AISHA KHAN SUMMER 2009

SECTION G & I

LECTURE ELEVEN

ECO 102 Development Economics

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 raten= 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

D1 D2 D3 Average investment level

Individual 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?