Question

Several arguments suggest that low-income countries might have an advantage achieving greater worker productivity and economic growth in the future. Offer two such arguments and discuss their relevance.

Answer 1

A first argument is based on diminishing marginal returns. Even though deepening human and physical capital will tend to increase per capita GDP, the law of diminishing returns suggests that as an economy continues to increase its human and physical capital, the marginal gains to economic growth will diminish.

A second argument is that low-income countries may find it easier to improve their technologies than high-income countries. High-income countries must continually invent new technologies, whereas low-income countries can often find ways of applying technology that has already been invented and is well understood.

Thirdly and finally, optimists argue that many countries have observed the experience of those countries that have grown more quickly and have learned from it. Moreover, once the people of a country begin to enjoy the benefits of an increased standard of living, they may be more likely to build and support the market-friendly institutions that will help provide this standard of living.