Economic Development Final Exam Study Guide

Rationale for Development Planning

- Market failure Inefficient or "bad" allocation of resources - Resource mobilization For future growth in strategic sectors - Attitudinal or psychological impact We did it! - Requirement to receive foreign aid PRSPs or Poverty Reduction Strategy Papers

Rural Development and the Environment: A Tale of Two Villages

- Representative African village -- Desertification -- Low opportunity cost of women's time encourages waste - Representative South American village -- Soil erosion -- Deforestation

Tragedy of the Commons - dynamic

Dynamic inefficiency due to overexploitation - Lowering productivity over time - Strategic myopia - All could benefit from sustainable practices Inefficiencies result from imperfections in property rights or other institutions

Lecture 8

Education and Health

Lecture 15

Finance for development

Lecture 11

Policy

The Market Economy

Policy shift toward free markets 1980s The "Washington Consensus" - Limited role of state - Greater role of free market - Supported by IMF, World Bank

Markets and Economic Efficiency Common Property Resources

Possible solution - Establish clear property rights - Perfect property rights are characterized by... Universality Exclusivity or Excludability Transferability Enforceability Possible Solution - Elinor Ostrom - Traditional institutions for common property resource management - Social enforcement mechanisms to prevent overexploitation - Inefficiencies arise because resource is not privately owned - Should the government sell publicly owned land? - Tragedy is analogous to inefficiency from sharecropping -- Family farmers can benefit from extended tenancy or ownership

Tragedy of the Commons - Static

Static inefficiency due to externality - Sharing economy: receive AP (not MP) - My entry lowers AP of all previous - Lower net benefits - All could benefit from restricting entry

The role of development banks

specialized public and private financial intermediaries that provide medium- and long-term credit for development projects. - The Industrial Development Bank of India (IDBI) was established in 1964 by an Act to provide credit and other financial facilities for the development of the fledgling Indian industry

Planning Models

The planning process has 3 stages or levels - Aggregate or Macro level - Sectoral level - Project level Three levels of models - Aggregate growth models - Multisector input-output, social accounting, and CGE (computable general equilibrium) models - Project appraisal

Some Specific Impacts of Climate Change

Where? - Sub-Saharan Africa countries will be disproportionately drought-afflicted and suffer the worst impacts on agricultural productivity - South & Southeast Asia will be disproportionately flood-affected - Pacific and Indian Ocean bordering states within the cyclone belt will be disproportionately storm-afflicted. - Mitigation strategies against Climate change -- taxes on carbons -- caps on greenhouse gases -- subsidies for technology

Subsistence Farming Trap

Why don't poor farmers adopt higher yield methods? - Answer 1: Rational response to risk aversion, uncertainty, and survival - Model must go beyond traditional economics of certainty -- Uncertainty in prices and quantities --- market conditions, weatgher -- Compounded by limited access to credit, insurance, and savings - Implication -- Risk averse subsistence farmer rationally prefers low mean, low variance technologies to high yielding high variance technologies - Why don't farmers adopt higher yield methods? - Answer 2: Insecurity of tenure lowers extent of investment by farmer - Role of contractual arrangements: Sharecropping -- If you receive just a share of your efforts...

Education and Health

Why relevant to development? - Important ends of development -- Sen's capability approach -- Core values of economic development --- sustenance, self-esteem, freedom -- HDI components - Important means of development -- Inputs in production function -- Investments in 'human capital' However, there are large deficits in health and ed. achievements - Despite great progress - too little investment in 'human capital'

Child Labor

Widespread phenomenon - 120 million full time child laborers in developing world - Where? Greatest number in Asia, highest % in Africa New models of multiple equilibria - Equilibrium 1: Low adult wages and high child labor - Equilibrium 2: High adult wages and low child labor - Government intervention may be needed to move to better eq

Sustainable Development

- "Meeting the needs of present generation without compromising the wellbeing of future generations" - Can view environmental resources as a kind of capital -- Running down the environmental capital stock is not consistent with the idea of sustainability -- Can substitute environmental capital for other forms of capital in the short run -- But eventually they are complements - Note: in developing countries, environmental capital is generally a larger fraction of total capital - To know whether environmental capital is increasing or decreasing, we need environmental accounting

