Development Economics

Assumptions of the production function

1. constant returns to scale 2. diminishing marginal product

GINI Coefficient

1. defined on the basis of a Lorenz Curve 2. ranges from 0 (perfect income equality) to 1 (complete inequality) 3. A/(A+B) = 2A 4. does not pickup underlying differences in the level and distribution of income for countries with similar GINI coefficient

3 elements of poverty measures

1. an indicator of well-being at the individual level 2. a poverty line: a threshold of well-being below which an individual is considered to be poor 3. a poverty statistic: a formula/concept to summarize poverty at the aggregate level

inequality

1. captures the distribution of well-being 2. believed to affect the effectiveness of growth in reducing poverty 3. GINI coefficient is most commonly use index

Malthusian Model

1. given the right circumstances, humans can breed at a prodigious rate 2. limited quantity of available resources limits human population- positive check 3. the smaller the population relative to the available land, the better off people would be, the better off people were, the faster population would grow, amount of land per person declines and people become poor. Poverty limits population growth 4. humans face another limitation: the deliberate reduction of fertility to prevent poverty- preventive check

what does the convergence toward the steady state predict?

1. if two countries have the same rate of investment but different levels of income, the country with lower income will have higher growth 2. if two countries have the same level of income by different rates of investment, then the country with a higher rate of investment will have higher growth 3. a country that raises its level of investment will experience an increase in its rate of income growth

ways in which reducing inequality is believed to improve economic growth

1. improved access to credit and investment opportunities 2. economic stability 3.pro-poor growth that reduces inequality is thus economically efficient

Theil Index

1. index of inequality, has advantage of additive decomposition 2. 0 = perfect equality, ln(N)= perfect inequality

Measures of well-being

1. monetary: economists prefer consumption expenditure to income (income doesn't take into account access to goods and basic services, income is prone to more measurement error, and is more volatile to seasonality) 2. non-monetary: health status (incidence of disease, life expectancy, mortality rate, nutrition status) education, wealth index (assets and durable goods, housing and housing amenities)

three key aspects of welfare

1. poverty - the level effect 2. inequality - the distribution of welfare 3. vulnerability - the risk of becoming poor or falling deeper into poverty

Key Points

1. poverty is a function of mean income and the distribution of income around the mean 2. depending on the shape of the income distribution, growth in mean income can have different impact on poverty 3. reducing inequality increases the poverty reducing effect of a give growth in income per capita 4. the elasticity of poverty reduction with respect to economic growth is higher in countries with low inequality

breakdown of the Malthusian model

1. predicts that the standards of living will remain constant over time, even in the face of technological progress- over last 2 centuries living standards have risen dramatically 2. claims higher income raises the growth rate of population, but the relationship between those two measures is negative, the richest countries in the world have the lowest rates of population growth

Poverty reduction methods

1. static redistribution 2. distribution-neutral growth 3. growth that favors the poor (pro-poor growth)

multidimensional poverty index (MPI)

1. three dimensions: education, health, living standards 2. 10 indicators in total with their own cut-off points

vulnerability proxy measurements

1. transition matrix tracing households as they move in and out of poverty 2. length of poverty spells 3. volatility of income flows 4. measuring the effects of shocks (income, health, natural disasters, conflict) on poverty outcomes

Paul Rosenstein-Rodan

1902-1985: Author of "Problems of Industrialization of Eastern and South-Eastern Europe," which was basis for the "Big-Push" hypothesis of economic development. Recognized the existence of low-level equilibrium-trap in which low-income countries may find themselves. The way out is through coordinated large investment in a number of industrial sectors simultaneously. Classic case of Coordination Failure so the state has to assume a central role in development

Arthur Lewis

1915-1991: Nobel prize winner. Known for the Lewis Model outlined in "Economic Development with Unlimited Supply of Labor". Recognized the dual structure of the economy in developing countries: a low-productivity traditional agricultural sector with open or disguised unemployment and a high productivity modern industrial sector. Small wage difference draws workers from agriculture to industry. Wages remain low because of the 'unlimited' supply of unskilled labor that allow high profits that are re-invested in the modern sector.

