Lock-in effects in economic development

"History matters. It matters not just because we can learn from the past, but because the present and the future are connected to the past by the continuity of a society's institutions." — Douglass North¹

Let me ask you a simple question: Why is the QWERTY keyboard still the standard layout for most English-language typists in 2025? The QWERTY layout was designed in the 1870s for mechanical typewriters to prevent jamming when typing frequently-used letter combinations. The mechanical constraints that necessitated this layout disappeared decades ago. More efficient layouts exist – Dvorak, Colemak, and others promise faster typing speeds with less finger movement. And yet, here we are, 150 years later, still using QWERTY.

This is the classic example of technological lock-in – a situation where an inferior standard persists due to network effects, coordination problems, and switching costs. Once enough people use QWERTY, keyboard manufacturers make QWERTY keyboards, which makes more people learn QWERTY, which ensures more QWERTY keyboards are produced, and so on.

But lock-in effects aren't just curiosities in the history of technology. They're fundamental to understanding why some regions prosper while others stagnate, why certain development strategies succeed while others fail, and why breaking out of poverty traps is so damned difficult.

Economic development displays remarkable path dependence. The places that industrialized first tend to remain wealthy. The same applies to regions within countries – the wealthy regions of Italy today largely correspond to the wealthy regions of Italy 500 years ago. This persistence demands explanation.

Consider a simplified model of development with three equilibria:

1. Low-level equilibrium: Subsistence agriculture, minimal infrastructure, low human capital, weak institutions.
2. Middle-income trap: Some industrialization, moderate infrastructure and education, but unable to compete with either low-wage countries in manufacturing or advanced economies in innovation.
3. High-level equilibrium: Advanced infrastructure, strong human capital, effective institutions, innovation-driven growth.

The transitions between these states aren't smooth or automatic. Each equilibrium features self-reinforcing mechanisms that resist change.

In the low-level equilibrium, poverty begets poverty through multiple channels:

• Poor nutrition reduces cognitive development and labor productivity²
• Limited tax revenue means minimal public goods
• Low education levels limit technology adoption
• High mortality reduces returns to human capital investment
• Weak institutions enable rent-seeking and discourage productive investment

These mechanisms interlock, creating a basin of attraction that pulls economies back toward poverty when small improvements occur. Only a sufficiently large coordinated push – changing multiple factors simultaneously – can escape this trap.

But what creates these lock-in effects in the first place? Let's explore the key mechanisms.

Increasing returns and network effects

Many economic activities display increasing returns to scale – the more they're done, the more efficient they become. Silicon Valley didn't become a tech hub by accident; once a critical mass of technology firms located there, the benefits for new firms to join became overwhelming. Knowledge spillovers, specialized suppliers, deep labor markets, and access to venture capital all improved with each new entrant.

These increasing returns create winner-take-all dynamics. The region or country that gets a small early lead can parlay that advantage into dominance, while latecomers struggle to catch up.

Economic development requires simultaneous advances on multiple fronts. Infrastructure, education, institutions, and technology must progress together. Building a modern port is useless without roads connecting it to manufacturing centers. Advanced factories need skilled workers, reliable electricity, and efficient logistics.

These complementarities create massive coordination problems. No single actor can transform all these elements simultaneously, and partial improvements may yield minimal returns. As Hirschman noted in his theory of unbalanced growth, strategic investments in key sectors can create beneficial imbalances that pull related sectors forward – but identifying these leverage points is fiendishly difficult.³

Perhaps the most powerful lock-in mechanism operates through institutions – the formal rules and informal norms that structure economic activity. Institutions tend to be remarkably persistent, often outlasting the conditions that created them.

Consider the divergent paths of North and South Korea. Starting from identical cultural and historical backgrounds, they developed radically different institutions after 1945. These institutional differences created enormous economic disparities that persist despite the obvious inefficiency of North Korea's system. The elites who benefit from extractive institutions work tirelessly to maintain them, even at the cost of overall economic decline.

Or take the American South. Acemoglu and Robinson argue that the legacy of plantation slavery created extractive institutional patterns that persisted long after emancipation, contributing to the region's relative economic backwardness for over a century.⁴ Sharecropping, restricted labor mobility, and limited educational opportunities for Black Americans replaced formal slavery but maintained many of its economic effects.

Lock-in effects pose a profound challenge to development economics. If history and chance events can lock regions into persistently inefficient equilibria, then standard policy prescriptions may prove inadequate.

The Washington Consensus policies – fiscal discipline, liberalization, privatization – assume that removing distortions will automatically lead economies toward optimal outcomes. But when multiple equilibria exist, removing barriers may not be sufficient. Economies can remain trapped in low-level equilibria even with reasonably good policies.

This doesn't mean development is impossible, but it does suggest the need for more nuanced approaches:

Big push strategies

Rosenstein-Rodan's "big push" model argued that coordinated investments across multiple sectors could help economies escape low-level traps.⁵ By simultaneously developing complementary industries, the investments could become self-sustaining.

