Question

what is the meaning of the term underdevelopmement trap. using examples describe the role of 1)history. and 2 coordination failure, in causing an economy to be stuck in an underdevelopment trap. Briefly, contrast the role of governemt in the development process as sugessted by the “underdevelopment trap paradigm” vs that in the soliw model paradigm

Answer 1

Underdevelopment trap is shown in figure below, It happens due cycle of to large informal sector, poorly skilled labor force, and less dynamic formal firms of innovation and employment growth.

Many a times this leads to poverty trap in a country as shown below: ow income leads to low savings which leads to low investment and then to low productivity.

In order to overcome this cycle, a strike at any point should be made,especially at low productivity.

Role of history:1. Colonial countries like India, Myanmar, Srilanka were British colonies. They were exploited by colonial masters. They used these countries as source of raw material and hence no new technology was introduced and hence production remained low and post independence as human capital was less developed they all depended on developed countries which took time for technology transfer. These countries are still developing as they are finding difficult to match with the speed of technology catch up. Due to globalization products from developed countries are occupying markets in them and they are becoming mere temporary outsourcing hubs.

2. Co ordination failure:Developing countries :

This occurs when a group of firms could have synergy and achieve a more desirable equilibrium output but fail to because they do not coordinate their decision making. When one firm reduces production and fires employees fearing recession the others also follow and truly recession starts to show a larger impact. This need expansionary fiscal policy where govt.. reduces taxes and increases investments. This leads to shift in aggregate demand to right from AD1 to AD2 as shown in figure below and hence real GDP also goes up from Q1 to Q2, more jobs are generated and hence economy comes back to normalcy. Solow Model assumes that labor, capital and technology leads to economic growth. However, it takes time to build thesev but through expansionary fiscal policy the economic recessions can be effectively met and if economy gets a boost of investments in human and physical capital then it grows as suggested by Solow.