Agricultural Growth: Past Progress and Current Challenges

- Agriculture is typically less productive -- Accounting for a much lower share of total output in developing countries than its share of employment - Agricultural productivity and output has been rising but unevenly - Need for a new green revolution focused on Africa -- To prevent malnutrition and famine - Food price spikes -- But other long term factors may lead to permanently higher food prices in the years ahead --- new biofuel technologies --- China and India - Need for government policies in agriculture

Autonomous Adaptation to Climate Change

- Almost certainly, autonomous adaptation will be the predominant form of adaptation - Undertaken by individuals, families, communities, eg: -- Altering crop or livestock varieties, -- Changing livelihoods, -- Increasing exploitation of common pool resources

Health Systems

- Many parallels with education - Measurement -- Hard to find comparable data across countries -- quality vs quantity of life - Two indicators -- Life expectancy -- Under 5 mortality

Remittances

- Causes? - Wage differences - Brain drain and the O-Ring model - Impacts? A diaspora bond is a debt instrument issued by a country - or potentially, a sub-sovereign entity or a private corporation - to raise financing from its overseas diaspora - Uneven

Educational Systems As Political Outcomes

- Design of system should be based on social costs/benefits -The political economy of educational supply and demand -- Resolved in political market -- Impact of power and influence - Difference between social and private benefits and costs may become even greater

Roles for Government in Agricultural Development

- Do no harm! -- Food price ceiling (to help urban dwellers) kills incentives in ag sector -- Ag subsidies reduce efficiency Ex of bad advice - Address environmental externalities in the ag sector - Provide agricultural research, extension, and marketing services -- Public good who else would provide? - Address monopsony power -- a single employer that reduces wages -- single buyer of crops that pays lower prices - Reduce informational asymmetries in product quality -- Lemons problem drives down value and prices for farmers - Provide institutions and infrastructure -- Markets - Ensure shared growth in agriculture sector -- Benefitting all, not just some - Address poverty traps

Markets and Economic Efficiency Static Case

- Efficient quantity: The quantity at which the social marginal cost and social marginal benefit of last unit consumed are equal -- MC = MB at Q - Idea -- Height of supply curve is private MC -- Height of demand curve is private MB -- Assume social costs and benefits are the sum of all private costs and benefits (no costs/benefits are external to the mkt) - Then market equilibrium Q* (where supply and demand curves cross) is the "Goldilocks quantity" -- It is just right; MC = MB - How does the market do it? Via prices: MC = P = MB

Environment and Sustainability

- Environmental issues affect, and are affected by, economic development - Many poor depend on natural resource-based livelihoods; yet poverty can lead to non-sustainable use of environmental resources low education, basic survival - Climate change is a concern especially for the developing world Which policies? - Key problem of market failure -- Leads to inefficiencies and degradation of resources - How can we account for environmental capital?

Urban Development and the Environment

- Environmental problems of urban slums -- Health threatening pollutants -- Unsanitary environmental conditions -- Serious impact on poor - Industrialization and urban air pollution -- Environmental Kuznets curve -- Pollution tax -- Absorptive capacity of the environment -- Severity of industrial pollution - Problems of congestion, clean water and sanitation -- Large health and economic costs --- impact on export earnings --- drag on development --- impact on poor - water -- private wells, flooding, salt intrusion

Demand Elasticities Export Earning Instability

- Export earnings are often unstable in developing countries -- Increased riskiness and lower growth - Possible causes? -- Low price elasticity of demand for agricultural commodities and supply shocks -- Low price elasticity of supply for basic commodities and demand shocks -- Low income elasticity of demand for primary products

Rural Poverty Traps

- Feedback Loop or Chicken-Egg Problem - Why is each of the following a poverty trap? -- Need collateral to obtain credit Low income trap -- Rural child labor and children out of school Low education, child labor trap across generations -- Low health and nutrition means less productive workers Low health and low income trap -- Lack of insurance (such as weather insurance) Vulnerable and risk averse farmers caught in low income trap -- Lack of "middlemen" and low specialization Thus isolated farmers in small markets caught in low income trap -- Perpetuation of social exclusion

Rates of Return to Education The US Case

- Graph shows US return on schooling from 1980 -- about 10% earnings increase per year of schooling -- Returns have risen substantially since then

South-South Trade

- Growth of trade among developing countries - Economic Integration: Theory and Practice -- Integration encourages rational division of labor among a group of countries and increases market size -- Provides opportunities for a coordinated industrial strategy to exploit economies of scale -- Trade creation -- Trade diversion Regional trading blocs and the globalization of trade NAFTA North American Free Trade Agreement MERCOSUR Southern Common Market SADC Southern African Development Community ASEAN Association of South East Asian Nations

Natural Resource Based Livelihoods: Pathways Out of Poverty?