Albert Hirschman

1915-2012: Proposed idea of unbalanced growth. Had doubts about the capacity of developing country governments to coordinate massive investment in as many industries as possible simultaneously. Suggested investment on Key Industrial Sectors which have strong Backward Linkages and Forward Linkages

Deaton: "Measuring Poverty in a Growing World"

Consumption measured from household surveys, which is used to measure poverty, grows less rapidly than consumption measured in national accounts. As a result, measured poverty has fallen less rapidly than appears warranted by measured growth. One reason is that richer households are less likely to participate in surveys. Growth in national accounts is also upward biased and consumption in the national accounts contains large and rapidly growing items that are not consumed by the poor and not included in surveys. Current statistical procedures in poor countries understate the rate of global poverty reduction and overstate growth in the world

Acemoglu et al. "Institutions as a Fundamental Cause of Long-Run Growth"

Differences in economic institutions are the fundamental cause of differences in economic development. Look at division of Korea into two parts with different economic institutions and the colonization of much of the world by European powers in the 15th century. Economic institutions determine the incentives of and the constraints on economic actors and shape economic outcomes. They are social decisions chosen for their consequences. Resolved in favor of groups with greater political power. Distribution of political power in society is in turn determined by political institutions and the distribution of resources.

Barrios, Bertinelli, Strobl, "Trends in Rainfall and Economic Growth in Africa: A Neglected Cause of the African Growth Tragedy"

Examine the role of rainfall trends in poor growth performance of sub-Saharan African nations relative to other developing countries using cross-country panel climatic data set in an empirical economic growth framework. Results show that rainfall has been a significant determinant of poor economic growth for African nations but not for other countries.

Foster-Greer-Thorbecke Poverty Index

Head Count Ratio Poverty Gap Depth of Poverty

Does the fact that the Malthusian model no longer works mean that population has no effect on income per capita?

No, 1. even though land shortage does not play the dominant role that it did historically, it is still an important factor determining countries' income 2. second channel operates through the growth rate of the population

Bourguignon: "The Poverty-Growth-Inequality Triangle"

Redistribution of 'wealth' from rich to less-rich people may have a positive impact on growth. This may occur by correcting credit market imperfections that would otherwise prevent some productive investments from taking place by lowering the tax rate or freeing other distortionary income redistribution mechanisms. Redistribution of wealth, not income, may produce favorable effect on economic efficiency and growth. Income transfers that are not lump-sum would have opposite effect on growth.

Multidimensional Poverty Index

Sen, focus on Capabilities (freedom to achieve functionings - health, education) and Functionings (being or doing whatever one wants to be or do in life) 3 dimensions: Education, health, living standards

Sachs, "Tropical Underdevelopment"

Uses GIS (geographic information system) mapping to present evidence that production technology in the tropics has lagged behind temperate zone technology in agriculture and health and has in turn opened a substantial income gap between climate zones. The difficultly of mobilizing energy resources in tropical economies is an other significant contributor to the income gap. These factors have been amplified by geopolitical power imbalances and by the difficulty of applying temperate-zone technological advances in the tropical setting and because poor public health and weak agricultural technology in the tropics have slowed the demographic transition from high fertility and mortality rates to low fertility and mortality rates. Economic development in tropical ecozones would benefit from a concerted international effort to develop health and agricultural technologies specific to the needs of the tropical economies.

multiple steady states

a country's initial position determines which of several possible steady states it will move toward

poverty profile

allows to examine the FGT poverty indices for different sub-groups of society in a given country. decomposes the national poverty measurements into sub-components based on the characteristics of the household head and other household characteristics

Inequality

captures the distribution of well-being, reflects the quality of institution in a country. believed to affect the effectiveness of growth in reducing poverty

implication of the Malthusian model

countries with higher productivity will not have higher living standards , but only more people "moral restraint" in preventing births is the only way in which a society can raise its standard of living

