Economic Development Reviewer (Midterm O-Ring Model

Period)
An economic model in which production
Chapter 4 functions exhibit strong complementarities
among inputs and which has broader
Binding Constraint
implications for impediments to achieving
The one limiting factor that if relaxed would be economic development.
the item that accelerates growth (or that allows a
larger amount of some other targeted outcome).
Middle-Income trap
A condition in which an economy begins
Complementarity
development to reach middle-income status but
An action taken by one firm, worker, or is chronically unable to progress to highincome
organization that increases the incentives for status. Often related to low capacity for original
other agents to take similar actions. innovation or for absorption of advanced
Complementarities often involve investments technology, and may be compounded by high
whose return depends on other investments inequality.
being made by other agents.

Underdevelopment Trap
Economic Agent
A poverty trap at the regional or national level in
An economic actor—usually a firm, worker, which underdevelopment tends to perpetuate
consumer, or government official— that chooses itself over time.
actions so as to maximize an objective; often
referred to as “agents.”
Deep intervention
 Catalyst – agent of change
 Microsoft – biggest producer of software A government policy that can move the economy
 Apple – california to a preferred equilibrium or even to a higher
permanent rate of growth, which can then be
self-sustaining so that the policy need no longer
Coordination Failure be enforced because the better equilibrium will
then prevail without further intervention.
A situation in which the inability of agents to
coordinate their behavior (choices) leads to an
outcome (equilibrium) that leaves all agents Congestion
worse off than in an alternative situation that is
also an equilibrium. The opposite of a complementarity; an action
taken by one agent that decreases the incentives
for other agents to take similar actions.
Big Push
A concerted, economy-wide, and typically public Where-to-meet dilemma
policy–led effort to initiate or accelerate
economic development across a broad spectrum A situation in which all parties would be better off
of new industries and skills. cooperating than competing but lack information
about how to do so. If cooperation can be
achieved, there is no subsequent incentive to Agency Costs
defect or cheat. Prisoners’ dilemma
Costs of monitoring managers and other
A situation in which all parties would be better off employees and of designing and implementing
cooperating than competing, but once schemes to ensure compliance or provide
cooperation has been achieved, each party incentives to follow the wishes of the employer.
would gain the most by cheating, provided that
others stick to cooperative agreements—thus
causing any agreement to unravel. Asymmetric Information
A situation in which one party to a potential
Prisoners’ Dilemma transaction (often a buyer, seller, lender, or
borrower) has more information than another
A situation in which all parties would be better off party.
cooperating than competing, but once
cooperation has been achieved, each party
would gain the most by cheating, provided that Linkages
others stick to cooperative agreements—thus
causing any agreement to unravel Connections between firms based on sales. A
backward linkage is one in which a firm buys a
good from another firm to use as an input; a
forward linkage is one in which a firm sells to
Multiple Equilibria
another firm. Such linkages are especially
A condition in which more than one equilibrium significant for industrialization strategy when one
exists. These equilibria sometimes may be or more of the industries (product areas)
ranked, in the sense that one is preferred over involved have increasing returns to scale that a
another, but the unaided market will not move larger market takes advantage of.
the economy to the preferred outcome.

Poverty Trap
Pareto Improvement
A bad equilibrium for a family, community, or
A situation in which one or more persons may be nation, involving a vicious circle in which poverty
made better off without making anyone worse and underdevelopment lead to more poverty and
off. underdevelopment, often from one generation to
the next.

