Industry

A

Physical Capital

Countries with well-developed economies possess large amounts of physical capital. On average, each worker in such a country has more machines, plant, equipment, and tools to work with than do workers in countries with developing economies. For example, in 1992 the private capital stock (total value of privately owned physical capital) per worker was $41,286 in Japan and $35,993 in the United States. In Chile, the economy of which is not as developed, the private capital stock per worker was $11,306. In the developing country of India, the private capital stock per worker was $1,997, while in Sierra Leone, where there is almost no industry, the figure was only $227.

B

Finance Capital

Investments in physical capital can increase production and generate industrial growth. However, enterprises require finance capital in order to purchase the plants, machines, and equipment necessary to produce goods and services. Because there is no guarantee that a particular business will be profitable, financial institutions assume a certain level of risk when they lend capital. Developing countries have a less established industrial base, less infrastructure, and less financial stability, and in some cases they suffer from political instability. As a result, they are often perceived as risky environments for starting businesses, and financial institutions may be less willing to lend money to these economies.

Developing countries generally depend on foreign investors for the finance capital that they need. Multinational corporations carry out much of this foreign investment. However, in 2001, 68 percent of all foreign direct investment went to industrialized countries. In the developing world, Latin America received 11.6 percent, Asia received 13.9 percent, and Africa received 2.3 percent. Many developing countries also borrow money on international financial markets (by selling bonds), but they usually must pay higher interest rates (the cost of borrowing money) than developed countries do. In addition, foreign investors may refuse to buy bonds if they fear that a government may not be able to repay its loans.

C

Training and Education

Developed countries also have more resources than do developing countries to invest in basic and vocational education, training programs, and higher education. As a result, workers and managers in developed economies typically receive more education and training. In 1998, for example, educational expenditures relative to the gross domestic product (the value of all goods and services produced within a nation's borders) were 5.6 percent in developed countries and 4.1 percent in developing countries. Adult literacy rates also reveal educational disparities among countries. In 2005 the adult literacy rate in Japan and the United States was more than 99 percent, while it was 87.1 percent in Brazil, 56.6 percent in India, and 18.7 percent in Niger.

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Disparities in education lead to shortages of skilled workers and educated managers in developing countries. An unskilled workforce is less productive and receives lower wages. Lower wages, in turn, encourage highly educated workers in these countries to migrate to industrialized countries to earn higher salaries. This migration, known as the brain drain, increases the scarcity of educated and skilled workers in developing countries.

D

Research and Development

Some economists believe that research in technology (the application of engineering and science to develop machines and procedures that improve human efficiency) contributes more significantly to industrial growth than does any other factor. Scientists and engineers usually conduct technological research in university and other research facilities that are funded primarily by government and business. Like finance capital and education, facilities and personnel for technological research are more scarce in developing than in industrialized economies. For example, in 2000 Japan had 5.0 and Sweden had 4.5 research scientists and technicians per 1,000 people in their populations. In contrast, during the same period Egypt had 0.5 scientists and technicians per 1,000 people, El Salvador had 0.02, and Pakistan had 0.08.

Many developing countries have tried to stimulate economic growth by simply acquiring machinery from developed economies, assuming that the technological knowledge necessary to use the physical capital could be as easily transferred. This perception was strengthened in the era after World War II (1939-1945), when the Japanese successfully manufactured automobiles, electronics, cameras, and other products by imitating American and European technologies. However, many of the developing countries that tried this have not experienced similar economic growth after acquiring equipment and machinery from industrialized countries. Economists believe that the Japanese were successful because their nation already possessed a skilled and educated workforce.

E

Role and Use of Natural Resources

In the 19th and early 20th centuries, the industrial nations of Europe established colonies near natural resources to support industrial growth at home. Today, many developed countries still secure access to natural resources located in developing economies. For example, U.S. petroleum companies obtain oil in the Middle East and other regions. However, large stores of natural resources are not necessary for industrial growth. While countries like Russia, South Africa, Australia, Canada, and the United States have based industrial growth in part on their natural resources (such as timber and petroleum), some industrialized countries, such as Singapore, Switzerland, and Japan, do not have significant amounts of natural resources.

Industrialized countries consume a disproportionate amount of the world’s natural resources. As a result, the standard of living in these countries may be more dependent than that of developing countries on the continued availability of timber and petroleum and other minerals. For example, the developed countries of the world contain only 19 percent of the world’s population but consume more than two-thirds of the world’s natural resources. These countries also consume a disproportionate amount of the world’s energy. On average, each person in the United States consumes the annual energy equivalent of 12,657 kg (27,905 lb) of coal. Worldwide, in contrast, each person consumes the annual energy equivalent of 1,825 kg (4,022 lb) of coal.

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