foundation for a rich country. Rich compared to, for example, Mexico. So why can't third world countries do the same?

  5. ALAA TUAMA says:

    Best teachers & best video

  6. runcandy3 says:

    Quite a few of these puzzle pieces are debatable among economists, and while many of these are true in a transitioning industrial economy, in a post-industrialized economy, other institutions become much more important and regulation becomes essential at maintaining investments and creating healthy communities where people feel free to invest and be creative with their resources.

  7. BlackR65 says:

    You are missing IQ as one of the last puzzles. It is not a coincidence that high IQ populations like North-Eastern Asians, USA, Canada, Australia, New Zealand and most part of Europe are wealthy, but the Latin, African and Muslim regions are facing poverty, wars and stagnation.

  8. Anmol marjana says:

    I hate to say that my country have all these darn problems

  9. Fallieres Bernier says:

    I found the video very clear to present to my high school students. Thanks for sharing

  10. Raghbir Singh says:

    Keep it sir
    Keep posting
    Very good imformation you are providing to us

  11. Michael Kummer says:

    George mason University …. Hm… Washington DC. The biggest hub of system integrators in form of governance. And yet they are not part of this "lovely" presentation. Well, there are so many countries where no one bother the entrepreneurs – just other entrepreneurs – and that is the point of Peter Thiel WSJ article. Conveniently the presenter forgets Steve Jobs the indispensable, and who "Warned I phone is No Substitute for Networking Face-to-Face". Forming, storming, norming, performing, reforming…that is what people in rich countries do better than people in poor countries. In essence richer countries force people play or die. And that is why immigrants need in most advanced countries…. They export aging, use brain drain youth drain, migration, and export import as tools better than the integrators of the poorer countries.

  12. aloke bachhar says:

    Great explanation.Than you so much sir

  13. Akanksha And Aditya Singh says:

    I thank you for two reasons

    1. You accepted that wealth does not stem from one single cause bout is very very complex.
    2. You referred to a farmer as "she",SHE


  14. Christophe Pochari says:


  15. TProgressASAP says:

    man……. rich country= small government intervention. poor country= a lot of government intervention.

  16. jayc says:

    3 minutes in and no mention of slavery and colonisation lol.. Waste of time

  17. Some Things In Life says:

    Some countries are made poorer by US or Imperial invasions.

  18. Maarten says:

    Some races just have higher IQ's and more creativity than other races.

  19. Rizky Satya says:

    Why some countries rich and some of them poor?

    —–> colonialism and global capitalism monopoly

  20. Soup Time says:

    Hey Vsauce, Michael here

  21. Abdullah says:

    Thank you
    the channel is helping me a lot in the university.

  22. Tasos Obscure says:

    Human capital is primarily what you're born with, hence the heritability of IQ.

  23. Oky 84 says:

    Hello, I really enjoy your videos. It would be very interesting to read more on these topics, can you tell which theories or essays you have applied regarding this topic?

  24. shineydugong says:

    My god this, this channel makes Economics 10 times more interesting than my uni degree.

  25. Malik Bagwala says:

    One of the best videos i have seen in a while.

  26. Jason says:

    You mentioned Washington's desire to not become a king or de facto king…here's his address for anyone who wants to read it https://en.wikipedia.org/wiki/George_Washington's_Farewell_Address

  27. queenform says:

    doesn't work in black countries

  28. Noa G says:

    Please make videos on India

  29. Mr Nine says:

    are you talking about Rich Countries and Poor Countries or about socialism and capitalism…………..???????

  30. K. Seren Seglias says:

    That sums um "why nations fail" perfectly, which I'm reading lately. Thanks a bunch for making the reading process easier for me!

  31. Insert Name says:

    3:00 that's not how collective farming worked. That's also a vast simplification of the famine.

  32. Seth Apex says:

    you don't need honest government you just need it to not interfere in the market mechanism.

  33. Tomatoe Eater says:

    Rich countries exploit poor countries through bias trading laws and other means like IMF, world bank etc. Its called neocolonialism.

  34. N Ala says:

    Really good videos…

  35. HK says:

    Do you think reserving 50% seats in colleges and employment for a few people regardless of their ability can hurt a country's economy?
    Ask India

  36. Deniz Denizer says:

    Thank you MRU!

  37. Cedie Ave says:

    The creators of the current systems we have are the Rich countries. Places where their systems are forced are the poor countries.
    Before white people came to Africa" we had our systems, Now we must conform to the West or be labeled as Terrorists.

