lec04a Econ 112 Development, Foldvary

The Solow residual, the portion of economy-wide growth not explained by an increase in labor or capital goods. This is based on technological progress and a reduction of imposed costs.

Endogenous growth theory.

When GNI growth is determined within the system rather than by forces outside the system.

Absorptive Capacity

The idea that the productivity of new investment has diminishing returns.

This doctrine was used to explain a lack of growth.

For example, as investment in infrastructure increases, one has to employ less qualified engineers and other workers.

The cost of the more productive workers and resources rises.

But empirical research is lacking.

Skilled workers can be brought in.

It does not explain chronically slow growth.

Coordination failures

Complementarities are elements of development that enhance one another.

Several things have to work together.

For example, a factory with advanced machines needs workers with those skills.

A problem in coordination is that there can be an unproductive equilibrium

in which everyone is waiting for everyone else.

Such happened in New Orleans after its hurricane and flood.

A land tax can push enterprise by creating a cost for doing nothing.

Synchronizing expectations

A society can be stuck in an unproductive equilibrium.

Example: tardiness in Ecuador

Ecuador was losing production due to tardiness.

Tardiness fees on itself, because if others are chronically late,

you are wasting time if you are punctual.

Then there was a private-sector drive to get people to be on time.

Campaña contra la impuntualidad.

A newspaper publishes a list of government officials late for public events.

Hundreds of organizations signed a promise to be punctual.

Meetings have notices that say, “Come in. You are on time.”

After the meeting starts, it is replaced by

“Do not enter. The meeting began on time.”

There can also be an unproductive equilibrium with corruption.

If the police and all officials are corrupt, the people have to accomodate it.

If other officials are corrupt, an honest official has a lower income and gets less done.

But corruption can be useful if bribes are less costly than restrictions and taxes.

How to reform a corrupt police and bureaucracy?

Inequality and economic growth

Some economists believe that growth necessarily creates inequality,

and that it may be beneficial in providing savings for investment.

However, there is unnecessary inequality from the land tenure.

And the poor do save in ways not counted,

such as improving one’s houise, which is investment.

A problem is that a poor person who seeks to start a business has no collateral for a loan.

One remedy: micro-loan programs, foreign savings.

Also: credit unions, mutual credit.

Development as discovery

Comparative advantages are developed and discovered.

The benefits of innovation spread to others.

But there can be a first-mover advantage.

Investors know in advance that new products get copied

after the patent expires.