- High dependence on natural resources in low income countries -- agriculture, hunting, fishing, forestry and foraging - Access often very inequitable - The poor often lack access to farmland, forests, water resources - And are losing control of natural resource commons areas -- common village lands may be spontaneously privatized. -- Governments may allow (or overlook) companies logging, fishing, and mining, without regard to local people -- Governments designate common lands "protected," banning livelihoods, while corruption often remains, and leaving no incentive to take part in protection. - A solution :"pro-poor governance" or genuine empowerment of the poor

Educational Systems Performance

- How to evaluate the performance of educational systems? -- Quantity years of schooling -- Quality universal exams? NCLB? teacher attendance? - Distribution of education - Education is central to economic advancement, breaking the cycle of poverty, and reducing inequality - Internal Migration - Brain drain

Government Failure

- If economic theory says government policy could fix market failures one cannot be sure that it will do so in practice! - "Government failure" can occur - Why? Politicians and bureaucrats may well be personal utility maximizers, not public interest maximizers - Misalignment of incentives. - Reforms include: civil service reform, constitution design

Child Labor Policy

- Increase numbers of children in school (Education for All, MDGs) -- new village schools; enrollment incentives for parents such as in Progresa - View child labor as poverty -- part of overall poverty policy (World Bank) - If child labor inevitable in the short run, regulate it -- prevent abuse, provide services for working children (UNICEF approach) - Ban child labor in its most abusive forms - Activist approach: trade sanctions -- Problem: could shift children to unregulated informal sector; could slow modern sector growth

Market Failure Broader Arguments

- Inequality -- A more equal distribution of income can be considered a public good when it is an agreed social objective - Poverty -- Similarly with lower poverty - Merit goods -- More health and education can be considered public goods

Issues in sharecropping and Figure 9.7 Incentives under Sharecropping

- Intrinsically inefficient due to poor incentives (Marshall) - Monitoring approach (Cheung) - Compromise between two types of risk (Stiglitz, others) - Screening argument (if high ability then take pure rental) - Giving sharecroppers a larger share of the produce and security of tenure on land can increase efficiency

Markets and Economic Efficiency

- Key result: A perfectly competitive market leads to an efficient allocation of goods and resources among persons -- quantity is right - Within a given time period static case - Across time periods dynamic case - Needs many assumptions to be satisfied -- No agent has market power -- Full information - no uncertainty -- All costs/benefits are internal to the market -- Time preferences account for future generations

Health and Education The Human Capital Approach

- Like financial or physical capital, investments generate a stream of benefits -- Pay now -- Receive future benefits - How to decide level of investment? -- Compare the present discounted value of this stream of benefits to the costs -- Invest if benefits exceed costs Private vs social returns - Private returns to education are high -- Agents base decisions on private returns - Social return are also high -- Policy should be based on social returns - The two can differ due to -- Externalities -- Subsidies and other distortions -- Education as a screening device Typically Private > Social, -- especially at higher levels of education

Child Labor Model of Basu Assumptions

- Luxury Axiom: With sufficiently high income, a household would not send its children to work - Substitution Axiom: Adult and child labor are perfect substitutes -- every hour of work by a child is equivalent to γ hour by an adult where 0 < γ < 1 is known as the MRTS -- Ex if γ = ½ then a child is half as productive as an adult

The Market Economy The New Consensus

- Markets have essential role in development - Governments can help secure conditions for an effective market based economy - A recognition that markets can fail - Government provision of key public goods, emphasis on health and education - New emphasis on government's responsibility toward poverty alleviation and shared growth

Potential limitations of microfinance as a development strategy

- Microfinance is a powerful tool, but it needs to be complemented with other development and poverty policies - Hard to reach ultra-poor - Credit has negatives as well as positives - Not everyone is an entrepreneur

Rain Forests

- Mitigate climate change by reducing greenhouse gases - Preserve biodiversity and livelihoods for the poor - Require sustainable management - Are global public goods - provide a restorative mechanism for the environment

