Topics 4 and 5 for MC Flashcards
Four Approaches to Development
- Linear Stages of growth
- Theories and patterns of structural change
- International-dependence revolution
- neoclassical, free market counterrevolution
Linear-Stages Theories
Rostow’s Stages of Growth. The traditional society, preconditions for take off into self-sustaining growth, take off, drive to maturity, age of mass consumption
Harrod-Domar Model
Functional Relationship growth rate of gross domestic product depends directly on national net savings and inversely on national capital-output ratio. Savings and output equations. The more savings the faster the growth.
Criticisms of Stages Model (HD)
necessary v sufficient conditions - it’s not enough to have capital and investment and there aren’t linear stages of development, it’s different for every country
structural-change models
focus on mechanisms for transforming economic structure from traditional subsistence to modern urbanized diverse manufacturing economy. hypothesis that underdevelopment is due to under utilization of resources arising from structural or institutional factors
Lewis-Two-Sector Model
two sector surplus labor model, traditional, overpopulated (rural) subsistence sector,, high productivity, modern (urban) industrial sector. focus on process of labor transfer, growth of output and employment in the modern sector.
Criticisms of the Lewis Model
rate of labor transfer and employment creation may not be proportional to the rate of modern-sector capital accumulation. unrealistic assumptions: reinvestment of profits, surplus labor in rural areas, constant real urban wages, assumption of diminishing returns in modern industrial sector
Patterns-of-development Analysis
an attempt to id characteristic features of the internal process of structural transformation that a “typical” developing economy undergoes as it generates and sustains modern economic growth
Empirical Patterns of Development
- switch from ag to industry
- rural-urban migration
- steady accumulation of physical and human capital
- population growth first increasing and then decreasing with decline in family size
Structural Changes Theories
development isn’t the same everywhere and there are some patterns but every case is unique
Neoclassical Dependence Model
- legacy of colonialism
- unequal power
- core periphery
- comprador groups
The False-Paradigm Mdoel
pitfalls of using “expert” foreign advisors who misapply developed country models
International-Dependence Revolution Recommendatinos
widespread fundamental economic, political and institutional reforms
International Dependence Revolution Criticisms
does little to show how to achieve development in a positive sense; accumulating counterexamples. Experiences with industrial nationalization and state-run production have mostly been bad
Neoclassical Counterrevolution: Market Fundamentalism
context: Reagan, Thatcher changed balance of power within World Bank and IMF, created GATT. Supply-side macro policies, privatization, unbridled free-market capitalism
Changing the Statist Model: 3 approaches
- free market approach
- public choice approach
- market-friendly approach
Solow Neoclassical Growth Model
constant returns to scale in steady state, only technology improvement can increase output and growth
Ways Developing Economies Differ from Western Economies
- limited information
- fragmented markets
- large nonmonetized sector
- widespread externalities in consumption and production
- discontinuities and economies of scale in production
- pervasive monopoly power with different decision rules
- invisible hand acts to benefit the already-haves
Endogenous Growth Theory
key assumptions:
- no decreasing returns to scale
- increasing returns to scale in aggregate output
- role of externalities in determining the rate of return on investments
Reconciling Differing Theories
gov’ts and markets both fail
must attend to institutional and political realities in developing world
developmetn economics has no universally accepted paradigm
each theory has some strength and weaknesses
complementarities
actions taken by one agent reinforce incentives for others to take similar actions
coordination failure
when you can’t get those complementarities together. multiple equilibria are a symptom of this sometimes
deep intervention
gov’t policy sometimes needed when there are multiple equilibria and the economy is stuck on the bad one
pecuniary externalities
positive or negative spillover effects on an agent’s costs of revenues
Assumptions of Big Push Model
- Only one factor of production = labor
- N types of products and consumers spend and equal amount on each good
- closed economy
- factor payments are less in the traditional sector than the modern sector
- constant returns to scale in traditional sector, increasing in modern
- perfection competition in traditional sector, limit-pricing monopolistic structure in modern
When is a “big push” necessary?
