ECO 102
Development Economics
AISHA KHAN
SUMMER 2009
SECTION G & I
LECTURE ELEVEN
Contemporary Models of Development
 Chapter Five
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

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
Romer model
 g-n = β/[1-α+β]
 g= output growth rate
 n= population growth rate
Romer model
 Finds that β >0 means that g-n > 0
 Hence positive endogenous growth
Criticism
 Assumes single sector production
 Doesn’t incorporate the transformation of labor and
capital in the production process
 Allocational inefficiencies
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
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
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
Multiple Equilibria
Individual investment level
D1
D2
D3
Average investment level
Multiple Equilibria
 Equilibrium is where the S function intersects the 45
degree line
 Stable equilibria  D1 and D3
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)
Case-Study: Economist Article
Case-Study: China
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?