Peasant Agriculture in Asia

- More equal land holdings - 85% are sharecroppers and tenant farmers, not owners -- low productivity due to incentive problems - High pop growth => Fragmented, dwarf land holdings -- Inefficient scale and low productivity, peasant impoverishment - Historical origins -- European colonial legacy of private property rights --- replaced traditional land structures -- Many owners also lost land over time

The State

- National economic plans were once the norm - Now far less common (with some exceptions) - Consensus: a comprehensive development policy framework can play an important role in accelerating growth and reducing poverty

Interactions with Income and Markets

- Note Higher income does not necessarily translate into greater investments in children's education and health - Better education for mom does translate to healthier children at any income level -- Intra-household externalities Basu and Foster (1998) - Market failures are especially large in education and health -- Requires policy -- Ex Deworming increases school attendance and leads to externalities for the wider community (Kramer and Miguel)

Prebisch-Singer Hypothesis

- Primary commodity export prices fall over time relative to manufactured goods - Implications for developing countries -- Need to avoid dependence on primary exports -- Will lose revenue unless they can continually increase export volumes - Why? Total export earnings depend upon: -- Total volume of exports sold -- price paid for exports

Women and Agriculture

- Provide agricultural labor -- 60% to 80% in Africa and Asia -- 40% in Latin America - Work longer hours than men -- Paid and unpaid -- Food security not cash crops - Ignored by many government assistance programs - Target men, not women - The Women's Empowerment in Agriculture Index is an innovative new tool composed of two sub-indexes: one measures the five domains of empowerment for women, and the other measures gender parity in empowerment within the household. It is an aggregate index reported at the country or regional level that is based on individual-level data on men and women within the same households.

Microfinance institutions (MFIs)

- Provide financial services to people otherwise with no access or only with very unfavorable terms. - Including microcredit, microsavings, and microinsurance - Focus: very small loans for microenterprises - Microcredit often uses group lending schemes (joint liability) - Provides "collateral of peer pressure" to jointly repay - An alternative without joint liability: "dynamic incentives," in which loan sizes steadily increase when loans are repaid MFIs: three current policy debates - Microfinance schism--Are subsidies appropriate? - Comprehensive or not--Should credit be integrated with education, health, or other programs? - Should MFIs undergo commercialization, whereby an NGO providing microfinance is converted into a for-profit bank?

Why Rural Development?

- Rapid industrialization as a development strategy -- Overemphasized in past - Agricultural and rural development strategy -- Now seen as an important part of any development strategy --- Reduce imbalances and hence migration to cities --- Key role of food in survival; most of ultra poor are in rural areas - Three complementary elements of an integrated agriculture and employment strategy -- Accelerate output growth equitably -- Raise domestic demand for agricultural output -- Expand non-agricultural rural labor-intensive activities that are supported by the farming community

The "Missing Women" Puzzle

- Research has concluded that in Asia at least 100 million women or more are "missing" -- If gender ratios were closer to normal levels based on biology, in comparison to other regions such as Europe, North America, or Latin America (or for that matter sub-Saharan Africa), that is the minimum number of additional women who would be alive in Asia - Some women are also missing in Africa, but a much smaller proportion - Reasons include inferior medical care for girls, and gender selective abortion or female infanticide

Trade Policies of Developed Countries

- Rich nation economic and commercial policies matter for developing countries -- Tariff and non-tariff barriers to developing country exports -- Adjustment assistance for displaced workers -- General impact of economic policy

Markets and Economic Efficiency Dynamic Case

- Similar assumptions ensure that the market generates efficient allocations over time. - Key additional "price": market discount rate r - Gives the tradeoff between now and future: -- $1 now is worth $(1+r) in the future -- $1 in the future is worth $1/(1+r) now - Consumers choose quantities now and in the future such that MBn = MB/f(1+r) - Producers choose quantities now and in the future such that MCn = MCf/(1+r) ----- - Key assumption: market discount rate r is equal to the "social" discount rate - Problem: market rate may be too high since -- Future generations do not have a market vote and they value the future more -- Current environmental decisions may be irreversible (as species die off or nonrenewable resources are depleted).

