Question

Use an example to explain why, after periods of rapid growth, a low-income country that has not caught up to a high-income country may feel poor.

Answer 1

The process is called convergence when countries with lower GDP per capita catch up to countries with higher GDP per capita levels. Convergence can take place even if high-and low-income countries increase investment in physical and human capital with the goal of increasing GDP. This is because, when new skills or resources are paired with labor force, the effect of new investment in physical and human capital on a low-income country will result in huge gains.

Nevertheless, a level of investment equivalent to that of the low-income country is not likely to have as large an impact in higher-income countries, because the more developed country most likely has high capital investment rates. So the incremental benefit from this additional investment tends to be less and less successively. Higher-income countries are more likely to have declining returns on their investments, and need to constantly invent new technologies; this enables low-income economies to have a chance of converging development.

Nonetheless, several high-income economies have developed economic and political structures that provide an ongoing stream of technological innovations with a healthy economic environment.