Theories about the Problems of LICs are discussed below:
In order to explain this big problem of poverty and of the asymmetric ownership of the wealth and income in the world, economists have come up with various theories.
Poverty trap theories:
Poverty trap theories elaborated the relative poverty of the Third World in the context of the twin gaps: foreign exchange gap (exports being less than needed imports) and an underlying savings gap (domestic savings being less than needed investment). As a result of which, the LICs’ economies were caught in the vicious cycle of the low saving, low scale of investment, low productivity gains (due to absence of scale economies), low per capita growth (remember productivity and the technological progress were engines of PCI growth/development), low savings …….
The Prebisch-Singer Hypothesis (PSH) is explained below:
A rival theory was the Prebisch-Singer Hypothesis (PSH), which located the reasons behind this persistent poverty in the structure of trade between the rich and poor countries. The PSH maintained that the LICs were stuck in the production of primary products (as prescribed by static comparative advantage theories like Hechscher-Ohlin prescribed) which were subject to volatility and declining prices both relative to manufactures and capital commodity.
Some economists pointed out the lack of human, social and public capital in LICs as the single most important factor distinguishing them from, say, post-WW2 Germany and Japan, countries which were able to rebuild themselves from total destruction to great economic prosperity on the back of a strong and skilled workforce (human capital), well-developed institutions like trust, meritocracy and accountability and explain communications, energy and housing infrastructures (public capital).
Others drew attention to very fast rising populations in the LICs, and the particular social and economic pressures formed thereby. Also coupled with the disease and severe ethnic and regional conflicts, some saw situation in LICs as practically ungovernable.
Lack of precious natural resources (such as oil, gas, iron, gold, copper etc.) was also cited by some as reason for the LICs’ continued poverty, and examples were known of South Africa and OPEC countries, a lot of of whom were able to raise living standards solely on the back of natural resource exports. Strong counter-argument exist against the theory, for instance, the LICs which registered the maximum rates of industrialization and GDP growth during last four decades, namely: Korea, Hong Kong, Taiwan, Singapore, did not possess any important natural resources. The same is right for Japan in the 20th century and the European countries in the 18th and 19th centuries.