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Can Cheap Countries Catch Up?

Being cheap may narrow poorer countries' path to prosperity by making technology relatively more expensive. But if these economies could develop the capabilities to export knowledge-intensive business services, their firms could be globally competitive while providing their employees with a higher standard of living.

CAMBRIDGE – Poor countries are cheap. In 2019, a dollar could buy more than twice as much in Argentina, Morocco, South Africa, and Thailand as it could in the United States. It could buy more than three times as much in Vietnam, India, and Ukraine, and more than four times as much in Afghanistan, Uzbekistan, and Egypt. If a country is cheap, it should be more competitive and thus able to catch up with richer economies. In fact, many cheap countries are falling further behind.

At first glance, the fact that poor countries are cheap is counterintuitive. If poor countries are much less productive, shouldn’t things there cost more, because it takes more time and effort to make them?

This would be the case if salaries were the same in all countries. But they are much lower in poor countries than in rich ones. According to the OECD, average annual wages in 2019 (in constant prices) were over $60,000 in Switzerland and the US; over $50,000 in Australia, Denmark, the Netherlands, and Germany; over $40,000 in France, South Korea, and Sweden; over $30,000 in Spain, South Korea, Italy, and Poland; over $20,000 in Greece and Hungary; and over $10,000 in Mexico.