1. Economic Development: Major Ideas Diminishing Returns | Equilibrium Ricardo/Malthus Marx: declining profit Solow  convergence Increasing Returns | Vicious & Virtuous Circles Smith Marx: Accumulation “Build the material and technical foundations of communism” Schumpeter Polanyi Myrdal/other ’50s economists

2. Production Possibilities Frontiers Countries on the frontier: diminishing returns –Increasing returns from technology? Countries trapped inside the frontier: –Increasing returns if they break loose –TRAP reinforced by increasing returns  positive feedbacks  vicious circles Coordination Failures | Agglomeration Economies Network Economies

3. Productivity: A Social Outcome Easterly’s assembly line metaphore: –If finished product depends on everyone’s performance, not just your own, you want to match up with the best. “Those who possess vehicles chat among themselves, those who possess wheelbarrows chat among themselves,…” –If yours is a club of the unskilled, best stick to primary goods (avoid processing that can mess up thing)  Primary Goods Trap

4. Primary Goods Trap Prebisch – Singer Analysis: Elasticity Pessimism Demand Elasticities Primary Goods: Low income elasticity Manufactures: High income elasticity | Terms of Trade Worsen for LDCs Primary Goods: Low price elasticities of demand and supply  Booms & Busts Prescription: ISI But … ISI confronts economies of scale ISI inhibits innovation

5. Flavors of Increasing Returns Technology: economies of scale Knowledge: a “public good” Leaks: To earn anything on your breakthrough, you’ve got to announce it … others can copy it Knowledge builds … new ideas don’t eliminate old … “stand on shoulders of giants” INTERACTION OPPORTUNITIES  High Rents Matches: Need complements to fully exploit your know-how (Surgeon needs nurses … ) –Small differences in skill  Big differences in rewards Traps: if complements not in place, don’t bother to invest in knowledge acquisition … no one bothers  neighborhood stagnates & decays

6. Disproportionate Rewards: The World Series Probability Yankees beat Cubs in any game = 60 %. Probability Yanks Win 4 in Row = 13% Probability Yanks Win in 5 Games = 21% Probability Yanks Win in 6 Games = 21% Probability Yanks Win in 7 Games = 16% –Probability that Yanks Win = 71% Thems that’s gots gits! Note: capital inflows to the USA

7. Breaking Out of Vicious Circles Jump to the frontier … skip obsolete techs SECURE PROPERTY RIGHTS … key to investment in new technologies Barriers to innovation: Nonappropriability of all benefits social returns > private returns Fear of obsolescence … the next new thing History … accommodate existing technologies

8. Development Strategies Big Push out of trap Advance on many fronts at once  Balanced Growth –Constraints: Finance / Skills  Encourage FDI Selective Growth –enclaves of prosperity – backwash effects and divergence Indicative Planning – subsidies … fund ‘em intelligently – mold expectations