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Differences Between Countries » Development Gaps: Saving, Education, Healthcare and Resources

What you'll learn this session

Study time: 30 minutes

Cambridge spec: 5.4.1

How differences in saving and investment cause gaps in development
How differences in education and healthcare affect a country's output and income
Why natural resources help a country but do not guarantee development
The consequences of these differences for countries and their people

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Four more reasons for development gaps

In Development Gaps: Income, Productivity, Population and Sectors you saw that countries differ in income, productivity, population growth and the size of their sectors. This lesson covers the other four differences in the spec: saving and investment, education, healthcare and natural resources.

As before, these causes are linked. A country with low saving invests little, so its workers have few machines, so productivity and income stay low, so saving stays low. This is why a development gap can last for decades.

Differences in saving and investment

Remember that saving is income that is not spent, and investment is spending on capital such as machines, factories and roads. Banks lend the money that households save to firms, who use it to invest. So a country that saves more can usually invest more.

💰 Low saving and investment

Households with low incomes spend almost everything on basic needs, so little is left to save. Firms cannot borrow to buy machines, so capital grows slowly and workers have few tools. Output per worker stays low.

🏭 High saving and investment

More funds are available for firms to build factories and buy equipment. Capital grows, productivity rises and so do output and income. Higher income allows even more saving.

Consequence: a country with low investment finds its economic growth is slow, so the gap between it and richer countries can widen over time.

Differences in education

Education gives workers skills and knowledge. Skilled workers are more productive, can use modern technology and can do higher-paid jobs. Economists call the skills and knowledge of the workforce human capital.

Key terms:

Human capital: the skills and knowledge of the workforce.

📝 Poor education

Many workers cannot read, use technology or learn new skills. Productivity and wages are low, and the country struggles to attract firms that need skilled staff.

🎓 Good education

Workers are more productive and can move into higher-value jobs. Incomes rise, and the government collects more tax to spend on further education.

Education costs money. A poorer government has less to spend on schools and teachers, and poor families may not be able to pay school costs or may need children to work rather than study. That is another reason why low income can keep a country poor: low income means little saving and little spending on schools and healthcare, so productivity and income stay low.

Differences in healthcare

Healthy workers produce more and miss fewer days of work. Healthcare also affects how long people live, which is one part of the Human Development Index.

Poor healthcare: more illness and early death, so fewer workers and lower productivity. Families spend money on treatment instead of saving, and children may miss school.
Good healthcare: a healthier, longer-working labour force, higher productivity, and people who can attend school and work more reliably.

Education and healthcare are both examples of spending on people. Countries that spend more on both usually find that output per head rises.

Differences in natural resources

Natural resources are the gifts of nature, such as oil, minerals, fertile land, forests and fish. A country with plenty can sell them abroad or use them to make goods, which can raise national income and provide funds for investment.

But resources alone do not guarantee development. A country needs more than resources:

Without capital and skills, resources may stay in the ground or be sold cheaply as raw materials.
Income may depend on one resource, so a fall in its price harms the whole economy.
If the money from resources is badly used or goes to only a few people, living standards may not improve.
Resources can run out.

Meanwhile, some countries with few natural resources have developed by investing in education, technology and services. This shows that human capital and investment can matter as much as what lies under the ground.

Worked example

Two made-up countries both earn $20 billion a year.

Ardovia has plentiful oil, but spends only $1 billion of its income on schools and health, and invests $2 billion in capital. Belmoor has no oil, but spends $4 billion on schools and health and invests $6 billion.

Share of income invested: Ardovia = 2 ÷ 20 = 10%. Belmoor = 6 ÷ 20 = 30%.

Belmoor builds capital three times as fast, and spends four times as much on people. Over time its productivity and income per head are likely to rise faster, even though Ardovia has more natural resources.

Common mistakes

Saying that a country with lots of natural resources must be developed. Always add what else is needed, such as investment and skilled workers.

Giving a cause with no link to development. Do not just say "poor education". Explain that fewer skills mean lower productivity, which means lower income.

Exam-style question

Zentoria is a low-income country. Few of its children finish school, many people cannot get healthcare, and households save little. The country has large copper deposits, but its government has little money to invest in mines or factories.

(a) State two reasons why households in Zentoria may save little. [2 marks]

(b) Explain how poor healthcare may reduce a country's output. [4 marks]

Model answer

(a) Incomes are low, so most is spent on basic needs (1). Families may need to spend savings on illness or school costs (1).

(b) Poor healthcare means more illness (1) so workers miss work and are less productive (1). Some people die early or cannot work, so the labour force is smaller (1). Less output is produced, so national output and income fall (1).

(c) Copper can raise income by exporting it, and the money could fund schools and investment (1). However, the government has little money to build mines or factories, so copper may be sold as a raw material at a low price (1). Prices may fall, which would harm the whole economy if copper is the main income (1). Education and healthcare are poor, so workers have low skills and productivity (1). So copper helps, but it does not guarantee development unless the income is used well to invest and educate people (2).

Exam tip

In a "Discuss" question like part (c), give a point for each side, then finish with a short conclusion that answers the question asked.

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