Chapter 4 Contemporary Models of Development and Underdevelopment

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Chapter 4 Contemporary Models of Development and Underdevelopment Copyright © 2006 Pearson Addison-Wesley. All

Chapter 4 Contemporary Models of Development and Underdevelopment Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

New Growth Theory: Endogenous Growth n n Motivation for the new growth theory The

New Growth Theory: Endogenous Growth n n Motivation for the new growth theory The Romer model (4. 1) (4. 2) (4. 3) Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2

New Growth Theory: Endogenous Growth n n n Motivation for the new growth theory

New Growth Theory: Endogenous Growth n n n Motivation for the new growth theory The Romer model Criticisms of the new growth theory Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 3

Underdevelopment as a Coordination Failure n n Coordination failures occur when agents’ inability to

Underdevelopment as a Coordination Failure n n Coordination failures occur when agents’ inability to coordinate their actions leads to an outcome that makes all agents worse off We’ll consider – “Big push” models – The ‘O-ring’ model Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4

Multiple Equilibria: A Diagrammatic Approach n n Generally, these models can be diagrammed by

Multiple Equilibria: A Diagrammatic Approach n n Generally, these models can be diagrammed by graphing an S-shaped function and the 45º line Equilibria are – Stable when the function crosses the 45º line from above – Unstable when the function crosses the 45º line from below Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5

Figure 4. 1 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 6

Figure 4. 1 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 6

Starting Economic Development: The Big Push n n Sometimes market failures lead to a

Starting Economic Development: The Big Push n n Sometimes market failures lead to a need for public policy intervention The big push: a graphical model – Assumptions Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7

Starting Economic Development: The Big Push n n Sometimes market failures lead to a

Starting Economic Development: The Big Push n n Sometimes market failures lead to a need for public policy intervention The big push: a graphical model – Assumptions – Conditions for multiple equilibria – Other cases in which a big push may be necessary Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 8

Figure 4. 2 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 9

Figure 4. 2 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 9

Other Cases in Which a Big Push May Be Necessary Intertemporal effects n Urbanization

Other Cases in Which a Big Push May Be Necessary Intertemporal effects n Urbanization effects n Infrastructure effects n Training effects Why the problem cannot be solved by a “super-entrepreneur” n Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 10

Further Problems of Multiple Equilibria n n Inefficient advantages of incumbency Behavior and norms

Further Problems of Multiple Equilibria n n Inefficient advantages of incumbency Behavior and norms Linkages Inequality, multiple equilibria, and growth Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 11

Figure 4. 3 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 12

Figure 4. 3 Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 12

Kremer’s O-Ring Theory of Economic Development n Implications of the O-ring theory Copyright ©

Kremer’s O-Ring Theory of Economic Development n Implications of the O-ring theory Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 13

Concepts for Review n n n n Agency costs Agent Aid failure Asymmetric information

Concepts for Review n n n n Agency costs Agent Aid failure Asymmetric information Big push Complementarities Complementary investments Copyright © 2006 Pearson Addison-Wesley. All rights reserved. n n n n Congestion Coordination failure Deep intervention Endogenous growth theory Linkage Multiple equilibria New growth theory O-ring model 14

Concepts for Review (cont’d) n n n O-ring production function Pareto improvement Pecuniary externalities

Concepts for Review (cont’d) n n n O-ring production function Pareto improvement Pecuniary externalities Poverty trap Prisoners’ dilemma Public good n n n Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Romer’s endogenous growth model Solow residual Technological externalities Underdevelopment trap Where-to-meet dilemma 15