6. Contemporary Theories of development

Question 1

What does the theory of coordination failure argue is the reason for underdevelopment

Answer 1

Complementarity in agents actions

Question 2

what is complementarity?

Answer 2

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

Question 3

Why may coordination failure occur?

Answer 3

Due to agents inability to coordinate their actions leading to a low-level equilibrium, where all agents are worse off

Question 4

what is an example of complimentaries?

Answer 4

Specialised firms and specialised labour, such as financing, London, or IT clusters

Question 5

What is an example of the importance of complementarities and how do you show it graphically?

Answer 5

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

Question 6

What is a poverty trap?

Answer 6

Individuals are unable to generate high enough income to maintain wealth and become poorer over time until they reach a low-income equilibrium

Question 7

Why is poverty sometimes referred to as absorbing?

Answer 7

Once in the vicious cycle it may be impossible to escape

Question 8

What are some examples of poverty traps?

Answer 8

• Credit constraints
• Lack of insurance
• Nutrition and efficiency wages
• Education

Question 9

How does a credit constraint poverty trap work?

Answer 9

No assets > no credit > no investment > low productivity > low income

Question 10

How does a lack of insurance poverty trap work?

Answer 10

No insurance > income, smoothing > low productivity > can’t afford insurance

Question 11

How does the nutrition and efficiency wage poverty trap work?

Answer 11

Low nutrition > poor health > low productivity > can’t afford nutritious food

Question 12

What are the implications of the multiple equilibria model?

Answer 12

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.

Question 13

What does the empirical evidence say about the multiple equilibria model?

Answer 13

• The threshold may be different for each individual and household
• By definitions we shouldn’t see many individuals or households around the threshold

Question 14

What paper finds evidence of multiple equilibria?

Answer 14

Lybbert et al (2004)

Question 15

In the multiple equilibria model, how can economic development be kickstarted?

Answer 15

A large enough to take you over the threshold known as the big push.

Question 16

Explain the rationale behind Rosenstein-Rodan’s theory of a circle of poverty?

Answer 16

Low productivity in one sector > low income > limits on the demand for goods and services from other sectors > perpetuates underdevelopment

Question 17

How did this idea of the circle of poverty create the idea for the big push?

Answer 17

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

Question 18

How can the circle of poverty be overcome?

Answer 18

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.

Question 19

What are some common criticisms of multiple equilibria theory?

Answer 19

• lack of empirical evidence
• assumption of homogeneity

Question 20

What are some common criticisms of the big push theory?

Answer 20

• 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)

Question 21

What does Kremer’s O-ring stress?

Answer 21

The theory stresses the importance of complimentaries in production, and the consequence of small failures in a production process

Question 22

What is a key point of the O-ring model?

Answer 22

Positive assortative matching

Question 23

What is posititve assortative matching?

Answer 23

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

Question 24

What are the overall implications of the O-ring model?

Answer 24

• 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

Question 25

What are some common criticisms of O-ring theory? (5)

Answer 25

• Limited applicability beyond certain sectors
• Static view of technology (output only on individual tasks)
• Neglect of Institutional and organisational factors
• Implications for development policy
• Only holds up in production processes with strong complementarities

Question 26

What are the HRV growth diagnostics?

Answer 26

The HRV growth diagnostics approach, focuses on finding and addressing entries, mostly constraints and growth

Question 27

Why is the HRV approach special?

Answer 27

It recognises that they are very different situations in different low income countries. No one-size fits all policy

Question 28

If the constraint on a countries development is high taxation what would we expect to see?

Answer 28

A large informal sector

Question 29

If the constraint on a countries development is infrastructure what would we expect to see?

Answer 29

Significant congestion

Question 30

If the constraint on a countries development is education what would we expect to see?

Answer 30

High rates of return to education

Question 31

What are some examples of agencies who have adopted HRV growth diagnostics?

Answer 31

• The inter-American development bank (IADB)
• The world bank

Question 32

What are some common criticisms of Growth diagnostics?

Answer 32

• subjectivity in diagnostic process (analysts may prioritise different things)
• neglect of political economy factors (Institutional constraints may limit the feasibility of reforms)
• Limited policy prescription (only a diagnosis)

Question 33

What is the basic idea of the S-shaped function in multiple equilibria with an example?

Answer 33

The benefits an agent receives from taking an action depend positively on how many other agents are expected to take the action or on the extent of those actions. For example, the price a farmer can hope to receive for his produce depends on the number of middlemen who are active in the region, which in turn depends on the number of other farmers who specialise in the same product.

Question 34

What is the S-shaped curve known as?

Answer 34

The “privately rational decision function”

Question 35

Explain why there is an S-shape in the model

Answer 35

This shape reflects what is thought to be the typical nature of complementarities. In general, some agents may take the complementary action (such as investing) even if others in the economy do not, particularly when interactions are expected to be with foreigners, such as through exporting to other countries. If only a few agents take the action, each agent may be isolated from the others, so spillovers may be minimal. Thus, the curve does not rise quickly at first as more agents take the action. But after enough agents invest, there may be a snowball effect, in which many agents begin to provide spillover benefits to neighbouring agents, and the curve increases at a much faster rate. Finally, after most potential investors have been positively affected and the most important gains have been realised, the rate of increase starts to slow down.

Question 36

What is the flying geese phenomenon and where has it been seen?

Answer 36

Successive development by countries in a region has been dubbed the “flying geese” phenomenon. For example South Korea and Taiwan focused on export-oriented industrialisation strategy and China followed suit.

Question 37

What is an example of where multiple equilibria has been seen?

Answer 37

The paramount leader Deng Xiaoping paid a 1991 visit to the southern China regions that had been leading in growth and reform and proclaimed, “You should be bolder and develop faster.” Coincidence or not, a rapid burst of investment and growth, as well as policy reform, followed his speech and its subsequent publication. It has been suggested that in effect this served to coordinate expectations and led to the shift from a lower-growth to a higher-growth equilibrium. Much more generally, the government of China has used its centralised authority to coordinate investments across industries.

Question 38

How have countries in Asia got around the bottlenecks issue?

Answer 38

By employing foreign manufacturing techniques and export-led investment and growth

Question 39

Give a statistic that supports the fact that China got around the bottlenecks

Answer 39

Zuliu Hu and Mohsin Khan concluded that productivity gains explained more than 42% of China’s growth in the formative 1979–1994 period and that productivity had overtaken investment by the early 1990s as the largest source of growth.