Peasant Agriculture in Africa

- Some export crops coffee, cocoa, sugar, flowers - But primarily subsistence farming -- "Shifting" cultivation --- Small plots farmed and rotated, rest underutilized -- Low tech --- Unimproved seeds, little fertilizer or irrigation --- Diminishing returns --- But fears of vulnerability to climate change - Coordination failure problems -- Excess demand for labor at planting time

The Three Agents of Development

- State, Market, Citizen (NGO) - Goal: Economic development and poverty reduction

Economic Globalization

- The increased openness of economies to international trade, financial flows, and foreign direct investment - Concerns: Inequality and risk

Market Failure Three General Forms

- The market cannot function properly or no market exists -- Most extreme case - The market exists but inefficient due to imperfections -- typical case - The market produces undesirable results as measured by social objectives other than efficiency -- Inequality and poverty -- Insufficient levels of "merit goods" like health, education --- Specific Examples: Market power - Monopoly, monopsony, etc. - Implication Without intervention, incorrect amount of private goods Public goods - Nonrival goods Efficiency requires counting everyone's MBs - Nonexcludable Free riders cannot be excluded Externalities - Agent does not receive all benefits from their market activities - Agent does not pay all the costs of their market activities Game Theoretic and Strategic Models - Oligopoly Few producers - Prisoners' dilemma Strong incentives to "rat" - Coordination failure Costly to coordinate - Misaligned incentives Individually rational choices produce inefficient outcomes Information failures - Adverse selection Insurance naturally attracts poor risks - Moral hazard Insurance naturally makes one less careful - Capital markets are particularly prone to failure due to intrinsic connection to information generation, transmittal

Agrarian Systems

- Three main types of countries in developing world -- Agriculture based countries 440M in Asia and SSA --- Agriculture makes up large part of economy and growth --- Often subsistence farming - Transforming countries 2.2B rural in Asia and Latin America -- Ag is large part of economy, but has low contribution to growth -- Most of world's rural people and poor - Urbanized countries 250M in LA, Eastern Europe, Central Asia -- Half or more even of the poor found in urban areas - Position of countries not stagnant

Peasant Agriculture in Latin America

- Unequal land holdings, large rural inequalities -- 1.3% own 72% of land -- The Latifundio-Minifundio (large plantations-small farms) dualistic pattern still persistent - But medium sized and family farms are also prevalent and more productive Why? -- Lower supervision/transaction costs than large plantations --- Where landlords are typically less focused on farming -- Better balance of labor to land -- Less dormant land and fewer idle landlords

Civil Society and NGOs

- What are the comparative advantages of civil society and NGOs? - Have potentially important roles in: -- Common property resource management -- Local public goods -- Economic and productive ideas -- Possibly other activities that are either: - Excludable but not rival - Rival but not excludable - Partly excludable and partly rival ------- Other comparative advantages of NGOs - Innovative design and implementation - Program flexibility - Specialized technical knowledge - Provision of targeted local public goods - Common-property resource management design and implementation - Trust and credibility - Representation and advocacy

The Gender Gap: Women and Education

- Young females receive less education than young males in nearly every developing country - Closing educational gender gap is important -- The social rate of return on women's education is higher than that of men in developing countries -- Education for women increases productivity and lowers fertility -- Educated mothers have a multiplier impact on many generations -- It can break the vicious cycle of poverty - Good news: Millennium Development Goals on parity being approached, progress in every developing region Consequences of gender bias in health and education - Economic incentives and their cultural settings -- Ex: Dowry Boys generate future benefits; Girls generate future costs; girls marginalized - "Missing Women" mystery in Asia Amartya Sen - Increase in family income does not always lead to better health and education

Planning Problems and Government Failure

-Practice is different from theory - Possible reasons... Deficiencies in the plan or its implementation Insufficient or unreliable data Economic disturbances Institutional weaknesses Lack of political will Conflict and fragile states - Governments may... Block private sector initiative with bureaucratic obstacles Have poor coordination among its parts Be constrained by black markets Have controls that create incentives for rent seeking Have an informational disadvantage compared to individuals Be more rigid and inflexible due to complex decision making Lack capabilities to administer detailed plans

Lecture 9

Agriculture

Why the Bretton Woods System Was Created

Avoid Past Mistakes - Disastrous economic policies that contributed to Great Depression and WW II - Protectionism - Tariff wars - Competitive Devaluations - Rebuild confidence in international cooperation and international financial system