Pecuniary Externality
O-ring Production Function
A positive or negative spillover effect on an
agent’s costs or revenues. A production function with strong
complementarities among inputs, based on the
products (i.e., multiplying) of the input qualities.
Technological Externality
A positive or negative spillover effect on a firm’s Implications of the O-Ring Theory
production function through some means other
than market exchange The analysis has several important implications:
• Firms tend to employ workers with similar skills market transaction; reflects the public good
for their various tasks. characteristic of information (and susceptibility to
free riding)—it is neither fully excludable from
• Workers performing the same task earn higher
other uses, nor nonrival (one agent’s use of
wages in a high-skill firm than in a low-skill firm.
information does not prevent others from using
• Because wages increase in q at an increasing it).
rate, wages will be more than proportionally
higher in developed countries than would be
predicted from standard measures of skill. Growth Diagnostics
• If workers can improve their skill level and make A decision tree framework for identifying a
such investments, and if it is in their interests to country’s most binding constraints on economic
do so, they will consider the level of human growth.
capital investments made by other workers as a
component of their own decision about how
much skill to acquire. Put differently, when those Social Returns
around you have higher average skills, you have
a greater incentive to acquire more skills. This The profitability of an investment in which both
type of complementarity should by now be a costs and benefits are accounted for from the
familiar condition in which multiple equilibria can perspective of the society as a whole.
emerge; it parallels issues raised in our analysis
of the big push model.
CHAPTER 6: Population Growth and
• One can get caught in economy-wide, low Economic Development: Causes,
production-quality traps. This will occur when Consequences, and Controversies
there are (quite plausibly) O-ring effects across
firms as well as within firms. Because there is an • In 2013, the world’s population reached about
externality at work, there could thus be a case for 7.2 billion people. In that year, the United Nations
an industrial policy to encourage quality Population Division projected that population
upgrading, as some East Asian countries have would rise to about 8.1 billion in 2025 and reach
undertaken in the past. This could be relevant for about 9.6 billion by the year 2050.
a country trying to escape the middle-income
• Every year, more than 75 million people are
trap.
being added to the world’s population. Almost all
• O-ring effects magnify the impact of local of this net population increase 97%—is in
production bottlenecks because such developing countries.
bottlenecks have a multiplicative effect on other
• For most of human existence on earth,
production.
humanity’s numbers have been few. When
• Bottlenecks also reduce the incentive for people first started to cultivate food through
workers to invest in skills by lowering the agriculture some 12,000 years ago, the
expected return to these skills. estimated world population was no more than 5
million (see Table 6.1). Two thousand years ago,
world population had grown to nearly 250 million,
Information Externality less than a fifth of the population of China today.
From year 1 on our calendar to the beginning of
The spillover of information— such as the Industrial Revolution around 1750, it tripled
knowledge of a production process—from one to 728 million people, less than three-quarters of
agent to another, without intermediation of a the total number living in India today. During the
next 200 years (1750–1950), an additional 1.7 The growth rate of a population, calculated as
billion people were added to the planet’s the natural increase after adjusting for
numbers. But in just four decades thereafter immigration and emigration.
(1950–1990), the earth’s human population
more than doubled again, bringing the total
figure to around 5.3 billion. The world entered the Natural Increase
twenty-first century with over 6 billion people. As
seen in Figure 6.1, in 1950 about 1.7 billion The difference between the birth rate and the
people lived in developing countries, death rate of a given population.
representing about two-thirds of the world total;
by 2050, the population of less developed
countries will reach over 8 billion, nearly seven- Net International Migration
eighths of the world’s population. In the
The excess of persons migrating into a country
corresponding period, the population of the least
over those who emigrate from that country.
developed countries will increase by tenfold,
from about 200 million to 2 billion people. In
contrast, the population of the developed
countries will grow very little between now and Crude Birth Rate
2050, even accounting for immigration from The number of children born alive each year per
developing countries. 1,000 population (often shortened to birth rate).

Death Rate
The number of deaths each year per 1,000
population.

Total Fertility Rate (TFR)

The number of children that would be born to a
woman if she were to live to the end of her
childbearing years and bear children in
accordance with the prevailing age-specific
fertility rates.

Doubling Time Life Expectancy at Birth

Period that a given population or other quantity The number of years a newborn child would live
takes to increase by its present size. if subjected to the mortality risks prevailing for
the population at the time of the child’s birth.

Rate of Population Increase

Under-5 Mortality Rate
Deaths among children between birth and 5
years of age per 1,000 live births.
Youth Dependency Ratio each age cohort measured on the horizontal
axis. Panel A (the left and middle panels) show
The proportion of young people under age 15 to
population pyramids for developed and
the working population aged 16 to 64 in a
developing countries, respectively (the age scale
country.
is that listed between these two figures).
Expressed in millions of people, rather than
percentages, the figure clearly reveals that most
Hidden Momentum of Population Growth future population growth will take place in the
The phenomenon whereby population continues developing world. The steeper bottom rungs for
to increase even after a fall in birth rates because the developing world as a whole, in contrast to a
the large existing youthful population expands very low-income country such as Ethiopia (right
the population’s base of potential parents. panel), reflect the large declines in population
growth in lower-middle income developing
countries over the past quarter century, and
particularly in China. For developed countries,
The Hidden Momentum of Population Growth
in the contemporary period the population in
Perhaps the least understood aspect of middle cohorts is typically greater than that of
population growth is its tendency to continue young cohorts; this is partly but certainly not
even after birth rates have declined substantially. exclusively viewed as a transitional feature of a
Population growth has a built-in tendency to period in which women have been delaying
continue, a powerful momentum that, like a births until later in life. From the Ethiopia pyramid
speeding automobile when the brakes are (Panel B) expressed as share of population,
applied, tends to keep going for some time young people greatly outnumber their parents
before coming to a stop. In the case of population (the age scale in this case is found to the right of
growth, this momentum can persist for decades the figure). When their generation reaches
after birth rates drop. There are two basic adulthood, the number of potential parents will
reasons for this. First, high birth rates cannot inevitably be much larger than at present. It
be altered substantially overnight. The social, follows that even if these new parents have only
economic, and institutional forces that have enough children to replace themselves (two per
influenced fertility rates over the course of couple, as compared with their parents, who may
centuries do not simply evaporate at the urging have had four or more children), the fact that the
of national leaders. We know from the total number of couples having two children is
experience of European nations that such much greater than the number of couples who
reductions in birth rates can take many decades. previously had more children means that the
Consequently, even if developing countries total population will still increase substantially
assign top priority to the limitation of population before leveling off. Panel A also focuses
growth, it will still take many years to lower attention on the fact that some age brackets are
national fertility to desired levels. The second increasing in size in some countries, while they
and less obvious reason for the hidden are decreasing in others. This reflects that in the
momentum of population growth relates to the demographic transition, the fraction of the
age structure of many developing countries’ population of working age first rises and then
populations. Figure 6.4 illustrates the great falls. On the one hand, countries where the
difference between age structures in less fraction of prime working-age citizens is rising
developed and more developed countries by face a potential crisis if many remain
means of two population pyramids for 2010. unemployed, as this is associated with inequality
Each pyramid rises by five-year age intervals for and (especially among males) social unrest, not
both males and females, with the total number in to mention the potential output loss. On the other
hand, this rise is also an important window of
opportunity for strong income and productivity
gains, referred to as the demographic dividend—
a period in which there are fewer children to
support, a larger fraction of women join or remain
in the workforce for longer periods of time, and
there are more available resources to invest in
human capital (see Chapter 8). In contrast,
where the fraction of people of working age is
falling as a result of population aging, the
resources needed for old-age support are
increasing. This is already a challenge for most
high-income countries. Leading up to this period,
a higher savings rate is required; but then
allowing more immigration can also help. The
transition is likely to pose an even greater
challenge for some middle-income countries with
big drops in fertility ahead of previous historical
patterns, most notably China (see the case study
at the end of the chapter), but also in several Demographic Transition
other Asian countries. The phasing-out process of population growth
*See Figure 6.4 below rates from a virtually stagnant growth stage,
characterized by high birth rates and death rates
Population Pyramid through a rapid-growth stage with high birth rates
and low death rates to a stable, low-growth stage
A graphic depiction of the age structure of the
in which both birth and death rates are low.
population, with age cohorts plotted on the
vertical axis and either population shares or
numbers of males and females in each cohort on
the horizontal axis. Replacement Fertility
The number of births per woman that would
result in stable population levels.

