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TECH TALK: Useful Concepts: Development Economics

July 15th, 2003 · No Comments

I know very little of Economics. Supply, Demand, Pricing are things which came in a text book almost two decades earlier in my life. Much of my decision-making has been drive more by gut and trial-or-error. Development Economics is a branch of Economics dealing with the economic transformation of developing countries, and so is even further removed from me. So, when I was discussing the problems of Rural India recently with Atanu Dey, I realised that while I can look at a very techno-centric view of the world, if that view of the world can get embellished by an understanding of some economic concepts, it will help me understand the problems and possible solutions better.

A book I came across was Debraj Rays Development Economics. As I started reading it, I realised that this is something I should have tried to understand long ago. Many of us live in developing countries. The challenges of poverty, rural-urban migration, agricultural dependence may seem far removed from our lives in cities, but nevertheless do have an indirect impact. And if we decide to work on solutions to transform rural areas, we need to understand the issues well, lest we take half-measures and make the problem worse.

Here is an excerpt from the book dealing with co-ordination failure. While the context may be from the point of view of rural areas, the problem is true of many other areas too where many elements of a solution have to all come together simultaneously to be able to make a difference.

Pervasive complementarities (the fact that a single individual takes some action increases the incentives for others to take the same or similar action) might lead to a situation where an economy is stuck in a low-level equilibrium trap, while at the same time there is another, better equilibrium, if only all agents could appropriately co-ordinate their actions to reach itAccording to this view, economic underdevelopment is the outcome of a massive co-ordination failure, in which several investments do not occur simply because other complementary investments are not made, and these latter investments ae not forthcoming simply because the former are missing!

This concept provides a potential explanation of shy similar economies behave very differently, depending on what has happened in their historyTo the extent that the formation of expectations is driven by past history, it may well be that a region that is historically stagnant continues to be so, whereas another region that has been historically active may continue to flourish.

In the case of an economic co-ordination failure, going first means taking economic losses. Unless there are entrepreneurs who deliberately run against the economic tide, either because of overoptimism or simple arrogance, we cannot break a co-ordination failure in the same way as old fashions are broken.

Rural India (and rural areas in most other developing countries) need such entrepreneurs.

Tomorrow: Game Theory

TECH TALK Useful Concepts+T

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