Project Appraisal Social Cost-Benefit Analysis

Basic concepts and methodology - Specify objective function - Compute social measures -- Shadow prices (of non market goods) -- Social discount rate (or social rate of time preference) - Establish decision criterion ------- - Choosing projects: some decision criteria -- NPV rule -- Compare the internal rate of return with an interest rate - Conclusions: planning models and plan consistency

Importance of Exports Across Developing Nations

Developing countries - Are generally more dependent on exports - Have less diversified portfolio of exports - South Korea's exports larger than all of South Asia or Sub Saharan Africa

The Scope of Environmental Degradation: An Overview

Environmental problems have consequences for health and productivity - Loss of agricultural productivity - Prevalence of unsanitary conditions created by lack of clean water and sanitation - Dependence on biomass fuels and pollution - Airborne pollutants inside the home

The Role of Central Banks and Alternative Arrangements

Functions of a full-fledged central bank... Issuer of currency Manager of foreign reserves Banker to the government Banker to domestic commercial banks Regulator of domestic financial institutions Operator of monetary and credit policy Currency boards - Form of central bank that issues domestic currency for foreign-exchange at a fixed exchange rate - Alternatives to central banks - Transitional central banking institution - Supranational central bank - Currency enclave - Open-economy central banking institution

Corruption Trends in Governance and Reform

Good governance enhances capability to function Good governance is broader than simply an absence of corruption Abuse of public trust for private gain Effects of corruption fall disproportionately on the poor - Tackling the problem of corruption - Accountability systems - Decentralization - Development participation - alternate interpretations - Legal structure and measurement

Conflict and Development

How are they related? - Personal security is key capability Other consequences? - Health Especially women, children, and refugees - Income and wealth Destroys capital stock and income flows - Hunger and poverty Weapon and outcome - Education Kids miss school, forced into fighting - Social cohesion and social capital Refugees - The risk of conflict likewise affects financial flows and economic decisions Would you invest? Causes and Risk Factors: General causes - Low income, low growth, poor institutions -- markers for low development Specific causes: - Horizontal inequalities especially across ethnic groups -- Polarization -- Inequality of opportunity - Using natural resources for basic needs - Exportable natural resources - diamonds, oil, conflict trap

Five Basic Questions

How does international trade affect economic growth? How does trade alter the distribution of income? How can trade promote development? Can developing countries control their trade? What is the optimal trade policy?

Toward a Strategy of Agricultural and Rural Development

Improving small-scale agriculture - Technology and innovation - Institutional and pricing policies: Providing necessary economic incentives - Adapting to new opportunities and constraints Conditions for Rural development - Land reform - Supportive polices - Integrated development objectives

Multisector Models and Sectoral Projections

Interindustry or input-output models - Modeling the interrelationships across sectors - Output of one sector is input of another Can be extended in 2 ways - Social Accounting Matrix or SAM models where data from national accounts, balance of payments, and flow-of-funds databases are supplemented with household survey data to model the flows in an economy, and are also used in: - Computable General Equilibrium or CGE models where estimates of elasticities and actual quantities are used to predict the impact of policies.

Lecture 12

International Trade Theory and Development Strategy

International Monetary Fund and the World Bank

July 1944 Bretton Woods Conference in N.H. - 44 Countries to rebuild international markets - IMF -- Restore international financial system Via financing for balance of payments deficits - World Bank -- Rebuild infrastructure Via financing of projects - Participation is voluntary Each country chooses whether to have representatives and take loans - However conditions of loans may be steep Some have been too austere, hard on the poor, exacerbated inequality International Monetary Fund Highlights: - Lender of last resort -- 2008 Global Financial Crisis US, UK, Ireland - IMF role expanded -- Surveillance of macro policies and global public goods - Technical Assistance and Capacity Building -- Design and implementation of fiscal and monetary policies - Financial assistance - To promote international monetary cooperation -To facilitate the expansion and balanced growth of international trade World Bank Highlights: - After Marshal Plan's success, focus shifted to developing world... International Development Association (IDA) Loans at concessional rates to low income countries International Finance Corporation (IFC) Lending to private enterprise But infrastructure loans were not enough President McNamara shifts emphasis to poverty and other dimensions

Civil Society and NGOs "Voluntary Failure"

