Economics of Developing Countries
Does Economic Growth Benefit the Poor?
"Growth really does help the poor; in fact, it raises their incomes by about as much as it raises the income of everybody else... In short, globalisation raises incomes, and the poor participate fully" "There is plenty of evidence that current patterns of growth and globalisation are widening income disparities and hence acting as a brake on poverty reduction."
Institutions
"The rules of the game in a society or, more formally, they are the humanly devised constraints that shape human interaction" Rent seeking by governments and individuals needs to be constrained. Any activity aimed at capturing a larger share of the economic pie rather than growing the pie is behaviour that needs to be constrained. Economists are most interested in institutions that; Constrain the power of governments Define and protect property rights Make contracts easily enforceable Minimise transaction costs
Criteria for Measures of Inequality
1. Anonymity - the measure does not depend on who is earning the income 2. Population Independence Principle - the size of the population does not matter 3. Scale Independence Principle - only relative incomes matter 4. Transfer (Pigou-Dalton) Principle - a regressive transfer must increase inequality
Criteria for Absolute Poverty Measures
1. Anonymity - it should make no difference who the people are that are living in absolute poverty 2. Population Independence - Countries with greater populations shouldn't not be more unequal just by construction 3. Pigou-Dalton - a regressive transfer should increase poverty
Possible Explanations for the EA Miracle
1. Higher rates of savings and investment in physical capital. This is consistent with many models such as Solow and Endogenous growth. 2. Rapid accumulation of human capital, especially primary and secondary education, and with reasonably equal access for girls. 3. A focus of exporting labour intensive manufactured goods (consistent with HR and HO models). But most economies had some barriers against imports.
Key Assumptions of the Lewis Model
1. Surplus Labour (L) in the agriculture sector 2. Agriculture workers are paid the average product of labour (APL) 3. Capitalists reinvest their profits (NOTE: 1 and 2 imply perfectly elastic supply of L in manufacturing)
Instability of Capitalism
1. The only way to increase profits is to find more workers to exploit - once there are no more workers to add to the labour force, profits cannot increase. 2. Workers are paid subsistence wage, so who can afford to buy all the output factories are producing? Capitalism is inherently unstable, it will collapse and the workers will take over.
Gary Field's Three Typologies
1. Traditional Sector Enrichment 2. Modern Sector Enrichment 3. Modern Sector Enlargement
Key Assumptions of Kremer's O-Ring Model
1. Workers are imperfect substitutes, e.g., two workers with q=0.5 cannot do the same job as one workers with q=1. 2. Must have complementarity in tasks, i.e., one workers productivity depends not only on their skills, but also the skills of fellow workers.
Child Labour
215 million children (aged 5 - 17) are classified as child labourers in LDCs. A child labourer is someone employed full time and outside the home (if aged 15 - 17 must be in hazardous conditions). If child labour were banned, family income would fall and the children would not necessarily end up in school.
Lorenz Curves
A Lorenz curve that lies at each and every point to the right of another Lorenz curve can be classed as more unequal. If two Lorenz curves cross we can get from one distribution to the other by making one regressive and one progressive transfer. We can't objectively state which distribution is more equal as to do so would be to make a valued judgement.
Adverse Selection
A bank has no way of knowing which borrowers are risky and which are safe so must care the same interest rate to both sets of borrowers. However, this causes some safe borrowers to pull out as interest rates are too high. There is now a higher proportion of risky borrowers so banks will increase interest rates. More safe borrowers pull out as the interest rate rises until eventually only risky borrowers will borrow and pay high interest rates.
Endogenous Growth Models
A long run growth model where there is no convergence. Aims to break away from diminishing returns to K. There are two approaches; 1. Spill over (externality) models 2. Linear models (e.g. AK model)
Gini Coefficient (Lorenz Curve)
A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income. G = A/ (A + B) The lower the Gini coefficient the more equal the distribution of income.
Harrod-Domar model
A model of economic growth that emphasises the importance of savings and investment. We assume economy are closed and that S = I. Change Y / Y = s / (K/Y) The model assumes K and L are used in fixed proportions. If the change in one is greater than the change in the other one factor will not be fully employed.
The Theory of Demographic Transition
A model predicts that as countries improve population growth will increase but eventually fall. There are three stages; Stage 1: the birth rate and death rate are both high Stage 2: DR falls due to improved medical knowledge, better public health, better nutrition and sanitation Stage 3: BR falls due to female education increasing, relative costs of having children increasing, etc. The demographic transition occurred much later in the developing world as birth rates stay high much longer than death rates.
The Big Push Model
A model where governments or entrepreneurs set up complementary industries all at once to create complementary demand. L is the only factor of production and there are two sectors; traditional and modern. There are constant returns to scale despite only having one factor of production (the more output produced, the less labour is needed). There are CRTS in the traditional sector and IRTS in the modern sector. We assume a closed economy and that there is perfect competition in the traditional sector. At low levels of output, the modern sector has higher costs. Modern firms will only enter when there is enough demand to push total revenue above total costs (wages).
