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INDUSTRIALISATION TUTORIAL ESWARAN & KOTWAL CLOSED ECONOMY
QG = AGFG (LG , H)
QT = A T L T
p = fixed by world prices therefore can't return from 2→ 1, just 1 → 2 excess demand met by imports
'Development Economics' Ray 1998 (Ch. 5, 16, 18) Chapter 5 • 'When externalities are such that the cost of an action ↑with the number of adopters, they cannot be responsible for multiple eq or historical lock in.' • E.g. congestion effects • Complementaries may lead to multiple eq. (e.g. all using Dvorak/all using QWERTY) • Particular eq depends on history • 'historical lock in occurs only when externalities take the form of complementaries.' • Co-ordination failure. • 'Pervasive complementaries might therefore lead to a situation where an economy is stuck in a 'low level eq trap'' • 'According to this view, economic underdevelopment is the outcome of a massive coordination failure.' E.g. 'each entrepreneur would invest if he were to believe that the others would invest as well.'
• Linkages • Forward linkage - affects the ease of supply of another product. • Backward linkage - A has a backward linkage to B - expansion of A↑demand for B • 'Backward linkages are like 'pulls' and forward linkages are like 'pushes'' • A 'big push' to move economy to another eq?
1. Massive (public) investment needed 2. Quantitative allocation of investment across different sectors - But lack of info and funds (aid?) - But 'if incentives are provided carefully and selectively, we can partly rely on the market to correct the co-ordination failure.' o Could instead follow a deliberate policy of 'imbalanced growth' Promote specific sectors only - linkages lead to ↑ investment Which sectors?
- Number of linkages - Strength of linkages o Backward linkages - directly ↑price of output↑supply o Forward linkages - ↓price of one input of production - Overall effect is far more diffuse - Effect is relatively small for each sector - Intrinsic profitability o 'government maximises the chances of overcoming co-ordination failutre by investing in the least profitable activity.'
• 'Thus initially the demand for skilled personnel is quite low, and the consequent rates of return to acquiring such skills might, as a result, be too limited to encourage their acquisition.' o If everyone thinks high rate of return is another sector - all move to that sector and rates of return ↑ - EXPECTATIONS o But if history plays a role - wait until rate of return in new sector actually exceeds that of old sector 'everybody wants everybody else to go first.' o 'Unless there are entrepreneurs who deliberately run against the economic tide...we cannot break a co-ordination failure in the same way.' 'expectations play a role when there is some advantage to going first.' 'trade at the lower current returns from moving now with the higher costs of moving in the future.'
• 'in the presence of capital market imperfections and slowly changing customer loyalties, a new firm would find it difficult to penetrate that market.' o Increasing returns o 'even a more efficient firm must incur losses at low levels of production.' o 'historical conditions dictate the course of new developments.'
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