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CONTEMPORARY MODELS OF DEVELOPMENT AND UNDERDEVELOPMENT
Underdevelopment as a Coordination Failure
The theories of economic development have emphasized complementarities between several conditions
deemed necessary for successful development. Complementarities are actions taken by agents such as a
firm, worker, or organization that increases the motivation for other agents to take similar actions (Smith
& Todaro, 2015). For instance, if a worker shows efficiency and productivity in his/her efforts, other
employees would be motivated to do the same.
Moreover, theories of economic development often highlight the problem that several things must work
well enough at the same time to get sustainable development underway (Smith & Todaro, 2015). A
coordination failure will arise if the agents cannot coordinate their behavior or choices to economic
situations that lead to a progressive outcome. For example, if there is no road access to a village, then
people inside cannot travel to access healthcare, teachers cannot get to schools to teach, and farmers
cannot get their goods to market. Improving the clinic in the nearby town, paying teachers extra to show
up on time, or creating a price information system has little impact because of the constraints of the
existing infrastructure. However, building the road does not, in itself, improve the clinic, change incentives
for teachers, or resolve agricultural market failures (Tompsett, n.d.).
The following economic models demonstrate the concept of complementarities and coordination failure
(Smith & Todaro, 2015):
• Big push is a concerted, economy-wide, and typically public policy-led effort to initiate or
accelerate economic development across a broad spectrum of new industries and skills. This
model suggests that since organizational decisions of firms depend on the decisions/initiatives
reinforced by other firms, public policy must pave the way for decisions that lead to development.
• O-ring model is an economic model in which production functions exhibit strong
complementarities among inputs. It has broader implications for impediments to achieving
economic development. This model suggests that even the smallest components of a complex
production process must be performed properly if the end product of the process is to have any
useful value. In other words, a mistake that creeps into even the smallest of tasks can cause the
final product to possess absolutely no value to users (The Hindu, 2018).
• Middle-income trap is a condition in which an economy begins development to reach middle-
income status but is chronically unable to progress to high-income status. It is often related to
low capacity for original innovation or absorption of advanced technology and may be
compounded by high inequality. This model suggests that developing countries must focus on
increasing capacity to innovate and mandating economic reforms in order to reach high-income
status (Asian Development Bank, 2018).
• Underdevelopment trap is a poverty trap at the regional or national level in which
impoverishment tends to perpetuate itself over time. This is influenced by several factors such as
high population growth, low education levels, few domestic resources, and unstable political
systems, among others. This model suggests that governments must facilitate equal distribution
of wealth and act towards eliminating inequalities in terms of social ranks.
• Deep intervention is a government policy that can move the economy 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 be enforced because the better equilibrium will then prevail without further
intervention. Equilibrium pertains to the social balance in the opposing aspects within a nation.
For example, equilibrium exists when there is a balance in supply and demand. In some cases, it
may also exist when the gap between the rich and the poor is met.
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This model suggests that governments must concentrate their efforts on other crucial problems
that have an essential role. For instance, instead of focusing on small problems, a nation may
address a public health concern.
• Congestion is the opposite of a complementarity. It is an action taken by one (1) agent that
decreases the incentives for other agents to take similar actions. For instance, as more people
gather to fish in one (1) particular lake, more fishers will try to look for another lake that is less
crowded; as more people begin to use one (1) specific road, more commuters will try to find an
alternative route.
• Prisoners’ dilemma is a situation in which all parties would be better off cooperating than
competing; but once cooperation has been achieved, one (1) party would gain the most by
cheating, provided that others stick to cooperative agreements, thus causing any agreement to
unravel. For instance, farmers in a particular region do not know what to specialize in. There may
be several perfectly good products from which to choose, but the critical problem is for all the
farmers to choose one (1) so that middlemen may profitably bring the region’s produce to market.
In some cases, other farmers would opt to produce goods that will bring them higher profits than
the agreed crop with the rest of the farmers.
