Why some economies grow faster than

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Why some economies grow faster than

Two centuries later, the Netherlands was 40 times richer than China, 24 times richer than India, and ten times richer than Thailand.

But, over the past three decades, the trend reversed. Now, the Netherlands is only 11 times richer than India and barely four times richer than China and Thailand. Yet some countries are still diverging.

While the Netherlands was 5. What could explain generalized divergence in one period and selective convergence in another? Why are some countries now converging, while others continue to diverge? There are potentially many answers to these questions. But I would like to outline a possible explanation that, if true, has important implications for development strategies today.

The economic expansion of the last two centuries has been based on an explosion of knowledge about what can be made, and how. An apt metaphor is a game of Scrabble: Goods and services are made by stringing together productive capabilities — inputs, technologies, and tasks — just as words are made by putting letters together.

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Countries that have a greater variety of capabilities can make more diverse and complex goods, just as a Scrabble player who has more letters can generate more and longer words. If a country lacks Why some economies grow faster than letter, it cannot make the words that use it.

Moreover, the more letters a country has, the greater the number of uses it could find for any additional letter it acquired.

This trap becomes deeper the longer the alphabet and the longer the words.

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The last two centuries have seen an explosion in technologies — letters — and in the complexity of goods and services that can be made with them. So the techies get techier, and the laggards fall further behind. Why, then, are some poorer countries now converging?

Is the technological alphabet getting shorter? Are products getting simpler? What is happening is that globalization has split up value chains, allowing trade to move from words to syllables.

Now, countries can get into business with fewer letters and add letters more parsimoniously. Unless you performed all of these functions well, you would go out of business.

Why some economies grow faster than

Globalization allows these different functions to be carried out in different places, thereby allowing countries to participate earlier, when they still have few locally available capabilities, which can then be expanded over time.

A recent example is Albania. Other countries that started in garments — for example, South Korea, Mexico, and China — ended up reusing the accumulated letters industrial and logistical capabilities while adding others to move into the production of electronics, cars, and medical equipment.

Once upon a time, IBM asked a Chinese manufacturer to assemble its Thinkpad — using the components that it would supply and following a set of instructions — and send the final product back to IBM.

Why some economies grow faster than

A couple of years later, the Chinese company suggested that it take responsibility for procuring the parts. Later, it offered to handle international distribution of the final product. Then it offered to take on redesigning the computer itself.

Soon enough, it was no longer clear what IBM was contributing to the arrangement. Learning to master new technologies and tasks lies at the heart of the growth process.

Why do some countries develop faster than others? | World Economic Forum

If, while learning, you face competition from those with experience, you will never live long enough to acquire the experience yourself.

This has been the basic argument behind import-substitution strategies, which use trade barriers as their main policy instrument. The problem with trade protection is that restricting foreign competition also means preventing access to inputs and knowhow. Participating in global value chains is an alternative way to learn by doing that is potentially more powerful than closing markets to foreign competition.Nov 12,  · One puzzle of the world economy is that for years, the world’s rich countries grew faster than poorer countries, a process aptly described by Lant Pritchett as “Divergence, Big Time.” When Adam Smith wrote The Wealth of Nations in , per capita income in the world’s richest country – probably the Netherlands – was about four times that of the poorest countries.

In the Solow model rich countries enjoy a higher level of capital per worker (K/L, or k), which enables those workers to be more productive. So a rich country might be at K0, while a poor country is at K1. Many firms from the outperforming economies are growing faster and providing higher shareholder returns than their peers in advanced economies.

Companies ranked in the top quartile in terms of total return to shareholders delivered average returns of 23 percent from to , compared with 15 percent for high performers in advanced economies. Dec 01,  · There are some things we know keeps country's economy from growing (corruption, civil war, too much government interference like in communist countries), but we do not have a theory that explains why economies grow that Status: Resolved.

Dec 01,  · There are some things we know keeps country's economy from growing (corruption, civil war, too much government interference like in communist countries), but we do not have a theory that explains why economies grow that explains the evidence urbanagricultureinitiative.com: Resolved.

Sep 12,  · Why some emerging economies grow faster and more consistently than others? Here are the reasons. September 12, 0 Comment. Many firms from the outperforming economies are growing faster and providing higher shareholder returns than their peers in advanced economies.

Companies ranked in the top .

Robert Solow's Growth Model - Why Do Economies Grow? | UBS