The Catch-Up Effect is a theory stating that Economies that start off poor tend to grow faster than countries that start off richer. This means that the poorer country’s income eventually will catch up to the richer countries. In theory new technologies may allow the economies of emerging countries to even surpass industrialized nations, but the possibility of this happening has become increasingly debatable as developed nations become increasingly modernize at fast paces. One of the reasons for this phenomenon is that poor countries often have little in the way of technology and maybe have very low efficiency rates. Since they have no access to capital to invest they can’t improve their processes and are trapped in this low-efficiency pattern. If they, however manage to attain some capital for investment the returns on this investment might be huge. This could be explained by the law of diminishing returns. A developed nation is so technologically advanced that the ROI of every unit of currency spent is dramatically lower than the ROI in an undeveloped nation because the poor nation is further behind in this diminishing returns path. This extra return allows poor countries to rapidly increase investment capital and raise efficiency until the law of diminish returns kick in and they are growing at the same pace as more advanced nations.

An example of this effect is the rapid growth in the Asian markets of Singapore, Hong Kong, Taiwan, and Korea in the 1960s and 1970s that led to them being called the Four Tigers. These countries started off very poor with little economic power, a lack of capital, no huge skyscrapers and rich banks and quickly transformed their economies into major world players.

Further Reading

• Economics
• Investment
• Return on investment
• Productivity
• Emerging Nation