1

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)

2

3

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?

4

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)

5

Figure 3.1

6

Figure 3.2

7

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

8

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

9

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

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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.

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Figure 4.2

12

Figure 4.2

Output if all in modern sector

Output if all in trad sector

13

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)

14

Big push: 1930s US South an example?

Bateman, Ros and Taylor (2008)

15

Externalities The role of ideas Rivalrous goods

Nonrivalrous goods

HIGH

Degree of excludability

LOW

Lawyer services

CD player Floppy disk

Fish in the sea

Sterile insects for pest control

Encoded satellite TV

transmission

Computer code for a software application

Operations manual for Wal-

Mart stores

National defense Basic R&D

Calculus

Based on Jones (2002), Romer (1993)

16

The role of ideas Rivalrous goods

Nonrivalrous goods

HIGH

Degree of excludability

LOW

Lawyer services

CD player Floppy disk

Fish in the sea

Sterile insects for pest control

Encoded satellite TV

transmission

Computer code for a software application

Operations manual for Wal-

Mart stores

National defense Basic R&D

Calculus

Public goods

17

The role of ideas Rivalrous goods

Nonrivalrous goods

HIGH

Degree of excludability

LOW

Lawyer services

CD player Floppy disk

Fish in the sea

Sterile insects for pest control

Encoded satellite TV

transmission

Computer code for a software application

Operations manual for Wal-

Mart stores

National defense Basic R&D

Calculus

Public goods

Spillovers

Make once only

18

The role of ideas Rivalrous goods

Nonrivalrous goods

HIGH

Degree of excludability

LOW

Lawyer services

CD player Floppy disk

Fish in the sea

Sterile insects for pest control

Encoded satellite TV

transmission

Computer code for a software application

Operations manual for Wal-

Mart stores

National defense Basic R&D

Calculus

Public goods

Spillovers

Make once only

SHIPYARDS HI-END CRUISE BLDG

CONTAINERS

19

New Growth Theory: Endogenous Growth

The Romer model about the generation of ideas which are public goods

Y AK L Ki i i 1(4.1)

Y AK L 1 (4.2)

1

nng (4.3)

20

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

• Leads to remarkable gains in productivity when high efficiency people work together

• And to greater incentives for skill acquisition.

(cf. Jones paper on Superstars)

LHLH qqqq 222

21

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)

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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

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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.  

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• 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.)  

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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

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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