Several countries in the world have failed to "converge" with industrialized countries. What does this mean about their economic growth rates? Explain why poorer countries have failed to "catch up", in terms of the pillars of economic growth. Are there any special problems facing these countries?

Answer 1

If a poor country fails to converge, this means that its economic growth is either equal to or less than that of the industrialized nations. If a country grows at the same rate, then it will never "catch up". If it grows at a slower rate, then the gap between poor country and the industrialized countries will widen over time.

Poor countries struggle in terms of capital formation, technological progress, and labor quality - limiting growth in labor productivity. Capital formation is difficult because poorer countries tend to have populations that live at subsistence level and are therefore unable to save. While foreign direct investment from multinational corporations may encourage capital formation and technological advancement, many poor countries may resent, or even block, the entry of these foreign businesses. In addition, these multinational corporations may not be interested in investing in poorer countries because these countries often lack skilled labor. Finally, educational attainment is significantly lower in poorer countries - often with portions of the population (women and ethnic minorities) receiving little or no education at all. With rudimentary skills, such as reading and writing, labor quality suffers.

Poorer countries may also suffer from special problems related to geography, health, and governance. These issues cannot be resolved through making economic choices alone. For example, a country with access to many different resources (such as the U.S.) is better able to encourage capital formation and technological progress than one that is resource poor. Lack of health care and exposure to disease and epidemic severely hinder labor quality. Finally, without political stability, it is difficult to encourage businesses to invest in physical capital or innovations necessary to spur economic growth.