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ECON304: Economic Development

Unit 3: New Models of Development   This unit will examine new theories in economic development that have emerged as a result of earlier development theories failing to produce predicted results. These new models center on market and coordination failures. Market failures come in the form of externalities, increasing returns, market imperfections, and distributional equity. Coordination failures are the result of the absence of complementary activities, which are necessary for a project to be successful. Some models deal with poverty traps, geography, institutions, and social capital. Other models, most notably the capacity approachto development, raise the question of how to define development.

Unit 3 Time Advisory
Completing this unit should take you approximately 22.25 hours.
☐    Subunit 3.1: 3.5 hours

☐    Subunit 3.2: 7.5 hours

☐    Reading: 6 hours

☐    Web Media: 1.5 hours

☐    Subunit 3.3: 4 hours

☐    Subunit 3.4: 3.75 hours

☐    Subunit 3.5: 1.5 hours

☐    Activity: 2 hours

Unit3 Learning Outcomes
Upon successful completion of this unit, you should be able to: - describe the common characteristics of the new models of economic development; - explain the differences among the various models and between any two models; - discuss and analyze why one model explains the development process better or worse than other models; - identify the key variables in each model; - explain the role of policy in each model;   - explain what New Institutional Economics (NIE) is; and - discuss how New Institutional Economics (NIE) modifies the traditional models of economic development.

3.1 Coordination Failures, Poverty Traps and the Big Push   The idea of the Big Push in development economics was first brought to the attention of economists by Paul Rosenstein-Rodan in 1943. Simply put, developing countries cannot do anything to lift themselves out of poverty until they can do it in a big way. Among the reasons for this idea is that there are indivisibilities in the production of goods and services, in the demand for goods, and in the supply of savings. Economies of scale can only be achieved when a minimum output can be produced. This minimum output may be too large for any one firm or individual. The theory provided an argument for government intervention, because it argued that only the government can produce and buy at the scale sufficient enough to overcome the indivisibilities. The theory went out of fashion in the 1970s and 1980s as a result of the lack of empirical evidence to support the idea. It has since been revived by other economists, including Jeffrey Sachs and William Easterly.    

  • Reading: Munich Personal RePEc Archive: Bogdan Glavan’s “Coordination Failures, Poverty Traps, ‘Big Push’ Policy, and Entrepreneurship: A Critical View” Link: Munich Personal RePEc Archive: Bogdan Glavan’s “Coordination Failures, Poverty Traps, ‘Big Push’ Policy, and Entrepreneurship: A Critical View” (PDF)

    Instructions: Read this article. This article provides an overview of the literature on poverty traps and their relation to coordination failures.
     
    Reading this article should take approximately 1 hour.

    Terms of Use: This article is in the public domain.

  • Reading: Center for Global Development: William Easterly’s “Reliving the ‘50s: The Big Push, Poverty Traps, and Takeoffs in Economic Development – Working Paper 65” Link: Center for Global Development: William Easterly’s “Reliving the ‘50s: The Big Push, Poverty Traps, and Takeoffs in Economic Development – Working Paper 65” (PDF)

    Instructions: To access the document, please click on the link above and then select the link titled “Download (PDF).” Read this 37-page document. The Easterly reading provides an updated look at the theories in this school and considers how applicable they are to today’s thinking on economic development.
     
    Reading this chapter should take approximately 2.5 hours.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

3.2 Geography as the Main Determinant of Development   The idea that geography is destiny in economic development has been with economists and non-economists for a long time. That the sun saps the energy of people in the tropics and therefore makes them less inclined to work, or that the prevalence of malaria-borne mosquitoes and sleeping sickness-borne tsetse flies in the tropics sickens people and effectively reduces the number of productive hours they can put to work each day, is both anecdotally appealing and almost intuitive. In recent years, several serious scholars have attempted to assess the impact of such geographic impediments on economic development.

