Announcements
“Employment of Married Women and Economic
Development: Evidence from Latin America”
Today (9/10) 3:30-5:00 (HCB 305)
Manuelita Ureta, Texas A&M University
“Where Are We Two Years After 9/11?”
Tomorrow (9/11) 7:30-9:00 p.m., Bennett Auditorium
Panelists: Stephen Gardner (Economics), Mark Long (ME
Studies), Christopher Marsh (Pol. Sci.), and Jerold
Waltman(Pol. Sci.), all from Baylor, and Norton
Mezvinsky (History, Central Connecticut State
University)
Chapter 5
History, Expectations,
and Development
ECO/INB 4334
September 10, 2003
Steve Gardner
(your humble substitute teacher
while the real guy is away)
Chapter Questions
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Why have living standards failed to converge
(as suggested by the Solow model)?
Why do investment rates differ between
developing countries?
How can equal savings rates lead to different
economic growth rates?
How do historical forces and expectations
influence current rates of growth?
Channels
History and Expectations influence
growth performance through two
channels:
 Complementarities
 Increasing Returns
Complementarities
Defined:
If the fact that other people in society are
taking a certain action makes it more
beneficial (higher payoff or less costly) for me
to take the same action, the actions are said
to be complementary.
Complementarities
Multiple Equilibria and Dominance
 When we have choices between
complementary actions, we have the
possibility of multiple equilibria, meaning that
society may coordinate around any one of the
possible actions, and exclude others.
 These societal choices often are influenced
by accidents of history
Complementarities
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Examples
QWERTY vs Dvorak typewriters
Mac vs PC computers
Drive on left or right side of street
Full-bodied or token money
More or less investment
Complementarities
Depending on historical circumstances,
complementarities may cause society to
coordinate exclusively on an inferior choice
(higher cost curve or less payoff)
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QWERTY over Dvorak (see next slide)
PC over Mac
Left over right driving in UK
Less over more investment
(Anti)Complementarities
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When the cost of an action increases with
more adopters, the action is anticomplementary.
Anticomplementary actions will not
encourage uniform behavior (adoption of a
single equilibrium) by all members of society.
In the following slide, commuters will divide
between routes.
Complementarities
Coordination Failure
 Coordination is required for society to switch
from an inferior to a superior complementary
action, but societies often fail to accomplish
this.
 So, a poor country can “lock in” a uniform low
rate of investment, which could change with
proper coordination.
Complementarities
Coordination is particularly important when
there are strong linkages between industries
(Albert Hirschman)
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Forward linkage—one industry provides inputs for
another (steel for railways)
Backward linkage—one industry provides demand
for another (steel for coal)
Complementarities
Balanced versus Unbalanced Growth
 Rosenstein-Rodan thought coordination
would require the government to give a
simultaneous (balanced) “big push” of all
industries at the same time.
 Hirschman argued that unbalanced support
of selected industries with strong linkages
(Walt Rostow’s “leading sectors”) could
stimulate a coordinated expansion of all
sectors (Rostow’s “takeoff”).
Complementarities
History versus expectations
 In the following graph, if the population
expected a move from old to new, that would
cause individuals to choose a move to new.
But that requires expectations to adjust from
historical experience.
 Problem exacerbated by delay – benefits of
adjustment are not immediate, so we hope
others will begin the adjustment without us.
Increasing Returns
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Defined:
A production activity for which an increase in
the scale of operation leads to lower unit
costs.
Increasing Returns
Transition Cost, Time, & Financial Markets
 Savings from increasing returns do not
accrue immediately (partly because of
consumer inertia), so producers experience
cost increases hopefully temporary) when
they switch from an old, but widely used,
technology to a new one (see next slide).
 This problem would be less serious if capital
markets were perfect, which is far from true in
developing countries.
Increasing Returns
Increasing Returns and Market Size:
Interaction
 Limitations on market size can limit gains
from external (rather than internal)
economies (inter-firm division of labor,
“roundaboutness” of production, complex
intermediate goods, etc.
 Vicious or virtuous circle of demand, market
size, industry-wide productivity, and income
growth.
Competition and
International Trade
International trade may be able to alleviate
some of the difficulties we have discussed
 Success on export markets can alleviate the
“market size” limitations on efficiency.
 Access to international markets for
intermediate and final goods can provide
“linkages”
Other Roles for History
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Social norms
See, for example,
http://people-press.org/reports/pdf/185topline.pdf
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Question 17a
The status quo
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Change usually creates winners and losers, even
if the gains are greater than the losses
Compensation of losers may not be credible or
implementable