Economics Midterm
Great Divergence
(from the rest of the world): European Renaissance, Early Modern Europe, Age of Enlightenment, and Industrial Revolution; speed at which a country develops has accelerated over time;
Sustainable Development Goals
17 goals with 169 targets adopted in 2016 (through 2030) 1. no poverty 2. zero hunger 3. good health and well-being 4. quality education 5. gender equality 6. clean water and sanitation 7. affordable and clean energy 8. decent work and economic growth 9. industry, innovation and infrastructure 10. reduced inequalities 11. sustainable cities and communities 12. responsible consumption and production 13. climate action 14. life below water and life on land 15. peace, justice and strong institutions
Microfinance
1976, Mohammed Yunus and Grameen Bank; introduced a new instituional form that may help reduce both screening costs and monitoring costs, so that the poor have access to (cheaper) credit; Microfinance Institutions also provide a broader set of financial services: larger individual loans; savings; insurance; default rates in microfinance are extremely low (less than 2%); Main elements: lends almost only to women (more reliable, improve bargaining power, more likely to have no other access), weekly repayment schedule (provides discipline, easier for clients to save small amounts, BUT discouraging because some activities don't make money right away), group lending (5 to 10 women who know each other) with joint liability (responsible for each other's loan, decrease screening costs, BUT creates excessive pressure?), regular meetings where members forge bonds and other things can be discussed (social capital?), very small loans initially, which become larger over time, extensive monitoring by credit officers who are not very well paid and work very hard, with incentives based on number of clients, and repayment rates and high interest rates (though not as high as money lenders); success because it helps clients save and build collateral; promise of future loans for people who have no other source of credit; as microfinance grows, competition between agencies may cause problems (Ponzi schemes to pick up new clients?); MFIs receive considerable subsidies (from governments, donations, workers who accept low pay)--"hidden subsidies"; business model: enduring subsidy and modest profit
Giffen Good
A good whose consumption decreases when the price decreases; substitution effect: you want to consume more of this good because it has become less expensive than other goods; income effect: superior good has a positive income effect where you will consume more as income goes up and an inferior good has a negative income effect where you will consume less as income goes up; in most cases, even for inferior goods, the substitution effect will dominate because most goods are only a small part of the budget; However, for a staple food that constitutes a large part of the budget, a decrease in the price may have a large income effect; a good is a giffen good when a negative income effect is larger than a positive substitution effect (ex. price subsidies for reduced price of rice in China)
Land abundance
Africa was land-abundant one century ago, but is labor-abundant now; tendency to expand agricultural production where there is land in excess (through deforestation often)
Dutch Disease
Also part of the International-dependence revolution; a boom in natural resources leads to de-industrialization; resource movement effect: resources shift toward the booming sector and away from the lagging sector; real exchange rate effect: if the world buys your natural resources, the value of the domestic currency appreciates and locally produced manufactured goods become more expensive for the world so manufacturing exports fall
Singer-Prebisch thesis
Also part of the international-dependence revolution; developing countries export primary products and developed countries export manufactured goods; the income elasticity of demand for manufactured goods is greater than that for primary products; as income rises the demand for manufactured goods increases relatively more rapidly; the terms of trade for primary commodity exporters do have a tendency to decline; how many imports can I afford with my exports?; but developed countries are net food exporters while some developing countries export manufactured goods and Africa's terms of trade have risen since 2000
Dualistic Development Thesis
Also part of the international-dependence revolution; superior and inferior elements can coexist: coexistence of wealthy, highly educated elites with masses of illiterate poor people; their coexistence is chronic and not merely transitional (as in the Lewis model); rising inequality over time; no trickle-down effect of economic growth; polarization and lower growth; need for more redistribution
Functionings and Capabilities
Amartya Sen's 'Development as Freedom'; Development can be seen as a process of expanding the real freedoms that people enjoy. Development requires the removal of major sources of unfreedom; what really matters is the capability to function (i.e. what the consumer can make of the commodities she owns); functionings: what people do or can do with the commodities of given characteristics that they come to possess or control; commodities are valued differently by different people; well-being means well, and measuring well-being by levels of consumption obtained confuses the role of commodities by regarding them as an ends in themselves rather than a means to an end; capabilities: the freedom that a person has in terms of the choice of functionings, given their personal features (conversion of characteristics into functionings) and their command over commodities (purchasing power); places greater emphasis on education health, social inclusion and empowerment; development as a process of expanding capabilities, giving people the freedom to realize more and better functionings
