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Why do rich countries remain rich?

Economics Asked on February 8, 2021

I can think of two possible explanations:

  • People there inherited the wealth of their ancestors (and of the companies of their generation).

  • Advances in technology allows you to earn money more easily.

Despite other factors at play: Approximately how big percent of the rich countries’ wealth is caused by the first one and how big by the second one?

4 Answers

GE models usually assume a representative household inherits wealth and this could further be passed along the generations to come. However, this representative household is not really a representative in real world. Majority of people do not inherit more than on average $300,000 i.e. house, business, cash, other property.

From growth theory perspective, the second factor is important to drive growth in advanced economies. Advanced countries, once reach steady state growth level, need technological shock to increase growth on a new steady state level. For the people to innovate (come up with new ideas) there needs to be proper institutions conducive to growth in the economy. Protection of private property, (property rights/patents) is an example - inventors have better protection in the West than in Africa/East, and hence they tend to invent better technologies which would ultimately stimulate growth. High wages are another factor, better paid employees are expected to be highly skilled. Firms pay skill-premium to attract talent in the West, this drives up average wage rate.

Answered by london on February 8, 2021

Another reason could be based on the discount factor of people, when people accumulates more capital, they have tendancy to be more patient, which let them to save more and invest more. So, countries with higher initial stock of capital tend to be more patient in this case. This explains in some part why these rich countries remain rich.

Answered by optimal control on February 8, 2021

The first answer of presented in the list is wrong. GDP is measure of current production not of past inherited wealth. Even though the existing capital plays a part, the lowest of deprecation rate is around 25 years IIRC, so by and large the wealth is not inherited, but created by the generation.

Advances in technology are usually assumed to spread all around the globe quickly (certainly within one generation). So that's not the answer either.

I would argue that the important values and institutions that allow for wealth creation are the primary reason. It would not be too far of stretch to say that the values that made the wealth creation possible in the first place are what allows the continuation in wealth generation.

(Of course the GDP growth in developed countries does not seem to be too persistent, and has been falling. The alternate answer is that rich nations don't remain rich.)

Answered by Dole on February 8, 2021

I'm surprised this has not been mentioned: Accumulation of capital stock. (Perhaps this is what was meant by the first item?)

Wealthy countries purchase capital, tools to produce new products. While some of this capital (education, computers, welding tools) is mobile, much of it is not. This will remain in the wealthy country and continue producing products and keeping a high standard of living.

In economics, the hog's share of the difference between developed and undeveloped countries is capital, however, there are numerous ways in which a country's institutions can inhibit or enhance growth (democracy, corruption, etc.). Once a country reaches a "developed" stage and has reached a steady-state of capital, additional growth is achieved by technological improvement.

Answered by RegressForward on February 8, 2021

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