Question

Below you can find a table with 5 development indicators for two (fictitious) countries A and B. In which country are the prospects for growth in GDP per capita the highest? Motivate your answer based on an analysis of these indicators.

	Country A	Country B
Gross domestic investment as a % of GDP	18.0	27.0
Foreign direct investment as a % of GDP	5.2	1.2
Illiteracy rate (%)	13	56
Employment share of agriculture (% of total labour force)	18	45
Population growth per year (%)	2.6	1.0

Answer 1

As we can see from the table, country B has the feature of a rapidly transforming economy, while country A is a middle-income country. In country B, population growth per year is much less than that of country A but domestic investments are higher. The high GDP growth rates along with low population growth rate indicates that country B is a booming country. Since country B has low population, hence per capita growth can be high. Country B has much more agriculture, that is more cheap labour (according to Lewis model) and so the transformation will continue. Note that population growth 2.6 times higher in country A means that its GDP growth also needs to be 2.6 times higher in order to be the same as in country B, which is highly unlikely. Even though investment in agriculture and an illiterate workforce will have lower productivity pay off than in industry, relative to the existing low level of productivity in country B but the percentage increases will be large. These factors are more important than the retarding effect of low FDI or illiteracy at low levels of development.

So, we see that country B is poorer among the two but has better per capita growth prospects and thus is likely to be catching up with country A. Its growth is still larger on a per capita basis. Although B’s economy will add less GDP value than each year, but it has larger percentage growth of GDP because of its low GDP level.