Lewis two-sector model
Based on the idea of structural change or the transition from rural-based agricultural economy to urban-based manufacturing and service economy; two sectors (the dual economy) a traditional overpopulated rural subsistence sector and a high productivity modern urban industrial sector; zero marginal labor productivity for farmers (surplus labor) meaning labor can be 'withdrawn' from the agricultural sector without any loss of output; in the modern sector, output is a function of labor, capital and technology; initially urban wage>rural wage so employers can hire as many surplus rural workers as they want without fear of rising wages; output increases, profits increase, reinvestment in capital, increase in demand for urban labor; Lewis' turning point: self-sustaining growth of modern sector until surplus labor is absorbed and wages start increasing in the countryside; limitations: assumes complementarity between capital and labor...what if profits are reinvested in labor-saving capital? what if profits are reinvested abroad? what about unemployment in the cities?; main idea: save and invest in the urban sector, and the surplus labor of the rural sector will be absorbed by the urban sector
Land redistribution
Best solution to under-productivity of farmers in developing nations is to redistribute land; but some people would lose (the current landowners); redistributing land will create more owner cultivated land which will be more productive (maximize effort); transfer of property rights can lead to long-term investments; redistribution of assets can reduce rural poverty and lower levels of inequality in the long-run; redistributing land is difficult: it is opposed by landowners who often control important political resources; lead to societal and political polarization? role of institutional legacies: back to AJR? peasant revolts in Europe; small farms from the get-go in USA; unequal land distribution in LA from colonization; bad allocation of land in some African countries (Zimbabwe); land decollectivization in Asia
Purchasing Power Parity Method
Calculation of GNI using a common set of international prices for all goods and services, to provide more accurate comparisons of living standards; relative purchasing power: the number of units of a foreign country's currency required to purchase the identical quantity of goods and services in the local developing market as $1 would buy in the U.S.
Harrod-Domar model
Economic growth comes from investment and saving; savings equal investment; Y(t)=C(t)+I(t) income is either consumed or saved; the capital stock increases if investment>depreciation (capital stock in time t+1 is equal to the current capital stock minus depreciation but plus investment; the rate of growth increases with the savings rate s, and decreases with the capital-output ratio and the depreciation rate; limitations: rates are exogenous to the income level in the model and do not depend on whether the country is a developing or developed country but these rates might be increasing or decreasing with income which has implications for the relationship between income and future growth (saving rate: subsistence where people are too poor to save vs. precautionary savings if people are poor and risk-averse; population growth: high in poor countries so poor countries remain poor since they accumulate less per capita); differences in savings rates, ICOR, population growth rates mostly taken as given; unlimited growth possible as long as you save and invest (constant returns to capital); not sufficient to have savings and investment
Subsistence Economy
Economy in which production mainly for personal consumption and standard of living yields little more than basic necessities of life: food, shelter and clothing
supply of education
Education infrastructure: build primary schools, secondary schools, universities, etc.; quality of teaching: teaching methods, teacher absenteeism; peer effects: uniforms, tracking, elite schools; labor markets can lead to an increase in the supply of education if people anticipate high returns of a well-educated populace
Technology adoption--Green Revolution
Even if skilled farmers have secure property rights, why don't they adopt the right technologies? don't know if the technology works (extension services, role of information campaigns, social learning effects all necessary); know that the technology works but face income constraints so cannot invest (imperfect credit markets); don't face income constraints but have self-control problems (farmers spend too much of their post-harvest income right away, instead of investing it just before the next harvest); the technology is risky, but people are risk averse and have no private insurance; know that the technology works but imperfect information about demand (i.e. prices in other locations)
Big push of industrialization
Example of a problem of coordination failures; Rosenstein-Rodan; a concerted, economy-wide and typically public policy led effort to initiate or accelerate economic development across a broad spectrum of new industries and skills; industrialization: factory production to benefit from returns-to-scale; if all factories adopted new technology simultaneously, production would increase in all sectors, everyone is more productive and receives a higher wage, aggregate supply and demand rise simultaneously and the country moves to a better equilibrium (higher productivity and income); justifies massive government investments; Olympic games, Marshall Plan and New Deal as examples; limitations: capital market failures--where to obtain the initial capital, agency costs, asymmetric information and communication failures--actions must be coordinated across many agents, limits to knowledge--in which sectors should we simultaneously invest? corruption--many opportunities with giant investment projects
