CHAPTER 4 SUMMARY - CHAPTER 4 SUMMARY CONTEMPORARY MODELS...

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CHAPTER 4 SUMMARY:CONTEMPORARY MODELS OF DEVELOPMENT AND UNDERDEVELOPMENT_________________________________________________________________________Introduction:Contemporary models clarify and redefine classic theoriesThey:oIncorporate problems of coordination among agentsoSees development as harder to achieve in that it faces more barriers than had previously been recognisedoDepart to some degree from conventional and neoclassical economics, at least in its assumptions of perfect information, the relative insignificance of externalities, and the uniqueness and optimality of equilibria. Underdevelopment as a Coordination FailureComplementaries:oComplementaries between several conditions are necessary for successful development:oInvestments must be undertaken by many agents in order for the results to be profitable for any individual agentoComplementary investments must come at the same time through coordinationo(Models that stress complementaries are related to endogenous growth approach, whereas coordination failure approach has evolved independently)Coordination failure:oA state of affairs in which agents’ inability to coordinate their behaviour leads to an outcome (equilibrium) that leaves all agents worse off than an alternative situation that is also in equilibrium (eg. what comes first, the skills or the demand for skills?)oEveryone is better off waiting for someone else to make the first moveNetwork effects are common:oBig Push – production decisions by modern-sector firms are mutually reinforcingoO-ring model – the value of upgrading skills or quality depends on similar upgrading by other agentsMultiple Equilibria: A Diagramatic ApproachGeneral:
oThe benefits an agent receives from taking an action depend positively on how many other agents are expected to take the action or on the extent of those actionsoAll participants are doing what is best for them, given what they expect others to do, which in turn matches what others are actually doingoAn economy can et stuck in a low growth rate largely because the economy is expected to have a low investment rateDiagram:oIn the multiple-equilibrium diagram, equilibrium is found where the “privately rational decision function” crosses the 45-degree lineoIf the S-shaped function cuts the 45-degree line from above then it is a stable equilibriumoCurve does not immediately rise quickly as more agents take action... there is a snowball effect after some timeMultiple equilibria:oThe value (utility of the various equilibria normally different oMoving to a high-utility equilibrium is known as a Pareto improvementGovernment:oMarket forces can generally bring us to one of the equilibria, but they are not sufficient to ensure that the best equilibrium will be achieved, and they offer no mechanism to become unstuck from a bad equilibrium and move towards a better oneoDeep interventions by a government may move an economy to a preferred equilibrium – government can then focus on other problems with the economy

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