Don’t neglect:
the role of geographic factors
• Landlocked (see picture)
• Disease burden (e.g. Malaria)
• Unsuitable for use of global agricultural
technologies (J. Diamond – Guns, germs and
steel)
• In addition to their complex interactions with
development of social infrastructure (as we saw
already)
1
2
Summary so far:
• For LDCs it’s productivity catch-up that matters
• This requires social infrastructure (and help to
overcome geographic obstacles
• What else may be going on? E.g.
– Does traditional sector represent a barrier to
modernization?
– Can countries get stuck in the bad one of two
possible equilibria?
– Do countries get bad advice and follow bad theories?
3
Changing structures
• How to shift labour into high productivity modern sector,
without loss of food supplied etc.
– (This problem was faced e.g. by Stalin: he decided to kill the
landowners and collectivize the farms)
• W.A. Lewis
“Economic Development with Unlimited Supplies of Labour” (1955)
– Marginal productivity of labour in trad agriculture below that in
modern sector (farm families share output between them: you
eat more than your marginal product) – in effect such sharing
rules retain too many people on the land
– Explains how national saving ratio can grow as underemployed
labour is drawn into more productive modern sector (without loss
of ag output)
4
Figure 3.1
5
Figure 3.2
6
Underdevelopment as a
Coordination Failure
• A developing economy might get stuck at a low level
equilibrium.
• An available higher level equilibrium might not occur
because of unco-ordinated actions of private agents
• Examples
– Predation (Murphy, Shleifer, Vishny)
– Rosenstein-Rodan’s “Big push”
– Kremer’s ‘O-ring’ model
7
Starting Economic
Development: The Big Push
• Sometimes market failures lead to a need for
public policy intervention
• Two sectors –differentiated by technology:
• But modern technology sector might not get
going without a big push
• Closed economy model: for perfectly open
economy multiple equilibrium much less likely
8
The Big Push (2)
•
•
•
•
How the modern producer might not get going
Assume modern wage higher than trad wage
Product differentiation: numerous products;.
Each good receives constant share of demand
(downward sloping demand curves).
• Modern technology has fixed cost and low
marginal costs
9
The Big Push (3)
• If wage is low (W1) modern producer enters
• If wage is medium (W2) modern producer will
only enter if all others do too (and hence we are
at B with higher national output)
• If wage is high (W3) modern producers would
lose money even if all entered.
10
Figure 4.2
11
Figure 4.2
Output if all in
modern sector
Output if all in
trad sector
12
New Growth Theory:
Endogenous Growth (2)
• Incentives for innovation: growth will depend on how
much effort is applied
– Building on the shoulders of giants
– But some ideas get “fished-out”
• Catching-up possibilities. May be more important – but
needs skill levels (human capital)
• Singapore and Hong Kong: technology or factor growth
in practice.
(Alwyn Young 1995)
13
Big push: 1930s US South an example?
Bateman, Ros and
Taylor (2008)
14
Externalities The role of ideas
Rivalrous goods
Nonrivalrous goods
Lawyer services
CD player
Floppy disk
Encoded satellite TV
transmission
HIGH
Computer code for a
software application
Degree of
excludability
Operations manual for WalMart stores
Fish in the sea
Sterile insects for pest
control
LOW
Based on Jones (2002), Romer (1993)
National defense
Basic R&D
Calculus
15
The role of ideas
Rivalrous goods
Nonrivalrous goods
Lawyer services
CD player
Floppy disk
Encoded satellite TV
transmission
HIGH
Computer code for a
software application
Degree of
excludability
Operations manual for WalMart stores
Fish in the sea
Sterile insects for pest
control
LOW
National defense
Basic R&D
Calculus
16
Public goods
The role of ideas
Make
once only
Rivalrous goods
Nonrivalrous goods
Lawyer services
CD player
Floppy disk
Encoded satellite TV
transmission
HIGH
Computer code for a
software application
Degree of
excludability
Operations manual for WalMart stores
Fish in the sea
Sterile insects for pest
control
Spillovers
LOW
National defense
Basic R&D
Calculus
17
Public goods
The role of ideas
HIGH
Rivalrous goods
Nonrivalrous goods
SHIPYARDS
HI-END CRUISE BLDG
Lawyer services
CD player
Floppy disk
Encoded satellite TV
transmission
Computer code for a
software application
Degree of
excludability
Fish in the sea
Operations manual for WalMart stores
CONTAINERS
Sterile insects for pest
control
Spillovers
Make
once only
LOW
National defense
Basic R&D
Calculus
18
Public goods
New Growth Theory:
Endogenous Growth
The Romer model about the generation of
ideas which are public goods
 1
Yi  AKi Li K
Y  AK
   1

L
n
g n 
1     
(4.1)
(4.2)
(4.3)
19
Kremer’s O-Ring Theory of
Economic Development
• Productive people working together can
increase each other’s productivity.
• Leads to sorting (high with high low with low–
always more efficient
q  q  2q H q L
2
H
2
L
• Leads to remarkable gains in productivity when
high efficiency people work together
• And to greater incentives for skill acquisition.
(cf. Jones paper on Superstars)
20
Kremer’s O-Ring Theory of
Economic Development
• As a result, economies can have multiple
equilibria— a bad one with low-skilled working
together vs a good one high-skilled working
together.
• This offers an alternative explanation to why
modest individual skill differences can
mushroom into huge aggregate productivity
differences
• (neglected in the simple log-linear production
function of the Solow model and its
descendants)
21
Alternative perspectives:
International-Dependency
• Neo-colonialism
– Unequal centre-periphery power relationships
• False-paradigms
– Inappropriate transplantation of rich country
models
– Unthinking support for existing elites
– Focusing on the wrong priorities
• Chronic dualism
22
Assignment reminder
• Short essay. Title: “Is China’s Role in Africa Good or Bad for
Development?” Length: between 1000 and 1200 words.
• For students attending the entire year EC3040 (A and B) this
assignment counts as 10% of the final grade.
• This assignment should be submitted by 5.30 pm on Monday 30th
March 2009.
• It should be submitted through Turnitin (www.turnitin.com) The class
ID is 2604847 and the class password is tcdldc
• Late submissions will be penalised.
23
• The goal of this assignment is to write a short piece
which draws on economic theory and evidence. Think of
it as something that you would like to read on the opinion
page of the Financial Times or similar. The grade will
depend on the content (relevant facts, consistent with a
coherent theory) and on the effectiveness with which the
content is communicated in the essay. The only
difference relative to a newspaper opinion column is that,
as with all academic essays, you should cite your
sources properly (the reference list will not be included in
the word count). You may use any sources you wish
(including Todaro and Smith). The topic is sufficiently
broad to allow you to concentrate on any aspect that
interests you. No need to be comprehensive.
• (I need hardly add that cut-and-paste is out: plagiarism
will be easily detected and penalised.)
24
Tutorial 2: Feb 24/27
• Social institutions and growth
• Must read: Nathan Nunn on the role of slavery
http://www.voxeu.org/index.php?q=node/779
• Other supporting reading posted on course
webpage
25
Conclusion on Topic 1
• Formal models help us to figure out what is
possible and what impossible
• They help us organize our analysis of the data
• We learn that there’s more to economic growth
than just capital accumulation…
…that social infrastructure may be crucial and
…that economies can require a push to get
beyond a low-level equilibrium
26