Credit
Formal: banks; poor often have no access to formal credit; formal institutions don't lend to the poor because of high screening and monitoring costs; additionally, formal institutions are often far from the poor and they have high fixed costs so they cannot be located everywhere; rationing credit to the poor by not lending vs informal: money lenders; in the informal market, lending rates are much higher than deposit rates; informal institutions are lending to the poor, but at very high interest rates; due to high screening and monitoring costs, they must charge a high interest rate; high interest rate gives the borrower more reason to default and escape, so the interest must go up even more to cover the cost of monitoring; the high interest rate is another form of credit rationing (few projects will be profitable enough given these interest rates)
Headcount Ratio
Fraction of the population which lives below or at the poverty line; alpha=0 in the FGT index; depth of poverty is not measured
Market Fundamentalism
Free-market analysis: markets alone are efficient, any government intervention in the economy leads to distortions, market imperfections in poor countries are of little consequence, underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention by overly active developing-nation governments; Public Choice Theory: governments do nothing right, politicians, bureaucrats favor their own interests, self-interest guides all individual behavior and governments are inefficient/corrupt; Market Friendly Approach: market imperfections so governments must facilitate the operation of markets, successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy in areas where the market is inefficient
Jeffery Sachs
Gallup, Mellinger and Sachs (1999) Geography and Economic Development; indirect of geography on income today through capital accumulation and innovation in the past; direct effect of geography on income today because geography still impacts capital accumulation and innovation; proximity to the coast, being in the tropics and malaria rates explain 2/3 of per capita GDP across countries today; geography affects transportation costs and health; main issue/limitation: correlation is not causality; in response to AJR's use of settler mortality: claim that geography influenced settler mortality;
Happiness, Satisfaction with life index
Gross National Happiness: concept coined by Bhutan's Kind in 1972; based in Buddhism: spiritual development matters more than material development; financial security is only one factor affecting happiness; other factors include family relationships, work, community and friends, health, personal freedom, personal values; climate can play a role; Satisfaction with Life Index: shows the average self-reported happiness in different nations; very subjective
Jared Diamond
Guns, Germs and Steel (1997); Collapse; technology and disease gave Europeans the advantage when they colonized the 'new world'
Self-discovery
Hausmann and Rodrik: Problem of information; a country may not know its comparative advantages; information externalities: for each firm, there is a cost of searching for profitable activities. But if the firm finds a new profitable activity, other competing firms may then specialize in the activity. Innovative firms do not reap the full benefits of their searches, and there is too little searching nationally; industrial policy: may help to identify domestic costs of potential products to specialize in by encouraging exploration in the first stage and encouraging movement out of inefficient sectors and into more efficient sectors in the second stage
Growth Diagnostics Framework
Hausmann-Rodrik-Velasco; focus on a country's most binding constraints on growth; no 'one size fits all' in development policy; requires careful research to determine the most likely binding constraint and then focus on it; low levels of private investment could be due to low social returns, low appropriability or high cost of finance; decision tree; if a developing nation experiences a relatively low level of private investment and entrepreneurship, what steps should it take
Discrimination in Education
Hoff and Pandey 2006; low caste and high caste students in India asked to solve mazes; low-caste boys can solve just as well as high-caste boys when their caste is not revealed but in mixed-caste groups when caste is revealed, low-caste boys' performance drops 20% below that of high-caste boys
Service Revolution
ICT, banking, insurance, education, health, entertainment, tourism; look in notes
Food availabilit
In regards to the "scorched earth policy" creating famine in Kolkata; British administrators destroyed food so that the Japanese would not take over; food availability decline hypothesis is the idea that famines occur because less food is immediately available; According to Sen, in every society each person can be thought of as having an entitlement to all possible combinations of the goods and services to which he has access. An entitlement is a collection of alternative bundles of goods and services. A person's entitlement can change for a number of reasons--variations in price, the implementation of new rationing rules, infestations of crops, etc. These examples demonstrate how some segments of the population can perish because of hunger despite there being no overall shortfall in food production (good example is Bengal famine of 1943)
Neoclassical/colonial dependence model
