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Topic 5 – Contemporary Model of Development & Underdevelopment

Introduction

In attempting to encourage modern development, development is both possible and

extremely difficult to achieve. Late 1980s, significant progress have been made in the analysis
of economic development and underdevelopment. The analysis also led to entirely new insights
into what makes development so hard to achieve. In this chapter, it will tackle a sample of some
of the most influential of the new models of economic development. These models shows that
development is harder to achieve. The new models have already influenced development policy
and modes of international assistance.

There has a new research to widen the context of developing countries in terms of
market economy. One of the major theme is incorporating problem of coordination among
economic agents. Other key themes includes formal exploration of situations in which increasing
returns to scale, a finer division of labor, the availability of new economic ideas or knowledge,
learning by doing, information externalities, and monopolistic competition or other forms of
industrial organization other than perfect competition predominate. This chapter concludes with
a framework to show the ability of the developing nation to close the gap between the
developed countries.

Background of the study

 The new models of economic development have broadened the scope for modeling
a market in developing country
 Departs from neoclassical economics in its assumption of perfect information, the
relative insignificances of externalities, and the uniqueness and optimality of
equilibria
Theories that helps us understand the barriers to development

Endogenous growth

According to traditional models, in the absence of external shocks and technological

change, all economies will converge to zero growth. This leaves no explanation for sustained
growth. All unexplained growth is attributed to the Solow Residual. Growth for the most part is
the result of an exogenous process It is impossible to analyze the exogenous process. It is
impossible to analyze the determinants of technological change. New growth theory provides a
framework for analyzing persistent growth in national income that is analyzing persistent growth
in national income that is determined within the system rather than by external forces.
Coordination failure
Emphasizes that complementary between several conditions is necessary for economic
development. It results in bad equilibrium in which agents are worse-off than alternative
equilibrium. Deep interventions by the government can move an economy to a preferred
equilibrium.

Multiple Equilibria
Equilibrium: All participants are doing what is best for them, given what they expect
others to do, which in turn matches what others are actually doing. In an economic system with
multiple equilibria, coordination failure occurs when a group of firms could achieve a more
desirable equilibrium but fail to because they do not coordinate their decision making.
Coordination failure can result in a self-fulfilling prophecy.

The big push

This shows how market failures can be mitigated by concerted public policy. It is the
most famous model of coordination failures and it emphasizes the existence of increasing return
in modern industrialized sector.

O – Ring
Provides insight into low-level equilibrium traps and explain the reasons for the existence
of poverty traps and why countries with low-income are caught in these traps. The production
function assumes that output is derived by multiplying level of skill required for completing a task
by the total number of tasks.

Definition of terms

Agency cost - arises from monitoring management others agents wherein they will implement
schemes to ensure compliance or provide incentives to follow employees wishes.
Asymmetric information – also known as “lemons problem” occurs when one party to a
transaction possesses greater material knowledge than the other party.
Behaviors and Norms - a number of behaviors which may have been advantageous at one
point in history have become ingrained in our societies, and have proven hard to undo.
Big push – a comprehensive investment, economy - wide and can be helpful to bring economic
development across a broad spectrum of new industries and skills.
Binding constraints – has the ability of a developing nation to further close the gap with
developed world.
Complementarity - an action that often highlighted the problem that several things must work
well enough, taken by one firm, worker, or organizations that increases the incentives for other
agents to take similar actions.
Congestion – the opposite of a complementarity; an action taken by one agent that decreases
the incentives for other agents to take similar actions.
Coordination failure - it is an approach that has evolved relatively independently and offers
some significant and distinct insights.
Deep intervention – government can then concentrate its efforts on other crucial problems in
which it has an essential role.
Economic agent – are individuals or organizations that impact the economy. Economic agents
are Consumers, producers, and influencers of capital markets and the economy at large.
Growth diagnostics – targeting the most binding constraints has important advantages over
other approaches to policy selection.
Incumbent advantage - increasing returns to scale in modern industries mean that an
established firm with large production using an outdated technology can often undercut a
competitor who is trying to enter the market using a more advanced production technique.
Information externality – innovators do not reap the full returns generated by their search for
profitable activities, without any intermediation of a market transaction.
Inequality and growth – traditionally, a certain degree of inequality was assumed good for
growth because this was thought to allow for resources to concentrate and be invested.
Linkages – a strategy for solving the coordination problems is to focus government policy on
encouraging the development of industries with key backward or forward linkages.
 Backward linkages- raise demand for an activity
 Forward linkages- lower the costs of using an industry’s output.

