# Why do rich countries remain rich?

I can think of two possible explanations:

• People there inherited the wealth of their ancestors (and of the companies of their generation).

• Advances in technology allows you to earn money more easily.

Definitely the first factor is more significant and there are more factors playing role. Anyway, please consider this question: Approximately how big percent of the rich countries' wealth is caused by the first one and how big by the second one?

• "Definitely the first factor is much more significant..." Citation? – cc7768 Dec 23 '15 at 14:18
• This is not a law of nature, Argentina did not stay wealthy. en.wikipedia.org/wiki/Economic_history_of_Argentina – Giskard Dec 23 '15 at 14:36
• @cc7768 This guess stated on the fact that wealth raises exponencialy, more you have (more you inherited), more you earn...but now I just realized that it is not as objective as I present it...maybe we could define the progress in technology as a difference between today's world and the world where factories stopped making new things. But still, this doesn't include for example development of medical techniques. – Probably Dec 23 '15 at 15:24
• en.wikipedia.org/wiki/The_rich_get_richer_(statistics) – BCLC Dec 28 '15 at 4:53
• en.wikipedia.org/wiki/… – BCLC Dec 28 '15 at 4:53

The first answer of presented in the list is wrong. GDP is measure of current production not of past inherited wealth. Even though the existing capital plays a part, the lowest of deprecation rate is around 25 years IIRC, so by and large the wealth is not inherited, but created by the generation.

Advances in technology are usually assumed to spread all around the globe quickly (certainly within one generation). So that's not the answer either.

I would argue that the important values and institutions that allow for wealth creation are the primary reason. It would not be too far of stretch to say that the values that made the wealth creation possible in the first place are what allows the continuation in wealth generation.

(Of course the GDP growth in developed countries does not seem to be too persistent, and has been falling. The alternate answer is that rich nations don't remain rich.)

• Maybe it would be better to specify which answer you mean (the chronologically first I supose) – Probably Jan 23 '16 at 11:55

Another reason could be based on the discount factor of people, when people accumulates more capital, they have tendancy to be more patient, which let them to save more and invest more. So, countries with higher initial stock of capital tend to be more patient in this case. This explains in some part why these rich countries remain rich.

• So the discount factor is not an exogenous "fundamental" parameter, in your view, but dependent on endowments? Do you have some reference for someone who argues like that? – FooBar Jan 23 '16 at 6:52
• @FooBar With slightly different choice of words: You could argue that the highest interest rate you are willing to pay on a \$100 loan today is dependent on your endowment today. This is not the subjective discount rate but it is certainly related and is relevant to the discussion. – Giskard Jan 23 '16 at 11:03 • @FooBar exactly. The discount factor depends on capital. There is a huge literature about the endogeneous discount factor, starting with Gary Becker's papers. There are some papers like Obstfeld (1990) , Epstein and Hynes (1983) which comes to my mind for the moment. – optimal control Jan 23 '16 at 13:21 • @optimalcontrol I see, you're talking about$\beta \neq (1+r)$in the international setting. Your point is rather about$r = r(K)$rather than$\beta = \beta(K)$? – FooBar Jan 23 '16 at 13:29 • @FooBar Not necessarily in the international setting. Also in a closed economy, we can talk about the influence of the capital stock on the discount factor of agents. My point was rather$\rho+\beta(K)$where$\rho$is the pure rate of time preference and$\beta(K)$is the discount factor of an agent based on its capital stock. So, in this case, function$\beta$decreases when capital stock increases. Economically, this means that people get more patient with an increasing capital stock, which is justified in a numereous papers in literature. – optimal control Jan 23 '16 at 14:21 GE models usually assume a representative household inherits wealth and this could further be passed along the generations to come. However, this representative household is not really a representative in real world. Majority of people do not inherit more than on average$300,000 i.e. house, business, cash, other property.

From growth theory perspective, the second factor is important to drive growth in advanced economies. Advanced countries, once reach steady state growth level, need technological shock to increase growth on a new steady state level. For the people to innovate (come up with new ideas) there needs to be proper institutions conducive to growth in the economy. Protection of private property, (property rights/patents) is an example - inventors have better protection in the West than in Africa/East, and hence they tend to invent better technologies which would ultimately stimulate growth. High wages are another factor, better paid employees are expected to be highly skilled. Firms pay skill-premium to attract talent in the West, this drives up average wage rate.

• \\$300,000 seems quite high, especially for a median. money.cnn.com/interactive/retirement/inheritance-retirees/… – Giskard Dec 23 '15 at 15:01
• Thanks! Only I still think we can determine wheter the wealth was earned mostly by the first or the second factor (the property of the firms I count as the first) and it doesn't matter tat with high wages comes progress in technology. – Probably Dec 23 '15 at 15:32
• But I got from you the third factor I believe can play a huge role: high wages. If I got you right, you mean the people in poor countries employed cheaply by the big companies, is that right? Wow, is it possible that some former colonies would develop better if they never were colonized (just a crazy idea)? – Probably Dec 23 '15 at 15:39
• Acemoglu et al (2001) tried to answer this question, they found evidence in support of negative effects of colonization, though, they do not offer a definitive answer because of estimation issues. A local oil rig engineer in Angola is paid £1000 p.m., while he, if speaks English, could be paid up to £4000 p.m. in the UK. So the west is a magnet for skilled people – london Dec 24 '15 at 13:19