  38. Alexis Rodruegz says:

    Good video but there are many non-institutional variables that affect economic growth:
    – Tropical countries cause people to be more lazy, and the farmland is worse because of the concentrated rain-fall
    – Land-locked countries are much poorer than countries with water access
    – Countries with good natural resources are richer (Saudi Arabia, US)
    – Countries that are invaded or controlled by other countries are much poorer (Afghanistan, Iraq, Iran after the war in Iraq)
    – Countries with too much or too little linguistic and genetic diversity are poor

    Here are the problems with GDP per capita:
    * Includes debt
    * Reducing birth rate increases it too much (temporarily)
    * In some climates GDP increasing AC and heating aren't needed
    * Exercise and good diet are more important for health than health spending…
    * Military(US) and government spending(China) increases GDP while making people less happy
    * Includes jails

  39. Arjun Dev says:

    Guns, Germs and Steel is widely regarded by historians and anthropologists to be a shit book.

  40. Arjun Dev says:

    Should've at least mentioned colonialism m8

  41. Kadir Kara says:

    very bad video

  42. Ganesh Nayak says:

    Feel so sad that we Indians still love socialism tough historically we have foremost capitalists .. for much of history we had one third of world GDP.. hope we get rid of our colonial hangover and get back to free market enterprising society. Subh Laabh

  43. skeletorrobo says:


  44. Sword says:

    You forgot the most fundamental reason: Quality of the inhabitant's genetics when it comes to their intellect.

  45. Gautham Thampy says:

    why didn't he talk about natural resources ?

  46. Cedric Samuels says:

    What about climate ? I guess that falls under the lucky bracket.

  47. Jimmi Hall says:

    very gay. ur gay lmfao

  48. D K says:

    Brilliant video!

  49. LagiNaLangAko23 says:

    "I'm poor coz I'm being oppressed!"

  50. hhhwite thrash says:

    Too much welfare goes for government offical officers etc. And not single mothers and similar as idiots think

    It's almost one forth of taxes just goes for these lazy unproductive fucks who are corrupted anyways

  51. Sameer Kareemi says:

    these lecturers makes me more enthusiastic of economics
    thank you

  52. Subscribe to My Channel says:

    Bull Shit video, no mention of neocolonialism.

  53. Jonathan Williams says:

    the problem is not to little government, but to many governments that are all rather large in terms of their effect on daily life

  54. WASSCE Tutorials says:

    This is even better than Crash Course Economics

  55. Rodolfo Lasparri says:

    IQ + Culture X Econ System = Results

    Case in point
    Haiti and Dominican Republic share the same island.

    Haiti's 70 ave IQ has resulted in a poophole, & DR's of 89 has resulted in relative wealth.

  56. Braddock E. Hutton says:

    I love these videos. Thanks you so much for posting them.
    Too few people really know or care about how wealth and success works in the macro scale.
    The entire modern world which those of us in wealthy countries take for granted, could very easily slip back into tyranny, poverty, and serfdom if we don't stay vigilant and root out corruption.
    It's not a natural tendency for those with power to willingly relinquish it. In the long run, everyone benefits from a sound democratic process, but even in free, capitalist societies the power of individuals with money is constantly undermining the system and stacking things in the favor of a few, to the detriment of the masses.
    The steadily increasing income disparity in developed countries is good evidence how the deck is being restacked in the favor of the rich.
    But still, we fail to take heed of this because our middle class is still living an enviable life. But if our working class knew where we actually should be right now, it'd cause a Revolution.

  57. Tanjina Luna says:

    thanks for the vidoes

  58. ClassicExampleBand says:

    We know what causes wealth inequality. Property rights and genetics are the two biggest reasons. Genetic differences in humans is a major factor in wealth creation among humans. Higher IQ people as a rule will have better incomes if they have the same rights to earn money.

  59. Digital Evidence Expert says:

    This video is right on target. If people set up market economies and let people keep the fruit of their labor the economy will succeed. There is another video that tries to explain why poor countries are poor by blaming the climate or a fly that devastates the oxen, etc. in an effort to not blame the people who live in these countries. That other video isn't able to explain the differences between North and South Korea where the geography and people are the same but the government policies were the difference that made South Korea successful and the North not. I find it interesting that other video disabled comments. This video does a great job of explaining the importance of good government policy and why socialism doesn't work.

  60. brian T says:

    Why do government regulations create monopolies?

  61. Nishan Hitang says:

    Very good explanation. thank you very much

  62. Noe Largo says:

    Thank you this clear explanation Sir!

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