Question

Discuss the following statement: “A large injection of capital into a typical LDC should be sufficient to break patterns of stagnation and replace them with a template for self-sustaining economic development.”

Answer 1

“A large injection of capital into a typical LDC should be sufficient to break patterns of stagnation and replace them with a template for self-sustaining economic development.”

LDC is a least developed country. E.g. Somalia.These countries have very low per capita income, low GDP and are stuck in poverty cycle.

LDCs are poverty trapped as shown in fig. below. Low incomes lead to low savings and hence a country cannot generate investments and hence productivity is always very less, sometimes at subsistence level.

It is possible to break this cycle through following means:

a.Aid: A country can receive large sums of money from World bank or other multilateral agencies and can invest in markets to break poverty cycles.

b. Trade: LDC s can trade products of comparative advantage with other countries and hence can overcome poverty.

c. aid and trade: A combination of above two.

Hence, if capital is infused in the country then more industries can be set up leading to more jobs and more income. This will also reduce other problems like high population growth. Investments in health, education and infrastructure will also help them in the long run and a way a country like India transformed from being a LDC to a well developing country through investments can be modeled for other countries as well.

However, getting investments is not easy and if govt. is corrupt, there is no proper technology or bureaucracy is time consuming then implementation of new investments will not be easy and a country will still be in poverty trap.

Hence a country should follow sustainable path through creation of better human and physical capital to make better human resources and institutions of repute first.