Average Poverty Gap (APG)
APG gives the average amount per capita required to eliminate absolute poverty. APG = TPG / N (OR 1/N x sum(Yp - Yi) Intuitively this measure gives us the average amount per capita to eliminate poverty.
AJRs Reversal of Fortune
AJR points out that places that were relatively poor in 1500s (such as NZ) are now relatively rich. Places that were relatively rich in 1500s are now relatively poor (such as Aztec empire). As geography has not changed over time, this shows us that geography cannot explain this reversal of fortune. However, institutions have changed over time and can explain this reversal of fortune.
Purchasing Power Parity (PPP)
An adjustment in gross domestic product per capita to reflect differences in the cost of living. When we use US$ to analyse income per capita we often over estimate the difference in income per capita between two countries, especially as poorer nations tend to have lower prices.
Modern Sector Enlargement
An economy that follows the lewis model where the modern sector is growing as pulling surplus workers from the agricultural sector, e.g., developed economies and some EA economies. Income and output per capita are increasing. We will see absolute poverty decrease because the poorest workers will see their income increase when they move into industry. The structure of the economy is changing making inequality ambiguous. The Lorenz curves will cross so to determine inequality or calculate the Gini coefficient would be to make a value judgement.
Modern Sector Enrichment
An economy where agriculture is stagnant but the modern sector grows and benefits are shred equally, BUT employment does not grow, e.g., Latin America and Africa. The rich are getting richer as we are not pulling people from the agricultural sector into industry. Income per capita will increase as the modern sector grows but absolute poverty will not change. This is because the poorest of the poor are in the stagnant agricultural industry. We will also see inequality increase as the gap between the rich and the poor grows.
Steady State
An economy will have zero growth in output and capital at the steady state. An economy will reach the steady state when change in k = 0 or when s x f(k) = (d+n)k
Traditional Sector Enrichment
An economy with a stagnant modern sector and a growing agricultural sector with benefits shared equal by all workers, e.g., Sri Lanka. We will see income per capita increase. If economic growth is happening in the agricultural sector, then absolute poverty should be falling. Inequality should also be falling as the poorer sector catches up with the richer sector.
Hausmann-Rodrick Model
Assumes an open economy with no industry to start and the LDC must discover what L-intensive manufactured goods it has a comparative advantage in producing. Three building blocks of the model; 1. Uncertainty about what a country has a comparative advantage in 2. Imported technology needs to be adapted to local conditions 3. Once CA has been discovered, new firms will enter, eroding monopoly power. Two possible market failures; a. Because of 3, there is little incentive for firms to start producing manufactured goods, i.e., any supernormal profits will be eroded as soon as other firms enter. b. Once CA has been discovered, we want other firms to enter otherwise specialisation will not take place, so must get rid of any barriers to entry.
The Neo-Malthusian Model
Based loosely on the ideas of Thomas Malthus. He argued that the population grows at a geometric rate but that food stocks grow at an arithmetic rate due to diminishing returns. Therefore, food will eventually run out, BUT Malthus ignored the role of technology.
The Role of Birth Control
Birth Control helps parents to reduce the number of births to their desired Lebel, BUT for brith control to reduce family sizes, the demand for children needs to fall first. This means that birth control has no effect of demand for children.
Population Growth Terminology
Birth Rate = number of children born is. year as a share of the population Death Rate = percentage of the population that die each year Population Growth =birth rate - death rate Fertility Rate = number of children on average a woman is likely to have during her childbearing years
How does k evolve?
By definition: change in k = s x f(k) - (n+d)k. Where; d = savings rate f(k) = y s x f(k) = savings = investment d = depreciation rate n = labour force growth rate s x y = dollar amount of savings (the gross rate of investment in the economy which is reduced by labour force growth rate and depreciation of capital)
Conditional Cash Transfers
CCTs may be one way to incentivise parents to send their children to school. Even though private returns education are high, parents may have imperfect information about returns, may have a high discount rate, may have reasons for not sending girls to school, or may not have a school near by. CCTs can also help to compensate parents for lost income due to children being in school.
Lenin on Capitalism
Capitalism thrived by exploiting colonies. Colonies would exploit workers, sell excess output to colonies, and extract materials. This is Lenin's argument as to how capitalism has managed to survive
AJR on Institutions
Colonial powers set up two types of institutions; 1. Institutions of private property = cluster of political, economic and social institutions which ensure a broad cross-section of society has effective property rights. 2. Extractive institutions = majority of population faces high risk of expropriation by the government, ruling elite, or other agents. According to AJR, countries near the equator got poor institutions as Europeans did not settle in large numbers.
Implications of the Solow Model
Conditional Convergence - this is an interesting concept but not helpful at all for policy making. Increased savings increases growth in the short run but not in the long run. The only source of long run growth is technological progress (exogenous to the model). This is not something the government can influence which implies there is a limited role for government. The model implies a limited role for government meaning they can't affect long run growth. It also implies that markets are optimally allocating resources, e.g., there aren't any market failures. The savings rate is determined by consumer preferences meaning eh government shouldn't be making changes to the savings rate. One thing the government may be able to do it to ensure property rights are well defined.
