Geography and regional economic growth: The high cost of deviating from Nature

Abstract

We analyze the role of nature and geography in determining economic and social outcomes. We propose a theoretical model relating geography and nature to economic growth, and examine that model using data from NUTS 2 European regions. By doing this, we identify the predictive power of first-nature variables to explain regional population distribution. Then we analyze the effects of misadjustment between the actual and predicted distribution of populations on economic performance. Our results indicate that deviating from first-nature outcomes has a significant negative effect on economic growth. The main policy implication emerging from our analysis is that strategies that harmonize with nature and geography yield better social welfare than those policies that conflict with them.