EC348 Development Economics Chapter 4 Lecture - Contemporary Models of Development and Underdevelopment

Beyond Solow – New Approaches to Growth Research by Solow and others reveals that GDP growth in the United States and many other countries has had to do largely, even primarily, with TFP growth (i.e., increases in productivity). Research has been conducted on why productivity growth has such a major impact and one explanation is that there are increasing returns to investment in knowledge. This may be a result of positive externalities (spillovers). Can you think of an example? 2

Physical Geography: Proximity Ecology Mineral and energy resource Geopolitical Relations: Conquest Imitation Threat This flowchart is an example of a model that shows how different variables that affect economic growth relate to each other. Social institutions: Economic Political Cultural Economic and Social outcomes: Economic growth Distribution of income Technology: Science Belief systems Innovation and diffusion Demography: Age structure Mortality Morbidity Fertility 3

Mechanisms of Economic Growth To get a better understanding of how these variables relate to each other we will need to distinguish between mechanisms and contexts and institutions Mechanisms of Economic Growth Accumulation of capital Division of labor Innovation Resource exploitation and depletion (pseudo growth) Income transfers (e.g. .from rich to poor) (pseudo growth) Social, Physical, and Geopolitical Context Kinds of Social Institutions Economic Political Cultural (norms, religious beliefs, governed by sanction) Scientific 4

Underdevelopment as Coordination Failure Economic development is difficult to achieve. It has been impossible for some countries (e.g., Nigeria, Sudan), but accomplished by others (e.g., S. Korea, Singapore) The success or failure of economic development policies can be explained by the “principal-agent” model. 5

Underdevelopment as Coordination Failure Principal: Government Agents: Households Private-sector firms Public agencies Government-owned enterprises International companies An effective principal is needed to coordinate actions taken by agents and achieve an optimal outcome, making all agents better-off. Coordination failure occurs when the principal fails to induce agents to coordinate their actions, which leads to an outcome that makes all agents worse-off. 6

The Big Push to Industrialization A big push to industrialization requires a set of leading firms to investment in productive activities and transfer of modern technology Investment decisions made by modern-sector firms are mutually reinforcing and public policy intervention is needed to correct market failure Refer to Handout 7 7

The O-Ring Theory of Economic Development Production is modeled with strong complementarities of inputs (labor & capital) and interdependencies among firms (output of one firm is input of another) Positive assortative matching in production: skilled labor works with its peers; profitable and modernizing firms coordinate with their counterparts Implications of strong complementarities for economic development and the distribution of income across countries will induce countries at the same level of development to coordinate their actions MDCs cooperate and coordinate with each other in the development and transfer of modern technology 8

Economic Development as Self-Discovery Hausmann and Rodrik: A Problem of Information Not enough to say developing countries should produce “labor intensive products,” because there are thousands of them Industrial policy may help to identify true direct and indirect domestic costs of potential products to specialize in, by: Encouraging exploration in first stage Encouraging movement out of inefficient sectors and into more efficient sectors in the second stage 9

The Growth Diagnostics Framework Focus on a country’s most binding constraints of economic development: low rate of return on investment and high cost of financing No “one size fits all” in development policy of market coordination Insufficient investment in physical, social, environmental, and human capital 10

The Growth Diagnostics Framework 11

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Neo-liberal / Capitalist Venezuela / Latin America Political Viewpoint Approaches Neo-liberal / Capitalist Marxist/ Socialist Populist Grassroots China, Asian Tigers Cuba, Kerala (India) Venezuela / Latin America Community based Market led development, following the ‘Modernisation Theory’ of WW Rostow Stressing industry and infrastructure, free trade and attracting foreign direct investment to create jobs and raise incomes. Breaking free of capitalism and profit. State ownership and planning so that profits from industry and uses for health and education; usually involves wholesale land reform . State control and limited involvement in world trade and TNCs Charismatic ‘man of the people’ leaders create a ‘them and us’ discourse promising social equality and using policies that appeal to the pockets of ordinary people Critics state populism is directionless and leads to poor economic decision-making Small-scale, community focussed development often aiming to meet basic needs rather than hugely improve incomes Often involves local or international NGOs who provide some funding and other support. 13

Strategies Bottom up Top Down Scale Small; based on one community or area e.g. a valley Large; often part of national planning aims Leadership Community and NGOs; partnership arrangements Government and government agencies; construction and engineering TNCs Funding source Local people and NGOs; donations or earned income recycled into the community Government, via multilateral aid (WB / IMF) or bilateral aid; private investment Aims Meeting basic needs of food, health, education and water; small improvements in income Meeting national needs in terms of energy or water supply, or transport; profit Technology Intermediate / appropriate Hi-Tech Types of project Food production, water supply, small scale renewable energy Electricity, transport, industry and infrastructure Winners Local people; the environment Industry, urban dwellers, TNCs Losers Usually are none Environment, rural people 14

Global Players 15 Player Role World Bank / IMF These two IGOs lend money to the developing world – essentially funding development, and as part of this process guide economic policy (the IMF). Much of the developing world’s debt is owed to the IMF and WB. TNCs Invest in the developing world e.g. building factories; Foreign Direct Investment tends to flow to low cost locations, but where people are educated and skilled; Africa’s share of FDI is therefore small. United Nations Monitors the MDG, but has many component organisation which focus on development (UNDP), health (WHO), food and farming (FAO) and environmental issues (UNEP); often involved in disaster relief as well as longer term aid. Governments Developed world governments provide funding for the UN, IMF and WB. They also provide bi-lateral aid the developing world in the form of Official Development Assistance (ODA). Developing World governments manage their countries path to development. NGOs Charities and not-for-profit organisations provide aid to the developing world, often in a smaller, more localised way compared to Governments and IGOs. Some NGOs receive government funding Individuals As consumers and voters, individuals can alter government policy both in the developed and developing world; community led development in becoming more common; developed world consumers may support fair trade. 15