Lecture 2 – Diverse Structures and Common

Characteristics of Developing Nations

• It is hazardous to try to generalize too much about the 157 member countries
of the United Nations that constitute the Third World. While almost all are poor
in money terms, they are diverse in culture, economic conditions, and social
and political structures.
• In this chapter, we attempt to provide an overview of the great diversity of
developing countries.
• Despite these variations, however, Third World nations share a common set of
problems, both domestic and international problems that in fact define their
state of underdevelopment
Some Classifications of Developing Countries
• In attempting to classify countries, some analysts, using the U.N. classification
system, prefer to distinguish among three major groups within the Third World:
the 44 poorest countries designated by the UN as “least developed”, the 88
non-oil-exporting “developing nations”, and the 13 petroleum-rich members of
the OPEC, whose national incomes increased dramatically during the 1970s
Others follow the classification system established by World Bank. It divides
133 countries (both developing and developed) with population in excess of
1 million into four categories according to their per capita income levels:

• Low-income (per capita GNP less than $785 in 1997), middle-

income ($786 to $3,125), upper-middle-income ($3,126 to $9, 655)
and high income economies (GNP per capita of $9,656 or more in
1997).
• The first three groups comprise 107 mostly developing countries,
while the last group, the high-income economies, consists of 26
countries, 24 of which are included in the First World and the other
two (Kuwait and the United Arab Emirates) classified as developing
• The most recent attempt at classification comes from the United
Nations Development Program (UNDP). It focuses on aspects of
“human development” that go beyond income to include such
noneconomic variables as life expectancy at birth and educational
attainment along with real per capita income.
It then constructs a Human Development Index (HDI) in w/c 174
countries are ranked into three human development aggregates -

• “high” (64 nations including several LDCs), “medium” (65 countries),

and “low” (45 countries)
• Finally, there is the classification systems designed by the
Organization for Economic Cooperation and Development (OECD)
in Paris, It divides the Third World (including countries and territories
not in the UN system) into 61 low-income countries (LICs) (those
with per capita income of less than $650, including 29 least
developed countries or LLDCs), 73 middle-income countries
(MICs), 11 newly industrializing countries (NICs), and the 13
members of OPEC
• Despite the obvious diversity of countries and classification
schemes, however, most developing nations share a set of common
and well-defined goals.
These include a reduction in poverty, inequality and unemployment; the provision
of minimum levels of education, health, housing, and food to every citizen; the
broadening of economic and social opportunities; and the forging of a cohesive
nation-state.

• Related to these economic, social and political goals are the

common problems shared in varying degrees by most developing
countries: widespread and chronic absolute poverty, high and rising
levels of unemployment and underemployment, wide and growing
disparities in the distribution of income, low and stagnating levels of
agricultural productivity, sizable and growing imbalances between
urban and rural levels of living and economic opportunities, serious
and worsening environmental decay, antiquated and inappropriate
educational and health systems, severe balance of payments and
international debt problems, and substantial and increasing
dependence on foreign technologies, institutions, and value-
systems
The Structural Diversity of Developing Economies
Any portrayal of the structural diversity of developing nations requires
an examination of 8 critical components:

1. The size of the country (geographic area, population and income)

2. Its historical and colonial background
3. Its endowments of physical and human resources
4. Its ethnic and religious composition
5. The relative importance of it public and private sectors
6. The nature of its industrial structure
7. Its degree of dependence on external economic and political forces
8. The distribution of power and the institutional and political structure
within the nation
Let us briefly consider each component, focusing on some similarities
and differences among countries in Africa, Asia, and Latin America
Size and Income Level
Obviously the sheer physical size of a country, the size of its population, and its
level of national income per capita are important determinants of its economic
potential and major factors differentiating one Third World nation from another.