Relative poverty lines

defined in reference to the national average income

absolute poverty lines

defined in terms of basic needs to achieve a minimum standard of living. mostly this is the monetary value of food items that could provide a minimum amount of calories

convergence toward the steady state

descries the process by which a county's per-worker output will grow or shrink from some initial position toward the steady-state level determined by the investment rate

endogenous variables

determined within the model

productivity

effectiveness with which factors of production are converted into output

marginal product

extra output produced when one more unit of the input is used in production

Capital's share of income

fraction of the national income (Y) that is paid out as rent on capital

strong absolute pro-poor growth

growth that is larger in absolute terms for the poor than the non-poor

relative pro-poor growth

growth that is proportionately larger for the poor than the non-poor

weak absolute pro-poor growth

growth that reduces poverty

Global Poverty Characteristics

highly concentrated in Sub-Saharan Africa and South East Asia. Persistent and multidimensional, deprives individuals of their economic and social potentials. Negative effects on society at large. Poverty has been declining in developing countries

steady state

if an economy has capital equal to kss, then the amount of capital per worker will not change over time

constant returns to scale

if we multiply the quantities of each input by some factor, the quantity of output will increase by the same factor

Chen-Ravallion

link pro-poor growth with the head count ratio of poverty, calculate the growth for income percentiles that are below the poverty line in the first period and call it the pro-poor growth rate

Lorenz Curve

maps the cumulative income share of percentiles of the total population ranked by per capita income

Ravallion and Chen, "Measuring pro-poor growth"

measure rate of pro-poor growth by the mean growth rate of the poor, which equals the rate of change in the Watts index of poverty normalized by the headcount index. Examples include China during the 1990s

poverty gap

measures how far each poor person's income falls short of the poverty line. indicates the financial burden to the social as a whole to bring every poor person's income upto the poverty line. Assumes perfect targeting and no administrative cost. gives equal weight to all income shortfalls of the poor.

Head Count Ratio

measures the percentage of a given population living below the poverty line. drawbacks: not sensitive to the income shortfall of the poor. if the poverty line is relative then P0 could increase even as the average income of the poor increases so relative poverty could rise while absolute poverty is falling

Depth of Poverty

measures the severity of poverty by giving more weight for the poorest of the poor. does not have a direct monetary interpretation.

capital dilution

negative effect of population growth on capital per worker

net rate of reproduction

number of daughters that each girl who is born can be expected to give birth to

population over the long run

persistent population growth at a rate beyond a glacial crawl is a relatively new phenomenon

capital

physic objects that extend our ability or do work for us, rival in its use - only a limited number of people can use a given piece of capital at one time, it also wears out- depreciation, productive - enables workers to produce more output

Growth Incidence Curve

plots the growth in income/consumption at different percentiles

investment

process of producing capital, part of what distinguishes it from a natural resource

ratio of productivity

ratio of output/ratio of factors of production

ratio of output

ratio of productivity x ratio of factors of production; the larger the ratio the larger the productivity gap we would infer

the role of inequality in pro poor growth

reducing inequality reduces poverty directly, less inequality enhances the poverty reducing effect of distribution-neutral growth, lower inequality appears to promote faster economic growth (through asset inequalities and market failures, high inequality could raise political/social instability)

measuring vulnerability

researchers use proxies: transition matrix tracing households as they move in and out of poverty, length of poverty spells, volatility of income flows, measuring the effects of shocks on poverty outcomes

Vulnerability

risk of becoming poor or falling deeper into poverty in the future, captures the degree of insecurity of household well-being, affects households resource allocation and choice of economic activities, indicates the quality of institutions

exogenous variables

taken as given when we analyze a model

development accounting

technique for breaking down differences in income into the part that is accounted for by differences in productivity and the part accounted for by differences in factor accumulation

growth accounting

technique for deriving the growth rate of productivity

the larger the difference in output between two countries that is explained by differences in factor accumulation....

the less reason there is to conclude that a difference in productivity is the source of differences in income between the two countries

Solow Model

theory of differences in income per capita across countries based on differences in capital per person. Focuses on a single dimension along which countries may differ from each other or along which a single country may change over time: namely, the amount of physical capital that each worker has to work with, fails to explain growth over long periods of time, during which countries should have reached their steady state

Raul Prebisch and Hans Singer

worked independently for the Prebisch-Singer Hypothesis. Argued how developing countries that export primary commodities may lose in a free trade with developed countries who export manufactured goods because of differences in the income elasticity of demand for primary and manufactured goods. Argued in favor of Import Substitution Industrialization with protective trade policy. Backed up policy stance with the Infant Industry argument