Economic Development Reviewer (Midterm
Period)
Chapter 4
Binding Constraint
The one limiting factor that if relaxed would be
the item that accelerates growth (or that allows a
larger amount of some other targeted outcome).
Complementarity
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.
Economic Agent
An economic actor—usually a firm, worker,
consumer, or government official— that chooses
actions so as to maximize an objective; often
referred to as “agents.”
 Catalyst – agent of change
 Microsoft – biggest producer of software
 Apple – california
Coordination Failure
A situation in which the inability of agents to
coordinate their behavior (choices) leads to an
outcome (equilibrium) that leaves all agents
worse off than in an alternative situation that is
also an equilibrium.
Big Push
A concerted, economy-wide, and typically public
policy–led effort to initiate or accelerate
economic development across a broad spectrum
of new industries and skills.
O-Ring Model
An economic model in which production
functions exhibit strong complementarities
among inputs and which has broader
implications for impediments to achieving
economic development.
Middle-Income trap
A condition in which an economy begins
development to reach middle-income status but
is chronically unable to progress to highincome
status. Often related to low capacity for original
innovation or for absorption of advanced
technology, and may be compounded by high
inequality.
Underdevelopment Trap
A poverty trap at the regional or national level in
which underdevelopment tends to perpetuate
itself over time.
Deep intervention
A government policy that can move the economy
to a preferred equilibrium or even to a higher
permanent rate of growth, which 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.
Where-to-meet dilemma
A situation in which all parties would be better off
cooperating than competing but lack information
about how to do so. If cooperation can be
achieved, there is no subsequent incentive to
defect or cheat. Prisoners’ dilemma
A situation in which all parties would be better off
cooperating than competing, but once
cooperation has been achieved, each party
would gain the most by cheating, provided that
others stick to cooperative agreements—thus
causing any agreement to unravel.
Prisoners’ Dilemma
A situation in which all parties would be better off
cooperating than competing, but once
cooperation has been achieved, each party
would gain the most by cheating, provided that
others stick to cooperative agreements—thus
causing any agreement to unravel
Multiple Equilibria
A condition in which more than one equilibrium
exists. These equilibria sometimes may be
ranked, in the sense that one is preferred over
another, but the unaided market will not move
the economy to the preferred outcome.
Pareto Improvement
A situation in which one or more persons may be
made better off without making anyone worse
off.
Pecuniary Externality
A positive or negative spillover effect on an
agent’s costs or revenues.
Technological Externality
A positive or negative spillover effect on a firm’s
production function through some means other
than market exchange
Agency Costs
Costs of monitoring managers and other
employees and of designing and implementing
schemes to ensure compliance or provide
incentives to follow the wishes of the employer.
Asymmetric Information
A situation in which one party to a potential
transaction (often a buyer, seller, lender, or
borrower) has more information than another
party.
Linkages
Connections between firms based on sales. A
backward linkage is one in which a firm buys a
good from another firm to use as an input; a
forward linkage is one in which a firm sells to
another firm. Such linkages are especially
significant for industrialization strategy when one
or more of the industries (product areas)
involved have increasing returns to scale that a
larger market takes advantage of.
Poverty Trap
A bad equilibrium for a family, community, or
nation, involving a vicious circle in which poverty
and underdevelopment lead to more poverty and
underdevelopment, often from one generation to
the next.
O-ring Production Function
A production function with strong
complementarities among inputs, based on the
products (i.e., multiplying) of the input qualities.
Implications of the O-Ring Theory
The analysis has several important implications:
• Firms tend to employ workers with similar skills
for their various tasks.
• Workers performing the same task earn higher
wages in a high-skill firm than in a low-skill firm.
• Because wages increase in q at an increasing
rate, wages will be more than proportionally
higher in developed countries than would be
predicted from standard measures of skill.
• If workers can improve their skill level and make
such investments, and if it is in their interests to
do so, they will consider the level of human
capital investments made by other workers as a
component of their own decision about how
much skill to acquire. Put differently, when those
around you have higher average skills, you have
a greater incentive to acquire more skills. This
type of complementarity should by now be a
familiar condition in which multiple equilibria can
emerge; it parallels issues raised in our analysis
of the big push model.
• One can get caught in economy-wide, low
production-quality traps. This will occur when
there are (quite plausibly) O-ring effects across
firms as well as within firms. Because there is an
externality at work, there could thus be a case for
an industrial policy to encourage quality
upgrading, as some East Asian countries have
undertaken in the past. This could be relevant for
a country trying to escape the middle-income
trap.
• O-ring effects magnify the impact of local
production bottlenecks because such
bottlenecks have a multiplicative effect on other
production.
• Bottlenecks also reduce the incentive for
workers to invest in skills by lowering the
expected return to these skills.
Information Externality
The spillover of information— such as
knowledge of a production process—from one
agent to another, without intermediation of a
market transaction; reflects the public good
characteristic of information (and susceptibility to
free riding)—it is neither fully excludable from
other uses, nor nonrival (one agent’s use of
information does not prevent others from using
it).
Growth Diagnostics
A decision tree framework for identifying a
country’s most binding constraints on economic
growth.
Social Returns
The profitability of an investment in which both
costs and benefits are accounted for from the
perspective of the society as a whole.
CHAPTER 6: Population Growth and
Economic Development: Causes,
Consequences, and Controversies
• In 2013, the world’s population reached about
7.2 billion people. In that year, the United Nations
Population Division projected that population
would rise to about 8.1 billion in 2025 and reach
about 9.6 billion by the year 2050.
• Every year, more than 75 million people are
being added to the world’s population. Almost all
of this net population increase 97%—is in
developing countries.
• For most of human existence on earth,
humanity’s numbers have been few. When
people first started to cultivate food through
agriculture some 12,000 years ago, the
estimated world population was no more than 5
million (see Table 6.1). Two thousand years ago,
world population had grown to nearly 250 million,
less than a fifth of the population of China today.
From year 1 on our calendar to the beginning of
the Industrial Revolution around 1750, it tripled
to 728 million people, less than three-quarters of
the total number living in India today. During the
next 200 years (1750–1950), an additional 1.7 The growth rate of a population, calculated as
billion people were added to the planet’s the natural increase after adjusting for
numbers. But in just four decades thereafter immigration and emigration.
(1950–1990), the earth’s human population
more than doubled again, bringing the total
figure to around 5.3 billion. The world entered the Natural Increase
twenty-first century with over 6 billion people. As
seen in Figure 6.1, in 1950 about 1.7 billion The difference between the birth rate and the
people lived in developing countries, death rate of a given population.
representing about two-thirds of the world total;
by 2050, the population of less developed
countries will reach over 8 billion, nearly seven- Net International Migration
eighths of the world’s population. In the
The excess of persons migrating into a country
corresponding period, the population of the least
over those who emigrate from that country.
developed countries will increase by tenfold,
from about 200 million to 2 billion people. In
contrast, the population of the developed
countries will grow very little between now and Crude Birth Rate
2050, even accounting for immigration from The number of children born alive each year per
developing countries. 1,000 population (often shortened to birth rate).