The Solow Model Predicts
Conditional convergence - the poorest countries grow quicker than the richest countries. In the short run, growth is correlated with Y/L(-), Sh(+), Sk(+), and n(-). In the long run all economies grow at the same rate unless the growth rate of technology varies across countries. Y/L is correlated with Sk, Sh, and n.
Constant Returns to Scale in the Solow Model
Constant returns to scale means if we double both K and L, output will also double. CRTS implies yY = f(yK, yL) where gamma (y) is the proportion we increase by. setting y = 1/L gives Y/L = f(K/L, 1), i.e., y = f(k) where k = K/L
Constraining Governments
Constitutions - imposes a constraint as they are much more difficult to change than laws Governments being accountable at the ballot box An independent judiciary Independent police force A free media - allowed to report on the mistakes of the government
The Model of Dynamic Comparative Advantage (HO model)
Countries have a comparative advantage in goods produced by factors they have an abundance of. An abundance of unskilled labour leads to a CA in unskilled labour intensive production. If wages increase, a country will lose its CA but will have a new CA in skilled labour intensive production. This is called the Technological Ladder Hypothesis.
Rich Countries
Developed countries, first world, global north , 1/3 world, industrialised, centre, westernised.
Poor Countries
Developing countries, third world, global south, 2/3 world, less development country (LDC), periphery.
Dollar and Kray (2000)
Dollar and Kray find a 1:1 relationship between growth in income per capita and growth in income of the poorest 20% using cross country data. They find a strong positive correlation between growth in income per capita and growth income income of the poor. They also find that growth promoting policies (such as trade openness and low inflation) do not adversely affect the poor.
Policy Implications of Spill-over Models
Due to positive externalities, markets will not produce efficient outcomes on their own. This implies a role for governments. To get efficient outcomes, the government needs to subsidise the activity that generates the externality (i.e., subsidising education to increase human capital)
Economic Development
Economic development is much broader concept that economic growth as it includes the characteristics of moving towards a developed country; Structural transformation Improvements in social indications Reductions in poverty Growth For this reason, most development economist consider Y/P a poor proxy for the level of economic development (welfare).
Reconciling Micro and Macro Literatures
Education is insignificant in Marco literature, but significant in Micro, what does this imply? Education is a screening device. Macro literature is picking up whether increases in education raise aggregate income, not an individuals income. So is suggesting that education raises productivity. But really education is just being used as a screening device.
Millennium Development Goals (MDGs)
Eight goals adopted by the UN to address inequity in the international system with the objective to improve people's lives globally by 2015. The headline goal was to reduce by half the number of people living on less than $1PPP per day. On average, across LDCs, the goal of halving poverty was reached by 2011, except in sub-Saharan Africa.
Macro Evidence on Returns to Education
Examines the effect of education on economic growth or income per capita, i.e., uses data for countries not individuals. If a positive correlation is found between education and economic growth this must mean more educated workers are more productive. This method includes the external benefits and indirect costs but not direct. Mankiw, Romer, and Weil found that education was positively correlated with economic growth. But Knowles and Owen added health to the MRW model and found that education became insignificant.
Microeconomic Theory of Fertility
Explains the demand for children (C) using consumer choice theory. Cd = f(Y, Pc, Px, Tx) Where Cd is demand for surviving children, Pc is the net price of C, Px is the price of other goods, and Tx measures the preference for other goods relative to children.
Spill-over (Externality) Models
Externalities lead to CRTS for individual firms but IRTS for aggregate production function. Spill-overs from K - a production function is given by Y = AK^a L^1-1 K-bar ^B. Where k-bar is the capital stock of the whole economy. Firms can't affect the level of capital for society so CRTS will hold. If all firms were to double inputs (L and K) then output for the economy will also double. Spill-overs from R&D - Y = AK^a R^Y L^1-a-y R-bar^B. Where R-bar is the R&D for the economy as a whole. Elasticities will sum to B + 1 which is greater than one and produces non-diminishing returns (externalities). Spill-overs from H - Y = AK^a H^y L^1-a-y H-bar^B. Where H-bar is the human capital for the whole economy. Again the elasticities sum to 1 + B which is more than 1 and produces an externality.
Foster-Greer-Thorbecke (FGT) Measure
FGT = 1/N x sum (Yp - Yi/Yp)^a The FGT measure takes into account inequality amongst the poor by giving a greater weight to observations further away from the poverty line. This makes it the only measure of absolute poverty that obeys the Pigou-Dalton criteria. However, as this measure is more complicated, the intuition behind it can be hard to explain.
Financial Benefits of Children
Financial security in old age and source of income. Countries with a more developed pension scheme will be less dependent on children as a retirement plan.