Middle – income trap - exists for some countries that make significant progress in
reducing extreme poverty and experience structural change, in which countries develop to a
degree but chronologically fail to reach high-income status, often due to lack of innovation
capacity.
Multiple equilibria – in general, when jointly profitable investments may not be made without
coordination, multiple equilibria may exist, and agents could find themselves in either a good or
bad position.
O-ring model – the key features is the way it models production with strong complementarities
among inputs.
O-ring production - A production function with strong complementarities among inputs, based
on the products of the input qualities.
Pareto improvement – if the economy moves to a new equilibrium where at least some actors
are made better off without hurting anyone.
Pecuniary externality – changes in price which merely redistribute wealth, development
economist have concluded that several market failures work to make economic development
difficult to initiate.
Poverty trap - is not merely the absence of economic means. It is created due to mix of factors,
such as access to education, and healthcare, working together to keep an individual or family in
poverty. It’s refers to an economic system in which is difficult to escape poverty.
Prisoner’s dilemma – is a situation where individual decision makers always have an incentive
to choose in a way that creates a less than optimal outcome for individuals as a group.
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.
Technological externality - economic situation where the production functions of one firm is
favorably or unfavorably affected by the production function of other firms.
Underdevelopment trap – in which a region remains, stuck in subsistence agriculture level due
to coordination failure.
Where - to – meet dilemma – agents will all be better off if they coordinate their actions, and
there’s no incentive to cheat once they do.
Review of Related Literature

Poverty in the Developing Countries is caused by the Development of

Underdevelopment”: Unpacking Andre Gunder Frank (1967) In Twenty First Century
Third World Politics
By: Mazi Mbah, Dr. Ojukwu, and Peter Beluchukwu Okoye
Published: November 11,2019

Abstract:

This study is a re-examination of the essence of Andre Gunder Frank’s (1967), landmark
statement that “poverty in the developing countries is caused by the development
of underdevelopment”, in which he held external forces arising from imperialism as being
responsible for the poverty in the Third World. The main aim of the study is to re-evaluate
Frank’s earlier statement in the light of contemporary Third World Politics using the
Historical Descriptive method and Dependency Theoretical Framework of analysis. The study
discovered that poverty is still at the root of Third World’s underdevelopment and is even
growing at geometrical proportion in the developing countries in the 21st century. This makes
Frank’s landmark statement of (1967), very much relevant today as it was the time he made it.
But holding only external forces arising from imperialism whether old or new solely
responsible for the growing poverty in the developing countries does not add up to explain the
alarming rate of poverty increase and underdevelopment in the Third World in the 21st century.
The study equally discovered that before the close of20th century and within two decades into
the 21st century that the developing countries under a United Third World Front known as
the Non-Aligned Movement made formidable successful pressures on the United Nations and
other international organizations on several issue areas to liberate their societies from
underdevelopment orchestrated by poverty. As a result of the fore-goings the study came to the
conclusion that many things are fundamentally wrong with manner and ways the Third World
Societies conduct their domestic affairs. The study therefore recommends are organization of
Third World Countries domestic, economic, political and social structures in line with the dawn
of a New World Order of dynamism as the key to unlocking developing countries’
underdevelopment occasioned by their high level of poverty. Equally, the developed countries of
Northern hemisphere should show humanitarian understanding in their dealings with the Third
World Countries instead of their current imperial overlord orientations in their relations with
the developing countries to correspond reasonably well with a New World Order of a Globalized
village.

