Macroeconomics Discussion Forum 2.1

One nation that always seems to be near the bottom of the per capita income ranks is Somalia. The catch-up effect is the idea that countries that start off poor tend to grow more rapidly than countries that start off rich. All things equal, small amounts of capital investment would make a larger difference to the poorer country than the richer one. Poorer countries can mimic methods and technologies of the richer countries. The catch-up effect suggests that Somalia would be able to benefit more from a small amount of capital than would a country near the top of the GDP ranks.

The book’s example of the “Most Improved” Student is a great one. A student that is failing because they aren’t studying can take advantage of the catch-up effect in order to win “Most Improved” while a student averaging a A- and studying regularly likely won’t. The student that goes from the F to the B+ would win “Most Improved”. However, the student that maintains the A- would win “Best Student” because their grade is still higher.

However, even with the increased capital, Somalia would face some limitations in their attempt to “catch-up” to a country higher in the GDP ranks. Their technical knowledge would be one thing that would hold them back. When comparing their knowledge and skills in technology, they are not equal to those of countries like Japan, Canada, or the US. Even with the necessary technology and physical capital, their inability to use them would limit their success.

Another limitation is human capital. Agriculture employs about 65% of the people of Somalia. With such a high margin of the population in the agriculture market, one would presume that they don’t have the knowledge and skills required to understand and develop the best way to produce goods and services. If they did, only a fraction of that would be needed for agriculture and the rest could produce other things, increasing the productivity and value of the country.

South Africa has a low per capita income....