ZEF Discussion Papers on Devlopment Policy 7

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ZEF Discussion Papers on Devlopment Policy 7Bog'liq zef dp07ZEF Discussion Papers on Devlopment Policy 7
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Linking Information and Communication
Technologies to Development
Since the 1960s and 1970s, standard neoclassical theory based on the traditional
assumptions of costless exchange at market clearing prices has given way to more refined
analytical work that investigates, among other phenomena, the causes and consequences of
transaction costs, uncertainty, incomplete markets and incomplete information. These
developments have provided another perspective, i.e., the information-theoretic approach to
understanding LDCs (Stiglitz, 1989).
One of the central tenets of the information-theoretic approach and a feature noted by
early observers is that acquiring information is extremely costly, especially within the context of
LDCs. For instance, in a discussion of LDC economies, Leibenstein (1968) evokes a picture of
LDCs as, “obstructed, incomplete and ‘relatively dark’ economic systems.” A similar sentiment
is expressed by Geertz (1978), “information is poor, scarce, maldistributed, inefficiently
communicated, and intensely valued.” These difficulties associated with information acquisition
have numerous implications.
The high costs of acquiring information may lead to behavior that differs markedly from
what it would have been if more information had been available. The lack of information may
reduce the extent of mutually beneficial exchanges
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and lead to economy-wide Pareto
inefficiencies.
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Furthermore, due to information constraints, there will be considerable market and event
uncertainty surrounding economic and administrative decisions in LDCs.
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Both types of
uncertainty have implications for the efficiency, productivity, and welfare of the various agents
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As Stiglitz (1989) points out, transactions which would be desirable in the presence of perfect information may
not occur, and at the same time transactions may occur which would not have occurred in the presence of perfect
information. However, the general result is that there is less trade. Also, see Akerlof (1970).
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With imperfect information and incomplete markets, the economy is almost always constrained Pareto
inefficient, i.e., there exists a set of taxes and subsidies which can make everyone better off (Greenwald and
Stiglitz, 1986, 1988).
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It may be useful to clarify the differences between market and event uncertainty. Market uncertainty arises when
each individual or economic agent is aware of his/her own endowment and productive opportunities, but unsure
about the supply-demand offers of other economic agents. This type of uncertainty leads to searches for appropriate
partners (resulting in time costs), inhibits exchange and may lead to allocative inefficiencies. In the extreme, when
information costs and transaction costs are too high, markets may fail. The second type of uncertainty, event
uncertainty, arises when individuals are uncertain not about the terms on which they engage in transactions, but
about exogenous events - such as resource endowments (e.g. whether the wheat crop will be large or small),
productive opportunities (e.g. whether electricity will be available) or public policy (e.g. whether taxes will be cut).
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