Multiple Equilibria: A Diagrammatic Approach
Multiple equilibria pertain to an economic condition in which a group of firms cannot achieve a more
desirable equilibrium or outcome due to coordination failure. Equilibrium is the balance of supply and
demand in the market or balance of any opposing aspects relevant to achieve social stability within a
nation.
In the example (see Figure 1), X-firm makes its output decisions based on the average output of other
firms (Y-firms). When X-firm produces as much as the average output of Y-firms (X-firm = Y-firms), the
economy is at equilibrium. The curve represents alternative output decisions for X-firm, and it intersects
with the 45-degree line at three (3) points, meaning there are three (3) equilibria. If the firm and society
are better off with more output, point B is the most desirable since it has the highest level of output.
However, the firm’s production is determined by what the other firms decide, demonstrating the concept
of Big Push. Ideally, the firms could all coordinate to produce at the level corresponding to the equilibrium
at point B. If they fail to coordinate, firms might produce at a less efficient equilibrium, resulting in
coordination failure.
Figure 1. Multiple equilibria
Source: Economic Development (12th ed., 2015), p.169
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Problems of Multiple Equilibria
The following are some examples of problems associated with multiple equilibria (Smith & Todaro, 2015):
• Intertemporal effects. These describe how an individual’s current decisions affect what options
become available in the future (Liberto, 2019). Logically, investments will be released on the
current period if it is expected that the demand will be high in the second period. This scenario
may cause many product sectors to invest simultaneously. Despite all these, the market does not
ensure that industrialization will occur.
• Urbanization effects. These describe a scenario between the traditional cottage industry
(handicraft, pottery, knitting) of rural societies and manufacturing intensive focus of urban
people. As a nation requires more manufactured products to support its basic needs, a big push
to urbanization may be necessary to achieve industrialization.
• Infrastructure effects. These describe a scenario wherein a company engages in building massive
facilities to realize profitability and cater to increasing demand of product sectors. But it is also
possible that efficient industrialization may not take place if other coordination problems are
present, even though the infrastructure is built.
• Training effects. These describe a scenario wherein firms underinvest in pre-boarding programs
and facilities in order to provide higher wages for their workers. This is an economic case for
mandatory public education to ensure that graduates of a nation have enough skillset and require
little training once they are deployed on their respective fields.
• Linkages. These involve connections between firms based on sales. A backward linkage happens
when a firm buys a good from another firm to use as an input, while a forward linkage occurs
when a firm sells to another firm. Such linkages are especially significant for industrialization
strategy when one (1) or more of the industries (product areas) involved have increasing returns
to scale, of which a larger market takes advantage.
An increasing return to scale occurs when the output increases by a larger proportion than the
increase in inputs during the production process. For example, if input is increased by three (3)
times, but output increases by 3.75 times, then the firm or economy has experienced an
increasing return to scale (Sara, 2018).
• Poverty trap. This involves a bad equilibrium for a family, community, or nation relating to a
vicious circle in which poverty and underdevelopment lead to more poverty and
underdevelopment, often from one generation to the next.
References:
Asian Development Bank. (2018). Avoiding the middle-income trap in Asia: The role of trade, manufacturing,
and finance. Retrieved on October 31, 2019, from [Link]
middle-income-trap-asia-role-trade-manufacturing-and-finance
Liberto, D. (n.d.). Intertemporal choice. In Investopedia. Retrieved on November 13, 2019, from
[Link]
Sara, O. (2018). Returns to scale in economics: Definition & examples. Retrieved on November 14, 2019, from
[Link]
Smith, S. & Todaro, M. (2015). Economic development (12th ed.). United Kingdom: Pearson Education, Inc.
The Hindu. (2018). What is o-ring theory in economics? Retrieved on October 31, 2019, from
[Link]
economics/[Link]
Tompsett, A. (n.d.). Complementarity in economic development policies. Retrieved on October 31, 2019, from
[Link] html
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