International-Dependence Revolution: some countries are poor because of (neo-)colonization, fault and inappropriate advice, or globalization; emerged in the 1970s mostly from developing country intellectuals; went out of favor in the 1980s and 1990s but were readopted by anti-globalization movement in the 2000s; developing countries cannot develop because developed countries and international organizations don't want them to; caught up in a dependence and dominance relationship with rich countries; neo-colonial dependence model: unequal power relationship between the center and the periphery; underdevelopment exists in developing countries because of continuing exploitative economic, political, and cultural policies of former colonial rulers toward less developed countries; underdevelopment as an externally-induced phenomenon; international division of labor; international special-interest power groups: multinational corporations, international organizations and aid agencies favor their own interests and the interests of developed countries and inhibit any genuine reform efforts that might benefit the wider population; helped by a small elite ruling class in developing countries; landlords, entrepreneurs, military rulers, merchants, salaried public officials and trade union leaders
O-Ring Theory of Development
Kremer's O-Ring Theory of Economic Development; based on the 1986 Challenger disaster where there was the failure of one small, inexpensive part which caused the shuttle to explode; an economic model in which production functions exhibit strong complementarities among inputs and which has broader implications for impediments to achieving economic development; based on the idea of production with strong complementarities among inputs; if one dimension fails, the whole system fails; in poor countries there can be economy-wide low-production quality traps (low stock of human capital, poor roads, power failures, etc); positive asortative matching: workers with similar levels of skill work together; implies brain drain
Industrial Revolution
Late 18th century; rapid industrialization in Europe and North America which facilitated the Great Divergence and led to a rapid improvement in living standards (escaped the Malthusian trap?); export-led industrialization
Hayek
Libertarianism; The Road to Serfdom (1944); warns of the danger of tyranny that results from government control of economy through central planning; Economic liberties and political liberties are equally important; the role of government is to ensure free markets, develop market for negative externalities and provide safety nets
Political Freedom and Civil Liberties
Liberty: the ability of individuals to have agency; right to life, freedom from torture, freedom from slavery, right to a fair trial, freedom of speech, freedom of thought, conscience and religion; Indices include: Freedom in the World, Polity IV, Worldwide Press Freedom Index
Super-entrepreneur vs. Central Planner
Means of enacting the 'big push'; either involving the private sector or government planning
Education and Labor Market--Gender
On low/middle income countries, for every 100 men in secondary schools and universities, only 79 girls; discrimination, self-esteem or lower returns to education for girls?; women are less likely to work, earn less than men for similar work, and are more likely to be in poverty even when they work; the fact that women have fewer opportunities in the labor market may contribute to their unequal treatment in the household. If women do not work outside the home, there may be a perception that they do not need to be as strong and healthy and do not need a formal education
Foster-Greer-Thorbecke (FGT) Index
P0, P1 and P2; measures the poverty gap and its different dimensions; with N number of people. z poverty line, y individual income, H number of poor (when y is less than or equal to z); headcount ratio, poverty gap and P2 measure (coefficient of variation: combines information on both poverty and income inequality among the poor)
demand for education
Parents: income (school fees, tuition fees, uniforms and supplies), child labor wage (opportunity cost), parental education (preferences, education and social capital are complementary factors), number of children (income constraint), sex of children (preferences, gender-specific returns, etc.), nutrition/health of children; Why invest? altruism or high expected returns?
Rawls
Social Libertarianism; Theory of Justice (1971); not everyone starts with the same 'original position' in society; a market economy can only function if there is equality of opportunity; Veil of Ignorance
Role of Fixed Factors
Solow Model: population growth has negative effects because the capital-labor ratio decreases when L increases; K might adjust in the long-term, however; rural land is to some extent a fixed resource, eventually no more land will be available; build upwards instead of outwards; environmental impact; hunger, overcrowding and climate change
food expenditure
Studies find that when total expenditure per capita increases by 10% food expenditure increases by 7% (not 10%); if total food expenditure increases by 7% the consumption of calories only increases by 3.5% (not 7%); when their income increases, people also spend a bit more on other things; food is an inferior good; The Engel Curve describes how household expenditure on a particular good or service varies with household income (inferior, normal, superior goods); Calorie Engel curve: relationship between calorie consumption and income; over time fewer calories at a given level of income (India example); people have substituted more expensive and better tasting calories to cheaper calories; economic growth has no effect on calorie consumption; with economic growth, the individual household moves up the Engel curve, but the Engel curve falls; even among the poor, increases in economic well-being has a positive, but very small impact on calories consumed;
Quality of medical advice