- high modern sector wages, need to raise total demand
- intertemporal effects, need to redistribute demand to later periods
- infrastructure/training effects reducing fixed costs of later entrants
how are large distortions created in the “big push” model?
very small individual distortions, each firm’s failure to account for it’s impact on other firm’s profit creates a very large distortion and a failure to industrialize at all
More problems with multiple equilibria
inefficient advantages of incumbancy - newer lower cost technology will not be adopted. Behavior and norms, corruption is harder to overcome than it is given credit for. Backwards linkages raise demadn for an industry while forward linkages lower the cost of using an industry’s output. Inequality; lack of access to credit; indivisibilities in human capital investment.
Fundamentals of Michael Kremer’s O-Ring Theory of Economic Development
- production is modeled with strong complementarities among inputs
- the “Challenger” analogy
- positive assortative matching in production, high skill workers have incentives to work with other high skilled workers
- implications of strong complementarities for economic development and the distribution of income across countries
“O-Ring” theory
- a production process is broken down into n tasks
- the various ways of carrying out these tasks are ordered by skill level q, where q is between 0 and 1
- with 2 workers the output it given by BF(qiqj)
(multiplying the q values of each of the n tasks together, this is the reason people want to work with other productive people)
O-Ring Theory Implications
- workers earn higher wages in high skill firms than in low skilled firms,
- wages are more than proportionally higher in developed countries than would otherwise be predicted.
- incentives for upgrading ones own skills depends on the human capital investment of others
- countries with high skill workers tend to have larger firms and specialized in more complex products
- firm size and wages will be positively correlated across and within countries
- brain drain
Hausmann and Rodrik Theory
a problem of information, need to discover comparative advantage. not enough to say developing countries should produce labor intensive products because that’s not specific enough
Building Blocks of Self-Discovery
- uncertainty about what products can be produced efficiently
- need for local adaptation of foreign tech
- imitation can be rapid
HRV Growth Diagnostics Frame Work
- focus on a country’s most binding constraints on economic growth
- no “one-size fits all”
- requires careful research to determine the most likely binding constraint
can doing inefficient things be rational?
yes!
Rostow’s Stages of Economic Growth
- Traditional society
- pre-conditions for take off
- take off
- drive to maturity
- age of mass consumption
Assumptions of the Lewis Model
- there is surplus labor in agriculture and therefore you can draw from that labor without diminishing output
- all rural workers share equally in output so wage depends on APL
- process of modern sector self-sustaining growth and employment expansion will continue until all surplus rural labor is absorbed in the new industrial sector
- after all surplus workers move the MPL doesn’t equal zero and labor-to-land ratio of rural product doesn’t equal zero ~Lewis Turning Point~
Gini Coefficient
measure of inequality in the country - says nothing about average income level
where-to-meet dilemma
a situation in which all parties would be better off cooperating rather than competing, but lack of info about how to do so prevents cooperation. If cooperation is achieved there is no subsequent incentive to defect or cheat away from that equilibrium.
congestion
opposite of a complementarity, and action taken by an agent which decreases incentives for other agents to take similar actions.
Pareto Improvement
a situation in which one or more persons may be made better off without making anyone worse off. This is a very low bar to pass, child labor can be considered pareto optimal.
intertemporal effects
even if the industrial wage rate is 1 multiple equilibria can occur if investment must be undertaken in the current period to get a more efficient production process in the next period
urbanization effect
rural to traditional and urban to modern push to move urban centers needed
infrastructure effects
using infrastructure makes it worth it to build
training effects
there is underinvestment in training facilities because entrepreneurs know that workers they train may be lured away by another firm in the next period who didn’t have to pay training cost
agency cost
costs of monitoring managers and other employees and designing and implementing schemes to ensure compliance or provide incentives to follow wishes of employer
inefficient advantages of incumbency
the first to enter have a huge advantage and even if another firm comes with better tech they may not be able to enter because start up costs are too high
linkages
strategy for solving coordination probs, forward linkages lower the cost of using and industry’s output
why inequality is bad for growth
- the rich don’t save as much as we thought they did
- the poor don’t have access to credit, cutting out group of potential entrepreneurs
reasons market prices in developing countries may not reflect true value
- inflation and currency overvaluation
- wage rates, capital costs and unemployment cause factor price distortion
- tariffs, quotas, subsidies and import substitution mean there is discrimination against the export sector
- savings deficiency: pressure to provide poor with more consumption makes it difficult to save enough
- social rate of discount, may not undertake good programs because we are too biased to the present
Lee Thesis
dictatorship is necessary to get over development hump