Rate of Return Analysis
Focuses on costs as well as benefits PV = sum (E - N) / (1 + i)^t Where E is income with an education, N is income without and education, I is the discount rate and t is the years. We discount back to present value to account for the time value of money. NPV = PV benefits - PV costs. An investment in education is profitable when NPV > 0. Internal rate of return is the discount rate that sets NPV = 0.
Do Markets Work Well in LDCs?
For markets to work well in LDCs there needs to be a legal framework to protect property rights. This is often absent in some LDCs.
Enforcing Contracts and Minimising Transaction Costs
Formal institutions - laws outlining the duties and obligations of each party in a transactions, dispute resolution mechanisms, not too much red tape. Formal institutions - norms such as business being done on a handshake basis.
Protecting Property Rights
Formal institutions - laws regarding ownership and use of property, law enforcement, independent judiciary. Informal institutions - noms that it is wrong to steal, informal sanctions against those who do
Formal vs Informal Institutions
Formal institutions = rules and regulations enacted by governments Informal institutions = conventions, codes or behaviour, etc. Formal institutions tend to be written down whereas informal institutions do not.
Geography as a Deep Determinant
Geography can affect development through; Tropical Diseases - less workers and less tourism can harm the economy. Excessive Heat - reduces ability for physical outdoor labour Soil Fertility Reduced by - heat and humidity, higher rainfall, absence of frost, more pests and diseases Landlocked - waterborne transport is the cheapest Remoteness - transport costs and minimal diffusion of technology
Government Intervention in EA Economies
Government spending was low in EA but government ownership was high in some EA economies. Most EA governments has high influence over relative prices and a high degree of regulation. It used to be argued that government intervention in EA was minimal, but this is only true if we focus on government spending. The extent of intervention varies around the EA region.
Headcount Index
HI is the percentage of people living below the poverty line. HI = H / N Where H is the number of people living below the poverty line. Problem: this does not measure the extent to which individuals are below the poverty line.
Moral Hazard
If a business project fails, the borrower will not have to repay the funds. There is therefore an incentive for borrowers to be less careful with the money (engage in risky activities)
Proximate Determinants of Development
Immediate causes of development for the production function, e.g., savings, investment, education, technology, etc. Inputs or productivity
South Korea Case Study
In 1960, SK was one of the worlds poorest economies, Y/P is now higher than EU average. Park concentrated on manufacturing exports and relied on borrowing (but to to the same extent on foreign investment). Chaebol are large family owned conglomerates that dominate the SK economy. Part controlled the chaebol through; - Threats of imprisonment - Export targets - Access to domestic markets for successful exporters - Tax breaks for successful exporters - Threat of tax audits - Infrastructure incentives
Including Technology in the Solow Model
In the Solow model, the only way to get long-run economic growth is if technology is growing. The production function becomes Y = AK^aL^1-a A one off increase in technology will shift both the production function (y=f(k)) and the savings curve (sxf(k)) upwards. This allows us to experience long run economic growth. If technology keeps growing, Y/L can also see growing where as savings cannot grow forever.
Market Failures Unique to LDCs
Incomplete Markets - financial markets may be missing (micro credit could fill this gap) Lack of Complementary Industries - limited demand for the goods produced High Rate of Time Preference - poor often struggle to save as they care more about tomorrows food than school in three years time.
Basu's Model of Child Labour
Key Assumptions; 1. Households with high enough income would not send children to work 2. Child and adult labour are substitutes meaning if y = 0.5 then it would take two children to do the job of one adult In the model there is a hybrid supply curve and three equilibria, one of which is an unstable equilibrium. A ban on child labour would force wages up high enough that the ban could be self sustaining as households would not send children to work.
Neo-Marxist Model
LDCs were exploited by colonialist and are now being exploited by MNCs in the same way Lenin argued, i.e., not being paid a reasonable wage and extracting resources. MNCs also try to sell goods with adverse health effects in LDCs where there are less restrictions on sale. These organisations are often referred to as "Agents of International Capital"
Neo-Colonial Model
Labour Theory of Value - the value of a good is determined by the amount of labour time taken to make it. This implies that workers should be aped the full value of the output they produce and failure to do so is exploitation. This implies capitalists are not contributing and shouldn't receive anything. A Neoclassical response is that the value of a good is determined by the price someone is willing to pay and that capitalists contribute investment of money (risk), managerial skills, and ideas/innovations.
Why Might Population Growth Be Desirable?
Larger markets from population growth will result in economies of scale which is good for economic growth. Population growth means that a larger proportion of the population will be found and more receptive to new ideas. This could lead to a higher rate of technological progress. The pressure of population growth can lead to the incentive to develop new technologies and provision of better infrastructure. Larger populations mean more entrepreneurs and innovators but also increase the chance of the next Adolf Hitler.
Rotating Savings and Credit Associations (ROSCAs)
Locally organised groups of savers where all members contribute funds at regular intervals and have turns borrowing the funds. A high degree of trust is required for ROSCAs to function effectively. One reason why people use ROSCAs is to save money faster that could be done alone.
