Question

Explain why it is difficult to set aside funds for investment when you are in poverty. Why do high-income countries find it challenging to achieve high growth rates?

a) Poverty limits disposable income for savings and investment. High-income countries face slow growth due to excessive government intervention.
b) Poverty restricts access to financial services, making saving difficult. High-income countries often prioritize stability over rapid growth.
c) Poverty results in high debt burdens, leaving little room for saving. High-income countries face diminishing returns to capital.
d) Poverty leads to a lack of investment opportunities. High-income countries struggle with overreliance on service sectors.

Answer 1

Investment is challenging in poverty due to the need to spend all incomes on necessities, preventing savings and investment. Low growth rates in high-income countries can be attributed to diminishing returns to capital and the preference for stability over rapid growth.

Step-by-step explanation:

It is difficult to set aside funds for investment when in poverty because individuals with low incomes must prioritize immediate needs, such as food and shelter, leaving little to no disposable income for savings or investments. In low-income countries, people often live on less than $1,035 per year, which equates to less than $100 per month, not allowing significant capital accumulation or the creation of loanable funds for investment in essential areas like physical infrastructure and human capital. Research by economists Abhijit Bannerjee and Esther Duflo has shown that households in these economies are trapped in poverty due to their inability to accumulate enough investment to improve their economic situation.

High-income countries, on the other hand, face challenges in achieving high growth rates for different reasons. One significant issue is the law of diminishing returns to capital: as an economy grows, each additional unit of capital investment yields less output than the previous one, making it harder to maintain high growth rates. Additionally, these countries may prioritize economic stability and the sustainability of growth over the pursuit of high growth rates, which can also impact the speed at which their economies expand.