DP3528 | Why are Poor Countries Poor? A Message of Hope which Involves the Resolution of a Becker/Lucas Paradox

Publication Date

20/09/2002

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Abstract

The paper attempts to explain why single factor explanations of the poverty of nations are usually found to be unsatisfactory. Poor countries outside Africa, for instance, have an income per head which stands at about one third of the rich countries? income per head. Yet each of the three items of the Solow model, namely human capital, physical capital (appropriated weighted) and total factor productivity, are each equal to about 70% of the corresponding levels of the rich countries. But 70% to the power of three is 35%! Multiplying small or relatively benign handicaps can yield dramatic effects on a country?s income. The paper then moves on to explain each of the three items. It argues that the Lucas paradox on why capital is scarce can readily be solved, once market prices rather than PPP prices are used to assess the return to capital mobility, and on the same ground it argues that PPP calculations bias downwards the TFP of poor countries. It then argues that human capital is lower in poor countries because of the fact that the returns to human capital are non concave so that the marginal propensity to turn one additional year of life expectancy into higher education is lower in poor countries than in the rich. The message of hope is that ?transpiration? strategies à la Singapore may work elsewhere.