Micro Evidence on The Returns to Education
Looking at individuals we can see that people with more education tend to earn more. However, age-earnings profiles focus only on benefits and ignore costs
The Kurznet's Ratio
Looks t the income share of the different groups, e.g., the income share of the richest 25% divided by the income share of the poorest 25%. This measure violates the transfer principle as it only looks at the richest and the poorest.
Common Characteristics of LDCs
Low Income Per Capita High Inequality High Poverty Rate Poor Social Indicators High Population Growth and High Dependency Burdens High Fractionalisation Dependence on Agriculture and Primary Products Adverse Geography Corruption Poor Infrastructure
Are Markets Less Competitive in LDCs?
Markets are often thin in LDCs (don't have a lot of buyers and sellers). Markets may be segmented due to poor infrastructure, or a lack of trusts in which case the village becomes the economy. Because there is a lack of trust, one village will not trade with another meaning there is little competition.
Mobile Banking
Mobile banking is now used in many LDCs around the world. Most households in Kenya have at least one person using M-PESA. This system allows customers to make deposits or withdrawals at agencies (the same place they can purchase credit for their phones). money can be transferred via SMS to other users and bills can be paid online. Mobile banking also helps to overcome the administrative costs of loaning small amounts.
First Mover
No one wants to be the first mover in the Big Push model because there will likely not be enough demand to make a profit if other modern sector industries do not also set up. This implies a roles for the government. The government can set up modern sector production. They only need to set up enough firms to make modern sector production profitable. Governments could also subsidise industrialisation. This would be a temporary subsidy as once enough firms set up it will become profitable. Governments could also coordinate the activities of private sector firms.
Financial Cost of Children
Opportunity cost of the mother's time. Cost of educating children and other costs. Children go from being 'little producers' to 'little consumers' Countries where female schooling is higher will have a higher opportunity cost of children. The cost of children as a whole are likely to increase as income per capita increases.
Dualistic Development Model
Otherwise known as structuralism, but is not the same thing as structural change. Structuralists are concerned with explaining the sourced of high inflation observed in Latin America. 1. Price Elasticity of supply of food is low meaning an increase in demand for food leads to a larger increase in price. This is due to landowners not being interest in food production. 2. Income Elasticity of demand for primary product exports is low. This puts pressure on exchange rates leading to inflation because import prices rise to a larger extent that export prices.
Declining Radius of Trust
People become less trusting of other the further may from their homes those people are, i.e., people are the most trusting of those who live near them.
Miguel and Kremer (2004)
Performed an RCT in Kenya and found not only that untreated individuals at treated schools were healthier, but so were untreated individuals in untreated schools within 3km. This means there are even larger externalities to deworming than once thought. There was also an effect on participation with a 7.5% gain in participation. This result implies that deworming is one of the most cost effective ways of increasing school participation.
Kuznet's Inverted U Hypothesis
Plots income per capita against inequality (Gini coefficient). Predicts that initially as income rises, inequality also rises but will eventually fall as income continues to rise. This is consistent with the Lewis model as initial nearly everyone is working in agriculture. Inequality increases as more workers move to manufacturing. Ultimately nearly everyone works in manufacturing, so inequality will decrease.
Unconditional Convergence
Poorer countries will grow more quickly than richer countries without the condition of having the same factors of growth. This is not predicted by the Solow model.
Conditional Convergence
Poorer countries will grow more quickly toward the same steady state level of capital and output as rich countries when they have the same savings rate, depreciation rate, and labour force growth rate as predicted by the Solow model.
Low Level Equilibrium Trap (Neo-Malthusian)
Population growth initially increases due to falling death rates. population stabilises once death rates stop falling. Population growth falls once birth rates fall. Equilibrium S (Subsistence) is stable and represents the poverty trap that countries fall into. Equilibrium T (Threshold) is unstable as if we start to the left, income per capita will fall, if we start to the right, income per capita will rise Once an economy is past T it will continue growing. To get past T it must move the income growth curve up or move the population curve down (implies a temporary role for the government).
Is Population Growth a Problem? No
Poverty is the real issues and population growth is just a symptom of high levels go poverty. It is a false issue designed to keep poor countries poor. Distribution of population is the real issue, i.e., we don't want further population growth in countries that are already densely populated.
Progresa
Progresa is a government social welfare program in Mexico to combat child labour and poor education and health. A key feature of progress is a CCT but the program combines both health and education. Low income families receive cash benefits IF children regularly attend school and health clinics. Payment increase with progress through school grades with higher payments for girls.
Randomised Controlled Trials (RCT)
Progresa was initially an RCT where before and after data for school attendance was compared between a treatment group and a control group. The control group allows us to see if Progresa improved attendance or if it would have improved anyway. Randomisation is important because it allows us to be confident results are causal. If not random, this may bias the results, i.e., progresa could be introduced where it was thought most likely to succeed.
