Beyond Rosenstein-Rodan: The Modern Theory of Coordination Problems in Development

The theme of this article is the importance – and the many causes – of coordination problems in development. Rosenstein-Rodan pointed out that spillovers may cause the return to an activity to increase with the number of others who undertake the same or complementary activities. If such spillovers are strong enough, multiple equilibrium outcomes may exist, some of which are better for every person than the alternatives, but with no tendency for market forces to lead from the worse to the better state of affairs. This article shows how modern economic theory broadened our view of the sources of spillovers that could lead to underdevelopment as an equilibrium. It argues for an “ecological” perspective on development, where the influences from others in one’s environment are a critical determinant of outcomes, and many interaction effects are not mediated by markets. This perspective provides the basis for the distinction between “deep” interventions, which change underlying forces, and “shallow” interventions, which do not and may actually make things worse. Karla Hoff is a research economist at the World Bank. This article draws on Hoff and Stiglitz (2000). The author would like to thank Irma Adelman for helpful comments, and Abhijit Banerjee, Arnold Harberger, Gustav Ranis, Debraj Ray, and Joseph Stiglitz for discussions of the issues raised in this article.