Less-developed Countries (LCDs) are caught in a vicious circle of poverty. For o

Question

Less-developed Countries (LCDs) are caught in a vicious circle of poverty. For output to increase, they must build up capital. To build up capital, they must save and consume less that what they are producing. However, because they ate poor, they have little or no extra output available for savings as it must go toward feeding and clothing the current generation. Thus, they are destined to remain poor forever. How should developed-countries and international institutions assist LCDS to develop and are there unintended consequences?

Explanation / Answer

One major positive for developed countries from LCD's is the interest rate.

Interest rates are always higher in developing countries than developed countries. And they are more higher in LCD's than developing countries. So if developed countries invest in LCD's, there return is much higher than their investment in their own country.

In this way all parties involved will get benefited. LCD's are getting capital, and developed countries are getting higher return for their investment.

International institutions such as world bank should provide loans to LCD's at less rates and give subsidies so that they can utilize that capital to develop and improve economy.

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