HAP T E R
Individuals need not make the right tradeoffs. And whereas in the past we thought the
implication was that the economy would be slightly distorted, we now understand that the
interaction of these slightly distorted behaviors may produce very large distortions. The
consequence is that there may be multiple equilibria and that each may be inefficient.
-Karla Hoff and Joseph E. Stiglitz, writing in
Frontiers in Development Economics,
The unconventional themes putforth by the high development theorists-their emphasis
on strategic complementarity in investment decisions and on the problem of coordination
failure-did in fact identify important possibilities that are neglected in competitive
Development, Geography, and Economic Theory, '995
After more than a half century of experience with attempting to encourage modern
development, we have learned that development is both possible and extremely
difficult to achieve. Thus an improved understanding of impediments and cata-
lysts of development is of the utmost importance. Since the late 1980s, significant
str,ides have been made in the analysis of economic development and underdevel-
opment. In some cases, ideas of the classic theories reviewed in Chapter 3 have
been formalized, and in the process, their logical structure and their significance
for policy have been clarified and refined. At the same time, the analysis has also
led to entirely new insights into what makes development so hard to achieve (as
witnessed in sub-Saharan Africa) but also possible to achieve (as witnessed in East
Asia). Indeed, this is what makes the study of economic development so very im-
portant: It does not happen automatically; it requires systematic effort. But devel-
opment is far from a hopeless cause; we knO\'v it can be done. Theory helps us think
systematically about how to organize our efforts to help achieve development-
goal second to none in its importance to humanity.
In this chapter. we review a sample of some of the most influential of the
models of economic development.
some ways, these models show that devel-
velopment strategy, and the new models have already influenced develop
policy and modes of international assistance.
The new research has broadened considerably the scope for modeling
economy in a developing-couJJtry context. One of its major themes is incorp
ing problems of coordination among agents, such as among groups of
workers, or firms and workers together. Other key themes, often but not alwc
conjunction with the coordination problem, include the formal exploration
uations in which increasing returns to scale, a finer dlivision of labor, the avai
ity of new economic ideas or knowledge, learning by doing, and monop"
competition or other forms of industrial organization other than perfect co
tion predominate and in which special, explicit requirements of long-run gr
(rather than only static efficiency) are separately or jointly important. The