HIST 151

Political Economy of Modern Asian Development

REMINDER

QUIZ #1 - NEXT CLASS

Moderated for one hour
(Approx 40 questions - MCQs, TF, FIB, MS, NA)
Review the key terms, slides, comparative advantage
exercise, and reading concepts.
Don’t be late!
Weekly Topics Defined
The Middle Income Trap (MIT) - usually refers to countries that have experienced
rapid growth to quickly reached middle-income status, but then failed to overcome
that income range to further catch up to the developed countries.

Game Theory - a branch of mathematics concerned with the analysis of strategies

for dealing with competitive situations where the outcome of a participant's choice
of action depends critically on the actions of other participants. Game theory has
been applied to contexts in war, business, and biology.

N.b. Course Spec schedule modification: We will cover more about Asian economic regionalism later in
the course.
Historical Context: Middle Income Trap
Globalization is the word used to describe the growing interdependence of the
world's economies, cultures, and populations, brought about by cross-border trade
in goods and services, technology, and flows of investment, people, and
information.
Waves of Globalization
These factors will determine how

an economy can deploy the

factors of production to participate

in the gains from trade and

specialization to develop.
What has changed in the 4th wave?
How will this change development strategies?

Source
What is the Middle Income Trap
LDCs and low-income countries have low costs for the factors of production.

MNCs can produce goods cheaply and the country is attractive to FDI.

Wages and Rents start to rise as a country rises to a middle income country

Other less developed and cheaper countries start to compete for low cost production

Middle Income countries need to find ways to compete with more highly developed
countries, but this is very difficult.

Many countries get trapped in the MIT and development stalls.

How to Measure MIT
Absolute Measurement Relative Measurement

source
MIT - Examples
MIT Examples
Escaping the MIT is hard,

but it is possible to fall

back into the MIT too!

source
Main factors that
determine whether
a country will get
trapped or scape
the MIT.

source
Escaping the MIT
1) Macroeconomic stability and openness, which are enhanced by trade and investment liberalisation, flexible
exchange rates, sustainable public finances and strict financial sector supervision.

2) Education, through the twin channels of workforce employability and productivity (Koen et al., 2013).

3) Law and rule enforcement, which is hard to quantify but better captured in recent work (Guillemette et al.,
2017).

4) Financial development and diversification – from bank lending to various forms of equity funding, so that
savings go to productive uses and entrepreneurs can more readily access funding (Cournède and Denk, 2015).

source
EXPY - Export Complexity Index
Having a more complex

set of exports in the

economy is key to escaping

the MIT.

(Use Atlas Database to

test the direction of your

country’s economy)
The Importance of Education to escape the MIT
Game Theory Example
If all countries are trying to develop and are competing, then a development
strategy needs to be formed. Using Game Theory, business leaders and
politicians can mathematically model what their competitors will likely do.

Example
1) We both own a garment factory that can produce more of the same item.
2) With investment, I will make more garments more cheaply than you and take your market share.
3) I am incentivized to expand and you know that.

What will you do?

Game Theory Example (cont.)
If we both choose to expand, the supply of our goods goes up and we each make
less of a profit margin.

Wages have been set by our local market or a government minimum wage.

Now, a cheaper producer in another country can make more profit and put both of
us out of business.

So, how to decide what to do? Game Theory can help give us insights.
Prisoner’s Dilemma
There is an incentive to defect

or not cooperate.

How can we calculate this?

Let’s look at the math.

Expected Payoff Matrix
Prisoner B

Defect (D) Cooperate (C)

Prisoner A Defect (D) -5 / -5 0 / -20

Cooperate (C) -20 / 0 -1 / -1

4 possible outcomes: DD, DC, CD, CC

Prisoner A’s 4
Best outcome for the group is total of -2 possible
outcomes
Best outcome for each individual is 0
Expected value for each individual for defecting = -5
Expected value for each individual for cooperating = -21