Differences in Economic Development Between Countries

Economic development: an improvement in economic welfare:

• Reduced poverty
• Expanding the range of economic and social choices
• Increasing freedom and self-esteem

UN divides nations into: 

• Very high human development
• High human development
• Medium human development 
• Low human development 

Measuring economic development

• Real GDP per head
• HDI

Causes of Differences in Economic Development Between Countries

There are a number of reasons why countries have different levels of economic development, including:

• Differences in incomes per head. Economic development tends to be lower in countries with low real GDP per head. In such countries, some people may struggle to afford a good standard of living. However, this does not mean that all the people in such countries are poor. In fact, some can be very rich.
• Differences in saving due to differences in income per head. Poor people cannot afford to dave and so the savings ratio (savings as a percentage of disposable income) of a country where the average income is low, is likely to be low. If savings are low, there will be a lack of finance for investment.
• Differences in investment. Countries with a low value of caital goods per worker will be likely to have low income per head.
• Differences in population growth. In countries with high population growth, there is usually a high dependency ratio, with a high proportion of children being dependent on a small proportion of workers. This means that some of the resources which could have been used to improve the quality of life of the current population, have to be used to support the extra members of the population.

Causes of Differences in Economic Development Between Countries

• Differences in education and healthcare. A lack of access to, or poor quality of, education and healthcare will reduce the quality of people’s lives and will result in low levels of productivity.
• Differences in the size of the primary, secondary and tertiary sectors. Economic growth and the quality of people’s working conditions tend to be lower the greater the proportion of workers employed in the primary sector: Underemployment can be high in agriculture. For instance, ten persons may be doing the work of six. This, again, lowers productivity.
• Differences in the concentration on a narrow range of exports (most of which are primary products). Countries that export a narrow range of products can be adversely affected by large decreases in demand or decreases in supply. The demand for manufactured goods and services tends to increase more than the demand for primary products as income increases.
• Differences in productivity. Countries with a low output per worker hour will tend to have low income per head and so may have, for instance, lower education and healthcare.

The causes of differences in economic development are interrelated. Indeed, countries can be subject to what is known as the under-development trap or the vicious circle of poverty. This is the problem, that a country with low incomes has a low saving rate. This means that most of their resources are used to produce consumer goods. The lack of capital goods keeps productivity and income low, as shown in Figure 1.

The problems facing economies with relatively low economic development

Economies with relatively low economic development may face a number of difficulties in seeking to improve their economic performance and living standards. These include:

• High growth of population. A high birth rate can result in resources being used, for instance, to feed and educate children. These could instead have been used to increase the country’s productive potential and living standards.
• High levels of international debt. Many poor countries have borrowed heavily in the past. In some cases, a large proportion of the country’s income is taken up in repaying (and paying interest on) foreign loans. This means it cannot be used to spend on education, healthcare, and investment. So the opportunity cost of repaying debt may be economic development.
• Reliance on the export of primary products. Over a period of time, the price of primary products tends to fall, relative to the price of manufactured goods and services. This means that some poor countries receive relatively less for their exports, whilst having to pay more for their imports. Over the last fifty years, a range of prices of primary products, including copper, cocoa, and coal, have been falling. A number of primary markets are dominated by the consuming countries and these rich countries use their buying power to keep down the prices of primary products. There have also been significant fluctuations in the price of some primary products due to climate changes and other factors affecting natural resources.
• Lack of investment in human capital and capital goods. Lack of expenditure on education, training, and capital goods holds back increases in productivity, introduction of new technology, and international competitiveness.
• Emigration of key workers. Doctors, nurses, teachers, managers, and other key workers may seek better-paid employment abroad. Since 1999, for instance, more medical staff have emigrated from Ghana than the country has been able to train. Most of these have emigrated to Canada, the UK, and the USA.
• Trade restrictions on their products. Tariffs, other restrictions, and foreign government subsidies on their own products make it difficult for developing countries to sell their products at home and abroad, on equal terms. The steepest tariffs tend to be imposed by rich economies on those products, which poorer economies concentrate on, including agricultural produce and labor-intensive manufactured goods. These tariffs also build up as the goods are processed into higher-value-added goods so that poorer economies are discouraged from building up their industries.
• Unbalanced economies. Certain markets may be underdeveloped such as the financial sector. A lack of a developed financial sector is likely to discourage saving and investment.

Measures to Promote Economic Development – Import Substitution

This involves the protection of new domestic industries against foreign competition by the government.

This help is designed to allow the industries to grow as they do so, imports can be replaced by domestic products. If successful, the strategy can increase domestic output, raise employment and improve the country’s trade in goods and services balance. There are risks, however, with this strategy. In the short tem, at least, it may raise prices and reduce choice and hence lower economics welfare. Other countries may also reiterate and the domestic industries may become reliant on protection without seeking to increase their efficiency and competitiveness.

Measures to Promote Economic Development – Export Promotion

An alternative strategy is to try to promote exports by exposing domestic firms to market forces. The idea is that, without government support, firms will be forced to become efficient. The success of this policy, however, depends on the firms being able to compete with foreign firms, some of which may have been established for some time (and as a result may have built up consumer loyalty) and may be taking advantage of economies of scale.

Measures to Promote Economic Development – Inviting MNC

Another strategy is to improve the country’s infrastructure, capital stock, education, training and healthcare systems. As the country may lack the tax revenue to do this, it may seek to attract multinational companies (MNCs), loans from abroad or foreign aid.

MNCs may promote development in their host countries. They can increase employment and wages, train and educate workers, bring in new technology and improve infrastructure, for example, by building roads and improving dock facilities. MNCs may pay workers in poor countries less than that in their home countries and may provide them with poorer working conditions. Nevertheless, as long as the wages are higher and the conditions are better than those generally operating in the host countries, the MNCs will be making a positive contribution to development. There are circumstances, however, when MNCs may harm development. MNCs may deplete non-renewable resources, cause pollution and put pressure on host governments to pursue policies which have a detrimental effect on development such as reducing health and safety regulations.

Measures to Promote Economic Development – Borrowing from Abroad

Borrowing from abroad can work, if the funds are used in a way which raises productivity and generates enough income to repay the loans, and make a contribution to higher living standards. Interest charged on loans, however, can be high which makes some projects unviable. Also, there is the risk that projects may not be as successful as expected. If this is the case, the countries will accrue debt. Some of the money raised may be used for unprofitable prestigious projects, or on the military or may be lost due to corruption.