By Steven Pearlstein
Washington Post Staff Writer
Thursday, April 23, 1998; Page C01

One of the most basic questions -- why some nations are consistently rich while others are poor -- has turned out to be one of the hardest for economists to answer.

For a long time, economists believed that a region's natural endowments -- such things as the richness of mineral deposits, the fertility of soil, access to water -- were the key determinants. But as agriculture and mining gave way to more advanced industrialization, researchers began to focus on human factors, such as the quality of the political, social and business institutions around which economic activity was organized.

These days, however, there is renewed interest in the geographic determinants of wealth and poverty, as evidenced by two papers delivered this week at the World Bank.

Harvard University's Jeffrey Sachs and John Luke Gallup concluded that two factors -- whether a region is outside the tropics and whether it has easy access to a seaport -- could explain at least half of the income gap between rich and poor nations. The accompanying chart does not do justice to the fancy mathematics that went into their study but, nonetheless, illustrates the basic point.

"There is an extraordinarily powerful correlation between geography and wealth," Sachs told the World Bank's annual conference on development economics. Sachs noted that, outside of Europe, there is not a single landlocked country that can claim a high average income. And of the 30 top economies ranked by economic output per capita, only three are tropical -- Hong Kong, Singapore and Mauritius.

Economists, it must be said, have become much more adept at isolating and quantifying things than they have at explaining the reasons for them. But Sachs and Gallup, reaching back to the work of Adam Smith, pose this hypothesis:

Countries grow wealthy by increasingly specializing in doing certain things while trading with other specialist countries for things they don't make. That's why being near ports and navigable rivers has been important and why populations have tended to concentrate along coasts. And the greater concentration, in turn, has begotten further specialization and economies of scale, creating a virtuous cycle in which the rich keep getting richer.

At the same time, Sachs and Gallup observe that a correspondingly bad dynamic takes hold in the hinterlands, where higher transportation costs make it difficult to trade and specialize. The problem is further compounded in countries near the equator that suffer the added burden of malaria and other intractable diseases, which dramatically lower the productivity of workers and spurs the best workers to flee.

This line of reasoning has some pretty profound implications for institutions such as the World Bank, which preach that sound economic policies -- deregulation, balanced budgets and free trade -- are the magic keys to raising living standards. Such reforms have worked great in South Korea and Poland (good ports, few mosquitoes), but as Sachs and Gallup note, they have proved stubbornly ineffective in landlocked Mongolia and tropical Tanzania.

Another cut at the same issue was taken by Paul Krugman of the Massachusetts Institute of Technology. Krugman started by noting a widening development gap not only among countries but even within countries. But rather than ascribe it primarily to natural geographic endowments, Krugman focuses on the self-reinforcing process by which market economies naturally concentrate economic activity in a few densely populated regions that, over time, tend to be richer than those places where economic activity remains dispersed.

Krugman points to the kind of geographic concentration that is exemplified by the financial district in Manhattan, California's Silicon Valley and the textile region north of Milan. In such places, he notes, companies enjoy competitive advantages by being near the large concentration of suppliers and customers. And this concentration of companies in the same industry, in turn, encourages development of a large pool of workers with relevant experience and skills and easy transmission of new and better production techniques from one firm to another.

At some point, however, Krugman's mathematical models show that concentration begins to suffer from a form of diminishing returns. So many people and companies move to the primary centers that land prices go through the roof, congestion makes it difficult to conduct business and the advantages of concentration are outweighed by its disadvantages. And in a world of diminishing transportation costs, parts of the production process are eventually spun off to secondary centers that also begin to enjoy high growth and higher income -- to Singapore, say, where chips are produced more cheaply for Silicon Valley's computers, or to Dublin, where it is more efficient to do the back-office functions for Wall Street's financial giants.

An important implication of Krugman's analysis is that developing countries might be able to boost their fortunes by engaging in a bit of economic planning that triggers the positive cycle -- a strategy followed by Japan and some of the Asian "tigers."

Such strategies, of course, run counter to the current thinking at the World Bank (and the U.S. Treasury) that economic planning doesn't work and that free markets are the only right path for developing economies. And Krugman himself warns against them: For every country that succeeds through some well-crafted government intervention, he predicts, there will be many more that will simply make a hash of it.