Chapter 4 Lecture - Contemporary Models of

Development and Underdevelopment

EC348 Development Economics

Beyond Solow – New Approaches to Growth

• Research by Solow and others reveals that GDP growth in the United States and many other countries has had to do largely, even primarily, with TFP growth (i.e., increases in productivity).

• Research has been conducted on why productivity growth has such a major impact and one explanation is that there are increasing returns to investment in knowledge. This may be a result of positive externalities (spillovers).

Can you think of an example?

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Physical Geography:ProximityEcologyMineral and energy resource

Geopolitical Relations:ConquestImitationThreat

Social institutions:EconomicPoliticalCultural

Technology:ScienceBelief systemsInnovation and diffusion

Demography:Age structureMortality MorbidityFertility

Economic and Social outcomes:

Economic growth

Distribution of income

This flowchart is an example of a model that shows how different variables that affect economic growth relate to each other.

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• Mechanisms of Economic Growth– Accumulation of capital– Division of labor– Innovation– Resource exploitation and depletion (pseudo growth)– Income transfers (e.g. .from rich to poor) (pseudo growth)

• Social, Physical, and Geopolitical Context

• Kinds of Social Institutions– Economic– Political– Cultural (norms, religious beliefs, governed by sanction)– Scientific

To get a better understanding of how these variables relate to each other we will need to distinguish between mechanisms and contexts and institutions

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Underdevelopment as Coordination Failure

• Economic development is difficult to achieve. It has been impossible for some countries (e.g., Nigeria, Sudan), but accomplished by others (e.g., S. Korea, Singapore)

• The success or failure of economic development policies can be explained by the “principal-agent” model.

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Underdevelopment as Coordination Failure• Principal:

– Government

• Agents:

– Households

– Private-sector firms

– Public agencies

– Government-owned enterprises

• International companies

• An effective principal is needed to coordinate actions taken by agents and achieve an optimal outcome, making all agents better-off.

• Coordination failure occurs when the principal fails to induce agents to coordinate their actions, which leads to an outcome that makes all agents worse-off.

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The Big Push to Industrialization

• A big push to industrialization requires a set of leading firms to investment in productive activities and transfer of modern technology

• Investment decisions made by modern-sector firms are mutually reinforcing and public policy intervention is needed to correct market failure

Refer to Handout

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The O-Ring Theory of Economic Development

• Production is modeled with strong complementarities of inputs (labor & capital) and interdependencies among firms (output of one firm is input of another)

• Positive assortative matching in production: skilled labor works with its peers; profitable and modernizing firms coordinate with their counterparts

• Implications of strong complementarities for economic development and the distribution of income across countries will induce countries at the same level of development to coordinate their actions

• MDCs cooperate and coordinate with each other in the development and transfer of modern technology

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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:

• Encouraging exploration in first stage

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

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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

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The Growth Diagnostics Framework: Hausmann-Rodrik-Velasco Growth Diagnostics Decision Tree

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© 2011 South-Western, a part of Cengage Learning12

Neo-liberal / Capitalist

Marxist/ Socialist Populist Grassroots

China, Asian Tigers

Cuba, Kerala (India)

Venezuela / Latin America

Community based

•Market led development, following the ‘Modernisation Theory’ of WW Rostow•Stressing industry and infrastructure, free trade and attracting foreign direct investment to create jobs and raise incomes.

•Breaking free of capitalism and profit.•State ownership and planning so that profits from industry and uses for health and education; usually involves wholesale land reform .•State control and limited involvement in world trade and TNCs

•Charismatic ‘man of the people’ leaders create a ‘them and us’ discourse promising social equality and using policies that appeal to the pockets of ordinary people•Critics state populism is directionless and leads to poor economic decision-making

•Small-scale, community focussed development often aiming to meet basic needs rather than hugely improve incomes•Often involves local or international NGOs who provide some funding and other support.

Political Viewpoint Approaches

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Bottom up Top Down

Scale Small; based on one community or area e.g. a valley

Large; often part of national planning aims

Leadership Community and NGOs; partnership arrangements

Government and government agencies; construction and engineering TNCs

Funding source

Local people and NGOs; donations or earned income recycled into the community

Government, via multilateral aid (WB / IMF) or bilateral aid; private investment

Aims Meeting basic needs of food, health, education and water; small improvements in income

Meeting national needs in terms of energy or water supply, or transport; profit

Technology

Intermediate / appropriate Hi-Tech

Types of project

Food production, water supply, small scale renewable energy

Electricity, transport, industry and infrastructure

Winners Local people; the environment Industry, urban dwellers, TNCs

Losers Usually are none Environment, rural people

Strategies

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Player Role

World Bank / IMF These two IGOs lend money to the developing world – essentially funding development, and as part of this process guide economic policy (the IMF). Much of the developing world’s debt is owed to the IMF and WB.

TNCs Invest in the developing world e.g. building factories; Foreign Direct Investment tends to flow to low cost locations, but where people are educated and skilled; Africa’s share of FDI is therefore small.

United Nations Monitors the MDG, but has many component organisation which focus on development (UNDP), health (WHO), food and farming (FAO) and environmental issues (UNEP); often involved in disaster relief as well as longer term aid.

Governments Developed world governments provide funding for the UN, IMF and WB. They also provide bi-lateral aid the developing world in the form of Official Development Assistance (ODA). Developing World governments manage their countries path to development.

NGOs Charities and not-for-profit organisations provide aid to the developing world, often in a smaller, more localised way compared to Governments and IGOs. Some NGOs receive government funding

Individuals As consumers and voters, individuals can alter government policy both in the developed and developing world; community led development in becoming more common; developed world consumers may support fair trade.

Global Players

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