  • Reading: Columbia University: Jeffrey Sachs, John Luke Gallup, and Andrew Mellinger’s “Geography and Economic Development” Link: Columbia University: Jeffrey Sachs, John Luke Gallup, and Andrew Mellinger’s “Geography and Economic Development” (PDF)

    Instructions: Scroll down to 1999, and find the paper titled “Geography and Economic Development.” Click on the “PDF” link under the title to access the paper. Read this 56-page article, which explores how geography might either promote of inhibit development. When reading this articles, consider how global warming might make the effects that the authors describe more extreme.
     
    Reading this article should take approximately 3 hours.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

  • Reading: World Bank’s Overview of the World Development Report 2009: “Reshaping Economic Geography” Link: World Bank’s Overview of the World Development Report 2009: “Reshaping Economic Geography” (PDF)

    Also available in:

    EPUB

    Instructions: Read this 32-page overview. When reading this articles, consider how global warming might make the effects that the authors describe more extreme.
     
    Reading this article should take approximately 3 hours.
     
    Terms of Use: World Bank’s Overview of the World Development Report 2009: “Reshaping Economic Geography” has been reposted by the kind permission of World Bank. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

  • Web Media: NPR’s Talk of the Nation: “Jared Diamond: The Rise and Fall of Civilizations” Link: NPR’s Talk of the Nation: “Jared Diamond: The Rise and Fall of Civilizations” (HTML and Flash)
     
    Also available in:

    QuickTime
    Transcript (HTML)
     
    Instructions: Please click on the link above, and begin by reading the description of the interview. To listen to the interview, click on the “play button.” You may have to press control and right click at the same time to allow the media player to open.
     
    Jared Diamond is a very influential thinker in this school of thought on development. If you are intrigued by this interview, you can find much more in his books, which should be available at most public libraries.
     
    Listening to this lecture and pausing to take notes should take approximately 1.5 hours.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

3.3 New Institutional Economics (NIE)   This subunit might properly be titled “Institutions Matter.” Taking its cue from Ronald Coase’s two seminal articles, “The Problem of Social Cost” (1960) and “The Nature of Man” (1973), the New Institutional Economists (NIE) examine the role of institutions in furthering or impeding economic development. Some of the institutions are property rights, hierarchy, and social organizations. In a well-acclaimed book by Henon De Soto,The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (2001), he argues that one of the factors hindering economic development in poor countries is the inability to make real estate (land) fungible. Since then, there have been many others who have echoed that theme and other institutional barriers.

  • Reading: ADB Institute: Melanie S. Mibo’s “Institutions and Economic Development” Link: ADB Institute: Melanie S. Mibo’s “Institutions and Economic Development” (HTML)
     
    Instructions: Read the summary of the paper included on the website. If you would like more detail, feel free to read the whole paper; to access the paper, click on “Download This Discussion Paper” link at the bottom of the webpage.
     
    Reading this summary should take approximately 2 hours.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: University of Maryland IRIS Center: Omar Azfar’s “The New Institutional Economics Approach to Economic Development – An Analytic Primer” Link: University of Maryland IRIS Center: Omar Azfar’s “The New Institutional Economics Approach to Economic Development  –  An Analytic Primer” (PDF)
     
    Instructions: Read this 54-page paper. The IRIS Center is a research and advisory center, located in the Department of Economics at the University of Maryland, College Park, which focuses on issues of economic growth and democratic development in poor and transition countries, focusing on the role of institutions.

    When reading this article, please make particular note of the following terms: transaction costs, the incomplete contracts problem, the principal-agent problem, the adverse selection problem, and the collective action problem. How might these problems inhibit economic growth and development? How might these problems be overcome?
     
    Reading this article and answering the questions above should take approximately 2 hours.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

3.4 Social Capital and Development   Social capital is one of those concepts in economic development which is clearly borrowed from sociology but which has become an important idea in the literature of economics. It represents social relations that have economic or productive benefits. In today’s language, one could substitute the term networking.

The World Bank defines social capital as “a set of horizontal associations between people, consisting of social networks and associated norms that have an effect on community productivity and well-being. Social networks can increase productivity by reducing the costs of doing business. Social capital facilitates coordination and cooperation.”
 
