In percent for almost two centuries) because growth stops

In the past three centuries standards of living
have diverged dramatically, a phenomenon that has been called the Great
Divergence (Jones, 2017). This term refers to the process by which the Western world
overcame pre-modern growth constraints and emerged during the 19th
century as the most powerful and wealthy world civilization. For
most of history, standards of living were extremely low, not much different
from that in the poorest countries in the world today. Since 1700, however, the
sustained growth emerged in different places at different times. The sustained
increases in standards of living are a remarkably phenomenon caused by the
economic growth. Whilst living standards in the richest countries have risen
sharply, this trend has differed from the poorest countries. A significant
result of the differences in growth performance is that living standards around
the word today vary dramatically (Jones, 2017).

 

Economic growth is the most powerful instrument
for improving the quality of life in developing countries; growth can generate
virtuous circles of prosperity and opportunity (DFID, 2008). Poorer countries
will grow faster to catch up to the level of income in richer countries; this
catch-up behaviour is related to an important concept in the study of the
economic growth known as convergence (Jones, 2017). However, highly volatile
growth is typical of the poor countries, especially those, like Brazil or
Russia, in the middle-income range. The result is that very few middle-income
countries have become high-income countries during the past half century. China
is on track to be the major exception, even though it has not yet moved far
along from the living standards of the middle-income countries (Wade, 2017).
The challenge of development is thus to transform growth episodes into
sustained growth (DFID, 2008).

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Countries that were relatively poor in the 60’s
have had different economic performance and growth within the last fifty years.
The Solow growth model has been the most widely framework used in all of
macroeconomics to explain why growth has been much faster in some countries
than other ones. The Solow growth model builds on the production model
introducing the theory of capital accumulation. The accumulation of capital is
converted from an exogenous variable into an endogenous variable because the
agents in the economy can accumulate tools, machines, computers, and buildings
over time. The model also suggests that living standards have possibly
increased more in some countries because of the higher investment rates in accumulating
capital and, hence, a higher amount of capital available for each worker.

 

In this model, the economy settles down to a
constant level of production and a constant amount of capital. Therefore, the
Solow model cannot explain growth as an endogenous outcome in the long-run
(e.g. the United States maintained an annual growth rate of two percent for
almost two centuries) because growth stops once capital reaches steady state.
However, the model shows how growth can occur in a transition phase when capital
is away from steady state. In this setting, the only way to have long-run
growth is through changes in the total factor productivity (TFP), which is
exogenous to the Solow model. Although the Solow growth model explains growth
when the economy approaches the steady state, this model does not answer the
question of what causes long-run growth (Jones, 2017).

 

In general, most poor countries have
substantially lower TFP levels and investment rates – the two determinants of
steady state incomes – than in rich countries (Jones, 2017). The TFP takes into
consideration the effect of technology changes in efficiency differences among
countries due to its enhanced position as a driver of economic growth. Foreign
investment adds economic growth simply by increasing capital accumulation in
the host country (Borensztein et al.,
1998). However, poor countries with a low capacity to save and invest are in
disadvantage because of losing out in terms of factor accumulation and in
building the educational capability that would facilitate technological
catch-up (Dowrick and Rogers, 2002). Questions of why countries exhibit
different investment rates and TFP levels are still unanswered and remain at
the frontier of economic research (Jones, 2017).

 

Foreign direct investment (FDI) plays an
important role in development efforts of poor countries, including:
supplementing domestic savings, employment generation and growth, integration
into the global economy, transfer of modern technologies, enhancement of
efficiency, and raising skills of local manpower (Dupasquier and Osakwe, 2003).
FDI inflow is significantly boosted by foreign investors’ increased familiarity
with the host economy, better infrastructure, higher return on investment, and
greater trade openness, but the inflow is significantly depressed by lack of
economic freedom (Quazi, 2007). The main objective of economic development for
the poorest countries is to help these countries to gain a foothold on the
ladder. The rich countries do not have to invest enough in the poorest
countries to make them rich; they need to invest enough so that these countries
can get their foot on the ladder. After that, the tremendous dynamism of
self-sustaining economic growth can take hold (Sachs, 2005).

 

Foreign investors may be attracted to countries
with more existing foreign investment, such as the Easter European and Baltic
countries where agglomeration has a strong positive impact on FDI (Anyanwu,
2012). According to a survey by Ernst and Young (2004), this region is the most
favoured place for investment in the manufacturing industry. Aiming to attract
FDI, the Easter European countries have created a regulatory framework, which
constitutes basic guaranties for foreign investors but also offered some
incentives under the national policies to create more favourable investment
climate and attract foreign investors. Market magnitude, level of trade
liberalization and labour quality are important in directing FDI setting
options (Popescu, 2014). Being less knowledgeable of a country’s environment,
foreign investors may view the investment decisions by others as a good signal
of favourable conditions and invest there too, so, as to reduce uncertainty
(Anyanwu, 2012).

