Week 5 - History, expectations, traps and multiple equilibria 1 Flashcards
Why is discussing the proximate causes of underdevelopment e.g. low TFP, low Investment, not ideal?
Because these are not root causes of underdevelopment, they are just as much a symptom as they are a cause
What is underdevelopment more likely to be as a result of?
Not as a failure of socio-cultural values or some economic parameter, but as an interactive outcome in a system, perhaps precipitated by some historical accident or inertia and path dependence.
More specifically, what can we attribute differences in the steady state determinants to?
Intrinsic differences in the willingness or ability to save or to procreate.
Why did we adopt the QWERTY keyboard?
To slow down mechanical writers so their typewriters won’t get jammed.
Even though other keyboards are more efficient, why do we still use the QWERTY keyboard? (2)
- For a single firm it does not make sense to switch to a different keyboard as retraining typists would be too high
- Why would typing schools teach a different keyboard which no one uses?
What is the key issue made apparent by the QWERTY keyboard example.
If everyone switched their keyboard, there would be substantial efficiency gains, but no one wants to switch. Return to switching depends on what everyone else does.
What is complementarity?
When the number of adopters of a system depends positively on other adopters.
What kind of externality does using a QWERTY keyboard exhibit?
Positive externality
Where are the equilibria on the QWERTY/Dvorak cost diagram. State whether they are stable or not
Everyone uses QWERTY - stable
Everyone uses Dvorak - stable
50/50 - unstable
What are some other examples of complementarities?
Social media: instagram, twitter, airbnb
Infrastructure with a fixed cost component
Evading taxes
How does the Romer AK model exhbit complementarity?
An individual firm is more likely to invest if future productivity is high, which depends on the investment of all other firms. Therefore investment is more profitable if more other firms invest.
What are the two stable equilibria in the complementarities in investment diagram?
When everyone invests
When no one invests
True or False: Complementarities can lead to an economy to be trapped in a bad equilibrium
True - a better equilibrium is available if all agents appropriately coordinated their actions.
How can underdevelopment by underinvestment be explained as a coordination failure?
A better equilibrium is available if only all agents could appropriately coordinate their actions. But no one invests because everyone thinks no one will invest.
What is demand complementarity?
If one sector e.g. steel, is doing very well, then they want more coal to increase production of steel so the coal sector would experience an increase in demand. Many sectors of the economy are linked - they can all bring each other up or pull each other down
What is Rosentein-Rodan’s idea of the big push?
Simultaneously raise investment in many sectors of the economy.
What are 2 problems of this ‘big push’ idea?
1.Need immense, and presumably, public investment in many sectors at once. A gov’t in poor countries won’t have resources for this.
2. Need a fairly precise idea on how to allocate investment across sectors.
What is Hirschman’s solution of unbalanced growth?
Selectively promote development of a few sectors and let the linkages with other sectors work their magic to bring us to the better equilibrium.
How would you select these key sectors? (3)
- Number of linkages
- Strength of linkages - backward stronger than forward linkages
- Intrinsic profitability of each sector. Focus on sectors that are important for the rest of the economy, but private investment isn’t that high.
What is the underdevelopment trap based on?
The idea that history or initial conditions pin us down in a bad equilibrium, from which it is then very difficult to escape.
True or false: If expectations change, we can move to a better equilibrium.
False
Why are expectations alone not enough for someone to make an investment?
Making an investment is very costly, so it’s more prudent to wait a little bit until the returns build up (which you might be expecting it to) but if everyone does this then the investment won’t go up so no one will make an investment.
Why might a poor country looking to develop an export sector that specialises in high value items not be able to?
Requires a constant supply of skilled engineers, but since there are currently none, the cost of investing is high for firms.
If everyone expects people to move to the ‘new’ sector, why might this sector end up not getting developed?
Expectations ignore time - returns to skills do not adjust instantly when people move, so expectations alone are not enough to make people move. You wait until returns actually increase, but if everyone is waiting no one will join.