Micro Finance
Provision of small loans and other financial services to individuals and small businesses in developing countries (includes savings as well as credit). Micro Credit = lending small sums of money to poor people with no collateral
The Grameen Bank Solution
Rather than lending to individuals, they lend to groups. Groups members must undertake training and attend all meetings. Loans are only made two the first two individuals. Once they have made repayments and so long as everyone attends meetings, will others get to borrow. Adverse Selection is over come as risk borrowers will find it hard to join a group as villagers know who risky borrowers are. Moral Hazard is overcome because there is peer pressure to repay loans by other members so they are less likely to be careless with money. Monitoring Costs are overcome as group members will know when mother's projects have succeeded and will have an incentive to tell the bank. Enforcement Costs are overcome as community members are able to apply sanctions at a lower cost such as exclusion from village activities and not helping with defaulters harvest.
Ravallion (2001)
Ravallion argues that we should 'look beyond averages' as only looking at averages can mask what is happening in individual countries. In some countries the incomes of the poor rise with income per capita growth, in other countries they fall. Ravallion finds that even in countries where the income of the poor is rising, this doesn't mean that even poor person sees this growth. In general, on average, data suggests that growth does help the poor.
Redistribution Increases Growth
Redistribution reduces poverty which can improve human capital as more people can afford to goto school and therefore improve growth. Equality in distributions can result in more political stability which leads to growth. Income equality can increase social capital as there are higher levels of trust and cooperation which leads to growth. High inequality can result in pressure for distortionary redistribution which reduces growth.
Redistribution Reduces Growth
Redistributions distort incentives as high marginal taxes and transfer payments can reduce the incentive to work. Taxes also reduce savings because the rich save more than the poor and taxes reduce the amount they can save. Spending on the poor also reduces investment as those funds could have been used to increase physical capital. However, The rich often hold their savings overseas. Plus the poor boy local goods and the rich buy imported goods.
Deworming
School-age children are particularly susceptible to intestinal worm infections, the symptoms of which include fatigue, diarrhoea, and vomiting. There are safe, low cost drugs for treating worms, but diagnosis is expensive. The treatment cures worms but does not prevent them. WHO recommends periodic mass treatment in areas with high prevalence rates. As the treatment is safe and prevalence is high, it is cheaper to treat everyone than to try and diagnose.
Do Higher Incomes Mean Workers are More Productive?
Screening Hypothesis - The best jobs go to those with the highest education, even if that education is not relevant for the job. Education only affects a country's distribution of income, not the total income. Human Capital Theory - incomes are a measure of productivity and education increases a persons productivity.
Attractive Regions for European Settlement
Settler mortality is low and this is typically high near the equator. Sparsely populated so settlers are able to claim land for their own. AJR argue that geography didn't have a direct effect on income per capita but does help to explain why poorer countries got poorer institutions which lead to poor income per capita.
Social Capital
Social capital embodies two things; degree of trust and cooperation and extent of networks between individuals (both formal and informal)
Theories of Structural Change
Structural change is the transition from an agricultural economy to one based on industry.
Absolute Poverty
Someone lives in absolute poverty if they can't afford the basic necessities of life. There are two ways to reduce absolute poverty - economic growth and more equal distribution of income.
Relative Poverty
Someone lives in relative poverty when they are poor compared to other members of society (income inequality).
The Gini Coefficient
Sums the income differences between each individual and all other individuals and normalises by diving by population squared as well as mean income. G = 1/ 2n^2 M x sum of income differences The Gini coefficient (and the Lorenz curve) obeys all four criteria of inequality measures.
Lewis Model
The Lewis model assumes there are two sectors; agriculture and industry. The model predicts that we can increase output by moving surplus workers from agriculture to manufacturing. When profits are reinvested by capitalists this will increase capital and allow more workers to be employed which results in more profit. The cycle stops when there is no longer surplus labour in the agricultural sector.
Sustainable Development Goals (SDGs)
The SDGs replace the MDGs in terms of goals to achieve by 2030. The SDGs are broader (17 goals and 169 targets) than MDGs and are intended to apply to all countries, not just LDCs. The headline goals is to have no one living on less than $1.25PPP per day (not including transitional poverty at about 3%)
Normalised Poverty Gap (NPG)
The amount per capita, as a proportion of the poverty line, required to eliminate poverty. NPG = APG / Yp (OR 1/N x sum(Yp - Yi / Yp) This is a more complicated measure meaning the intuition behind it can be more difficult to understand. Note: NPG, TPG, and APG ignore inequality among the poor.
Grameen Bank
The bank, established by Professor Muhammad Yunus, that provides microloans to primarily women in developing countries, who are more likely to use the money for productive uses, despite no credit history. Features; Money is lent to groups of 5 borrowers at a nominal interest rates of 16%.
The Effect of Pricing on Deworming
The benefits to a family of deworming are so high that we would expect parts to deworm their children even if there is a small cost. When the NGO administered deworming in Kenya and added a small charge of $0.30 for some random schools, the take up rate among parents fell from 75% to 19%. Families paid a flat rate, meaning those with more children paid less but take up was insensitive to variation in price per child. Children who needed the treatment the most were no more likely to purchase the treatment. This implies that any charge no matter how small will put parents off because incomes are low and the opportunity cost is high. Plus some of the benefits of deworming are not realised until much later. This implies that governments or aid agencies should be the ones paying for the treatment.
