Harris-Todaro Model

The Harris-Todaro model was created to explain how internal migration occurs from rural to urban sectors through the difference in the expected wage. Pritchett points out that migration can benefit developing countries and their population much more significantly than any aid attempts. Industrial world transfer are around $70bn a year in aid, but by simply allowing a 3% rise in their labour force (taken up by migrants), the gains would be $300 billion: 4.5x greater. Fundamentally it was used to explain migration within an economy, but we attempt to expand the model to an international level. The model begins by accepting that the assumption of (near) full employment in urban labour markets isn’t particularly appropriate for developing countries which are beset by a chronic (under/)unemployment problem whereby many uneducated and unskilled rural migrants cannot find a job in the formal sector so become unemployed or join the informal sector. Thus in deciding whether to move to the city or stay at home on the farm, an individual has to weigh up the probability and risks of being unemployed for a considerable period of time against the positive urban-rural real income differential.

Big Push Model

A coordination problem is a situation where agents are unable to coordinate their behaviour, such that they end up in an equilibrium that leaves all agents worse off than in an alternative Pareto efficient equilibrium. This exists because complementarities between several conditions are necessary for successful development and the externalities arising from these complementarities are often not considered by decision making agents. Rosenstein-Rodan developed the big push theory which suggests that a government, or coalition of firms/organisations/individuals, needs to overcome these preconditions before growth can occur. Ellis describes this Big Push theory as a "minimum level of resources that must be devoted to... a development programme if it is to have any chance of success. Launching a country into self-sustaining growth is a little like getting an airplane off the ground. There is a critical ground speed which must be passed before the craft can become airborne....".

What is economic development?

‘What is economic development and how would you measure it? Does an increase in per capita national income always constitute an increase in the standard of living?’

Economic development is hard to define, but is an improvement in the living conditions of the population as a whole. Whilst closely linked with economic growth – high growth could result in high development – they are not the same thing and economic growth, as we shall discover, does not necessarily equate to economic development. It can be measured in a variety of different ways and Streeten believes it is necessary for its own sake, to improve the condition of people, because it results in higher productivity and lower fertility (which is generally seen as a good thing), can lead to a better environment and a healthier civil society, democracy and social stability. [...]