 

Contrarily, Africa has never been a major
recipient of FDI flows. Africa does not attract much FDI due to the sluggish
economic growth, diminished resources, fewer trade opportunities for the
developing countries, and possible reductions in aid flows from donor nations
consequent on the financial and economic crises (Anyanwu, 2011). The problem in
many developing countries has been the absence of an industrial strategy and
implementing organizations, and the unwillingness of the ‘aid’ community,
including the World Bank, to help them do industrial strategy sensibly (Wade, 2003).
FDI will play a key role in the process of economic development as both a
source of capital, but, more importantly, as a catalyst for job creation,
skills development, technology transfer, and ultimately, the longer-term
diversification and transformation of the African economies (Anyanwu, 2012).

 

Technology has been the main force behind the
long-term increases in income in the developed economies. The evidence shows
that technological investment has also been much higher in rich countries than
the poor ones (Rodriguez and Wilson, 2000). Technology was a critical component
of the ‘Asian Miracle’ and presents a model that focuses on the change in
industrial structure facilitated by the efficient absorption of modern
technology (Nelson and Pack, 1999). This suggests that all the world, including
today’s poorest countries, has a reasonable hope of reaping the benefits of
technological advance (Sachs, 2005). The rate at which lagging economies catch
up is determined by their ability to absorb ideas and knowledge from the
technology frontier (Rodrik, 2011). This could be achieved through attracting
FDI, which can be an important source of technology transfer, and higher
spending on research and development (World Bank, 2018).

 

Productivity gains that characterise economic
development has been sustained by the shift of resources out of traditional
agriculture and other low-productivity primary activities to the manufacturing
sector (Lin, 2011). The production process in the manufacturing sector has
typically absorbed large numbers of relatively unskilled workers from other
sectors at a substantial productivity premium (Hallward-Driemeier and Nayyar,
2017). A recent example of the success of the manufacturing export-led model is
China that has become today the world’s largest manufacturing economy and is
standing as one of the most competitive nations in the world. Contrarily,
Africa remains one of the most pressing challenges to global development
(Anyanwu, 2014). A principal source is that Africa imports (mainly consumer
goods) more than it exports while the reverse is true for China. Moreover, the
structure of Africa’s exports is biased towards traditional primary commodity
exports unlike China that has recently shifted towards a more innovation-led
growth model. This Chinese growth success story is inspirational, and Africa
could learn a lot from it (Anyanwu, 2014).

 

A low level of education is a major obstacle to
development as it implies an

overall shortage of skills for the organization
and functioning of the economy and reflects a low capacity to absorb
technological advances (United Nations, 2015). High-quality education would
raise labor-force skills, and promote productivity growth (World Bank, 2017). China
has nurtured a population with high levels of human capital; in the last fifty
years the average years of schooling for Chinese adults have increased fivefold.
Clearly, human capital has been one of many enabling factors in China’s
meteoric growth (Diop, 2015). Contrarily, most of the African countries are far
from where they should be on learning. Africa needs a skilled labor force in
order to experience growth like China’s. The quality of education and an
emphasis on science and technology will be essential to African productivity
and income growth (Diop, 2015). Education and training policies will need to be
redesigned to deliver more of the new skills needed for countries to take
advantage of emerging opportunities (Hallward-Driemeier and Nayyar, 2017).

 

Over 50 years, the variations in growth rates
that have been observed historically make dramatic differences in the average
living standards of a country’s residents. The lessons from history and from
economic theory are now clear: all developing countries – regardless of their
size, location, or natural resources – can achieve annual growth rates of 8
percent or more for decades and successfully embark on the path of prosperity,
provided that they carefully follow their comparative advantage and tap into
the potential of latecomer advantages, and engage into activities that will
dynamically transform their economic structure (Lin, 2011). The bad news is
that this is not easy to accomplish. It would be
nice if governments simply had to stabilize, liberalize, and open up, and
markets would do the rest. Alas, that is not how sustained con­vergence was
achieved in the past. Continued rapid growth in the developing world will
require proactive policies that foster structural transformation and spawn new
industries—the kind of policies that today’s advanced economies employed
themselves on the way to becoming rich. Such policies have never been easy to
administer. They will face the added obstacle over the next decade of an
external environment that is likely to become increasingly less permissive of
their use (Rodrick, 2011).