Contemporary Economic Development Theories PDF

Underdevelopment as
Chapter 4
Coordination Failure
Contemporary • Economic development is difficult to
Models of achieve. It has been impossible for some
Development and countries (e.g., Nigeria, Sudan), but
Underdevelopment accomplished by others (e.g., S. Korea,
Singapore)
• The success or failure of economic

development policies can be explained by
the “principal-agent” model.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 4-2
1 2
Underdevelopment as Underdevelopment as
Coordination Failure Coordination Failure
• Principal: • An effective principal is needed to
– Government coordinate actions taken by agents and
achieve an optimal outcome, making all
• Agents: agents better-off.
– Households
– Private-sector firms • Coordination failure occurs when the
– Public agencies principal fails to induce agents to coordinate
– Government-owned enterprises their actions, which leads to an outcome that
– International companies makes all agents worse-off.
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 4-3 Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 4-4
3 4
Technological Transfer for

Models of Coordination Failure
Modernization
• Technological Transfer for Modernization • The model is explained by the privately
rational decision function, an S-shaped
• The Big Bush to Industrialization curve. The intersection of this curve with the
45º line is the point of equilibrium.
• The O-Ring Theory of Economic Development
• At equilibrium, the expected outcome of an
• The Growth Diagnostics Framework action equals its actual outcome
5 6
1
Multiple Equilibria: Technological Transfer for
Graphical Illustration Modernization
• Stable equilibrium: The S-shaped function crosses
the 45º line from above (points D1 and D3). Here
firms adjust their investment decisions in
coordination with average investment in the
industry.
• Unstable equilibrium: The S-shaped function

crosses the 45º line from below (point D2). As firms
coordinate their investment decisions, equilibrium
moves to D1 (decrease investment) or D3 (increase
investment).
7 8
Technological Transfer for

The Big Push to Industrialization
Modernization
• To achieve stable equilibrium, firms must be • A big push to industrialization requires a set
able to coordinate their investment decisions of leading firms to investment in productive
such that all firms benefit from each other’s activities and transfer of modern technology
investment.
• Public policy creating incentives for • Investment decisions made by modern-

investment is the key for successful sector firms are mutually reinforcing and
coordination. The government must public policy intervention is needed to
establish inclusive incentives to encourage correct market failure
business investment.
9 10
The Big Push:

The Big Push to Industrialization
Coordination Failure
Assumptions: • A firm is deciding to invest in new
technology
• One factor of production: labor
• It faces a production function in the
• Two economic sectors: traditional vs. modern
traditional sector that passes through the
• Same production function for each sector origin as output increases with labor
• Consumers spend an equal amount on each employment
product they buy
• Closed economy • It faces a production function in the modern
• Perfect competition sector that requires some labor employment
before initiating production (point F)
11 12
2
The Big Push: The Big Push:
Graphical Illustration Coordination Failure
• At a low wage rate like W 1, a new firm will
enter the modern sector after paying the
fixed labor cost (F). With high demand
(Q2), the firm makes profit and invests in
modern technology
• As W 2 > W 1, other firms enter the modern

sector to share the profit. Coordination
between these firms is now needed for the
economy to adopt modern technology
13 14
The Big Push: The Big Push:

Coordination Failure Coordination Failure
• At W 2, investment becomes profitable if all • Point A is a stable equilibrium as low profits
firms invest in modern technology to discourage firms to invest in modern
industrialize the economy. High demand technology (no industrialization)
for manufactured products makes workers
and firms benefit from capital investment • Point B is an unstable equilibrium because it
requires the principal to provide incentive to
invest and agents to coordinate their
• At a high wage like W3, investment in
decision of investment in modern
modern technology is not profitable
technology (industrialization)
15 16
Conditions Making Conditions Making

The Big Push Necessary The Big Push Necessary
• Intertemporal effects: investment in the • Infrastructural effects: improvement in
modern sector becomes profitable over- transportation, communication, and
time as the market size increases distribution systems reduces the cost of
investment
• Urbanization effects: demand for
manufactured goods increases with • Training effects: the labor force
urban population growth becomes more productive and skilled
with education
17 18
3
Coordination Problem Cannot Be Coordination Problem Cannot Be
Solved by a Super-Entrepreneur Solved by a Super-Entrepreneur
• Capital market failure: bankers are unwilling • Limited knowledge: agents do not have
to provide loans to a single firm sufficient information about the importance
of industrialization
• Cost of monitoring managers: expensive
agency costs to ensure compliance of
employees • Lack of empirical evidence: agents do not
know that other firms are investing in
• Communication failure: agents wanting to modern technology
share profit cannot convince the super-
entrepreneur to do so
19 20
Further Problems of Further Problems of

Multiple Equilibria Multiple Equilibria
• Linkages: underdeveloped backward and • Inefficient advantages of incumbency:
forward linkages to support industrialization existing firm have lower production cost
• Inequality and growth: trickle-up growth, • Behavior and norms: agents may be corrupt
resulting in increased inequality and poverty, and bribery may be the standard method of
reduces the buying power of workers and doing business internationally
their demand for manufactured goods
21 22
The O-Ring Theory of The O-Ring Theory of

Economic Development Economic Development
• Production is modeled with strong • Implications of strong complementarities for

complementarities of inputs (labor & capital) economic development and the distribution
and interdependencies among firms (output of income across countries will induce
of one firm is input of another) countries at the same level of development
to coordinate their actions
• Positive assortative matching in production:
skilled labor works with its peers; profitable • MDCs cooperate and coordinate with each
and modernizing firms coordinate with their other in the development and transfer of
counterparts modern technology
23 24
4
4.6 Economic Development as Self- 4.6 Economic Development as Self-
Discovery Discovery
• Hausmann and Rodrik: A Problem of Information • Three building blocks of the theory; and case examples of
• Not enough to say developing countries should produce their reasonableness in practice:
“labor intensive products,” because there are thousands of – Uncertainty about products can produce efficiently (evidence:
them India’s success in information technology was unexpected;
reasons for Bangladesh’s efficiency in hats vs Pakistan’s in
• Industrial policy may help to identify true direct and indirect bedsheets is not clear)
domestic costs of potential products to specialize in, by: – Need for local adaptation (evidence: seen in cases such as
• Encouraging exploration in first stage shipbuilding in South Korea)
• Encouraging movement out of inefficient sectors and into – Imitation can be rapid (e.g. the spread of cut flower exporting in
Colombia)
more efficient sectors in the second stage
25 26
The Growth Diagnostics Framework The Growth Diagnostics Framework
• Focus on a country’s most binding constraints

of economic development: low rate of return
on investment and high cost of financing
• No “one size fits all” in development policy of

market coordination
• Insufficient investment in physical, social,

environmental, and human capital
27 28

Contemporary Economic Development Theories PDF

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Contemporary Economic Development Theories PDF

Transféré par

Droits d'auteur :

Formats disponibles

Underdevelopment as

• The success or failure of economic

Technological Transfer for

• Unstable equilibrium: The S-shaped function

Technological Transfer for

• Public policy creating incentives for • Investment decisions made by modern-

The Big Push:

• As W 2 > W 1, other firms enter the modern

The Big Push: The Big Push:

Conditions Making Conditions Making

Further Problems of Further Problems of

The O-Ring Theory of The O-Ring Theory of

• Production is modeled with strong • Implications of strong complementarities for

The Growth Diagnostics Framework The Growth Diagnostics Framework

• Focus on a country’s most binding constraints

• No “one size fits all” in development policy of

• Insufficient investment in physical, social,

Vous aimerez peut-être aussi