"Contemporary models of development and underdevelopment" refer to current theories and
frameworks that explain why some countries or regions are wealthy and progressing
(developed), while others remain poor and lagging behind (underdeveloped).
These models analyze factors such as economic policies, political stability, access to education
and healthcare, infrastructure, technological advancements, natural resources, and global trade
dynamics. They aim to understand the complex interactions that lead to different levels of
prosperity among nations and regions in today's world.
The success or failure of economic development policies can be explained by the
“principal-agent” model.
Principal:
Government
Agents:
Households
Private-sector firms
Public agencies
Government-owned enterprises
International companies
— An effective principal is needed to coordinate actions taken by agents and achieve an
optimal outcome, making all agents better-off.
— Coordination failure occurs when the principal fails to induce agents to coordinate
their actions, which leads to an outcome that makes all agents worse-off.
Economic agent An economic actor—usually a firm, worker, consumer or government official—
that chooses actions so as to maximize an objective.
Complementarity An action taken by one firm, worker, or organization that increases the
incentives for other agents to take similar actions. Complementarities often involve investments
whose return depends on other investments being made by other agents.
Coordination failure A state of affairs in which the inability of agents to coordinate their
behavior (choices) leads to an outcome (equilibrium) that leaves all agents worse off than in an
alternative situation that is also an equilibrium.
Big push 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.
O-ring model An economic model in which production functions exhibit strong
complementarities among inputs and which has broader implications for impediments to
achieving economic development.
Middle-income trap A condition in which an economy begins development to reach middle-
income status but is chronically unable to progress to high-income status. Often
related to low capacity for original innovation or for absorption of advanced technology, and may
be compounded by high inequality.
Underdevelopment trap A poverty trap at the regional or national level in which
underdevelopment tends to perpetuate itself over time.
Deep intervention A government policy that can move the economy to a preferred equilibrium
or even to a higher permanent rate of growth that can then be self-sustaining so that the policy
need no longer be enforced because the better equilibrium will then prevail without further
intervention.
Congestion The opposite of a complementarity; an action taken by one agent that decreases
the incentives for other agents to take similar actions.
Where-to-meet dilemma A situation in which all parties would be better off cooperating than
competing but lack information about how to do so. If cooperation can be achieved, there is no
subsequent incentive to defect or cheat.
Prisoners’ dilemma A situation in which all parties would be better off cooperating than
competing but once cooperation has been achieved, each party would gain the most by
cheating, provided that others stick to cooperative agreements— thus causing any agreement
to unravel.
Multiple equilibria A condition in which more than one equilibrium exists. These equilibria may
sometimes be ranked, in the sense that one is preferred to another, but the unaided market will
not move the economy to the preferred outcome.
Pareto improvement A situation in which one or more persons may be made better off without
making anyone worse off.
Pecuniary externality A positive or negative spillover effect on an agent’s costs or revenues.
Technological externality A positive or negative spillover effect on a firm’s production function
through some means other than market exchange.
Agency costs. Costs of monitoring managers and other employees and of designing and
implementing schemes to ensure compliance or provide incentives to follow the wishes of the
employer.
Asymmetric information A situation in which one party to a potential transaction (often a
buyer, seller, lender, or borrower) has more information than another party.
Linkages 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 another firm. Such linkages are especially significant for industrialization strategy when one
or more of the industries (product areas) involved have increasing returns to scale that a larger
market takes advantage of.
Poverty trap A bad equilibrium for a family, community, or nation, involving a vicious circle in
which poverty and underdevelopment lead to more poverty and underdevelopment, often from
one generation to the next.
O-ring production function A production function with strong complementarities among inputs,
based on the products of the input qualities.
Information externality The spillover of information— such as knowledge of a production
process—from one agent to another, without intermediation of a market transaction; reflects the
public good characteristic of information (and susceptibility to free riding)—it is neither fully
excludable from other uses, nor non-rival (one agent’s use of information does not prevent
others from using it). Growth diagnostics A decision tree framework for identifying a country’s
most binding constraints on economic growth.
Social returns The profitability of an investment in which both costs and benefits are accounted
for from the perspective of the society as a whole.
