For Developing Economies to grow certain variables have been identified as fundamental to the cause. These fall into two broad areas:
Human Capital – health, education and fertility.
Legal Infrastructure – rule of law (property rights), government interference, democracy and monetary control. These influence fixed capital investment which determines technology.
Where a Developing Economy has these characteristics, but low income per capita, their potential for increasing GDP/capita is great. However economies with poor governance and low education will remain stuck in this low-income trap. This has been the position a number of African nations have found themselves in for so long.
In the initial years of growth developing economies open themselves up and embrace developed nation technologies and infrastructure. However, to further develop they need to become more innovative and drive the change themselves rather then relying on other countries. It is at this point that many economies struggle and get stuck in what is often known as the middle-income trap.
Many countries are still at such an extremely low level of development and there are years of catch-up growth ahead. China has a high rate of investment as a percentage of GDP but is this just catch-up growth? Many have said that it is too focused on unproductive investment and China’s policymakers are building cities, roads etc to keep the economy growing (Chart 7). However according to the HSBC report China’s level of development today is so much lower than that of the Asian tigers before their rapid expansion (Chart 8). They believe that the strong rate of investment is entirely justified – providing China with much-needed basic infrastructure.