Supply of healthcare: infrastructure provision measured by distance to health centers? Quality: public doctors put in much less effort than private doctors; nurse absenteeism; poor treatment; information, learning, trust: very difficult to find on your own what works and what doesn't, even in developed countries; malaria example: people who got antimalarial bednets were more likely to pay for a second one in the future, neighbors of people who got one for free were more likely to pay for one if they had to pay (learning effect); BUT back to the fake pills-->can lead to a mistrust effect if they are led astray
Conditional Cash Transfers
Target poverty by providing cash payments to families in exchange for regular school attendance; often in the form of a voucher; make them conditional because unconditional transfers could lead to misappropriation by the parents; strong effects on school enrollment but even stronger effects for girls; reduction in poverty (redistribution effects) and reduces vulnerability as it acts as a sort of insurance; limitations: no effects if no school around (must take into account demand and supply); corruption?; form of a positive income shock
Acemoglu Johnson and Robinson
The Colonial Origins of Comparative Development (2001): colonization strategies (settlement or extraction); high settler mortality in the economy led to extractive institutions; bad institutions persisted after independence; instrument institutions with settler mortality to estimate causal effect of institutions on development; strong effects and much larger than the effects of geography on development Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution (2002): colonies that were relatively rich (urban) in 1500 are now relatively poor whereas some colonies that were poor in 1500 are now relatively rich (los dos Nogales); institutional reversal; high pre-colonial densities implied that the European powers could not easily dominate or eliminate the native population GROUP PRESENTATION 1: Why Is Africa Poor
Patterns of long-term development
The Great Divergence; speed of growth has accelerated; economic optimism post-WW2 led to a great amount of public (unsustainable) debt: economic recession in late 1970s, oil prices increased; interest rates increased in US and Europe; Structural Adjustment Programs; Cold War context allowed the U.S. to impose their idea of how the economy should work; overoptimism and the Financial Crisis of the 1990s: banks and corporations over-borrowed, and foreign banks over-lent; 1973 oil crisis: Arab-Israeli war, U.S. support of Israel, Organization of Arab Petroleum Exporting Countries retaliated with an oil embargo; oil glut when Saudi Arabia increased production in the oil price collapsed in the 1980s; 2000s energy crisis: oil prices increasing until 2008;
Modern Economic Growth
The speed at which a country develops has accelerated over time; large amount of public debt; check notes
Malthusianism
Thomas Malthus (1798): unchecked population growth is exponential but the growth of food supply is arithmetic; neo-malthusianism: population growth is bad, and we need to advocate for population control programs to ensure resources for current and future populations; Malthusian Trap: income stagnant (and low) because positive income shocks only resulted in more people (i.e. low income per capita-->good harvest-->increase in income per capita-->more babies-->income per capita goes back down); industrial revolution needed to break out of the fertility trap: income rose much faster than fertility (as people became more industrious, returns to education increased and women worked resulting in fewer children); criticism: ignores technological progress Post-Malthusianism: do we still live in a Malthusian world?: technological progress, globalization, higher incomes, higher densities and returns-to-scale, Boserup effect -->No??
Poverty Gap
Total Poverty Gap (TPG) is the summation of the difference between the poverty line and individual income for all the people below or at the poverty line; Average Poverty Gap: total poverty gap divided by the total population; monetary amount necessary to bring all the poor right up to the poverty line; also called normalized poverty gap, average income shortfall or normalized income shortfall
Solow Model
Two factors of production, labor and capital; diminishing returns to individual factors of production; fewer investment opportunities as a country develops; capital accumulation and growth decelerate over time; poor countries should grow faster than richer countries; change in capital is equal to net investment (investment-depreciation); STEADY STATE: change in capital is zero, the productivity of one extra unit of capital is equal to depreciation, leading to no further investment; all countries converge towards their own steady state (where growth is zero); supports the idea that all poor countries should develop eventually; technological progress is exogenous; with technological progress the steady state will keep shifting to the right on the graph meaning that rich countries can grow further; model of exogenous growth; technological progress is a manna from heaven; international convergence has not been validated by the data; believes in unconditional convergence, that poor countries should develop eventually; conditional convergence among countries that have the same rates of technological progress, savings, population growth and capital depreciation; save and invest but all countries eventually converge to the steady state, Y=(depreciation + population growth)K (production/income per capita is a function of the stock of capital per capita)
Exchange Rate Method
Use exchange rates to express incomes in a common unit; prices that depend on traded goods and services; don't take into account non-traded goods; international relative price for item i in country j (relative to the U.S.) is equal to the price of item i in country j over the price of item i in the U.S.
