Problems of lower income countries, Business Economics


There are vast income and wealth disparities in world we live in. Approximately one-fourth of the world’s population accounts for the three-fourths of the world’s resources and consumption. The per capita income in world’s poorest countries is $330 each year on the other hand in the richer countries, is $24,000 per year which is about 70 times higher!

More worryingly, contrary to the expectations and wishes, these disparities have not gone away since  the  1950s  –  time  when  number of  world’s  poorest  countries  got independence. In some cases such as Africa, disparities appear to have increased, widening the living standards gap between the first and third worlds. Many people in the Third World live in extreme poverty beyond the wildest imagination of people living in HICs.

Theories about the Problems of LICs are discussed below:

In order to explain this vast problem of poverty and of the asymmetric ownership of wealth and the income in world, economists have come up with many such theories.

Poverty trap theories is as follows:

Poverty trap theories explained relative poverty of the Third World in the context of the twin gaps: foreign exchange gap and the fundamental savings gap (domestic savings being less than need investment). As a result of which, the LICs’ economies were caught in the vicious cycle of the low scale of investment, low saving, low productivity gains (because of the absence of scale economies), low per capita growth/development (keep in mind productivity and technological progress were the engines of PCI growth), low savings …….


The Prebisch-Singer Hypothesis (PSH) is described below:

A competitor theory was the Prebisch-Singer Hypothesis (PSH), which located reasons for this persistent poverty in the structure of the trade between the rich and poor nations. The PSH maintained that the LICs were stuck in the production of primary products (as prescribed by the static comparative advantage theories such as Hechscher-Ohlin prescribed) which were subject to volatility and declining prices both relative to the manufactures and capital goods/commodities.

Some economists pointed out that the lack of human, social and public capital in LICs as the single most significant factor distinguishing them from, post-WW2 Germany and Japan, countries which were able to rebuild themselves from entire destruction to the great economic prosperity on back of a strong and skilled workforce, well-developed institutions like meritocracy and accountability , trust, and elaborate communications, energy and housing infrastructures.

Others drew notice to the very fast rising populations in the LICs, and the certain social and economic pressures formed thereby. Coupled also with the disease and severe ethnic and the regional conflicts, some saw the situation in LICs which were virtually ungovernable.

Lack of precious natural resources (such as oil, gold, iron, copper gas, etc.) was also cited by some of the reason for LICs’ continued poverty, and instances were given of South Africa and the OPEC countries, many of whom were able to lift living standards solely on the back of natural resource exports. Strong counter-argument exist against the theory, for instance the LICs which registered the highest rates of the industrialization and GDP growth during the last four decades, namely: Korea, Taiwan, Singapore, Hong Kong, did not possess any important natural resources. The same is true for the Japan in the 20th century and the European countries in 18th and 19th centuries.

Posted Date: 7/19/2012 4:24:32 AM | Location : United States

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