1. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 4 Contemporary Models of Development and Underdevelopment

2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-2 New Growth Theory: Endogenous Growth n Motivation for the new growth theory n The Romer model (4.1) (4.2) (4.3)

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-3 New Growth Theory: Endogenous Growth n Motivation for the new growth theory n The Romer model n Criticisms of the new growth theory

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-4 Underdevelopment as a Coordination Failure n Coordination failures occur when agents’ inability to coordinate their actions leads to an outcome that makes all agents worse off n We’ll consider –“Big push” models –The ‘O-ring’ model

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-5 Multiple Equilibria: A Diagrammatic Approach n Generally, these models can be diagrammed by graphing an S-shaped function and the 45º line n Equilibria are –Stable when the function crosses the 45º line from above –Unstable when the function crosses the 45º line from below

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-6 Figure 4.1

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-7 Starting Economic Development: The Big Push n Sometimes market failures lead to a need for public policy intervention n The big push: a graphical model –Assumptions

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-8 Starting Economic Development: The Big Push n Sometimes market failures lead to a need for public policy intervention n The big push: a graphical model –Assumptions –Conditions for multiple equilibria –Other cases in which a big push may be necessary

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-9 Figure 4.2

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-10 Other Cases in Which a Big Push May Be Necessary n Intertemporal effects n Urbanization effects n Infrastructure effects n Training effects Why the problem cannot be solved by a “super-entrepreneur”

11. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-11 Further Problems of Multiple Equilibria n Inefficient advantages of incumbency n Behavior and norms n Linkages n Inequality, multiple equilibria, and growth

12. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-12 Figure 4.3

13. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-13 Kremer’s O-Ring Theory of Economic Development n Implications of the O-ring theory

14. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-14 Concepts for Review n Agency costs n Agent n Aid failure n Asymmetric information n Big push n Complementarities n Complementary investments n Congestion n Coordination failure n Deep intervention n Endogenous growth theory n Linkage n Multiple equilibria n New growth theory n O-ring model

15. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4-15 Concepts for Review (cont’d) n O-ring production function n Pareto improvement n Pecuniary externalities n Poverty trap n Prisoners’ dilemma n Public good n Romer’s endogenous growth model n Solow residual n Technological externalities n Underdevelopment trap n Where-to-meet dilemma