Chapter 4

Report
Chapter 4
Contemporary
Models of
Development and
Underdevelopment
Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
New Growth Theory: Endogenous
Growth


Motivation for the new growth theory
The Romer model
 1
Yi  AKi Li K
Y  AK

   1
L
n
g n 
1     
Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
(4.1)
(4.2)
(4.3)
4-2
New Growth Theory: Endogenous
Growth



Motivation for the new growth theory
The Romer model
Criticisms of the new growth theory
Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
4-3
Underdevelopment as a
Coordination Failure
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Coordination failures occur when agents’
inability to coordinate their actions leads to
an outcome that makes all agents worse off
We’ll consider
– “Big push” models
– The ‘O-ring’ model
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4-4
Multiple Equilibria: A
Diagrammatic Approach
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
Generally, these models can be
diagrammed by graphing an S-shaped
function and the 45º line
Equilibria are
– Stable when the function crosses the 45º line
from above
– Unstable when the function crosses the 45º line
from below
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4-5
Figure 4.1
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4-6
Starting Economic Development:
The Big Push


Sometimes market failures lead to a need
for public policy intervention
The big push: a graphical model
– Assumptions
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4-7
Starting Economic Development:
The Big Push


Sometimes market failures lead to a need
for public policy intervention
The big push: a graphical model
– Assumptions
– Conditions for multiple equilibria
– Other cases in which a big push may be
necessary
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4-8
Figure 4.2
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4-9
Other Cases in Which a Big Push
May Be Necessary
Intertemporal effects
 Urbanization effects
 Infrastructure effects
 Training effects
Why the problem cannot be solved by a
“super-entrepreneur”

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4-10
Further Problems of Multiple
Equilibria
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Inefficient advantages of incumbency
Behavior and norms
Linkages
Inequality, multiple equilibria, and growth
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4-11
Figure 4.3
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4-12
Kremer’s O-Ring Theory of
Economic Development

Implications of the O-ring theory
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4-13
Concepts for Review
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Agency costs
Agent
Aid failure
Asymmetric
information
Big push
Complementarities
Complementary
investments
Copyright © 2006 Pearson Addison-Wesley. All rights reserved.

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Congestion
Coordination failure
Deep intervention
Endogenous growth
theory
Linkage
Multiple equilibria
New growth theory
O-ring model
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Concepts for Review (cont’d)
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O-ring production
function
Pareto improvement
Pecuniary externalities
Poverty trap
Prisoners’ dilemma
Public good
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Copyright © 2006 Pearson Addison-Wesley. All rights reserved.
Romer’s endogenous
growth model
Solow residual
Technological
externalities
Underdevelopment
trap
Where-to-meet
dilemma
4-15

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