When we talk about economic development, we often think about the difference between poorer (developing) countries and richer (developed) countries. Surprisingly, the difference isn’t about how much money people have. It’s more about the technology people use and the institutions that support these technologies.
In a developed country, people use advanced technology every day. This includes things like smartphones, computers, modern healthcare equipment, and efficient transportation systems. These technologies make life easier, more productive, and help people earn more money.
Poorer countries do not have access to the same technology. Couldn’t we just ship poorer countries technology?
No. The poorer country would enjoy the benefits of the new technology, until the technology required maintenance or became unusable (broken).
Tractor Example
An example is a tractor. Farmers in richer countries use modern tractors to increase the amount they can farm and increase the amount of food they can increase. A modern tractor has tires, computer chips, and engine, just to name a few important parts. Now imagine if your tractor broke down in a richer country and a poorer country. In a richer country the farmer could go to a shop to buy the parts or take it to a person the specializes in repairing tractors. In very poor countries there are no shops that sell tractor supplies. A part would have to be ordered from another country and delivered, possibly taking a month. There would not be people who have a job specialized to repairing tractors, the farmer would have to repair the tractor themselves.
Institutions are Important
Institutions like the tractor part shop, or tractor repair people, play a big role. Institutions are the rules and organizations in a country, like schools, private companies, banks, and governments. Good institutions support the use of technology by providing education, ensuring fair business practices, and maintaining law and order. For example, schools teach people how to use technology, banks provide loans for businesses to buy new technology, and governments make sure everyone follows the rules (intellectual property, regulate safe use).
In a developing country, people might not have access to the same level of technology. They might use older tools and methods, which are less efficient and less productive. Institutions in these countries might also be weaker. Schools might not exist, or may not have the resources to teach new skills, there may be fewer banks and banks might not offer loans for new technology, and the government might struggle to enforce rules fairly, if at all.
So, the key difference between developing and developed countries is not just about money. It’s about the level of technology people use and the strength of institutions that support and promote the use of technology. Strong institutions are crucial for economic development because they help people access and effectively use new technologies, leading to better jobs, higher incomes, and overall improved living standards.