LS5 Contemporary Models of Development and Underdevelopment.pptVIP

Contemporary Models of Development and Underdevelopment Contemporary Models of Development and Underdevelopment New theories that help us understand the barriers to development include Endogenous growth Coordination failures Multiple equilibria The Big Push O-Ring theory Contemporary Models of Development and Underdevelopment The new models of economic development have broadened the scope for modeling a market in a developing country Departs from neoclassical economics in its assumptions of perfect information, the relative insignificance of externalities, and the uniqueness and optimality of equilibria The New Growth Theory: Endogenous Growth Endogenous growth theory explains TFP “endogenously” Advances in explaining growth rate differentials across countries New growth theories assume increasing returns to capital, permit increasing returns to scale and focus on the role of externalities in determining rate of return on capital investments Suggest an active role for public policy in increasing complementary investments Endogenous Growth Models The models imply that a country’s LR growth rate depends on its rate of savings and investment, not only on exogenous productivity growth The models use the aggregate production Y=AK Assume that marginal productivity of capital is constant as a result of concurrent investment in human capital and R D The Romer Endogenous Growth Model The model addresses technological spillovers that may be present in the process of industrialization The aggregate production function is similar to that of Harrod-Domar model and endogenises why growth might depend on investment As a result of saving, investment (knowledge/ know-how) spillovers occur leading to higher rates of growth Drawbacks of the theory/model Underdevelopment as a Coordination Failure Influential during 1990- early 2000 Emphasizes that complementarities between several conditions is necessary for economic development Complementarities versus congestions C