upper middle-income Country
WB gross national income per capita is $3856-$11,906
Lower-middle income Country
WB gross national income per capita is $976-$3855
Low income Country
WB gross national income per capita is less than $975
high-income Country
WB gross national income per capita is more than $11, 907; some high-income countries are still classified as developing because of their governments lack of export sectors (oil-rich countries) and significant portions of their population remain poor
Migration and Development
Welfare gains: for the migrants (economic opportunities, religious and political freedom); solution to excessive demographic growth in developing countries, population decline in developed countries; human capital flight: emigration of large group of individuals with technical skills brain drain (most educated leave); brain gain (come back with better education and experiences); remittances: transfers, insurance against shocks, investments in the origin location; social networks, ethnic networks, business networks; cultural globalization; migration can be understood as rational (even if the outcome is sometimes regret); need migration policies to deter market failures: inefficiently large city scales, negative externality to urban public goods; negative externalities to rural areas: loss of relatively better skilled workers; other negative externalities from living conditions, such as health (urban promiscuity)
Developing Country
World Bank looks at gross national income per capita (low-income to lower-middle income country); Exception of resource rich countries because the wealth is not spread equally; UNDP looks at NHDI for levels of human development; developing world is mostly seen as Africa, Asia and Latin America; also considers newly industrializing countries; Least developed countries have low income, low human capital, and high economic vulnerability; also called emerging markets; Underdeveloped markets lack: legal system that enforces contracts and validates property rights, a stable and trustworthy currency, an infrastructure of roads and utilities that result in low transport and communications costs, a well-developed banking system, substantial market information for consumers and producers, and social norms that facilitate successful long-term business relationships
Inequality-adjusted human development index
adjusts the NHDI for inequality in distribution of each dimension
Millennium Development Goals
adopted by the UN in 2000 (through 2015) 1. Eradicate extreme poverty and hunger 2. Achieve universal primary education 3. Promote gender equality and empower women 4. Reduce child mortality 5. Improve maternal health 6. Combat HIV/AIDS, malaria and other diseases 7. Ensure environmental sustainability 8. Develop a global partnership for development
Total Fertility Rate
average number of children born to a woman during her lifetime; decreases as a country develops
Afro-optimism
belief that a bright future lies ahead for the African continent; sustained economic growth in the 2000s; economic reforms in the 1980s and 1990s; democratic reforms in the 1990s and consolidation in the 2000s; economic diversification
Determinants of population growth
births, deaths, immigrants, emigrants; natural growth vs. mechanical growth
Marriage Markets
bride price (as opposed to dowries): money, property, or other form of wealth paid by a groom/his family to the parents of the woman he is about to marry; it is a cultural practice prevalent in Africa and some parts of Asia; economic consequences: higher bride price payment if woman is more educated which increases the returns to education; (dowries on the other hand lower the economic returns to having girls)
Superstar theory of increasing inequality
business has become global, people and companies sell their products and services to many more consumers now; this drives up pay for the top workers (athletes, entertainers, lawyers, traders, etc.)
Crops
cash: grown for sale (cocoa, coffee, tea, cotton, rubber, sugar, tobacco, bananas, palm oil, etc.); many developing countries export (unprocessed) cash crops; they can use the surplus to import food and fund industrialization; food: staple food; overtaxation: Arthur Lewis--underemployment in the agricultural sector but investments needed in the industrial sector--tax farmers for initial funds to invest in industry?; overtaxation of cash crop production can lead to agricultural decline; problem of state capacity: in poor countries, they often had no choice but to tax agricultural exports
Child labor
child labor because people are poor and there is a lack of schools; child labor as a response to or as a cause of the poverty trap?; any work that deprives children of their childhood, interferes with their ability to attend school, and that is mentally, physically , socially or morally dangerous; private and social costs: children don't go to school, health of child workers is significantly worse, cruel and exploitative working conditions; history: before WW2, many children worked in Europe and the US, what changed? higher income: luxury axiom (people don't like their children to work, so they only force them to work when they need the money), compulsory education laws and availability of schools (increased the opportunity costs of child labor) and child labor laws have directly increased the cost of child labor; income constraint; bans to overcome coordination failures BUT what if they still don't go to school or go to school and learn nothing? most children are hired by their parents/relatives in agriculture/services because they are poor and this helps them learn useful skills; Ban could make them enter more dangerous work; hazardous work: must be more aware of what aspects of work can be hazardous to children; CCTs to incentivize schooling; ban child labor in its most abusive forms
Keeping up with the Joneses
competition between richest people on earth (can lead to innovation); aspirations: inequality could have a positive effect on aspirations-->become a 'self-made man'; relative deprivation: negative effect on both happiness and investment (believe the system is rigged)
Human Development Index
composite index from three indicators measured equally: income, life expectancy (at birth) and education (adult literacy and gross enrollment index of children) chosen to measure knowledge, longevity and standard of living; UNDP has published the Human Development Report since 1990; no consideration of quality of education or life
Technology adoption
continental orientation and crop diffusion explains why the Americas were historically poorer than the rest of the world; longitude vs latitude; if we live in a world of increasing returns where new technologies are constantly developed, is geography not relevant anymore?; with the right technology you can eradicate diseases; trade costs have decreased; with air con and heating people can live anywhere; geography should matter less as countries develop
Middle-income trap
countries develop to a degree but fail to reach high-income status; can be due to an institutional problem; often related to low capacity for original innovation or for absorption of advanced technology and may be compounded by high inequality
Theory of comparative advantage
countries specialize in the export of commodities in which they have a relative cost advantage (poor countries: relative abundance of unskilled labor and natural resources-->labor-intensive and resource sectors); composition of exports: developing countries mostly primary products and textiles and light manufactured items whereas developed countries export mostly high-tech manufactured goods and services
Traditional Sector Enrichment
countries whose policies focused on achieving substantial reductions in poverty even at very low incomes; growth results in higher income and less poverty; more equal relative distribution
Crude Rate of Natural Increase
crude rate of birth minus crude rate of death
Curative vs. Preventive Care
curative care: mostly ex-post, large expenses, often for care that is very invasive and of poor quality; preventive health care costs are incurred today, but benefits are in the future; very small costs discourage people (value it based on how much you spend?); low demand for preventive health care: demand factors: procrastination, costs/income, supply factors: quality of medical advice, information and trust; free distribution: in terms of malaria nets, more cost-effective than charging
Infant and Child Mortality
death rate of children less than one year old and death rate of children under five years old; important for the demographic transition because the amount of children surviving to adulthood decreased fertility rates
Added Value Ladder
development can be seen as climbing up the 'added value ladder' (producing computers, high-tech services and not just t-shirts)
Green Revolution
development of high-yielding varieties, expansion of irrigation infrastructure, modernization of production techniques, etc.