NGOs may ... - Be captured by goals of funders rather than intended beneficiaries - Pay too much attention on means—such as fundraising—which can become ends in themselves. Effective fundraisers, ineffective NGOs - Pay too little attention to means, as when poor fundraising keeps NGOs from realizing scale and significance. Effective NGOs, ineffective fundraisers - Pay too little attention to process - May have no external feedback to help improve or change such as private firms receive in markets, or elected governments receive at the polls

Education and Health Synergies and Complementarities

Note: each affects the other Greater health capital - Raises the rate of return (ROR) to education - Lowers depreciation of education capital - Improves school attendance - Improves learning Eg Head Start Greater education capital - Improve effectiveness of public health programs and healthcare - Directly improve hygiene and sanitation - Improves training of healthcare personnel Investment in one raises returns to the other They are complementary inputs for a given person - Greater health capital may improve the returns to investments in education inducing greater investment - Greater education capital may improve the returns to investments in health inducing greater investment Impacts are especially large for developing countries - Can lead to poverty traps

Key Issues for Developing Countries

Often rely heavily on - Exports especially of primary products - Imports especially of machinery, capital goods, intermediate producer goods, and consumer products (Implies greater risk and uncertainty) Often have - Chronic deficits in current account (exports minus imports) - Chronic deficits in capital account (capital flows in minus capital flows out) Often - Heavily promote exports and accumulate large foreign exchange reserves typically US dollars held government or central bank

Planning Problems in Developing Countries

Planning may - Be manipulated by privileged groups - Increase the power of narrow interest groups - Increase risks by pointing all in same direction

Economic Models of the Environment

Q/ Are markets good at addressing environmental issues? A/ At least 3 related reasons they may not be - Externalities costs or benefits external to mkts -- Impact? Wrong allocation in current period - Missing participants choices ignore future people - Vague or imperfect property rights unclear who owns which resources

Aggregate Models Harrod-Domar

Recall: K (t) = kY(t) where: - K(t) is capital stock at time t - Y(t) is output at time t - k is the capital-output ratio

The Role of the Financial System in Economic Development

Six major functions of the financial system - Providing payment services Checking, plastic - Matching savers and investors Traditional banking function - Generating/distributing information Quality of borrowers -Allocating credit efficiently based on risk/reward - Pricing, pooling, and trading risks facilitates diversification - Increasing asset liquidity cash when you need it Government's role: Monetary policy - Adjusting money supply and interest rate - To control inflation, exchange rate, and economic growth Common problems of developing-country financial systems - Fragmented and disorganized less efficient, increased cost of capital, and lower growth - Captured by foreign companies externally focused - Infiltrated by foreign currency harder to conduct monetary policy - Lack transparency viewed as unfair, keeps out many participants - Dualistic Small "organized" sector with low interest rates, large "disorganized" sector with high rates - Inflationary monetary policy Too much currency chasing too few goods - Historically a problem in Latin America

Environmental Accounting

Sustainable net national income is: NNI* = GNI - Dm - Dn - R - A - GNI: Gross national income - Dm: depreciation of manufactured capital assets - Dn: depreciation of environmental capital - R: expenditure needed to restore environmental capital - A: expenditure required to avert destruction of environmental capital - Note: R and A are thus components of GNI, but not of NNI*

International Financial Flows

Three sources: - Private direct and portfolio investment -- build factory or buy equity - Remittances of earnings by international migrants -- As much as 11% of GDP for some countries - Public and private development assistance -- Aid from gvts, multinational donors, NGOs

The Poor are Agents and Victims of Environmental Degradation

Victims: - The poor live in environmentally degraded lands which are less expensive since the rich avoid them - People living in poverty have less political clout to reduce pollution where they live - Living in less productive polluted lands gives the poor less opportunity to work their way out of poverty Agents: - The high fertility rate of people living in poverty - Short time horizon of the poor (by necessity) - Land tenure insecurity - Incentives for rainforest resettlement

Aggregate Models Harrod-Domar with Differentiated Savings

W + π = Y - where W and π are wage and profit incomes S π π + SwW = I - where s π and sw are the propensities to save from wage income and profit

Policy Options

What developing countries can do - Proper resource pricing - Community involvement - Clearer property rights and resource ownership - Improved economic alternatives for the poor - Improved economic status of women How developed countries can help LDCs - Trade policies: reduce barriers, subsidies - Debt relief and debt for nature swaps - Development assistance What developed countries can do for the environment - Emissions controls - R&D - Import restrictions on unsustainable production