ECONOMIC DEVELOPMENT CONTEMPORARY MODELS OF DEVELOPMENT AND UNDERDEVELOPMENT.docx

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ECO DEVELOPMENT CHAPTER 4: CONTEMPORARY MODELS OF DEVELOPMENT AND UNDERDEVELOPMENT 4.1 UNDERDEVELOPMENT AS COORDINATION FAILURE Complementary- an action taken by one firm, worker, or organization that increases the incentives for other agents to take similar actions. Coordination failure - a situation in which the inability of agents in which the inability of agents to coordinate their behavior (choices) leads to an outcome (equilibrium) that leaves agents worse off than alternative situation. The success or failure of economic development policies can be explained by the “principal-agent model” Principal-agent model- this refers to the relationship between an asset owner or principal and the agent or person contracted to manage that asset on the owner’s behalf. PRINCIPAL - Government AGENTS - Households - Private-sector firms - Public agencies - Government-owned enterprises - International companies. 1. An effective principal is need to coordinate actions taken by agents and achieve an optimal outcome, making all agents better-off. 2. Coordination failure- occurs when the principal fails to induce agents to coordinate their actions, which leads to an outcome that makes all agents worse-off. MODELS OF COORDINATION FAILURE 1. Big push - a concerted, economy-wide, and typically public-policy led efforts to initiate or accelerate economic development across a broad spectrum of new industries and skills. 2. O-ring model- a economic model in which produces functions exhibit strong complementarities among inputs. 3. Middle-income trap- is a condition in which an economy begins to develop and reach middle- income status but is chronically unable to progress to high-income status. According to Adam Smith , it is already understood, specialization is one of the sources of high productivity. Indeed, specialization and a detailed division of labor are hallmarks of an advanced economy. As Shade Emran and Forhad Shilpi , stresses in the development of agricultural markets, “middlemen” play a key role by effectively vouching for the quality of the products they sell; they can do this because they got to know the farmers from whom they buy as well as the products. UNDERDEVELOPMENT TRAP- It is defining the poverty trap at the regional or national level in which underdevelopment tends to perpetuate itself over time. PROCESSES OF SUSTAINABLE DEVELOPMENT 1. Deep intervention- a government policy that can move the economy to a preferred equilibrium or even to a higher permanent rate of growth. 2. Congestion- the opposite of a complementarity; an action taken by one agent that decreases incentives to other agents.

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