Monitoring (Auditing) Costs
The cost of checking whether a business venture or project really did fail when a borrower claims that they cannot repay the debt.
Enforcement
The cost/difficulty of finding ways to make the borrower ay when they have decided not to repay the debt or are reluctant to do so.
Range
The difference between the richest and the poorest divided by the mean. Dividing by the mean makes the measure independent of absolute income. R = 1/M (Ym - Y1) This measure violates the transfer principle.
Is Population Growth a Problem? Yes
The earth has limited resources meaning food will run out and there are immense environmental concerns of population growth. The Solow model argues that population growth reduces output per person (income per capita falls). Population growth increases the dependency burden (the share of the population that is dependent on the work force). When population growth is high, a large share of the population will be young and increase the dependency burden.
Deep Determinants of Development
The fundamental determinants are the variables that cause proximate determinants such as Social infrastructure, institutions, or geography.
Transitional Dynamics
The growth rate of k = change in k / k which gives us change in k . k = s x f(k) / k - (n+d) As k increases, the rise in y gets smaller so f(k)/k falls. Neither n+d changes with changes in k which is why the line is horizontal. An economy to the right of k* will have a negative growth rate. The distance between sxf(k)/k and n+d is the rate of growth of capital. Poorer countries (with less capital) will be growing faster than richer countries toward the same steady state. This is only true of countries with the same factors.
The Role of Government
The main responsibility for ensuring strong (formal) institutions lies with the government. If the government is not committed to economic development, institutions are likely to be weak. Poor governance and poor institutions help us to explain differences in economic growth.
Dependency Burden
The proportion of the total population aged 0 to 15 and 65+, which is considered economically unproductive and therefore not counted in the labor force. On average the dependency burden is 49/100 in Des and 72/100 in LDCs. Dependency burdens are high in DCs due to the high share of population over 65. Dependency burdens are high in LDCs due to the high share of people under 15. Dependency burden is a problem because it reduce Y/P for a given Y/L.
False Paradigm Model
The proposition that developing countries have failed to develop because their development strategies (usually given to them by Western economists) have been based on an incorrect model of development, one that, for example, over stresses capital accumulation or market liberalisation without giving due consideration to needed social and institutional change. In short, LDCs are given bad, but well intentioned, advice by organisations such as The World Bank or IMF.
Banerjee et al (2015)
The research involved running an RCT to test the effects of a multifaceted anti-poverty program, carried out in 6 countries. Features included; - Households chose an asset to invest in, typical livestock - Received periodic cash transfers for up to a year, enough to ensure they didn't eat the asset - Given training such as how to use their asset and stay healthy - Given advice on saving Poor households were chose at random and compared to a control group. At the end of the program those in the treatment group had food consumption 5% higher than the control group and also spent more time working. The treatment group also have higher household incomes, fewer people going to bed hungry, and increased the value of their assets by 15%. We are seeing positive outcomes from the program and these benefits lasted longer than the program. However, providing this program was costly even though the benefits outweighed the costs for all but one country.
Why do Birth Rates Fall as Income Per Capita Increases?
The substitution effect (net price increase) dominates the income effect (family income increase), i.e., as income rises, the cost of having children becomes relatively more expensive and the budget line pivots inwards.
Total Poverty Gap (TPG)
The sum of the difference between the poverty line and actual income levels of all people living below that line. TPG = Sum (Yp - Yi) Equals the total dollar amount required to eliminate the poverty gap. Violates the population independence principle.
Linear Models
There are no externalities of linear models so we assume the elasticity of L is zero. There is a very broad definition of K that includes both physical and human capital. The AK model; Y = AK Y/L = y = f(k) = Ak Change in k/k = sA - (n+d) where Ak = f(k) In this model K and Y grow at constant rates, i.e., there is not convergence. If savings rate is lower than depreciation and labour force growth rate the economy will be striking at a constant rate. An increase in savings will permanently increase the growth rate in this model. There is now an incentive for governments to increase the savings rate of an economy.
Dependency Theory
There are three strands of the dependency theory; Neo-colonial (neo-Marxist) False paradigm Dualism / Structuralism
Including Human Capital in the Solow Model
There are two possible methods; 1. Interpret K as being both physical capital and human capital 2. Include human capital (H) as a separate factor of production. Human capital is the skills and attributes that make workers more productive which is typically attributable to education.
AJR Findings
There is a negative correlation between settler mortality and institutions. There is a positive relationship between institutions and income per capita. A regression equation found that once institutions were controlled for, latitude had no effect on income per capita. This meant that geography had no direct effect on income per capita. But was still an important factor as it influence the quality of institutions which is a determining factor.
Cd/Pc < 0
There is a negative relationship between demand for children and the net cost of raising a children. This means that as the cost of raising a child increases, the demand for children falls.