Death Rate
The number of deaths each year per 1,000
population.

Total Fertility Rate (TFR)

The number of children that would be born to a
woman if she were to live to the end of her
childbearing years and bear children in
accordance with the prevailing age-specific
fertility rates.

Doubling Time Life Expectancy at Birth

Period that a given population or other quantity The number of years a newborn child would live
takes to increase by its present size. if subjected to the mortality risks prevailing for
the population at the time of the child’s birth.

Rate of Population Increase

Under-5 Mortality Rate
Deaths among children between birth and 5
years of age per 1,000 live births.
Youth Dependency Ratio
The proportion of young people under age 15 to
the working population aged 16 to 64 in a
country.
Hidden Momentum of Population Growth
The phenomenon whereby population continues
to increase even after a fall in birth rates because
the large existing youthful population expands
the population’s base of potential parents.
The Hidden Momentum of Population Growth
Perhaps the least understood aspect of
population growth is its tendency to continue
even after birth rates have declined substantially.
Population growth has a built-in tendency to
continue, a powerful momentum that, like a
speeding automobile when the brakes are
applied, tends to keep going for some time
before coming to a stop. In the case of population
growth, this momentum can persist for decades
after birth rates drop. There are two basic
reasons for this. First, high birth rates cannot
be altered substantially overnight. The social,
economic, and institutional forces that have
influenced fertility rates over the course of
centuries do not simply evaporate at the urging
of national leaders. We know from the
experience of European nations that such
reductions in birth rates can take many decades.
Consequently, even if developing countries
assign top priority to the limitation of population
growth, it will still take many years to lower
national fertility to desired levels. The second
and less obvious reason for the hidden
momentum of population growth relates to the
age structure of many developing countries’
populations. Figure 6.4 illustrates the great
difference between age structures in less
developed and more developed countries by
means of two population pyramids for 2010.
Each pyramid rises by five-year age intervals for
both males and females, with the total number in
each age cohort measured on the horizontal
axis. Panel A (the left and middle panels) show
population pyramids for developed and
developing countries, respectively (the age scale
is that listed between these two figures).
Expressed in millions of people, rather than
percentages, the figure clearly reveals that most
future population growth will take place in the
developing world. The steeper bottom rungs for
the developing world as a whole, in contrast to a
very low-income country such as Ethiopia (right
panel), reflect the large declines in population
growth in lower-middle income developing
countries over the past quarter century, and
particularly in China. For developed countries,
in the contemporary period the population in
middle cohorts is typically greater than that of
young cohorts; this is partly but certainly not
exclusively viewed as a transitional feature of a
period in which women have been delaying
births until later in life. From the Ethiopia pyramid
(Panel B) expressed as share of population,
young people greatly outnumber their parents
(the age scale in this case is found to the right of
the figure). When their generation reaches
adulthood, the number of potential parents will
inevitably be much larger than at present. It
follows that even if these new parents have only
enough children to replace themselves (two per
couple, as compared with their parents, who may
have had four or more children), the fact that the
total number of couples having two children is
much greater than the number of couples who
previously had more children means that the
total population will still increase substantially
before leveling off. Panel A also focuses
attention on the fact that some age brackets are
increasing in size in some countries, while they
are decreasing in others. This reflects that in the
demographic transition, the fraction of the
population of working age first rises and then
falls. On the one hand, countries where the
fraction of prime working-age citizens is rising
face a potential crisis if many remain
unemployed, as this is associated with inequality
and (especially among males) social unrest, not
to mention the potential output loss. On the other
hand, this rise is also an important window of
opportunity for strong income and productivity
gains, referred to as the demographic dividend—
a period in which there are fewer children to
support, a larger fraction of women join or remain
in the workforce for longer periods of time, and
there are more available resources to invest in
human capital (see Chapter 8). In contrast,
where the fraction of people of working age is
falling as a result of population aging, the
resources needed for old-age support are
increasing. This is already a challenge for most
high-income countries. Leading up to this period,
a higher savings rate is required; but then
allowing more immigration can also help. The
transition is likely to pose an even greater
challenge for some middle-income countries with
big drops in fertility ahead of previous historical
patterns, most notably China (see the case study
at the end of the chapter), but also in several Demographic Transition
other Asian countries. The phasing-out process of population growth
*See Figure 6.4 below rates from a virtually stagnant growth stage,
characterized by high birth rates and death rates
Population Pyramid through a rapid-growth stage with high birth rates
and low death rates to a stable, low-growth stage
A graphic depiction of the age structure of the
in which both birth and death rates are low.
population, with age cohorts plotted on the
vertical axis and either population shares or
numbers of males and females in each cohort on
the horizontal axis. Replacement Fertility
The number of births per woman that would
result in stable population levels.

