The catch-up effect says that countries with low income can grow faster than countries with higher income. However, in statistical studies that include many diverse countries we do not observe the catch-up-effect unless we control for other variables

Question

that affect productivity. Considering the determinants of productivity, list and explain some things that would tend to prohibit or limit a poor country's ability to catch up with the rich ones.

Answer 1

The argument that poor countries will tend to catch up with rich ones is based on the idea that another unit of capital will increase output more in a country that has little capital than one that has much capital. So, for a given share of GDP devoted to investment, a poor country will grow faster than a rich one.

This argument assumes that other things are the same, but share of GDP invested may be lower in a poor country and the productivity of investment may be less. A politically unstable environment where property rights are unprotected or not secure tends to discourage investment. A country that has limited trade because of legal restrictions or geography cannot focus on producing what it produces best and so has lower productivity. To get the most out of investment, or even simply to use some types of new investment, requires having workers who have acquired some basic human capital.