Geography, Depreciation, and Growth

Any visit to the seashore will confirm that it is more difficult to build a large sandcastle if one locates the project too near the lapping waves of the ocean. The sandcastle may grow well initially, but eventually a rouge wave washes out some portion of the progress. It may be possible for the sandcastle to grow on net, so long as investment in building outpaces losses to the waves, but it must be true that identical building effort would lead to a larger castle were construction sited on a portion of the beach further from the waves. Beach-goers face depreciation of sandcastle investments by waves, with an average rate of depreciation that is influenced by their location on the beach. We point out here that similar dynamics apply to capital accumulation, and thereby economic growth, which faces average rates of depreciation that differ by geography. It has been previously proposed that geography influences economic growth for many reasons. For example, geography may affect labor productivity via health, and trade costs via ruggedness and landlockedness (Gallup, Sachs and Mellinger, 1999); geography affected agricultural productivity during early stages of development which may have enduring influence (Nordhaus, 2006; Hornbeck, 2012); or geographic conditions could influence the nature of persistent economic and political institutions (Acemoglu, Johnson and Robinson, 2002; Rodrik, Subramanian and Trebbi, 2004; Dell, 2010). Yet to our knowledge, prior work has neither suggested nor documented that depreciation varies by location, and thus its potential role in influencing the wealth of nations has not been considered nor explored.