• Large and populated nations like Brazil, India, Egypt exist side by
side with small countries like Paraguay, Nepal, Jordan, and Chad.
• Large size usually presents advantages of diverse resource
endowment, large potential markets, and a lesser dependence on
foreign sources of materials and products.
• But it also creates problems of administrative control, national
cohesion, and regional imbalances.
• There is no necessary relationship among a country’s size, its level
of per capita national income, and the degree of equality or
inequality in its distribution of that income.
• For example, India, with a 1997 population over 960 million, had a
1997 per capita income level of $390, while nearby Singapore, with
only 3 million people, had a 1997 per capita income of $32,940
Historical Background
Most African and Asian nations were at one time or another colonies of Western
European countries, primarily Britain and France but also Belgium, the
Netherlands, Germany, Portugal and Spain.

• The economic structure of these nations, as well as their

educational and social institutions, have typically been modeled on
those of their former colonial rulers.
• Countries like those in Africa that only recently gained their
independence are therefore likely to be more concerned with
consolidating and evolving their own national economic and political
structures than with simply promoting rapid economic development.
• Perhaps more important, the European colonial powers had a
dramatic and long-lasting impact on the economies and political and
institutional structures of their African and Asian colonies by their
introduction of three powerful and tradition-shattering ideas: private
property, personal taxation, and the requirement that taxes be paid
in money rather than in kind.
As we will discover later, these ideas combined to erode the autonomy
of local communities and to expose their people to many new forms of
potential exploitation.

• In Asia, different colonial heritages and the diverse cultural traditions

of the indigenous peoples have combined to create different
institutional and social patterns in countries such as India (British),
Philippines (Spanish, Japanese, American), Vietnam (French) and
Indonesia (Dutch)
Physical and Human Resources
• A country’s potential for economic growth is greatly induced by its
endowments of physical resources (land, minerals, and other raw
materials) and human resources (numbers of people and their
level of skills)
• The extreme case of favorable physical resource endowment is
the Persian Gulf of oil states. At the other extreme are countries like
Yemen and Bangladesh, where endowments of raw materials and
minerals and even fertile land are relatively minimal.
Geography and climate can also play an important role in the success
or failure of development efforts. Island economies like Taiwan seem
to do better than land-locked economies.

• Temperate zone countries do better than tropical zone nations, all

other things being equal.
• In the realm of human resource endowments, not only are sheer
numbers of people and their skill levels important, but so also are
their cultural outlooks, attitudes toward work, access to information,
willingness to innovate, and desire for self-improvement.
• Moreover, the level of administrative skills will often determine the
ability of the public sector to alter the structure of production and the
time it takes for such structural alteration to occur. This involves the
whole complex of interrelationships between culture, tradition,
religion and ethnic and tribal fragmentation or cohesion.
• Thus the nature and character of a country’s human resources are
important determinants of its economic structure and these clearly
differ from one region to the next.
Ethnic and Religious Compositions
Ethnicity and religion play a major role in the success or failure of
development efforts.

• Clearly, the greater the ethnic and religious diversity of a country, the
more likely it is that there will be internal strife and political instability.
• It is not surprising therefore, that some of the most successful recent
development experiences - South Korea, Taiwan, Singapore, and
Hong Kong – have occurred in culturally homogeneous societies.
• Today, more than 40% of the world’s nations have more than five
significant ethnic populations. In most cases, one or more of these
groups face serious problems of discrimination.
• Ex. Of ethnic and religious conflicts leading to widespread death and
destruction i.e. Afghanistan, Somalia, Ethiopia, Sri Lanka
• The point is that the ethnic and religious composition of a developing
nation and whether or not that diversity leads to conflict or
cooperation can be important determinants of the success or failure of
development efforts.
Relative Importance of the Public and Private Sectors
Most developing countries have mixed economic systems, featuring
both public and private ownership and use of resources.

