CONTEMPORARY MODELS OF

DEVELOPMENT AND
UNDERDEVELOPMENT
 Objective:

01 To explain disparities.

02
To identify key drivers.

To know about Policy

03 Prescription.
To know about the

04 increasing emphasis on
sustainability and
inclusivity.

05 To understand Global
Perspective.

06 To adapt to changing global and

local contexts.
CONTEMPORARY MODELS
• This theory highlight the fact that development is much
harder to achieve than had been previously thought.

• This new models incorporate:

a) Coordination Problems
b) Alternative Market Structure
c) Increasing returns to scale
d) Imperfect Information
e) Multiple Equilibria
f) Externalities
ECONOMIC AGENT

An Economic actor – usually a firm, worker,

consumer or government officials – that
chooses actions as to maximize an objective.
01 Underdevelopment as a Coordination Failure

Complementarity

An action taken by one firm, worker, or

organization that increases the incentives for
other agents to take similar actions.
COORDINATION
FAILURE

A state of affairs in which the inability of agents to

coordinate their behavior (choices) leads to an
outcome (equilibrium) that leaves all agents worse
off than in an alternative situation that is also an
equilibrium.
 Big Push

O-ring Model

Middle-income trap
Big Push

A concerted, economywide, and typically public –

led effort to initiate or accelerate economic
development across a broad spectrum of new
industries
O-ring Model

An economic model in which production

functions exhibit strong complementarities
among inputs and which has broader
implications for impediments to achieving
economic development.
Middle-income trap
 02
MULTIPLE EQUILIBRIA:
A DIAGRAMMATIC
APPROACH
 MULTIPLE EQUILIBRIA

A Condition in which more than one equilibrium

exist. These equilibria may sometimes be
ranked, in the sense that one is preferred to
another, but the unaided market will not move
the economy to the preferred outcome.
• Privately Rational Decision Function

An individual’s investment level is a

function of his expectation of the
economy-wide or industry-wide average
level of investment.
• Rational Expectation Equilibrium

The actual average investment level is a

function of the sum of individual
investment decisions.
• Adjusting Expectations and Stable vs.
Unstable Equilibria

• Shape of S-curve and Number of Equilibria

• Welfare and Pareto-ranking Equilibria
• Technology Spillovers and the Romer Model
• Changes in Expectations
• Market Mechanism
• Hindrances to switching from Bad Equilibria
• Technology Transfer and Sufficiency
• Welfare and Pareto-ranking Equilibria
• Technology Spillovers and the Romer Model
• Changes in Expectations
• Market Mechanism
• Hindrances to switching from Bad Equilibria
• Technology Transfer and Sufficiency
 03
Starting Economic
Development: The Big Push
The Big Push

• Main insight here is that it is harder to get growth

underway to maintain it
• Market failures make initializing growth difficult.

 Low initial demand

 High set-up costs
 Increasing Returns to Scale
 Spillovers and underinvestment
 A concerted economy-wide effort is needed.
Pecuniary Externality

A positive or negative spillover effect on an agent’s costs

or revenues.
The Big Push: A Graphical
Model

1. Factors – assuming that labor is only the factor.

2. Factor Payments
3. Technology
4. Domestic Demand
5. International supply and demand
6. Market Structure
Note:
This model has not assumed the existence of any type of
technologies externalities, in which the presence of one
advanced firm can, through ”learning by watching” other firms’
production methods or some similar effect, generate spillover
to other firms that can raise their productivity as well as lower
their costs.
Other Cases in Which a Big Push is Necessary

1.Intemporal Effects
2.Urbanization Effects
3.Infrastructure Effects
4.Training Effects
 Why the Problem Cannot Be
Solved by a Super-Entrepreneur?
1. Market Failures
2. Agency Cost
3. Communication Failures
4. Limit of Knowledge
5. There is no Private agent has
been observe playing the role of
SUPER-ENTREPRENEUR
04
FURTHER PROBLEMS
OF MULTIPLE
EQUILIBRIA
Inefficient Advantages
of Incumbency

• The benefits established firm due to economies of

scale, which make it difficult for new entrants with
superior technologies to complete, resulting in an
economy potentially stuck with less efficient practices.
Behavior and Norms

• Movement to a better equilibrium is especially difficult

when it involves many individuals changing their
behavior from one of rent seeking or corruption of
honesty and the value of building a reputation to reap
the gains from cooperation.
Linkages

• Connection between firms based on sales. A backward

linkage is one which a firm buys a good from another
firm use as an input; a forward linkage is one in which a
firm sells to another firm.