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Midterm continuation….
#17 Lecture notes: (for lectures and discussions only)
Book references and suggested readings:
A. Economic Development 12th Edition by Michael P. Todaro and Stephen C. Smith
Copyright 2015,2012,2009 by Michael P. Todaro and Stephen Smith
B. Economics by Paul A. Samuelson and William D. Nordhaus
Copyright 2010,2005,2001 by McGraw Hill Companies, Inc.
C. Issues in Philippine Economic Development
Copyright 1995 by tereso Tulao Jr., Gerardo Largosa, Christina Castill
D. Economics (volume 3)
Philippine Economic and Development Issues
Copyright Gerardo Sicat, 1983, 2003

Contemporary Models of Development and Underdevelopment

Development is both possible and difficult to achieve as such improved understanding of the impediments and catalysts
of development is of utmost importance. In some cases, ideas of classic theories of development have been formalized
and in the process, their logical structure and their significance for policy have been clarified and refined and the analysis
has also led to entirely new insights into what makes development so hard to achieve but also possible to achieve that
makes the study of economic development important. Theory, indeed, guides us to think systematically about how to
organize our efforts to achieve development.

The new models of economic development show that development is harder to achieve since it faces more barriers than
had been recognized previously. The new models have already influenced development policy and modes of
international assistance. The contemporary models of development and underdevelopment concludes with a framework
for appraising the
locally binding constraints (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) on the abilitiy of a developing nation to close the gap with the
developed countries.

Newer theories in 1990s and early 20th, have emphasized

complementarities ( an action taken by one firm, worker, or organization that increases the incentives for other economic
agents to take similar action – often it involves investments whose return depends on other investments being made by
other economic agents) between several conditions necessary for successful development.
Economic agents are those economic actor such as firm, worker, consumer, government that chooses actions so as to
maximize an objective. These newer theories often highlight the problem that several things must work well enough, at
the same time, to get sustainable development underway. Models of development that stress complementaries are
related to some of the models used in the endogenous growth approach but the coordination failure approach though
evolved relatively independently and offers some significant and distinct insights. Coordination failure is situation or a
state of affairs in which the ability of agents to coordinate their behavior (choices) leads to an outcome (equilibrium) that
leaves all agents worse off than in an alternative siutation that is also an equilibrium. Coordination failure may occur even
when all agents are fully informed about the alternative equilibrium: they can not get there because of coordination
difficulties, sometimes because people differet expectations and sometimes because everyone is better off wiating for
someone else to make the first move.

When complementarities are present, an action taken by one firm, worker, organization, or government increases the
incentives for other agents to take similar action such network effects are common. Such network effects are also
common in analyses of frontier technologies in developed countries, in particular in information technologies such as the
use of operating system, word processing program, instant messaging, and other software depends how many user also
adopt it. This framework can also be used in analyses of Middle-income trap which is a condition in which an economy
begins development to reach middle-income status but is chronically unable to progress to high-income status that is
often due to low capacity for innovation or absorption of advamced technology or compounded by high inequality.
Examples of complementarity is the presence of firms using specialized skills and availability of workers who have
acquired those skills. However firms will not enter a market if workers do not possess the skills the firm needed and
workers will not acquire the skills if there is no firm that will employ them.

Coordination problem can be illustrated by Where-to-meet Dilemma a situation in which all parties would be better off
cooperating than competing but lack information information about how to to do so. If cooperation can be achieved, there
is no subsequent incentive to defect or cheat.

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