Differences in Development between Countries

Topic 16 introduced some of these. The gap between developed and developing countries usually involves several reinforcing factors at once.

Differences in physical capital

Developed countries have more machinery, factories, infrastructure, transport networks and communication systems per worker. A worker with better tools produces more output per hour. The accumulated capital stock is the result of decades of investment, and investment requires saving, which is harder in low-income countries where most income is spent on immediate needs.

Differences in human capital

Developed countries have higher levels of education, training and healthcare. A more educated workforce is more productive; a healthier workforce works more hours and learns faster. Most developing countries have made huge progress in human capital over recent decades, but gaps remain in tertiary education and specialised skills.

Differences in technology and innovation

Developed countries are usually the source of new technologies (R&D investment, patents, world-class research universities). Developing countries can adopt technology from elsewhere, but the adoption is rarely as fast or as complete as making it in-house.

Natural resources (with the resource-curse caveat)

Natural resources can support development (Norway's oil wealth, Australia's mineral exports, Saudi Arabia's hydrocarbons). But they do not guarantee it. The resource curse describes how some resource-rich countries actually grow slower than resource-poor ones:

• Commodity-price volatility. A country heavily dependent on one resource swings between booms and busts.
• Dutch disease. A strong export of one commodity raises the exchange rate, making other industries (manufacturing, services) less competitive.
• Corruption and rent-seeking. Resource wealth concentrates in the hands of those who control the resource, which can fuel corruption.
• Failure to diversify. Countries that focus on one commodity may neglect the institutions, education and infrastructure needed for broader growth.

Resource-rich countries that diversify, save resource revenues sensibly, and maintain strong institutions (Norway) escape the curse. Those that do not (some African oil exporters) stay poor despite the wealth.

Political stability, governance and institutions

• Political stability encourages investment because firms need predictability before committing capital.
• Rule of law protects property and contracts. Without it, firms cannot trust their investments will pay off.
• Low corruption ensures public spending reaches public services.
• Stable democracy (or stable governance more generally) avoids policy reversals and conflict.

Countries with weak institutions struggle to develop even when they have other advantages.

Trade patterns and dependence

Many developing countries are trade-dependent on a narrow range of primary exports. This creates two risks:

• Volatile export earnings, as commodity prices swing widely.
• Low income elasticity of demand for primary commodities: as world incomes rise, demand for them grows only slowly, so the country's relative income stagnates.

Countries that diversify into manufacturing and services tend to grow faster than those stuck in primary exports.

Demographic structure

A country with a young dependency-heavy population (many children per worker) has less to invest in capital and infrastructure. A country with a demographic dividend (a large working-age share with few dependants) can grow rapidly. Most developing countries are somewhere in transition between these states.