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Contemporary Models of Development and Underdevelopment

This document discusses contemporary models of development and underdevelopment, specifically focusing on the coordination failure approach. It explains that complementarities between agents like households, private firms, public agencies, and governments are necessary for successful development. When these complementarities are present, an action by one agent increases incentives for others to also take action. However, underdevelopment can occur when there is a coordination failure where agents are unable to coordinate their actions and behaviors, resulting in a worse outcome than if they had cooperated. Examples provided include investments in a "big push" that are mutually reinforcing, and upgrading skills that depends on others also upgrading.

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Raisajoy Mohamad
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126 views

Contemporary Models of Development and Underdevelopment

This document discusses contemporary models of development and underdevelopment, specifically focusing on the coordination failure approach. It explains that complementarities between agents like households, private firms, public agencies, and governments are necessary for successful development. When these complementarities are present, an action by one agent increases incentives for others to also take action. However, underdevelopment can occur when there is a coordination failure where agents are unable to coordinate their actions and behaviors, resulting in a worse outcome than if they had cooperated. Examples provided include investments in a "big push" that are mutually reinforcing, and upgrading skills that depends on others also upgrading.

Uploaded by

Raisajoy Mohamad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CONTEMPORARY MODELS OF

DEVELOPMENT AND
UNDERDEVELOPMENT
Underdevelopment as Coordination
Failure
KEY TERMS
■ Principal:
– Government
■ Agents:
– Households
– Private-sector firms
– Public agencies
– Government-owned enterprises
– International companies
Complementarities
Complementarities between several conditions are
necessary for successful development .
Investments must be undertaken by many agents in order
for the results to be profitable for any individual agent
An action taken by one firm, worker, or organization
increases the incentives for other agents to take similar
actions
>Endogeneous Growth Models
Increasing returns due to these complementarities.
>Coordination Failure Approach
Underdevelopment as Coordination
Failure
■ Coordination failure - A situation in which the inability of
agents to coordinate their behavior (choices) leads to an
outcome (equilibrium) that leaves all agents worse off
than in an alternative situation that is also an
equilibrium.
■ Coordination failures occur when several agents would
be better off if they could cooperate on actions if all or
most agents participated but worse off taking the action
if too few participated.
Underdevelopment as Coordination
Failure
■ This coordination problem can leave an
economy stuck in a bad equilibrium—that is,
at a low average income or growth rate or
with a class of citizens trapped in extreme
poverty.
Underdevelopment as Coordination
Failure
>When complementarities are present, an action taken by one firm increases
the incentives for other agents to take similar actions I These
complementarities often involves investments whose returns depends on other
investments being made by others
Examples:
Big Push, in which production decisions by modern-sector firms are mutually
reinforcing .
O-Ring model, in which the value of upgrading skills or quality depends on
similar upgrading by other agents.
Analyses of frontier technologies in developed countries (information
technologies)
Analyses of middle-income trap in which countries develop to a degree but
chronically fail to reach high-income status, often due to lack of innovation
capacity.
Underdevelopment as Coordination Failure
--Coordination Problems--
■ Where-to-meet dilemma A situation in which all parties would be
better off cooperating than competing but lack information
about how to do so. If cooperation can be achieved, there is no
subsequent incentive to defect or cheat.
■ Prisoners’ dilemma A situation in which all parties would be better off
cooperating than competing, but once cooperation has been
achieved, each party would gain the most by cheating, provided that
others stick to cooperative agreements—thus causing any agreement
to unravel.
Thank you <=

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