• The division between the two and their relative importance are mostly a
function of historical and political circumstances Thus, in general, Latin
American and Southeast Asian nations have larger private sectors than South
Asian and African nations.
• The degree of foreign ownership in the private sector is another important
variable to consider when differentiating among LDCs.
• Economic policies, such as those designed to promote more employment, will
naturally be different for countries with large public sectors and ones with
sizable private sectors.
• In economies dominated by the public sector, direct government investment
projects and large rural works programs will take precedence, whereas in
private-oriented economies, special tax allowances designed to induce private
businesses to employ more workers might be more common.
• Although the problem of widespread unemployment may be similar, the
solution differ in countries with significant differences in the relative importance
of the public and private sectors
Industrial Structure
The vast majority of developing countries are agrarian in economic,
social, and cultural outlook

• Agriculture, both subsistence and commercial, is the principal

economic activity in terms of the occupational distribution of the
labor force.
• It is in the relative importance of both the manufacturing and service
sectors that we find the widest variation among developing nations.
• In spite of common problems, therefore, development strategies
may vary from one country to the next, depending on the nature,
structure, and degree of inter-dependence among its primary,
secondary and tertiary industrial sectors.
• The primary sector consists of agriculture, forestry, and fishing; the
secondary sector, mostly of manufacturing; and the tertirary, of
commerce, finance, transport and service.
Common Characteristics of Developing Nations
1. Low levels of living characterized by low incomes, inequality, poor
health, and inadequate education

2. Low levels of productivity

3. High rates of population growth and dependency burden
4. High and rising levels of unemployment and underemployment
5. Substantial dependence on agricultural production and primary-product
exports
6. Prevalence of imperfect markets and limited information
7. Dominance, dependence, and vulnerability in international relations
Low Levels of Living
• In developing nations, general levels of living tend to be very low for the
vast majority of people.
• These low levels of living are manifested quantitatively and qualitatively
in the form of low incomes, inadequate housing, poor health, limited or
no education, high infant mortality, low life and work expectancies, and in
many cases a general sense of hopelessness.
So far, we can list the following common characteristics of developing countries:

1. Low relative levels and, in many countries, slow growth rates of

national income
2. Low levels and, in many countries, stagnating rates of real income per
capita growth
3. Highly skewed patterns of income distribution, with the top 20% of the
population receiving 5 to 10 times as much income as the bottom 40%
4. Consequently, great masses of Third World populations suffering from
absolute poverty, with up to 1.3 billion people living on subsistence
incomes of less then $370 per year
5. Large segments of the populations suffering from ill health,
malnutrition, and debilitating diseases, with infant mortality rates
running as high as 10 times those i9n developed nations
6. In education, low levels of literacy, significant school dropout rates,
and inadequate and often irrelevant educational curricula and facilities
Low Levels of Productivity
Throughout the developing world, levels of labor productivity (output per
worker) are extremely low compared with those in developed countries.

• Low levels of productivity can therefore be explained by the absence or

severe lack of “complementary” factor inputs such as physical capital or
experienced management.
• The area of physical health most clearly reveals the close linkage that
exists between low levels of income and low levels of productivity in
developing nations.
• It is well known, for example, that poor nutrition in childhood can severely
restrict the mental and physical growth of individuals. Poor dietary habits,
inadequate food, and low standards of personal hygiene in later years can
cause further deterioration in a worker’s health and can therefore
adversely influence attitudes toward the job and the other people at work.
• We may conclude, therefore, that low levels of living and low productivity
are self-reinforcing social and economic phenomena in poor countries
and, as such, are the principal manifestations of and contributors to their
underdevelopment.
High Rates of Population Growth and Dependency Burden
Of the world’s population, more than 4/5 live in less developed
countries and less than 1/5 in the developed nations.

• Birthrates in less developed countries are generally very high, on the order of 30
to 40 per 1,000, whereas those in developed nations are less than half that figure.
• There are few less developed countries with a birthrate below 20 per 1,000 and
no developed nations with a birthrate above it. (Crude birthrate – is the yearly
number of live births per 1,000 population)
• Death rates (the yearly number of deaths per 1,000 population) in Third World
countries are also high relative to the developed nations.
• The average rate of population growth is now about 2% per year in Third World
countries (2.3% excluding China), compared to population growth of 0.5% per
year in the industrialized world.
• A major implication of high LDC birthrates is that children under age 15 make up
almost 40% of the total population in these countries, as opposed to less than
21% of the total population in the developed countries.
• Thus in most developing countries, the active labor force has to support
proportionally almost twice as many children as it does in richer countries.
By contrast, the proportion of people over the age of 65 is much
greater in the developed nations.

