ECON 313 Chapter 4 Notes

ECON 313 Chapter 4 Notes - ECON 313 Chapter 4 Notes Many...

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ECON 313 Chapter 4 Notes Many new theories of economic development that became influential in the 1990’s and early 21 st century emphasized complementarities between several conditions necessary for successful development. Several things must work well enough, at the same time, to get sustainable development underway Investments must be undertaken by many agents (firms/workers), in order for results to be profitable for any one agent In general, when complementarities are present, an action taken by one agent increases incentives for other agents to take similar actions A coordination failure is a state of affairs in which agents’ inability to coordinate their choices leads to an equilibrium that leaves all agents worse off than in an alternative situation that is also at equilibrium. Important example of complementarities is the presence of firms using specialized skills and the availability of workers who have acquired those skills. Workers won’t acquire those skills unless a firm that requires them is there to employee them, and a firm won’t locate in an area where the people who live there don’t possess those skills. Both groups would be better off if the skills were acquired, but neither can do so without the other taking the initiative. This leaves areas with low average income and growth rate. Another example is the commercialization of agriculture. Specialization and division of labor are important for high productivity. In order for specialization in agriculture to occur, there must be middlemen willing to vouch for the goods that they sell over distances. However, in order for there to be middlemen, there must be a need for them by farmers who have begun specializing in a certain product. This results in an underdevelopment trap in which a region remains stuck in subsistence agriculture. Often, the only way for complementarities to work is to have both investments come at the same time, through coordination. Government policy is often needed for coordination of these investments to occur.
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Some dictatorships purposefully keep their countries in low economic development so that they may remain in power. Deep interventions are government policies that move the economy to a more preferred equilibrium, or even to a higher rate of economic growth, to make it so there is no incentive to go back to the behavior associated with bad equilibrium. Where-to-meet-dilemma illustrates coordination problems: A bunch of friends know they will all be on vacation in Buenos Aires on a certain day, but none of them know where in the city the others will be. Without communication or coordination, it is likely that they will never meet up. This is similar to farmers in a region not knowing what to specialize in so that the middlemen may profitably bring the village’s produce to market.
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