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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. The Growth Diagnostics Framework: Hausmann-Rodrik-Velasco Growth Diagnostics Decision Tree11

12. © 2011 South-Western, a part of Cengage Learning12

13. 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

14. 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

15. 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

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