• Both older people and children are often referred to as an economic

dependency burden in the sense that they are nonproductive
members of society and therefore must be supported financially by
a country’s labor force (usually defined as citizens between the ages
of 15 and 64)
• The overall dependency burden (i.e. both young and old) represents
only about 1/3 of the populations of developed countries but almost
45% of the populations of the less developed nations.
• Moreover, in the latter countries, almost 90% of the dependents are
children, whereas only 60% are children in the richer nations.
• We may conclude, therefore, that not only are Third World countries
characterized by higher rates of population growth, but they must
also contend with greater dependency burdens than rich nations.
High and Rising Levels of Unemployment and Underemployment

• One of the principal manifestations of and contributors to the low

levels of living in developing nations is their relatively inadequate or
inefficient utilization of labor in comparison with the developed
nations.
• Underutilization of labor is manifested in two forms: First, it occurs in
underemployment – people both rural and urban, who are working
less than they could.
• Underemployment also includes those who are normally working full
time but whose productivity is so low that a reduction in hours would
have a negligible impact on total output.
• The second form is open unemployment – people who are able
and often eager to work but for whom no suitable jobs are available.
• Rates of open unemployment in the developing world average 8%
to 15% of the labor force.
Given recent and current birthrates in most LDCs, their labor supply will
be expanding rapidly for some time to come.
• This means that jobs will have to be created at equivalent rates simply to keep
pace.
• Moreover, in urban areas where rural-urban migration is causing the labor
force to grow at explosive annual rates of 5% to 7% in many countries
(especially in Africa), the prospects for coping effectively with rising levels of
unemployment and underemployment and for dealing with the frustrations and
anxieties of an increasingly vocal and educated but unemployed youth are
frighteningly poor.
Substantial Dependence on Agricultural Production and Primary-Product
Exports
• The vast majority of people in LDCs live and work in rural areas. Over 65%
are rurally based, compared to less than 27% in economically developed
countries.
• Similarly, 58% of the labor force is engaged in agriculture, compared to only
5% in developed nations.
• Agriculture contributes about 14% of the GNP of developing nations but only
3% of the GNP of developed nations.
Small-Scale Agriculture
The basic reason for the concentration of people and production in agricultural and
other primary production activities in developing countries is the simple fact that at low
income levels, the first priorities of any person are food, clothing, and shelter.

• Agricultural productivity is low not only because of the large

numbers of people in relations to available land but also because
LDC agriculture is often characterized by primitive technologies,
poor organization, and limited physical and human capital inputs.
• Technological backwardness persists because Third World
agriculture is predominantly noncommercial peasant farming.
• In fact, in many countries, average holdings can be as low as 1 to 3
hectares.
• It is no wonder that efforts to improve the efficiency of agricultural
production and increase the average yields of rice, wheat, corn and
millets are now and will continue to be top-priority development
objectives.
Dependence on Primary Exports
Most economies of less developed countries are oriented towards the production of
primary products (agriculture, fuel, forestry, and raw materials) as opposed to
secondary (manufacturing) and tertiary (service) activities.

