Are Undeveloped Nations Coming Closer to the Developed?

Are Undeveloped Nations Coming Closer to the Developed?

Are undeveloped nations growing faster than the rich? Is the gap between emerging nations and rich countries closing in? This topic has attracted attention in mass media as economists debate about growth rates in poor and rich countries. Countries worldwide are labeled as developed or developing (undeveloped) based on their technological infrastructure and economy. Developed nations refer to a sovereign state that has a highly advanced and developed economy and technological infrastructure (Smith, 2020). However, developing nations are lagging in terms of economy and technological infrastructure. They are also referred to as “third world” countries. Therefore, to analyze whether developing nations are coming closer to the developed nations, this literature review focuses on economic theories such as the convergence theory (Catch-Up effect) and Endogenous Growth theory. This literature review will also explore conditional convergence for growth rates in different countries to expand on the debate.

Are Undeveloped Nations Coming Closer to the Developed?


Disparities between Developed and Undeveloped Countries

According to Kuznets (2019), the disparity levels between developed and developing countries are the most prominent causes of worldwide inequality. Differences between poor and rich countries are enormous; a study by (Kuznets, 2019) showed that a prosperous nation’s per capita is more than seven times a developing country’s average. Current differences in the economy are outcomes of historical economic differences and growth rates. Kuznets (2019) aver that factors that lead to the differences in economic growth between developed and undeveloped countries include globalization, policy changes like shifts toward less progressive fiscal regimes, the emergence of winner-take-all markets, the increasing significance of finance, changes in labor markets formation, and unequal technological innovations.

However, a study by Qureshi (2018) demonstrates that disparity between countries has decreased, while the inequality among nations has increased. Global inequality significantly increased during the Industrial Revolution and the early 20th Century (Qureshi, 2018). He argues that both disparities between countries and within countries increased. Gaps in national mean incomes grew as most European countries and America extensively outgrew away from the rest of the world (OECD, 2011). In the Organization for Economic Co-operation and Development (OECD), the gap between the rich and developing nations has reached its highest level. Governments must quickly act to address the disparity (OECD, 2011).

Source: OECD (2011).

Income inequality is more significant in some major developed countries. OECD (2011) contends that such a disparity results from income gaps in wages and salaries within nations, as developed nations have benefited more from technological advances while developing countries suffer from low-level skills and technology. Therefore, can developing countries close the gap between them and rich countries?

Are Undeveloped Nations Coming Closer to the Developed?


Endogenous Growth Theory

How is it possible for income inequality within countries to increase while the disparity between countries decreases? Today, Indian and Chinese economies have rapidly grown over the last half-century. Therefore, while internal inequality has increased in China and India, the nations’ growth has decreased the disparity between countries globally, making millions of people’s living standards converge with those in Australia, America, and Europe (Morley, 2015). Paul Romer, an economist, has developed a theory to explain the happenings given “endogenous” technological change (Morley, 2015). He contends that such a scenario may depend on capital accumulation and population growth (Morley, 2015). The Paul Romer endogenous growth theory relates the establishment of fresh suggestions to the capacity of labor in the zone of expertise (Johns, 2019). Such new ideas enable people to produce regular services and goods more productive. Therefore, endogenous growth theory states that economic growth is foundationally achieved due to internal rather than external forces. The thesis argues that an increase in productivity is tied to more investment in human capital and fosters innovation from both government and private sectors (Johns, 2019). So, does the application of endogenous growth theory influence global disparity?

According to Osiobe (2019), governments are keen on investing in human capital and intellectual property in their debates concerning stimulating economic growth. With the population increase in developing nations, if these countries invest in Paul Romer’s ideas, the gap between the poor and rich countries will be minimized, and the developing countries economies will come closer to the rich. However, Osiobe (2019) argues that, as with neoclassical growth theory, it is difficult to point to a particular policy that can facilitate the catch-up effect in global economies.

Are Undeveloped Nations Coming Closer to the Developed?


Convergence Theory

The idea of convergence or the catch-up effect in economics is the hypothesis that developing countries’ per capita incomes will tend to grow faster than the more prosperous nations (Greenlaw et al., 2018). Lee (2019) argues that the catch-up effect is a hypothesis that all nations will eventually converge in per capita income since developing nations tend to grow more rapidly than developed countries. The “law of diminishing marginal returns” states that as a government invests and profits, the amount gained from the investment will eventually decline while the level of investment increases (Greenlaw et al., 2018). The argument is based on the principle that each time an economy invests, it benefits slightly less from the investment. Therefore, the profits on capital investment vary in different countries, with developing countries reaping large amounts compared to capital-rich economies. Lee (2019) supports the idea by the empirical observation that rich nations tend to grow at a slower rate than developing countries. According to the World Bank, the gross domestic product (GDP) in developing countries was 4%, while the GDP for developed countries was 1.6% in 2019 (Kenton, 2021).

Source: Pettinger (2019)

Pettinger (2019) avers that the law of diminishing returns shows a decline in productivity improvements from a fixed capital. He argues that increased investment will result in low marginal profits for developed nations, while for developing countries, increased investment will produce high marginal gains (Pettinger, 2019). For example, if an economy has low production in agriculture, then a small investment like a motorized tractor can produce a higher rate of returns.

