ECO 102 Development Economics

1. ECO 102 Development Economics Aisha Khan Summer 2009 Section G & I Lecture eleven

2. Contemporary Models of Development • Chapter Five

3. 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

4. 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

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

6. Romer model • Finds that β >0 means that g-n > 0 • Hence positive endogenous growth

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

8. Underdevelopment as a coordination failure • 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 lead a country to be trapped in underdevelopment. • government deep intervention can help solve at times

9. Underdevelopment as a coordination failure • Complementarities between actions allows network effects • E.g of a complementarity • The availability of specifically skilled labor and the presence of firms that needs the labor with specific skills • Complementary investments must come at the same time

10. Multiple Equilibria • Multiple equilibria can arise when there is coordination failure • Graphically we can show multiple equilibria • S shaped function reflects • The benefits an agent receives from taking an action depend positively on how many other agents are expected to take the action

11. Multiple Equilibria Individual investment level D1 D2 D3 Average investment level

12. Multiple Equilibria • Equilibrium is where the S function intersects the 45 degree line • Stable equilibria  D1 and D3

13. Big Push: Starting economic devpt • Coordination failure model • Assumption • Economy is not able to export • Subsistence economy • “big push” is needed to stimulate investment in other areas of good production (need for coordination)

14. Case-Study: Economist Article

15. Case-Study: China

16. Case-Study: China • This case study examines the development experience of China. Let us consult the Penn World Tables (http://datacentre.chass.utoronto.ca/pwt/) to gather statistics on these countries over time. Under PWT 6.1, choose Alphabetical List of Countries, then select China. Retrieve data on population and Real GDP per Capita (Constant price, chain series) from 1970 to 2000. Now divided • Population in 2000 to Population in 1970 • Real GDP per Capita in 2000 to Real GDP per Capita in 1970 • Which number is larger? • What can you infer about China’s economic development from the above comparison?