• These primary commodities form their main exports to other nations

(both developed and less developed).
How Low-Income Countries Today Differ from Developed Countries
in Their Earlier Stages
• The position of developing countries today is in many important ways
significantly different from that of the currently developed countries
when they embarked on their era of modern economic growth.
• We can identify 8 significant differences in initial conditions that
require a special analysis of the growth prospects and requirements
of modern economic development:
1. Physical and human resource endowments
2. Per capita incomes and levels of GDP in relation to the rest of the
world
3. Climate
4. Population size, distribution and growth
5. Historical role of international migration

6. International trade benefits

7. Basic scientific and technological research and development
capabilities
8. Efficacy of domestic institutions
Physical and Human Resource Endowments
• Contemporary developing countries are often less endowed with
natural resources than the currently developed nations were at the
time when the latter nations began their modern growth.
• Some developing nations are blessed with abundant supplies of
petroleum, minerals, and raw materials for w/c world demand is
growing; most less developed countries, however – esp in Asia,
where more than half of the world’s population resides – are poorly
endowed with natural resources.
The difference in skilled human resource endowments is even more
pronounced. The ability of a country to exploit its natural resources and to
initiate and sustain long-term economic growth is dependent on, among other
things, the ingenuity and the managerial and technical skills of its people and
its access to critical market and product information at minimal cost.
• The populations of today’s low income developing nations are often less
educated, less informed, less experienced, and less skilled than their counterparts
were in the early days of economic growth in the West.
• Paul Romer argues that today’s developing nations “are poor because their
citizens do not have access to the ideas that are used in industrial nations to
generate economic value”.
• For Romer, the technology gap between rich and poor nations can be divided into
2 components, a physical object gap, involving factories, roads, and modern
machinery, and an idea gap, including knowledge about marketing, distribution,
inventory control, transactions processing, and worker motivation.
• This idea gap, and what Thomas Dixon calls the ingenuity gap (the ability to apply
innovative ideas to solve practical social and technical problems), between rich
and poor nations lies at the core of the development divide. No such human
resource gaps existed for the now developed countries on the even of their
industrialization.
Relative Levels of Per Capita Income and GDP
The people living in low-income countries have, on average, a lower level of real
per capita income than their developed-country counterparts had in the 19 th
century.

• First of all, nearly 40% of the population of developing countries is

attempting to subsist at bare minimum levels. Obviously, the
average standard of living in, say early 19th century England, was
not as economically debilitating or precarious as it is today for a
large fraction of people in the 40 or so least developed countries,
now referred to as the “bottom billion”.
• Second, at the beginning of their modern growth era, today’s
developed nations were economically in advance of the rest of the
world. They could therefore take advantage of their relatively strong
financial position to widen the income gaps between themselves
and less fortunate countries in a long period of income divergence.
• By contrast, today’s developing countries began their growth
process at the low end of the international per capita income scale.
Climatic Differences
Almost all developing countries are situated in tropical and subtropical
climatic zones.
• It has been observed that the economically most successful countries are
located in temperate zone.
• The extremes of heat and humidity in most poor countries contribute to
deteriorating soil quality and the rapid depreciation of many natural goods.
They also contribute to the low productivity of certain crops, the
weakened regenerative growth of forests, and the poor health of animals.
• Extremes of heat and humidity not only cause discomfort to workers but
can also weaken their health, and generally lower their level of
productivity and efficiency.
Population Size, Distribution, and Growth
• Before and during their early growth years, Western nations experienced
a very slow rise in population growth. As industrialization proceeded,
population growth rates increased primarily as a result of falling death
rates but also because of slowly rising birth rates. However, at no time did
European and North American countries have natural population growth
rates in excess of 2% per annum, and they generally averaged much less.
By contrast, the populations of many developing countries have been
increasing at annual rates in excess of 2.5% in recent decades, and
some still rising that fast today.

