Catch-Up Effect

Updated Dec 31, 2022

Definition of the Catch-up Effect

The catch-up effect is an economic phenomenon in which countries with lower levels of development tend to grow faster than countries with higher levels of development. That means countries that are behind in terms of economic development tend to grow faster than countries that are already more advanced until they eventually catch up.

Example

To illustrate this, let’s look at the example of two countries, Country A and Country B. Let’s assume that country A is a developed country with a high level of economic development. By contrast, Country B is a developing country with a significantly lower level of economic development.

Over the past 10 years, Country A has grown at an average rate of 2% per year, while Country B has grown at an average rate of 5% per year. One of the reasons for this discrepancy is the law of diminishing marginal returns. In addition, country B can learn from country A and use at least some of its advanced technologies to grow more quickly. This difference in growth rates is an example of the catch-up effect.

Why the Catch-up Effect Matters

The catch-up effect is an important concept for understanding economic growth and development. It shows that countries with lower levels of development can grow faster than countries with higher levels of development. This is because they have more room to improve and can benefit from the advances made by more advanced countries.

In addition, the catch-up effect can also be used to explain why some countries are able to achieve rapid economic growth. For example, countries like China and India have experienced rapid economic growth in recent years due to their ability to benefit from the advances made by more advanced countries. This has enabled them to catch up to more advanced countries in terms of economic development.