Cd/Tx < 0
There is a negative relationship between the demand for children and preferences for other goods. This means the more you prefer other things, the lower the demand for children will be.
Cd/Px > 0
There is a positive relationship between demand for children and the price of other goods. This means the as the price of other goods increases, children seem less expensive, so demand for children increases. This assumes that children and other goods are perfect substitutes.
Cd/Y > 0
There is a positive relationship between income and demand for children meaning we assume children are a normal good. As income increases, so too does the demand for children.
Implications of EG Models
There is no convergence. Long run growth is greater than zero even without technological progress. There is an implied role for governments to either subsidise factors that cause externalities or to increase savings.
Poverty's Long Farewell
This article insinuates that achieving the SDG headline goal will be much more difficult that it was to achieve the MDG. The reason for this is that back in the 1990s there was a very large proportion of people sitting just below the poverty line. Therefore, during MDGs they only had to move a large portion of people just over the poverty line to achieve their goal. It will be much harder to move the remaining individuals who are much further below the poverty line.
Measuring Social Capital
Trust is the percentage of people who say most people can be trusted when asked "generally speaking would you say most people can be trusted, or that you can't be too careful in dealing with people?" Countries that have high levels of trust tend to be countries where people are homogenous, i.e., have the same culture or standard of living.
UCTs vs CCTs
Unconditional Cash Transfers are transfers without conditions. Baird et al assignment families in Malawi to one of three treatments; 1. No cash transfer 2. UCT 2. CCT Both UCTs and CCTs were found o reduce dropout rates, but CCTs had 2.3 times the impact of UCTs. BUT two years later, girls in UCT are 44% less likely to be married and 27% less likely to have ever been pregnant. Girls in the CCTs group would stop getting money when they dropped out so would need to find a husband to support them. CCTs are best for keeping girls in school and learning while UCTs are best at reducing early marring and pregnancy.
K is Fully Mobile Between Countries
When K is fully mobile (economies are no longer closed), K will flow to low K/L countries where it will be more productive. If all countries have the same production function then, Y/L will be the same in all countries. Investment will no longer equal savings as the economy is no longer closed. Capital flows from countries where MPk is low to countries where MPk is high (from rich to poor countries). In theory most countries down have any capital controls so this is a plausible concept. However, most countries also have similar savings and investment rates which discourage this.
Economic Benefits of High Social Capital
When trust is high more transaction will take place and people won't need to put as many resources into protecting against theft. When cooperation is high, market failures may be solved through collective action. When people are well networked, information will spread more easily meaning new technologies and best practice techniques are more likely to be introduced.
Corruption
Where bribes have to be paid to government officials in order to undertake business. Corruption will likely reduce investment by reducing the incentive to invest, and lead to a misallocation of resources, i.e., contracts go to those who can pay bribes. Te residences of government controls makes corruption more likely.
Baird et al (2014)
While M and K found no short run effect on test scores, Baird et al found hat among females, deworming increased the chances of passing the national primary school exit exam by about 25%. Baird et al also found that treated individuals, later in life, were likely to be working longer hours and to be in higher paying jobs. This shows there is a cost benefit advantage for the government if they are the ones saying for the treatment as they will receive higher taxes.
Implications of Kremer's O-Ring Model
Workers performing the same task at a high skill firm earn higher wages than in a low-skill firm. This means the gap in wages between DCs and LDCs will be greater than that suggested by the skills gap. Complementarity of workers allows for increasing wages over and above the skills gap. When other workers have low skills there is little incentive to gain skills. This can result in a low skills trap and provides a rationale for government intervention. Unskilled workers will NOT be employed for complex production process. Therefore, LDCs with more low q workers will produce agricultural and unskilled labour intensive goods.
Externalities of Deworming
Worms are an infectious illness meaning they spread from one person to another. If we treat one person, that means others cannot catch worms from them. Treatment improves the children health and reduces the probability of kids who don't have worms from contracting them. However, performing an RCT worn pick up this externality because randomising in schools means that untreated children benefit from having treated children around them and this underestimates the effect of the treatment. If we use another school as a control group we can more accurately measure the value of the externality.
Kremer's O-Ring Model
Y = BF(qi x qj) = qi x qj Where qi and qj are the probabilities of worker I and j successfully completing their tasks. If a task isn't successfully completed the output will be ruined. Positive assortive matching = workers end up working with colleagues with similar skills because of complementarity. This maximises output. An increase in one workers q will benefit a firm with higher q more than a firm with lower q.
Basic Solow Model
Y = K^a (A L)^1-a But for simplicity we ignore technology and the model becomes Y = K^a L^1-a Assumptions of the model include; closed economy, diminishing marginal products of K and L, constant returns to scale, and all economies have the same production function.
Including H as a Separate Factor
Y = f(A, K, H, L) Physical capital and human capital will tend towards a steady state but technology can grow indefinitely. Therefore, adding human capital to the model as a separate factor adds more detail to the model but they key predictions of the model stay the same.
