Chapter 5 Slide 1 Copyright © 2003 Pearson Education, Inc.

Chapter 5 Slide 1Copyright © 2003 Pearson Education, Inc.

Chapter 5 Slide 2Copyright © 2003 Pearson Education, Inc.

Contemporary Models of Development and Underdevelopment

Chapter 5

Chapter 5 Slide 3Copyright © 2003 Pearson Education, Inc.

New Growth Theory: Endogenous Growth Motivation for the new growth theory The Romer model

Y AK L Ki i i 1(5.1)

Y AK L 1 (5.2)

g n

1

(5.3)

Chapter 5 Slide 4Copyright © 2003 Pearson Education, Inc.

New Growth Theory: Endogenous Growth Motivation for the new growth theory The Romer model Criticisms of the new growth theory

Chapter 5 Slide 5Copyright © 2003 Pearson Education, Inc.

Underdevelopment as a Coordination Failure 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

Chapter 5 Slide 6Copyright © 2003 Pearson Education, Inc.

Multiple Equilibria: A Diagrammatic Approach 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

Chapter 5 Slide 7Copyright © 2003 Pearson Education, Inc.

Figure 5.1 Multiple Equilibria

Chapter 5 Slide 8Copyright © 2003 Pearson Education, Inc.

Starting Economic Development: The Big Push Sometimes market failures lead to a

need for public policy intervention The big push: a graphical model

– assumptions

Chapter 5 Slide 9Copyright © 2003 Pearson Education, Inc.

Figure 5.2 The Big Push

Chapter 5 Slide 10Copyright © 2003 Pearson Education, Inc.

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 eqilibria– other cases in which a big push may be

necessary Why can’t the problem be solved by a

‘super-entrepreneur’?

Chapter 5 Slide 11Copyright © 2003 Pearson Education, Inc.

Further Problems of Multiple Equilibria Inefficient advantages of incumbency Behavior and norms Linkages Inequality, multiple equilibria, and

growth

Chapter 5 Slide 12Copyright © 2003 Pearson Education, Inc.

Kremer’s O-Ring Theory of Economic Development The O-ring model

Chapter 5 Slide 13Copyright © 2003 Pearson Education, Inc.

Figure 5.3 The O-Ring Production Function: Wage as a Function of Human Capital Quality

Chapter 5 Slide 14Copyright © 2003 Pearson Education, Inc.

Kremer’s O-Ring Theory of Economic Development The O-ring model Implications of the O-ring theory

Chapter 5 Slide 15Copyright © 2003 Pearson Education, Inc.

Concepts for Review Agency costs Agent Aid failure Asymmetric

information Big push Complementarities Complementary

investments

Congestion Coordination failure Deep intervention Endogenous growth

theory Linkage Multiple equilibria New growth theory O-ring model

Chapter 5 Slide 16Copyright © 2003 Pearson Education, Inc.

Concepts for Review, cont’d

O-ring production function

Pareto improvement Pecuniary

externalities Poverty trap Prisoners’ dilemma Public good

Romer’s endogenous growth model

Solow residual Technological

externalities Underdevelopment

trap Where-to-meet

dilemma