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Contemporary Economic Development Theories PDF
Contemporary Economic Development Theories PDF
Chapter 4
Coordination Failure
Contemporary • Economic development is difficult to
Models of achieve. It has been impossible for some
Development and countries (e.g., Nigeria, Sudan), but
Underdevelopment accomplished by others (e.g., S. Korea,
Singapore)
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Underdevelopment as Underdevelopment as
Coordination Failure Coordination Failure
• Principal: • An effective principal is needed to
– Government coordinate actions taken by agents and
achieve an optimal outcome, making all
• Agents: agents better-off.
– Households
– Private-sector firms • Coordination failure occurs when the
– Public agencies principal fails to induce agents to coordinate
– Government-owned enterprises their actions, which leads to an outcome that
– International companies makes all agents worse-off.
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Multiple Equilibria: Technological Transfer for
Graphical Illustration Modernization
• Stable equilibrium: The S-shaped function crosses
the 45º line from above (points D1 and D3). Here
firms adjust their investment decisions in
coordination with average investment in the
industry.
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The Big Push: The Big Push:
Graphical Illustration Coordination Failure
• At a low wage rate like W 1, a new firm will
enter the modern sector after paying the
fixed labor cost (F). With high demand
(Q2), the firm makes profit and invests in
modern technology
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Coordination Problem Cannot Be Coordination Problem Cannot Be
Solved by a Super-Entrepreneur Solved by a Super-Entrepreneur
• Capital market failure: bankers are unwilling • Limited knowledge: agents do not have
to provide loans to a single firm sufficient information about the importance
of industrialization
• Cost of monitoring managers: expensive
agency costs to ensure compliance of
employees • Lack of empirical evidence: agents do not
know that other firms are investing in
• Communication failure: agents wanting to modern technology
share profit cannot convince the super-
entrepreneur to do so
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• Inequality and growth: trickle-up growth, • Behavior and norms: agents may be corrupt
resulting in increased inequality and poverty, and bribery may be the standard method of
reduces the buying power of workers and doing business internationally
their demand for manufactured goods
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4.6 Economic Development as Self- 4.6 Economic Development as Self-
Discovery Discovery
• Hausmann and Rodrik: A Problem of Information • Three building blocks of the theory; and case examples of
• Not enough to say developing countries should produce their reasonableness in practice:
“labor intensive products,” because there are thousands of – Uncertainty about products can produce efficiently (evidence:
them India’s success in information technology was unexpected;
reasons for Bangladesh’s efficiency in hats vs Pakistan’s in
• Industrial policy may help to identify true direct and indirect bedsheets is not clear)
domestic costs of potential products to specialize in, by: – Need for local adaptation (evidence: seen in cases such as
• Encouraging exploration in first stage shipbuilding in South Korea)
• Encouraging movement out of inefficient sectors and into – Imitation can be rapid (e.g. the spread of cut flower exporting in
Colombia)
more efficient sectors in the second stage
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