ECO 102 Development Economics Aisha Khan Summer 2009 Section G & I Lecture Ten

Contemporary Models of Development Chapter Five

The New Growth Theory: Endogenous Growth Traditional growth theories (chapter 4) Don’t explore long term growth Motivation Solow residual Increases in GDP that arise not due to changes in capital of labor Exogenous and independent process of technological progress Persistent GNP growth is determined by the production process not external forces

The Romer Model Technological spillovers in the process of industrialization Assumes Growth processes derive from the firm or industry level CRS Capital stock includes knowledge  public good  spill over

Romer model g-n = β/[1-α+β] g= output growth rate n= population growth rate

Criticism Assumes single sector production Doesn’t incorporate the transformation of labor and capital in the production process Allocational inefficiencies

Underdevelopment as a coordination failure A state of affairs in which agents inability to coordinate their behavior leads to an outcome where all agents are worse off than in the alternative situation Illustrated by the “where-to-meet” problem Lack of coordination can make a country be trapped in underdevelopment. government deep intervention can help solve at times

Reminder Assignments on Kenya due today

Case-Study: Economist Article