DISCLAIMER: Every reasonable effort is made to ensure the accuracy of the information used in the creation of this reference material, without prejudice to the existing copyrights of the authors. As an off-shoot of the innumerable difficulties encountered during these trying times, the authors endeavored to ensure proper attribution of the esteemed original works, by way of footnotes or bibliography, to their best abilities and based on available resources, despite the limited access and mobility due to quarantine restrictions imposed by the duly constituted authorities. We make no warranties, guarantees or representations concerning the accuracy or suitability of the information contained in this material or any references and links provided here. Links to other materials in our CPOD and CAM was made in good faith, for noncommercial teaching purposes only to the extent justified for the purpose, and consistent with fair use under Sec. GD185 of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines. Final #19 Lecture notes: (for lectures and discussions only) Book references and suggested readings: A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith B. Economics by Paul A. Samuelson and William D. Nordhaus Copyright 2010,2005,2001 by McGraw Hill Companies, Inc. C. Issues in Philippine Economic Development Copyright 1995 by tereso Tulao Jr., Gerardo Largosa, Christina Castill D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003 Big Push Model One of the best known coordination failures model in the development literature is Big Push model pioneered by Paul Rosenstein-Rodan, who first raised some of the basic coordination issues. The big push is a model of how the presence of market failures can lead to a need for a concerted economywide and probably public-policy-led effort to get the long process of economic development under way or to accelerate it. Coordination failure problems work against successful industrialiazation, a counterweight to the push for development. A big push may not always be needed, but it is helpful to find ways to characterize cases in which it will be. Many development economists have concluded that several market failures work to make economic development difficult to initiate, like pecuniary externalities which are spillover effects on cost or revenues. Market Failures arises because it is not possible for the market to correctly weigh costs and benefits in a situation in which some of the costs are completely unaccounted for. Demand-side market failures arise because it is impossible in certain cases to charge consumers what they are willing to pay for the product. (ex. Benefits from fireworks display) Supply-side market failures arise in situations in which a firm does not have to pay the full cost of producing its output. ( (ex. cost of smoke polution from factory machines) An externality occurs when some of the costs or the benefits of a good or service are passed onto or spill over to someone other than the immediate buyer or seller. Pecuniary externality is a negative or positive spillover effect on an agent’s costs or revenue. Negative externalities cause supply-side market failures, these failures happen because producers do not take into account the costs that their negative externalities impose on others. Positive externalities cause demand-side market failures, these failures happen because market demand curves in such cases fail to include the willingness to pay of the third parties who receive the external benefits caused by the positive externalities. Some conditions that the need for a big push can result from: a. Urbanization effect- when some traditional cottage industry is rural and the increasing-returns-to-scale manufacturing, urban dwellers’ demand may be more concentrated in manufactured goods. As such, one needs a big push to urbanization to achieve industrialization. b. Infrastructure effects – in using infrastructure, such as bridges, roads, airports, ports, an investing firm modern firm helps defray the large fixed cost of that infrastructure. The existence of infrastructure helps investing firms lower their own costs.Then investing firms thereby constribute indirectly to lwering the cost of other firms like lowering the average cost of infrastructure use. As such, there is a need for a big push for infrastructure. c. Training effects- the presence of underinvestment in training facilities because entrepreneurs know that workers they train may be enticed away with higher wages offered by rival firms refused to pay these training costs.There is also less demand for workers to undergo training because of not knowing which skills are they going to acquire. In this case, a big push for mandatory public education is necessary. FOOTNOTES: Materials contained in the learning packets have been copied and conveyed to you by or on behalf of Pamantasan ng Cabuyao pursuant to Section IV- The Copyright Act (RA) 8293 of the Philippines Intellectual Property Code. You are not allowed by the Pamantasan ng Cabuyao to reproduce or convey these materials. The content may contain works which are protected by copyright under RA 8293. You may be liable to copyright infringement for any copying and/or distribution of the content and the copyright owners have the right to take legal action against such infringement. Do not remove this notice. (19) DISCLAIMER: Every reasonable effort is made to ensure the accuracy of the information used in the creation of this reference material, without prejudice to the existing copyrights of the authors. As an off-shoot of the innumerable difficulties encountered during these trying times, the authors endeavored to ensure proper attribution of the esteemed original works, by way of footnotes or bibliography, to their best abilities and based on available resources, despite the limited access and mobility due to quarantine restrictions imposed by the duly constituted authorities. We make no warranties, guarantees or representations concerning the accuracy or suitability of the information contained in this material or any references and links provided here. Links to other materials in our CPOD and CAM was made in good faith, for noncommercial teaching purposes only to the extent justified for the purpose, and consistent with fair use under Sec. GD185 of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines. Final #20 Lecture notes: (for lectures and discussions only) Book references and suggested readings: A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith B. Economics by Paul A. Samuelson and William D. Nordhaus Copyright 2010,2005,2001 by McGraw Hill Companies, Inc. C. Issues in Philippine Economic Development Copyright 1995 by tereso Tulao Jr., Gerardo Largosa, Christina Castill D. Economics (volume 3) Philippine Economic and Development Issues Copyright Gerardo Sicat, 1983, 2003 O-Ring Theory of economic development An innovative and influential model that provides important insights into low level equilibrium traps was provided by Michael Kremer. The notion is that modern production requires that many activities be done well together in order for any of them to amount to a high value. It is a form of strong complementarities and is a natural way of thinking about specialization and the division of labor which along with economies of scale is a hallmark of developed economies in general and particularly industrial. Michael Kremer’s O-Ring theory key feature is it models production with strong complementarities among inputs. The O-ring models explains not only the existence of poverty traps but also the reasons countries in such traps my have exceptionally low incomes compared with high income countries. O-ring production function is a production function with strong complementarities among inputs, based on the products of the input qualities. Example: positive assortative matching It means that workers with high skills will work together and workers with low skills will work together. If to compare countries using the model, this type of matching means that high-value products will be concentrated in countries with high-value skills. In this model, everyone will like to work with the more productive workers because if your efforts are multiplied by those of someone else, you will be more productive when working with a more productive worker. A firm with a higher-productivity worker can afford to pay a higher wage and has the incentive to bid higher to do so, because the value of output will be higher with two productive workers than with one low and one high-productivity worker. Skill matching is more advantageous than skill mixing. Some implications of the O-ring theory a. Firms tend to employ workers with similar skills for their various tasks. b. Workers performing the same task earn higher wages in a high skills firm than in low-skill firm. c. If workers can improve their skill level and make such investments, and if it is in their interest to do so, they will consider the level of human capital investments made by other workers as a component of their own decision about how much skill to acquire. d. O-ring effects magnify the impact of local production bottlenecks because such bottlenecks have a multiplicative effect on other production. e. Bottlenecks also reduce the incentive for workers to invest in skills by lowering the expected return to these skills. FOOTNOTES: Materials contained in the learning packets have been copied and conveyed to you by or on behalf of Pamantasan ng Cabuyao pursuant to Section IV- The Copyright Act (RA) 8293 of the Philippines Intellectual Property Code. You are not allowed by the Pamantasan ng Cabuyao to reproduce or convey these materials. The content may contain works which are protected by copyright under RA 8293. You may be liable to copyright infringement for any copying and/or distribution of the content and the copyright owners have the right to take legal action against such infringement. Do not remove this notice. (20)