Source:
https://www.academia.edu/42619534/_Poverty_in_the_Developing_Countries_is_caused_by_th
e_Development_of_Underdevelopment_Unpacking_Andre_Gunder_Frank_1967_In_Twenty_Fi
rst_Century_Third_World_Politics
 Imperial Manila: How institutions and political geography disadvantage Philippine
provinces
By: Rollin F Tusalem
Published: April 9,2019

Abstract:

Critics of Philippine democracy have pointed out that the unitary system employed since the
country became a sovereign state in 1946 led to the prolonged underdevelopment of sub-
national regions (provinces). Hence, policy makers have put forward the argument that a shift to
a Federal system is necessary because of the imperial Manila syndrome. This is the notion that
political, economic, and social underdevelopment is more prevalent the farther away a province
is from the capital, Metro-Manila, which has been a longstanding theory of ‘core-periphery’
dynamics in political geography. Using sub-national data derived from Philippine provinces, the
study finds that provinces farther away from Manila in terms of geodesic distance are indeed
disadvantaged not only in terms of economic, poverty, and human development indicators, but
also in terms of dependence on internal revenue allotments which inhibits local growth. Physical
distance from the capital also decreases rural funds for provincial development. The
implications suggest that a Federal arrangement can promote peripheral growth and
development, but it certainly is not a panacea.

Source: https://journals.sagepub.com/doi/abs/10.1177/2057891119841441?
fbclid=IwAR1rNxzJ5FxsXB_D0h61BY0HZmIqYt4b2VHRJ2_8D9BjXMX6k7mzkC8Pbak&journal
Code=acpa#articlePermissionsContainer

Conceptualizing Development and Underdevelopment:

From Classical Modernization to Contemporary
Post-Development Discourse
By: M. Saiful Islam
Published:October15, 2018

Abstract

Development, as an ideology and practice, has been a matter of much contestation since its
inception at the enlightened period. The way development has been understood, explained and
practiced has undergone various experiments and directions over the time. Yet, what
development is theoretically and what it should be in practice remains as contested and vague.
This article is an attempt to examine the trajectory of development from its origin in the classical
modernization to the more contemporary neo-liberal and post-development discourses. It is
argued that the way development has been propagated by the modernists as economic growth
and positive change has been vehemently challenged by the post-modernists on the ground
that development is not only hegemonic, authoritative and dependency creating mechanism that
routinely fails and but also produces unintended consequences on the lives of the people. Thus,
there has been a growing realization that development needs to be rethought in a way that
would promote an alternative development or even an alternative to development. Such a shift
in perspectives and continuing deliberations on development has given rise to the question
whether development has reached an impasse which needs to be pushed forward. By reviewing
the existing literature, this article aims at unfolding the dynamic trajectory of development both
as theory and practice, and argues that development is and continues to be an interesting and
stimulating topic in social sciences given its vibrant engagement with and implications on
various stakeholders both at the global and local contexts.

Keywords:Development and underdevelopment, modernization, dependency, world system,

post-development, alternative development

Source:
https://www.researchgate.net/publication/328284785_Conceptualizing_Development_and_Und
erdevelopment_From_Classical_Modernization_to_Contemporary_Post-
Development_Discourse

International Dependency and the Economic Development of Less Advanced Countries

By:Saidou Baba Oumar & Molem Christopher Sama
Published: May 25, 2015

Abstract:

Dependency is a double-edge sword that can either promote or demote the status of the
dependent. The case of the dependency relationship between less advanced countries (LACs)
and most industrialized countries (MICs) is a pertinent example that explains the attitude
developed by each party to situate and maintain itself in its current status to be classified as
underdeveloped, developing or developed. This paper investigated the effects of international
dependency on the economic development of LACs using the analytical approach of secondary
data interpretation and found that although the dependency between LACs and MICs is bi-
directional, LACs have surrendered all their potentials for attaining economic development to
MICs who are steadily designing different devices such as developmental projects aids,
structural adjustment programs, MDGs or good governance programs to maintain them in a
state of economic and political vulnerability. In view of this, the paper recommends LACs to
wake up from sleep and take their destiny in hand by building up strong institutions that can take
care of their needed structural changes and basic-needs requirements before embracing the
ideas of international dependence revolution models (IDRMs) and market fundamentalism
models (MFMs), for no external forces may sacrifice to hold the bull by the horns for them to
milk the cow.

Keywords: trade, growth, government, market, resources, vulnerability

Source:
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.924.5127&rep=rep1&type=pdf