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

  • Cohen, Daniel
  • Soto, Marcelo

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3528.

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Date of creation: Sep 2002
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Handle: RePEc:cpr:ceprdp:3528
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  1. Daron Acemoglu & Fabrizio Zilbotti, 1999. "Productivity Differences," NBER Working Papers 6879, National Bureau of Economic Research, Inc.
  2. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers 7911, National Bureau of Economic Research, Inc.
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  5. Ben S. Bernanke & Refet S. Gurkaynak, 2001. "Is Growth Exogenous? Taking Mankiw, Romer and Weil Seriously," NBER Working Papers 8365, National Bureau of Economic Research, Inc.
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  9. Nehru, Vikram & Swanson, Eric & Dubey, Ashutosh, 1995. "A new database on human capital stock in developing and industrial countries: Sources, methodology, and results," Journal of Development Economics, Elsevier, vol. 46(2), pages 379-401, April.
  10. Alan Krueger & Mikael Lindahl, 2000. "Education for Growth: Why and For Whom?," Working Papers 808, Princeton University, Department of Economics, Industrial Relations Section..
  11. Cohen, Daniel, 1996. " Tests of the "Convergence Hypothesis": Some Further Results," Journal of Economic Growth, Springer, vol. 1(3), pages 351-61, September.
  12. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  13. Temple, Jonathan, 1999. "A positive effect of human capital on growth," Economics Letters, Elsevier, vol. 65(1), pages 131-134, October.
  14. Peter Klenow & Andrés Rodríguez-Clare, 1997. "The Neoclassical Revival in Growth Economics: Has It Gone Too Far?," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 73-114 National Bureau of Economic Research, Inc.
  15. Pritchett, Lant, 1996. "Where has all the education gone?," Policy Research Working Paper Series 1581, The World Bank.
  16. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
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