Can Eradicate Low Social Returns In A Poverty Approach?

A country which experiences continuous underdevelopment and is stuck in a low-level equilibrium of capital per worker is one which is in a poverty trap. If this underdevelopment is left unaddressed then there is no possibility of this country escaping this trap. Proven by many countries in East Asia, it is possible through investment to increase economic growth to a higher equilibrium leading to a break from the bad cycle. The problem is however that many private investors have no incentives to invest in these underdeveloped countries as they have many imperfections, which could lead to them receiving little or no returns, countries which receive little investment see little economic development. There is no universal policy which can eradicate …show more content…
A country which is seeking to increase there social costs when this is one of the main binding constraint on development, policies must firstly seek to solve these. Second, Low-level of human capital, this is seen when skills, education and workers health are very low. These factors are all complementary with other factors in production and the main source of the problem is communication failure due to multiple equilibria. For instance in rural communities the private returns of education depends positively on the educational attainment of the total community. When the education level is high it tends to produce a higher level of specialisation, but for there to be a demand for specialised skills others in the community have to be specialised. This leads to two levels of Nash equilibria, one where all choose to only stick with low education and one where all choose to stick with high education. The lower equilibrium is the worst for the community and is the one which leads to poverty trap, nonetheless majority of families in underdeveloped countries as a whole still tend to choose lower education. In order for human capital to increase in these countries the government will have to intervene with policies making it compulsory for a higher level of education, leading to the low education equilibrium no longer being a …show more content…
This can be due to two things, government failures or market failures. Many market failures are limiting factors to economic development. A very important market failure which is predominately due to communication failure is pecuniary externalities. For example if a country wishes to industrialise in order to increase development by using high technology and increasing return to scale, it will only be economically beneficial when different producers with this modern technologies enter in many markets to. Figure one shows the production functions for both modern sector and for traditional sector. When wages are as shown on the diagram (between point A and B), there are two possible equilibria: the lowest where no other modern firms enter any of the markets, leading to wages falling back to being low (w1) and output decreasing; the highest in which modern firms enter all markets causing profits, wages and output to be high. When many modern firms enter different markets it causes domestic income to increase, this is due to the wages increasing to the modern level. Workers have an increase wage In this case investment needs to be very coordinated and firms will need to communicate with each other to receive the greatest returns.There will be little investment when there are high micro-risks. In order for an investor to be inclined into giving their money,