Economic Development - Todaro and Smith Summary Chapter 4 PDF

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Economic Development Summary Of Chapter 4 This chapter presents the most influential newer models of economic development. The classic models are insufficient, and so have been refined or replaced new ideas. The general goal of the chapter is to demonstrate that development may be more difficult to ...

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Economic Development Summary Of Chapter 4 This chapter presents the most influential newer models of economic development. The classic models are insufficient, and so have been refined or replaced by new ideas. The general goal of the chapter is to demonstrate that development may be more difficult to accomplish than has been previously understood. Contemporary models of development attempt to incorporate one or more of the following ideas: 

Problems of coordination among agents

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Increasing returns to scale

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Finer divisions of labor

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New economic ideas of information

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Learning by doing

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Imperfect competition, such as monopolistic competition Several particular types of models are discussed. These include endogenous growth models such as Roemer's model, and coordination failure models such as the "Big Push" model and Kremer's O-Ring theory. After a general introduction, the chapter begins with a discussion of "new" growth theory (or endogenous growth models). The text motivates this discussion by considering the shortcomings of Solow's growth model, in which technological progress is exogenously determined. In the Roemer model, technological change is endogenously determined: economy wide capital stock affects industrywide output (that is, increasing returns to scale may exist). This model, unlike the Solow model, can explain persistent economic growth. Several criticisms of Romer's model are presented. The chapter continues on to describe and discuss models that posit that underdevelopment is the result of economic agents' failures to coordinate with each other. In such models, multiple equilibria are possible, and economies can be stuck in a "bad" equilibrium. In such cases, government intervention may be required to move the economy to a preferable equilibrium. For example, in an underdeveloped area industrialization may fail to occur because firms are reluctant to locate in places where workers do not possess the requisite skills. Workers in that have no incentive to acquire such skills, since no employment opportunities exist. The text presents a diagram explaining the concepts of multiple equilibria and coordination failure. Rosenstein-Rodan's "big push" model is described and presented diagrammatically as an example.

Several other multiple equilibria problems are then discussed. These include inefficiencies associated with incumbency, and behavior and societal norms. Linkages between industries are also discussed, as are the relationships between multiple equilibria, economic growth and income inequality. Kremer's O-ring model is presented as a final example of coordination failure. In these models, workers of similar skill levels tend to work together (that is, high-skill workers tend to match up, and low-skill workers also work with other low-skill workers). This creates the possibility that an economy can be caught in a low production quality 'trap.' Production bottlenecks are also possible outcomes. Hausmann-Rodrik-Velasco's "growth diagnostic framework" proposes a decision tree to illustrate that one development model would not fit all economies. It argues that the development strategy must identify a economy’s most binding constraints and the development policy must target the removal of such constraints.

Written By Anessh Matlani...