South Korea's development under Park Chung-hee exemplifies this approach. The government coordinated investments in steel, shipbuilding, chemicals, and eventually electronics, creating a mutually reinforcing industrial ecosystem. What looked like "picking winners" was actually solving a coordination problem the market couldn't address.

Daron Acemoglu advocates "inclusive economic institutions" as the key to sustained growth. But transplanting institutions that worked elsewhere often fails. Effective institutions must evolve in context, building on existing informal norms and power structures.

China's township and village enterprises (TVEs) illustrate this principle. Rather than immediately privatizing state enterprises, China created hybrid ownership forms that functioned within existing political constraints while introducing market incentives. These transitional institutions enabled growth while avoiding political backlash. Sometimes new technologies can help economies bypass lock-in effects. Mobile banking in Kenya allowed the country to develop sophisticated financial services without first building a traditional banking infrastructure. Similar opportunities exist in renewable energy, where countries can build decentralized clean power systems without replicating the fossil fuel phase of development.

The African paradox and Morocco's transition

Africa presents perhaps the most compelling case study of lock-in effects. The continent possesses abundant natural resources, favorable demographics with a young population, and in many cases, reasonably sound economic policies. Yet most African nations struggle to escape low or middle-income traps. Why?

The answer lies in a complex web of historical lock-in effects. Colonial powers established extractive institutions designed to export resources rather than develop local economies. These institutional patterns persisted after independence, with new elites often stepping into the same extractive roles. Infrastructure was built to move resources from inland areas to ports rather than to connect domestic markets. Educational systems were designed to create administrative personnel rather than entrepreneurs or engineers.⁶

Morocco offers an interesting counterexample of partial escape from these traps. Since the early 2000s, Morocco has pursued what some economists call a "diagonal strategy" – neither fully state-directed nor purely market-driven, but a pragmatic mix that addresses multiple constraints simultaneously.

The Tanger Med port complex, launched in 2007, exemplifies this approach. Rather than just building infrastructure, Morocco created an integrated ecosystem including special economic zones, logistics networks, and targeted education programs. The government coordinated complementary investments while allowing private sector competition within this framework.

Morocco's renewable energy strategy follows a similar pattern. The Noor Ouarzazate solar complex – one of the world's largest concentrated solar power plants – isn't just an energy project but part of a broader industrial strategy including technical training, research facilities, and local component manufacturing.

These initiatives haven't made Morocco wealthy overnight, but they've helped it avoid both the low-equilibrium trap that afflicts many sub-Saharan nations and the middle-income trap that often follows initial development. Morocco's GDP per capita has nearly doubled since 2000, and its economy has developed greater complexity.⁷

What distinguishes Morocco's partial success from the continued struggles of many other African nations? Three factors stand out:

• Institutional continuity with adaptation – Morocco maintained political stability while gradually reforming institutions, avoiding both the extractive stagnation of autocracies and the chaotic institutional ruptures that plagued many post-colonial states.
• Strategic complementarity – Investments across sectors were coordinated to address multiple constraints simultaneously, from infrastructure and education to governance and industrial policy.
• Geographical leverage – Morocco strategically utilized its proximity to European markets and position as a gateway to Africa, turning historical trade patterns to its advantage rather than remaining trapped by them.

Morocco's experience suggests that escaping lock-in effects requires not just good policies but a coherent development vision that addresses historical constraints while creating new path dependencies that favor growth rather than extraction.

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What does all this mean for development strategy in 2025? First, context matters enormously. The specific history, geography, and institutional environment of a country determine which development paths are feasible. Copy-paste solutions rarely work. Second, improving one factor in isolation – be it education, infrastructure, or governance – may yield disappointing results due to complementarities. Development strategies must address multiple constraints simultaneously or find clever sequencing approaches that create positive feedback loops. Third, the persistence of lock-in effects means that temporary interventions rarely produce lasting change. Policies must be sustained long enough to shift the economy to a new basin of attraction.The good news is that lock-in effects work both ways. Once an economy transitions to a higher equilibrium, the same forces that previously trapped it in poverty can help sustain its prosperity. South Korea and Taiwan didn't just grow rapidly; they transformed their economic structures in ways that made their progress self-reinforcing.

Perhaps most importantly, understanding lock-in effects should make us more humble about development prescriptions. The path from poverty to prosperity isn't a linear trajectory that all countries can follow by implementing the right policies. It's more like navigating a complex fitness landscape with multiple peaks and valleys, where history and chance events can constrain future possibilities.

Economists' job isn't to hand down universal formulas but to help countries identify their specific constraints and opportunities – the unique landscape they must navigate. And we should recognize that sometimes, what looks like irrationality or market failure may actually reflect powerful lock-in effects that simple policy tweaks cannot overcome.

Escaping lock-in effects requires not just good economics, but political creativity, cultural adaptation, and technological innovation. It's hard precisely because it requires coordinated changes across multiple domains of human activity. But the remarkable development successes of the past century – from Japan to South Korea to China – show that it can be done.

History matters, but it isn't destiny.

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