Additionally, Greenlaw et al. (2018) argue that poor economies may have an upper hand in attaining improved work productiveness and prosperity. Like Paul Romer’s theory, developing nations may find it effortless to enhance their technology than developed countries. The idea is based on the notion that as developed countries invent new technology to grow, the developing countries can apply the already created technologies to grow their economies (Greenlaw et al., 2018). Such an event was named the advantages of backwardness by economist Alexander Gerschenkron (Greenlaw et al., 2018). Precisely, the economist was insinuating that developing countries have the potential to catch up with developed countries.

Optimists from various nations also aver that a number developing nations have learned and distinguished the encounters faced by developed countries (Greenlaw et al., 2018). Furthermore, once the people from developing countries realize the advantages of a greater living standards, they become more probable to establish and support the market-oriented organizations that aid the creation of such standards of living.

On the other hand, the broad convergence of per capita incomes between countries higher disparity within countries. A wider gap between the world’s most developed and undeveloped citizens creates a divergence between poor and rich nations (Estrada et al., 2013). According to (Dervis), income has incredibly concentrated at the top in most countries. As a result, within-nation income distribution leads to the absence of per capita income growth in a group of impoverished nations, making it impossible to participate in the convergence theory. Additionally, the rapid catch-up growth rate impacts most citizens in developing countries, introducing a large number of the global middle class (Kuran, 2012). While the nature of technological change, associated winner-take-all characteristics of many developing countries, increased skill premium, mobility of capital relative to immobility of labor, especially unskilled labor, and the declining influence of labor unions- have all led to the expanding active income at the top pyramid of developing nations.

Additionally, Dabla-Norris et al. (2015) demonstrate that the middle class and the top 1 percent have experienced the most significant economic gains. While examining changes in real income between 1988 and 2008, Dabla-Norris et al. (2015) contend that the most considerable profits accrued for the global median income (50th percentile) citizens and the top 1 percent. These results coincide with the argument by Dervis about the rapid growth of middle-class citizens and the concentration of income at the top of the economic pyramid of various countries. Meanwhile, income gains rapidly decreased below the 50th percentile and became stagnant around the 90th percentile globally (Dabla-Norris et al., 2015). As a result of the within-country income disparity, some scholars argue that economic convergence is neither inevitable nor likely.

Greenlaw et al. (2018) illustrate why developing countries cannot close the economic gap between them and rich countries. The argument is that if the development of a government relies on the intensification of physical and human capital, then the advancement is deemed to slow down after some time (Greenlaw et al., 2018).

Source: Greenlaw et al. (2018)

Are Undeveloped Nations Coming Closer to the Developed?. If an economy starts from point R with the level of human and physical capital at C1 with output per capita at G1, the economy will experience diminishing marginal returns as it moves from R to through U to W. This scenario takes place if the economy solely depended on capital deepening while maintaining Technology 1 line. However, when improvements in technology are merged with capital deepening, there will be a technological improvement from 1 to 2 as capital deepens from C1 to C2. Similarly, the economy improves from R to S, and then from S to T as C2 moves to C3 and Technology 2 goes to Technology 3. Therefore, improvements in technology stabilize economic growth without any slow-down (Greenlaw et al., 2018).

Similarly, with capital deepening and technological merge, the rise in GDP per capita in developed economies does not need to disappear due to diminishing returns (Greenlaw et al., 2018). If human and physical capital and technological improvement are deepened simultaneously, a developed nation can move from R to T as C1 moves to C3 and Technology 1 move to Technology 3, the higher aggregate production line. Therefore, in the same context of technological improvement and human and capital deepening, both developed and undeveloped countries will experience an increase in per capita income. As a result, the gap between poor and rich countries will remain stagnant.


Are Undeveloped Nations Coming Closer to the Developed? The disparity between developed and undeveloped countries globally is increasingly equal, yet most developed countries are becoming less similar. However, the rapidly rising inequality within countries, including the extreme concentration of income at the top and widening middle class, presents global concern on economic convergence. The concentration of high pay at the top of a nation’s economy can negatively affect its financial performance, leading to an increased disparity between poor and rich countries. With economic convergence occurring at a slower rate globally, the high inequality of within-country income distribution could still cause an imbalance between developed and developing countries, leading to the re-emergence of disparity between poor and prosperous nations.


Dabla-Norris, M. E., Kochhar, M. K., Suphaphiphat, M. N., Ricka, M. F., & Tsounta, M. E. (2015). Causes and consequences of income inequality: A global perspective. International Monetary Fund.

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Estrada, Á., Galí, J., & López-Salido, D. (2013). Patterns of convergence and divergence in the euro area. IMF Economic Review61(4), 601-630.

Greenlaw, S. A., Shapiro, D., & Taylor, T. (2018). Principles of Microeconomics, (OpenStax).

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Kuran, T. (2012). The long divergence. In The Long Divergence. Princeton University Press.

Kuznets, S. (2019). Economic growth and income inequality. In The gap between rich and poor (pp. 25-37). Routledge.

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