Malthusian Population Trap

The threshold population level anticipated by
Thomas Malthus (1766–1834) at which
population increase was bound to stop because
lifesustaining resources, which increase at an
arithmetic rate, would be insufficient to support
human population, which would increase at a
geometric rate.
Microeconomic Theory of Fertility
The theory that family formation has costs and
benefits that determine the size of families
formed.
Family-Planning Programs
Chapter 7: Urbanization and Rural-Urban
Migration: Theory and Policy
Urban Bias - the notion that most governments
in developing countries favor the urban sector in
their development policies, thereby creating a
widening gap between the urban and rural
economies.

Public programs designed to help parents plan

and regulate their family size. Rural-Urban Migration
Others issues not population growth:
The movement of people from rural villages,
 Underdevelopment towns, and farms to urban centers (cities) in
 World Resource Depletion and search of jobs.
Environmental Destruction
 Population Distribution
 Subordination of Women Agglomeration Economies
Cost advantages to producers and consumers
from location in cities and towns, which take the
Population-Poverty Cycle forms of urbanization economies and localization
A theory to explain how poverty and high economies.
population growth become reinforcing.
Empirical Arguments: Seven Negative Urbanization Economies
Consequences of Population Growth
Agglomeration effects associated with the
1. Economic Growth general growth of a concentrated geographic
2. Poverty and Inequality region.
3. Education
4. Health
5. Food Localization Economies
6. Environment
7. International Migration Agglomeration effects captured by particular
sectors of the economy, such as finance or
autos, as they grow within an area.
Reproductive Choice
The concept that women should be able to Social capital
determine on an equal status with their
husbands and for themselves how many children The productive value of a set of social institutions
they want and what methods to use to achieve and norms, including group trust, expected
their desired family size. cooperative behaviors with predictable
punishments for deviations, and a shared history
of successful collective action, that raises
expectations for participation in future
cooperative behavior.
 labor turnover rates and retain trained and skilled
workers.
Congestion
An action taken by one agent that decreases the
incentives for other agents to take similar
actions. Compare to the opposite effect of a
Efficiency Wage
complementarity.
The notion that modern-sector urban employers
pay a higher wage than the equilibrium wage rate
Informal Sector in order to attract and retain a higher-quality
workforce or to obtain higher productivity on the
The part of the urban economy of developing
job.
countries characterized by small competitive
individual or family firms, petty retail trade and
services, labor-intensive methods, free entry,
Induced Migration
and market-determined factor and product
prices. Process in which the creation of urban jobs
raises expected incomes and induces more
people to migrate from rural areas.
Todaro Migration Model
A theory that explains rural-urban migration as
Wage Subsidy
an economically rational process despite high
urban unemployment. Migrants calculate A government financial incentive to private
(present value of) urban expected income (or its employers to hire more workers, as through tax
equivalent) and move if this exceeds average deductions for new job creation.
rural income.
Harris-Todaro Model
An equilibrium version of the Todaro migration
model that predicts that expected incomes will
be equated across rural and urban sectors when
taking into account informal-sector activities and
outright unemployment.

Present Value
The discounted value at the present time of a
sum of money to be received in the future.

Labor Turnover
Worker separations from employers, a concept
used in theory that the urban-rural wage gap is
partly explained by the fact that urban modern-
sector employers pay higher wages to reduce