6. Contemporary Theories of development Flashcards
What does the theory of coordination failure argue is the reason for underdevelopment
Complementarity in agents actions
what is complementarity?
Actions by one agent increases the incentive other agents to engage in similar actions example, investment must be undertaken by many agents simultaneously for the terms to be positive for any economic agents
Why may coordination failure occur?
Due to agents inability to coordinate their actions leading to a low-level equilibrium, where all agents are worse off
what is an example of complimentaries?
Specialised firms and specialised labour, such as financing, London, or IT clusters
What is an example of the importance of complementarities and how do you show it graphically?
Multiple equilibria - plot individual investment on the y against expected decision by other agents on x, 45 degree line and s-shaped curve through it
What is a poverty trap?
Individuals are unable to generate high enough income to maintain wealth and become poorer over time until they reach a low-income equilibrium
Why is poverty sometimes referred to as absorbing?
Once in the vicious cycle it may be impossible to escape
What are some examples of poverty traps?
- Credit constraints
- Lack of insurance
- Nutrition and efficiency wages
- Education
How does a credit constraint poverty trap work?
No assets > no credit > no investment > low productivity > low income
How does a lack of insurance poverty trap work?
No insurance > income, smoothing > low productivity > can’t afford insurance
How does the nutrition and efficiency wage poverty trap work?
Low nutrition > poor health > low productivity > can’t afford nutritious food
What are the implications of the multiple equilibria model?
Only transfers sufficiently large enough to overcome the saddle point will be effective in the long run. A small improvements will have no structural effect.
What does the empirical evidence say about the multiple equilibria model?
- The threshold may be different for each individual and household
- By definitions we shouldn’t see many individuals or households around the threshold
What paper finds evidence of multiple equilibria?
Lybbert et al (2004)
In the multiple equilibria model, how can economic development be kickstarted?
A large enough to take you over the threshold known as the big push.
Explain the rationale behind Rosenstein-Rodan’s theory of a circle of poverty?
Low productivity in one sector > low income > limits on the demand for goods and services from other sectors > perpetuates underdevelopment
How did this idea of the circle of poverty create the idea for the big push?
If all sectors become more productive simultaneously than the increasing income, due to the increasing wages/profits will create the demand for new goods produced. A modern firm can’t sell to a subsistence level population, it needs other firms
How can the circle of poverty be overcome?
A large scale investment in one nation across multiple firms edgy by government could solve this coordination failure. Coordination and simultaneous large scale. Investment in multiple sectors is needed.
What are some common criticisms of multiple equilibria theory?
- lack of empirical evidence
- assumption of homogeneity
What are some common criticisms of the big push theory?
- assumptions of simultaneous investment (doesn’t prioritise sectors with higher growth)
- coordination challenges (Context of weak institutions and governments make this unfeasible)
- neglect structural transformation (needs investment and strucutral change)
What does Kremer’s O-ring stress?
The theory stresses the importance of complimentaries in production, and the consequence of small failures in a production process
What is a key point of the O-ring model?
Positive assortative matching
What is posititve assortative matching?
High skilled workers will seek to work with other high skilled workers. Hence, workers with low skills will have no option but to work together
What are the overall implications of the O-ring model?
- High value production will be concentrated in countries with higher skills
- Similar workers performing similar tasks in high skill countries earn higher wages than in low-skilled countries
- Productivity and wage increase in q at an increasing rate - the wage gap is more than proportionally higher than the skill gap would suggest
- Bottlenecks which multiplicatively affect others production