Agricultural development/decline
development: now seen as an important part of any development strategy; Green Revolution as an example; how to increase agricultural productivity in poor countries; decline: over-taxation of cash crop production;
Technology frontier
diffusion of knowledge from those on the forefront of R&D for technology; rich countries push the technology frontier forward; how to facilitate diffusion to poor countries? they often don't have the right infrastructure and institutions
Functional distributions
distribution of income to factors of production (land=rents, labor=wages, and capital=profits or dividends) without regard to ownership of the factors; attempt to explain the income of a factor of production by the contribution that this factor makes to production
Human capital (as it relates to Child Labor)
education is just as important as health; in poor countries there is often low enrollment because people are poor, there is a lack of schools, and there is poor teacher quality; thus, people turn to child labor; how can we break out of the poverty trap of low school enrollment and child labor?; returns to education/strong correlation between education and per capita income; poor countries have a low stock of human capital and there are also lower returns to education due to corruption and rent seeking among other things; high income can also improve educational opportunities; roles of income constraints (tuition) and preferences (education as a luxury good); human capital and the quality of economic institutions are complementary factors; child labor seen as an alternative to education in cases where quality is low, but as a hindrance to education where poverty is high
School Supply
education quality is low in developing countries: high teacher absence, high student absence, low achievement; poor teacher quality: if people do not care, they won't put pressure on the teacher to deliver; parents will not want to send their children to these schools if they feel they are not delivering useful skills; children will not study and won't remember anything; vicious cycle; teachers often teach to the top of the class, even when the majority of the students cannot follow what is going on; if teachers feel that the majority of their students are not 'up to the mark', they will tend to blame the students, or the parents, and lose motivation; Lorenz Curve/Gini for education: can measure inequality of education in terms of years achieved
empirical methods
endogenous effect; instrumental variables; natural experiments: natural variation for one group, no variation for the other group, compare the two groups before and after a designated time; randomized experiments: same as a natural experiment, but the effect is randomized (CCTs: transfers to half the villages, and no transfers to the other half); treatment the policy chosen that is applied to certain groups in an experiment to measure the effect; random assignment
Income inequality
equal life chances regardless of identity; back to Rawls' veil of ignorance and the unfairness of inequality; people make mistakes and becomes poor and people may be poor from day one; inequality can be detrimental to economic growth; extreme inequality leads to economic inefficiency; extreme income disparities undermine social stability and solidarity; SOME inequality provides incentives, but not too much; a country where most people are poor cannot be considered developed
Education Quality
fairly low for developing countries: high teacher absence, high student absence, low achievement; teacher quality: if people do not care, they will not put pressure on the teacher to deliver; tracking: students assigned to sections based on initial achievement-->allows teachers to teach at a level closer to where the majority of the students sit (high level for high performing kids and lower levels for bottom track)
Farmer Behavior
farmers face constraints to adopting modern agricultural technologies such as price, weather, and other uncertainties (lack of property rights) along with limited access to credit and insurance; they are risk-averse; risk averse subsistence farmers prefer technologies that combine low mean-per-hectare with low variance (safe crops) to alternative high yielding but higher risk technologies; in developing countries, small farms are more productive than large farms (you would think it would be the opposite due to increasing returns to technology with fixed costs, better access to capital, better farmer should accumulate more land) BUT individuals work more (and better) on their own land than on rented land, because as renters they do not get the full benefit of their effort level; Agency Problem: large farms cultivated by hired labor (means fewer incentives to work hard) whereas smaller farms are owner cultivated; fixed-rent contract: landlord charges fixed sum of money for use of land (but farmers who are risk averse do not like these); sharecropping: landlord allows the tenant to use the land in return for a share of the crop produced on the land (can be argued that sharecropping is inefficient relative to fixed-rent); threat of eviction: instrument for the landlord to force the tenant to work more? NO--actually decreases productivity further; risk averse tenants are reluctant to make long-term investments (fallow land or trees) especially if there is a high probability of eviction
Demand for Children
first two or three as 'consumer goods' additional children as 'investment goods': work on family farm, micro-enterprise, old age security motivation; depends on preferences for children (+), infant mortality (+), income (+/-), price of children (-), price of other goods (+), welfare system (+/-), wage-earner (-) and returns to education (-); Quality-Quantity Trade-off
Social capital
for example, countries with mountainous areas are more linguistically and ethnically diverse (because people lived in isolation); importance for coordination and cooperation?
