TinselWriter

ellaino94

4.pdf

Home >Business & Finance homework help >Economics homework help >TinselWriter

4.1 Underdevelopment as a Coordination Failure

• A newer school of thought on problems of economic development

• Coordination failures occur when agents’ inability to coordinate their actions leads to

inability to coordinate their actions leads to an outcome that makes all agents worse off.

• This can occur when actions are complementary, i.e.,

• Actions taken by one agent reinforces incentives for others to take similar actions

4.2 Multiple Equilibria: A Diagrammatic Approach

• Often, these models can be diagrammed by graphing an S-shaped function and the 45º line

• Equilibria are

– Stable: function crosses the 45º line from above

– Unstable: function crosses the 45º line from below

Figure 4.1 Multiple Equilibria

4.3 Starting Economic Development: The Big Push

• Sometimes market failures lead to a need for public policy intervention

• The Big Push: A Graphical Model, 6 assumptions – One factor of production

– Two sectors

– Same production function for each sector

– Consumers spend an equal amount on each good

– Closed economy

– Perfect competition with traditional firms operating, limit pricing monopolist with a modern firm operating

• Conditions for Multiple Equilibria • A big push may also be necessary when there are:

– Intertemporal effects

– Urbanization effects

– Infrastructure effects

– Training effects

Figure 4.2 The Big Push

Why the Problem Cannot be Solved by a Super-Entrepreneur

• Super Entrepreneur?

– Capital market failures

– Cost of monitoring managers- Asymmetric Information

– Communication failures

– Limits to knowledge

– Lack of any empirical evidence that would suggest this is possible

In a Nutshell: Big Push Mechanisms

• Raising total demand

• Reducing fixed costs of later entrants

• Redistributing demand to later periods when other industrializing firms sell

• Shifting demand toward manufacturing goods

• Shifting demand toward manufacturing goods (usually produced in urban areas)

• Help defray costs of essential infrastructure (a similar mechanism can hold when there are costs of training, and other shared intermediate inputs)

4.4 Further Problems of Multiple Equilibria

• Inefficient Advantages of Incumbency

• Behavior and Norms

• Linkages

• Inequality, Multiple Equilibria, and Growth

4.5 Michael Kremer’s O-Ring Theory of Economic Development

• The O-Ring Model

– Production is modeled with strong complementarities among inputs

– Positive assortative matching in production

• Implications of strong complementarities

• Implications of strong complementarities for economic development and the distribution of income across countries

4.6 Economic Development as Self- Discovery

• Hausmann and Rodrik: A Problem of Information

• Not enough to say developing countries should produce “labor intensive products,” because there are thousands of them

• Industrial policy may help to identify true direct and indirect domestic costs of potential products to specialize in, by:

domestic costs of potential products to specialize in, by:

• Encouraging exploration in first stage

• Encouraging movement out of inefficient sectors and into more efficient sectors in the second stage

4.6 Economic Development as Self- Discovery

• Three building blocks of the theory; and case examples of their reasonableness in practice:

– Uncertainty about products can produce efficiently (evidence: India’s success in information technology was unexpected; reasons for Bangladesh’s efficiency in hats vs Pakistan’s in bedsheets is not clear)

in hats vs Pakistan’s in bedsheets is not clear)

– Need for local adaptation (evidence: seen in cases such as shipbuilding in South Korea)

– Imitation can be rapid (e.g. the spread of cut flower exporting in Colombia)

4.7 The Hausmann-Rodrik-Velasco Growth Diagnostics Framework

• Focus on a country’s most binding constraints on economic growth

• No “one size fits all” in development policy

• Requires careful research to determine the

• Requires careful research to determine the most likely binding constraint

Figure 4.3 Hausmann-Rodrik-Velasco Growth Diagnostics Decision Tree

Concepts for Review

• Agency costs

• Asymmetric information

• Big push

• Complementarity

• Congestion

• Information externality

• Linkage

• Middle-income trap

• Multiple equilibria

• O-ring model

• Coordination failure

• Deep intervention

• Economic agent

• Growth diagnostics

• O-ring production function

• Pareto improvement

• Pecuniary externalities

• Poverty trap

• Prisoners’ dilemma

Concepts for Review (cont’d)

• Social returns

• Technological externality

• Underdevelopment trap

• Where-to-meet dilemma