Contemporary theories of development

Question 1

Underdevelopment as a coordination failure:

Answer 1

• stresses the importance of complementarities in agents actions
• action by one agent increases incentive of other agents to engage in similar activities
• eg investment must be undertaken by several agents simultaneously for postive returns

Question 2

Coordination failure

Answer 2

occurs when agents are unable to coordinate their actions, leads to low level equilibrium where all agents are worse off. existence of multiple equilibria

Question 3

An example of complementarities

Answer 3

specialised firms and labour

Question 4

Specialised firm and labour

Answer 4

-firms wont locate to areas where workers dont have the required skills
- workers in these areas dont acquire these skills since no firms there to employ them
everyone woudl be better off if firms invested in these areas and workers acquired these skills
- but unless firms coordinate economy will be stuck at bad equilibirum wtih high poverty and low economic growth
- to escape bad eq: coordinated joint investment by frims eg trainingB

Question 5

Big push

Answer 5

need for one large one time intervention across multiple sectors

Question 6

Circle of poverty

Answer 6

• low productivity in one sector
• lower incomes
• low demand for good and services in other sectors
• perpeturates underdevelopment
• if all sectors became productvie simulatenously, increase income by increasing wages / profits, increase demand for new goods produced

Question 7

an underdevelopment trap

Answer 7

• assume closed, subsistence economy ie no trade or disposable income
• no demand for goods produced by modern firms as people have no income tospare
• requires existence of other modern firms, because profits of first modern firm require this no modern firm wants to start production
• a large scale invesment in modernisation across multiple firms could solve this cooridnation failure

Question 8

Criticisms of big push theory:

Answer 8

1) Assumption of simultaneous invesment: neglect of possibility of increasing investment in sectors with a high potential for growth
2) coordination challenges: implementing coordinated investment in contexts with weak institutions and governance = unfeasible
3) neglect of structural transformation- dev requires increase in investment nad strucutural change

Question 9

O Ring theory

Answer 9

stresses importance of complementarities in production and consequences of small failures on tje production process

Question 10

Production function

Answer 10

Q = f(q1, q2, q3…qn) 0 <qi < 1 skill level of worker completing task i
- model assumes strong complementartiies among inputs.-
- a single weak link in production process reduces probability that output will be produced

Question 11

Implications of O ring theory

Answer 11

1) POSITIVE ASSORTIVE MATCHING: high skilled workers seek work with other high skilled workers. low skilled owrkers forced to wokr together. with strong complementarities in production, more efficient to match

2) high value production in countries with higher skills, higher wages

3) model stresses importance of bottlenecks - affect production of other- decreases indiviual incentive to invest in skills

Question 12

criticisms of o ring theory

Answer 12

1) Static view of technolgy ; assumes quality of output soley based on successful completion of individual tasks

2) neglect of institutional / organisational factors: these can affect production processe