• Moreover, the concentration of these large and growing populations in a few

areas means that many developing countries have considerably higher
person-to-land ratios than the European countries did in their early growth
years.
The Historical Role of International Migration
• In the 19th and early 20th centuries, a major outlet for excess rural populations
was international migration, w/c was both widespread and large-scale.
• More than 60 million people migrated to the US between 1850 and 1914, a
time when world population averaged less than a quarter of its current levels.
• Despite restrictions, well over 50 million people from the developing world
have managed to migrate to the developed world since 1960. The pace of
migration from developing to developed countries – particularly US, Canada
and Australia has picked up since the mid-1980s to between 2 and 3 million
people per year. And the number of illegal migrants have increased
dramatically since 1980.
Some people in recipient industrialized nations feel that these migrants
are taking jobs away from poor, unskilled citizen workers.
• The irony of international migration today, however, is not merely that this
traditional outlet for surplus people has effectively been closed off but that
many of the people who migrate from poor to richer lands are the very ones
that developing countries can least afford to lose: the highly educated and
skilled.
• Since the great majority of these migrants move on a permanent basis, this
perverse brain drain not only represents a loss of valuable human
resources but could also prove to be a serious constraint on the future
economic progress of developing nations.
• For example, between 1960 and 1990, more than a million high-level
professional and technical workers from the developing countries migrated to
the US, Canada, and the UK
• The Philippines lost 12% of its professional workers to the US.
• Paradoxically, a potential benefit is that the mere possibility of skilled
emigration may encourage many more workers to acquire information
technology or other skills than are ultimately able to leave, leading to a net
increase in labor force skills.
The Growth Stimulus of International Trade
International free trade has been called the “engine of growth” that propelled the
development of today’s economically advanced nations during the 19 th and early
20th century.

• Rapidly expanding export markets provided an additional stimulus to

growing local demands that led to the establishment of large-scale
manufacturing industries.
• Together with a relatively stable political structure and flexible social
institutions, these increased export earnings enabled the developing
countries of the 19th century to borrow funds in the international
capital market at very low interest rates.
• This capital accumulation in turn stimulated further production,
made increased imports possible, and led to a more diversified
industrial structure
• In the 19th century, European and North American countries were
able to participate in the dynamic growth of international exchange
largely on the basis of relatively free trade, free capital movements,
and the unfettered international migration of unskilled surplus labor.
In the 20th century, the situation for many developing countries was very different.
With the exception of a few very successful Asian countries, the non-oil-exporting
developing countries faced formidable difficulties in trying to generate rapid
economic growth on the basis of world trade.

• For decades after the First World War, many developing countries experienced
a deteriorating trade position. Their exports expanded, but usually not as fast
as the exports of developed nations.
• Their terms of trade (the price they receive for their exports relative to the
price they have to pay for imports) declined over several decades. Export
volume therefore had to grow faster just to earn the same amount of foreign
currency as in previous years.
• Where developing countries are successful at becoming lower-cost producers
of competitive products with the developed countries (ex. Textiles, clothing,
shoes, some light manufactures), the latter have often resorted to various
forms of tariff and nontariff barriers to trade, including “voluntary” import
quotas, excessive sanitary requirements, intellectual property claims,
antidumping, “investigations” and special licensing arrangements
• But in recent years an increasing number of developing countries, particularly
China and other East and Southeast Asia, have benefitted from expanded
manufactures exports to developed countries.
Basic Scientific and Technological Research and Development Capabilities

• Basic scientific research and technological development have played a crucial

role in the modern economic growth experience of contemporary developed
countries.
• Their high rates of growth have been sustained by the interplay between mass
applications of many new technological innovations based on a rapid
advancement in the stock of scientific knowledge and further additions to that
stock of knowledge made possible by growing surplus wealth.
• Even today, the process of scientific and technological advance in all its stages,
from basic research to product development, is heavily concentrated in the rich
nations, despite the emergence of China and India as destinations for research
and development (R&D) activities of multinational corporations.
• Moreover, research funds are spent on solving the economic and technological
problems of concern to rich countries in accordance with their own economic
priorities and resource endowments.
• Rich countries are interested mainly in the development of sophisticated
products, large markets, and technologically advanced production methods
using large inputs of capital and high levels of skills and management and while
economizing on their relatively scarce supplies of labor and raw materials.
The poor countries, by contrast, are much more interested in simple
products, simple designs, saving of capital, use of abundant labor, and
production for smaller markets.

