Economics (0455) | Differences in economic development between countries

Welcome to Economic Development: Understanding the Global Divide!

Hello! This chapter explores one of the most important questions in Economics: Why are some countries rich and others poor? Understanding these differences, their causes, and their impacts is crucial for understanding the global economy.

Don't worry if this topic seems complex. We will break down the causes of development gaps into small, easy-to-understand factors. Let's get started on figuring out why standards of living vary so widely across the world!

1. How We Measure Differences in Development

Before we analyze the differences, we must recall the main ways economists measure development (a quick review from Section 5.1):

Real GDP per Head (or per capita)

This is the total value of goods and services produced in a country (GDP), adjusted for inflation (Real GDP), and then divided by the population (per head).

• What it shows: The average income/output per person.
• Analogy: If GDP is the size of the whole cake, Real GDP per head shows the average size of the slice each person gets.

Human Development Index (HDI)

Economists agree that income alone doesn't show true development. HDI measures progress in three key areas:

1. Health: Measured by life expectancy at birth.
2. Education: Measured by mean years of schooling and expected years of schooling.
3. Income: Measured by Gross National Income (GNI) per head (similar to GDP per head).

Key Takeaway: HDI gives a broader picture of living standards than just using income figures alone.

2. Core Differences: Income and Productivity

The most obvious difference between a developing country and a developed country is their average income and output capacity.

Income Differences

Differences in income between countries are vast. A person in a wealthy nation may earn hundreds of times more per year than a person performing the same job in a very poor nation.

• Impact: Low income in developing countries leads directly to low living standards. Citizens cannot afford essential goods, good housing, or access to private education and healthcare.
• The Poverty Cycle: Low incomes prevent people from saving or investing, which means the economy struggles to grow, keeping incomes low—this is often called the vicious cycle of poverty.

Productivity Differences

Productivity is defined as output per unit of input (usually output per worker or per hour worked). Differences here are fundamental to explaining the income gap.

Developed countries have much higher productivity because:

1. They use better technology and machinery (capital).
2. Their workforce has higher skill levels (human capital).
3. Their infrastructure (roads, communication) is efficient.

Analogy: Imagine a farmer in a developed country using a large, modern tractor (high capital) versus a farmer in a developing country using a basic hand hoe (low capital). The tractor farmer's productivity is vastly higher, allowing them to earn more income.

3. Causes of Differences in Economic Development

The syllabus identifies several critical factors that explain why these massive gaps in income and productivity exist.

3.1 Human Capital: Education and Healthcare

A country’s workforce is its most valuable resource, known as human capital.

Education

Differences in access to quality education greatly influence development.

• Impact on Workers: Education provides necessary skills and training. Highly skilled workers are more productive, earn higher wages, and can use advanced technology effectively.
• Impact on the Economy: A highly educated population leads to innovation and growth in high-value secondary and tertiary sectors (like tech and finance).
• In contrast: In developing countries, high rates of illiteracy and low school attendance (especially for girls) limit job opportunities and keep productivity low.

Healthcare

Poor health reduces a worker’s ability to work, their efficiency, and their longevity.

• Impact on Workers: Countries with poor healthcare systems (lack of clean water, sanitation, and access to basic medicines) experience higher rates of illness. This means workers miss more days, their physical strength is lower, and their life expectancy is shorter.
• Impact on the Economy: Investment in healthcare is necessary to maintain a physically fit and large labour force, boosting national productivity.

3.2 Economic Structure: Primary, Secondary, and Tertiary Sectors

The way an economy is structured—meaning where its workers are employed—is a strong indicator of its development level.

• Primary Sector: Extraction of raw materials (e.g., farming, mining, fishing).
• Secondary Sector: Manufacturing and processing (e.g., factories, construction).
• Tertiary Sector: Services (e.g., finance, tourism, education, transport).

The Difference:

In developing countries, a very high proportion of the population is often employed in the Primary Sector (agriculture).

Why is this a problem?

1. Primary goods generally have low, unstable prices (e.g., cocoa or copper prices can crash easily).
2. They offer low-skilled, low-wage jobs.
3. The output is heavily dependent on weather, making income volatile.

In developed countries, the majority of employment and output comes from the high-value Tertiary Sector (services), which provides higher wages and more stable income.

3.3 Financial Factors: Saving and Investment

Saving and the lack of Capital

Countries need investment (spending on capital goods like factories, machinery, and infrastructure) to increase their productive capacity. Investment requires funds, often generated through saving.

In developing countries:

• Low incomes mean people have little left over to save.
• Low saving means there are limited funds available in the banking system for firms to borrow and invest.
• This shortage of investment leads to outdated technology and poor infrastructure, which keeps productivity (and thus income) low.

Did you know? Many developing countries rely heavily on foreign aid or Foreign Direct Investment (FDI) from multinational companies (MNCs) to fill this gap between low domestic saving and the need for investment.

3.4 Demographic Factor: Population Growth

The rate of population growth is a major influence on development, especially if resources are already scarce.

In many developing countries, population growth is very high.

• Strain on Resources: If the population grows at 3% per year, but the Real GDP grows at only 2%, the average standard of living (Real GDP per head) actually falls. The economic growth is being "eaten up" by the new population.
• Strain on Public Services: High birth rates mean a large proportion of the population is dependent (children). The government must spend more on schools, healthcare, and welfare instead of investing in long-term infrastructure and capital goods.

In contrast, many developed countries have low or even declining population growth, meaning their existing wealth is shared among a relatively stable or shrinking number of people.

4. Summary of Impacts and Relationships

The factors above do not act in isolation—they are all linked together, often reinforcing the differences.

Think of the connections in this chain:

Low Education and poor Healthcare -> Lower Productivity -> Lower Income -> Lower Saving -> Lower Investment in capital goods -> Continued reliance on low-value Primary Sector jobs.

Common Exam Mistake to Avoid

When discussing differences in development, make sure you explain *why* a country's structure matters. Do not just state "They rely on the primary sector." Instead, explain: "Reliance on the primary sector leads to low productivity because raw commodity prices are volatile and generally low-value, keeping overall national income depressed."

Key Takeaway: Differences in development are not just about having cash now, but about having the productive capacity (good health, education, infrastructure, and technology) to generate wealth sustainably in the future.