Lecture notes, lecture 1 - Underdevelopment as a coordination failure- econ 313 PDF

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Underdevelopment as a Coordination failure- Econ 313 ...

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Economic Development – Underdevelopment as a Coordination Failure Ismail A. Talaat • • • •

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Complementarities between several conditions necessary for successful development are now frequent among the new and recent theories of economic development Complementarities -- an action taken by one firm, worker, or organization that increases the incentives for other agents to take similar actions. Complementarities often involve investments whose return depends on other investments being made by other agents. These new theories also emphasize that in many important situations, investments must be undertaken by many agents in order for the results to be profitable for any individual agent. Coordination failure – a state of affairs in which the inability of agents to coordinate their behaviour (choices) leads to an outcome (equilibrium) that leaves all agents worse off than in an alternative situation that is also an equilibrium. This does not imply that they do not know the desired equilibrium, it is just difficult to reach. When complementarities are present, an action take by one firm, worker, organization, or government increases the incentives for other agents to take similar actions. Middle income trap – a condition in which an economy begins development to reach middle-income status but it is chronically unable to progress to high-income status. Often related to low capacity for original innovation or for absorption of advanced technology, and may be compounded by high inequality. Specialization and a detailed division of labour are hallmarks of an advanced economy. But we can specialise only if we can trade for the other goods and services we need. The absence of motives for specialization can result in the underdevelopment trap. Underdevelopment trap -- a poverty trap at the regional or national level in which underdevelopment tends to perpetuate itself over time. Sometimes they fail to find equilibrium by failing to figure out who shall take the first step. The answer to this is most of the times that both measures should be taken in the same time with coordination. Many economists nowadays, look actively for vases in which government policy can still help, even when government is imperfect, by pushing the economy toward a self-sustaining, better equilibrium. Such deep intervention moves an economy to a preferred equilibrium. Deep intervention – a government policy that can move the economy to a preferred equilibrium or even to a higher permanent rate of growth that can then be self-sustaining so that the policy need no longer be enforced because the better equilibrium will then prevail without further intervention. Congestion – the opposite of a complementarity; an action taken by one agent that decreases the incentives for other agents to take similar actions. In real economic problems, the people who need to coordinate investments do not even know the identity of the other key agents....