Malthusian Population Trap

The threshold population level anticipated by
Thomas Malthus (1766–1834) at which
population increase was bound to stop because
lifesustaining resources, which increase at an
arithmetic rate, would be insufficient to support
human population, which would increase at a
geometric rate.
Microeconomic Theory of Fertility Chapter 7: Urbanization and Rural-Urban
Migration: Theory and Policy
The theory that family formation has costs and
benefits that determine the size of families Urban Bias - the notion that most governments
formed. in developing countries favor the urban sector in
their development policies, thereby creating a
widening gap between the urban and rural
Family-Planning Programs economies.

Public programs designed to help parents plan

and regulate their family size. Rural-Urban Migration
Others issues not population growth:
The movement of people from rural villages,
 Underdevelopment towns, and farms to urban centers (cities) in
 World Resource Depletion and search of jobs.
Environmental Destruction
 Population Distribution
 Subordination of Women Agglomeration Economies
Cost advantages to producers and consumers
from location in cities and towns, which take the
Population-Poverty Cycle forms of urbanization economies and localization
A theory to explain how poverty and high economies.
population growth become reinforcing.
Empirical Arguments: Seven Negative Urbanization Economies
Consequences of Population Growth
Agglomeration effects associated with the
1. Economic Growth general growth of a concentrated geographic
2. Poverty and Inequality region.
3. Education
4. Health
5. Food Localization Economies
6. Environment
7. International Migration Agglomeration effects captured by particular
sectors of the economy, such as finance or
autos, as they grow within an area.
Reproductive Choice
The concept that women should be able to Social capital
determine on an equal status with their
husbands and for themselves how many children The productive value of a set of social institutions
they want and what methods to use to achieve and norms, including group trust, expected
their desired family size. cooperative behaviors with predictable
punishments for deviations, and a shared history
of successful collective action, that raises
expectations for participation in future
cooperative behavior.
 labor turnover rates and retain trained and skilled
workers.
Congestion
An action taken by one agent that decreases the
incentives for other agents to take similar
actions. Compare to the opposite effect of a
Efficiency Wage
complementarity.
The notion that modern-sector urban employers
pay a higher wage than the equilibrium wage rate
Informal Sector in order to attract and retain a higher-quality
workforce or to obtain higher productivity on the
The part of the urban economy of developing
job.
countries characterized by small competitive
individual or family firms, petty retail trade and
services, labor-intensive methods, free entry,
Induced Migration
and market-determined factor and product
prices. Process in which the creation of urban jobs
raises expected incomes and induces more
people to migrate from rural areas.
Todaro Migration Model
A theory that explains rural-urban migration as
Wage Subsidy
an economically rational process despite high
urban unemployment. Migrants calculate A government financial incentive to private
(present value of) urban expected income (or its employers to hire more workers, as through tax
equivalent) and move if this exceeds average deductions for new job creation.
rural income.
Harris-Todaro Model
An equilibrium version of the Todaro migration
model that predicts that expected incomes will
be equated across rural and urban sectors when
taking into account informal-sector activities and
outright unemployment.

Present Value
The discounted value at the present time of a
sum of money to be received in the future.

Labor Turnover
Worker separations from employers, a concept
used in theory that the urban-rural wage gap is
partly explained by the fact that urban modern-
sector employers pay higher wages to reduce