Ch4 - Econ 383 - Economic Development for Fragile Countries...

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Econ 383 - Economic Development for Fragile Countries Lecture Note - Contemporary Models of Development and Underdevelopment Department of Economics University of Waterloo Fall 2011 1
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Topics Covered In this chapter, we review a sample of some of the most influential new models of economic development. The new research has broadened considerably the scope for modeling a market economy in a developing-country context. We are interested to see how historical forces and expectations shape the overall pattern displayed by a country or a region. 2
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Topics Covered Both our history and our expectations change the way we behave today and in the future. History an expectations interact and work through two main channels: complemetarities and increasing returns. 3
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Topics Covered One of the major themes for new economic development model is incorporating problems of coordination among agents, such as among groups of firms, workers, or firms and workers together. Other key themes include the formal exploration of situations in which increasing returns to scale , a finer division of labor , the availability of new economic ideas or knowledge , learning by doing , information externalities , and monopolistic competition or other forms of industrial 4
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Topics Covered All of these approaches depart to some degree from conventional neoclassical economics, at least in its assumptions of perfect information, the relative insignificance of externalities, and the uniqueness and optimality of equilibria. 5
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Topics Covered Major Topics: (1). Coordination failure as an explanation for underdevelopment. (2). The existence and implication of multiple equilibria. (3). The Big Push Model. (4). Kremer’s O-ring theory. (5). Hausmann-Rodrick-Velsco growth diagnostic framework. 6
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Central Questions In what sense do initial conditions matter for development? Is it possible for two countries with same potentials for development be locked into two different equilibria? 7
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Poverty Trap Poverty has a tendency to persist and understanding why that is the case may give us some idea of how to better deal with it. A poverty-trap can also be referred to as a the low-level equilibrium trap. When talking about economics in the usual Walrasian framework every outcome is pareto optimal but our idea of a poverty trap suggests we may want to consider a different framework. 8
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Poverty Trap Can a Big Push from one equilibrium to another make everyone better? Are there sub-optimal equilibria? When looking at poverty traps we are going to see some models that allow for these possibilities and, of course, we are going to see lots of multiple equilibria. 9
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Externality An externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit.
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Ch4 - Econ 383 - Economic Development for Fragile Countries...

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