The implications of social capital for economic development have been exploited in many areas. For example, some micro financiers find that the rate of recovery of loans is higher if the lending is made to social groups rather than to individuals. The concept of susu or (rotational savings) depends on the social networking group to make it work. One cannot be in the rotational saving if one is not a member of the social group. The group generates social capital with economic benefits; it enables people to save or have access to capital which may not be easily obtained any other way. 

  • Reading: IMF: Francis Fukuyama’s “Social Capital and Civil Society” Link: IMF: Francis Fukuyama’s “Social Capital and Civil Society” (HTML)
     
    Instructions: Read this paper. Francis Fukuyama is an influential scholar in this emerging approach to economic development. In this paper, Fukuyama defines social capital, explores its role in economic and political development, examines its origins, and makes some suggestions for how it might be cultivated. This paper was prepared for delivery at the IMF Conference on Second Generation Reforms.

    Reading this article should take approximately 1 hour and 30 minutes.
     
    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Reading: World Bank’s “Social Capital in Poverty Reduction and Economic Development” Link: World Bank’s “Social Capital in Poverty Reduction and Economic Development” (PDF)
     
    Instructions: This paper explores the different agents involved in generating, using and destroying Social Capital.
     
    Reading this paper should take approximately 1 hour and 30 minutes.
     
    Terms of Use: “Social Capital in Poverty Reduction and Economic Development” has been reposted by the kind permission of World Bank and can be viewed in its original form here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.

  • Guest Lecture: YouTube: TED Talks’ “Jacqueline Novogratz: A Third Way to Think about Aid” Link: YouTube: TED Talks’ “Jacqueline Novogratz: A Third Way to Think about Aid” (YouTube)

    Instructions: Watch this guest lecture. The speaker lays out a compassionate, forceful, and encouraging picture of how entrepreneurial innovation can drive social change.
     
    Watching this lecture and pausing to take notes should take approximately 45 minutes.

    Terms of Use: This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. It is attributed to TED, and the original version can be found here.

3.5 Human Capabilities Approach   - Reading: Policy & Practice: A Development Education Review: Denis O’Hearn’s “Amartya Sen’s Development as Freedom: Ten Years Later” Link: Policy & Practice: A Development Education Review: Denis O’Hearn’s “Amartya Sen’s Development as Freedom: Ten Years Later” (HTML)

 Instructions: Read this text; make sure to click on “next” to read
both pages of the article. This article examines the impact of the
thoughts of influential development thinker Amartya Sen. Amartya Sen
is a prominent Indian economist, who is currently the Thomas W.
Lamont University Professor and Professor of Economics and
Philosophy at Harvard University. He has published on a wide variety
of topics including inequality, alternative definitions of poverty,
and gender inequality, among many others. Pay particular attention
to O’Hearn’s description of Sen’s *capability approach*. Do you
think his critiques are justified?  
    
 Reading this article and answering the question above should take
approximately 1 hour.  
    
 Terms of Use: Please respect the copyright and terms of use
displayed on the webpages above.
  • Web Media: PBS’ Good Fortune: “Additional Video: Amartya Sen” Link: PBS’ Good Fortune: “Additional Video: Amartya Sen” (Flash)
     
    Also available in:
    YouTube
     
    Instructions: Once the website has loaded, click on the “play” sign in the media box to launch the video. While watching consider the reading on Sen’s work and impact. This interview with key thinker Amartya Sen is part of the online supporting media for PBS’ Good Fortune, a provocative documentary film exploring how massive international programs to alleviate poverty in Africa may be undermining the very communities they aim to benefit.
     
    Watching this video and pausing to take notes should take approximately 30 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpages above.

Unit 3 Activity   - Activity: The Saylor Foundation’s “ECON304 Course Discussion Board” Link: The Saylor Foundation’s “ECON304 Course Discussion Board”
 
Instructions: After reviewing the course materials for this unit, please respond to the following questions by posting to the course discussion board. Please feel free to start your own discussions as well as review and respond to other students’ postings.
 
1.    How can market failures retard economic development? Try to provide examples to support your answer.

 2.    In your opinion, what is the best way to address the market
failures? Explain your response.  
    
 Completing this activity should take approximately 2 hours.