• But they have neither the financial resources nor the scientific and
technological know-how to undertake the kind of R&D that would be in
their best long-term economic interests.
• In contrast, when the developed countries were embarking on their early
growth process, they were scientifically and technologically greatly in
advance of the rest of the world.
Efficacy of Domestic Institutions
• Another difference between most developing countries and most
developed countries at the time of their early stages of economic
development lies in the efficacy of domestic economic, political, and social
institutions.
• By the time of their early industrialization, many developed countries,
notably the UK, US and Canada, had economic rules in place that
provided relatively broad access to opportunity for individuals with
entrepreneurial drive.
The developed countries also typically enjoyed relatively stronger
political stability and more flexible social institutions with broader
access to mobility

Are Living Standards of Developing and Developed Nations Converging?

• At the dawn of the industrial era, average real living standards in the richest
countries were no more than 3x as great as those of the poorest. Today, the
ratio approaches 100 to 1.
• So as noted by Lant Pritchett, there is no doubt that today’s developed
countries have enjoyed far higher rates of economic growth averaged over 2
centuries than today’s developing countries, a process known as divergence.
• Divergence – a tendency for per capita income (or output) to grow faster in
higher-income countries than in lower-income countries so that the income
gap widens across countries over time.
• But in comparing development performance among developing nations and
between developed and developing countries, it is appropriate to consider
whether, with strenuous economic development efforts being made
throughout the developing world, living standards of developing and
developed nations are exhibiting convergence.
Convergence – the tendency for per capita income (or output) to grow
faster in lower-income countries than in higher-income countries so
that lower-income countries are “catching up” over time.

• If the growth experience of developing and developed countries

were similar, there are two important reasons to expect that
developing countries would be “catching up” by growing faster on
average than developed countries.
• The first reason is due to technology transfer. Today’s developing
countries do not have to “reinvent the wheel”, for example, they do
not have to use vacuum tubes before they can use semiconductors.
• Even if royalties must be paid, it is cheaper to replicate technology
than to undertake original R&D partly because one does not have to
pay for mistakes and dead ends along the way.
• This should enable developing countries to “leapfrog” over some of
the earlier stages of technological development, moving
immediately to high-productivity techniques of production.
As a result, they should be able to grow much faster than today’s developed
countries are growing now or were able to grow in the past, when they had to invent
the technology as they went along and proceed step be step through the historical
stages of innovation (known as “advantage of backwardness”)

• In fact, if we confine our attention to cases of successful development, the

later a country begins its modern economic growth, the shorter the time
needed to double output per worker.
• Example: Britain doubled its output per person in the first 60 years of its
industrial development, and the US did so in 45 years. South Korea once
doubled per capita output in less than 12 years. China had done so in less
than 9 years.
• The second reason to expect convergence if conditions are similar is based
on factor accumulation.
• Today’s developed countries have high levels of physical and human capital;
in a production function analysis, this would explain their high levels of output
per person.
• But in traditional neoclassical analysis, the marginal product of capital and the
profitability of investments would be lower in developed countries where
capital intensity is higher, provided that the law of diminishing returns applies.
That is, the impact of additional capital on output would be expected to be
smaller in a developed country that already has a lot of capital in relation to
the size of its workforce than in a developing country where capital is scarce.

• As a result, we would expect higher investment rates in developing countries,

either through domestic sources or through attracting foreign investment.
• With higher investment rates, capital would grow more quickly in developing
countries until approximately equal levels of capital and (other things being
equal) output per worker were achieved.
• Given one or both of these conditions, technology transfers and more rapid
capital accumulation, incomes would tend toward convergence in the long run
as faster-growing developing countries would be catching up with the slower-
growing developed countries.
• But globally, evidence for relative convergence is weak at best even for the
most recent decades.
• There is no apparent tendency toward convergence across countries. It is
clear that divergence is occurring, so there is growing gap among developing
countries (i.e. middle-income countries are growing faster than low-income
countries). Poor developing countries have not been catching up as a group.