Diminishing returns to individual factors of production
for the Solow model; for labor and capital; capital is marginally more productive for low levels of capital; as you increase capital stock, each additional unit adds a smaller amount of productivity; creates a concave production function
Climate Change
form of a geographical shock; in the global economy, climate change will create winners and losers; geographic and economic consequences; higher temperatures, lower rainfall, desertification, rainfall variability, droughts, hurricanes, sea level changes; will there be increasing poverty or local adaptation? if there is increasing poverty will there be climate change refugees?; it is costlier to adapt in developing countries Deschenes and Greenstone (2007) The Economic Impacts of Climate Change: Evidence from Agricultural Output and Random Fluctuations in Weather (Heterogeneity of impact) Schlenker and Roberts (2008): Estimating the Impact of Climate Change on Crop Yields: The Importance of Nonlinear Temperature Effects (importance of HIGH increases in temperatures)
Demographic Transition
from high birth and death rates to low birth and death rates Stage 1: high birth rate>40 and high death rate>40 Stage 2: decline in death rate (epidemiological transition) Stage 3: decline in birth rate (decline in childhood death leads to less births, urbanization changes the traditional values placed upon fertility, female literacy and employment, contraception) Stage 4: low birth rate (around 10) and low death rate (around 10) Stage 5: birth rate<death rate, population is aging and will decline unless there is mass immigration
Cut-throat capitalism
generates more innovation but also more inequality
Nutrition in childhood
good nutrition in childhood makes the adult more productive now; good nutrition during childhood is an investment: long term impact on health (the body might not recover from deficiencies during childhood), and long term impact through education (children may learn better if they are well nourished); children who were in utero during Ramadan earn less as adults; children of children born during Chinese famine are smaller; Kremer & Miguel study on de-worming: reduction in school absenteeism, high levels of externalities; worms make you unproductive and potentially worsen education and labor force productivity
subsidized credit programs
government; often equivalent to free transfer programs; typically failures with high default rates; loans disguised as government transfers, and thus political giveaways
Lorenz Curve
graph depicting the variance of the size distribution of income from perfect equality, the greater the curvature of the curve, the greater the relative degree of inequality; line of equality (45 degree); measures the percent of income held by a certain percent of the population;
Endogenous Growth Theory
growth depends on factors within the economy, or factors considered within the theory; economic growth is primarily a result of things within the country not external forces; investment in human capital, innovation and knowledge are significant contributors to economic growth
Modern Sector Enrichment
growth is limited to a fixed number of people in the modern sector; growth results in higher incomes, no change in poverty, less equal relative distribution of poverty
gender discrimination
how can we measure it? What explains it?; are women treated differently because they are women, either as a consequence of taste, statistical discrimination or because the returns to investing in girls/women is systematically lower?; sector specific gender discrimination (relative returns of girls/women in non-agricultural sectors); gender discrimination affects future economic outcomes for girls and women, which then conditions mortality?
monitoring costs
how to force poor borrowers to select safe projects one loan is approved; leads to high interest rates if costs are high; sometimes, high interest rates give borrowers more reason to default and escape so the interest rate goes up even further to cover the cost of monitoring--the upward pressure feeds on itself (multiplier effect); microfinance also attempts to lower monitoring costs (women in groups monitor one another for free)
Screening costs
how to select safe borrowers; can be costly and drive up costs of borrowing for the poor; costs of screening are smaller for moneylenders who live in villages among borrowers; micro-finance attempts to reduce these costs and improve access to credit (importance of group lending here)
Technological Progress
human capital is a form of technological progress; societies also invest in research and development and this can increase the returns to physical capital and promote long-run growth; increasing returns because of technology
collateral
if the poor were not poor, they would have some collateral that they could use to persuade the banks to lend to them. But the poor are poor, so little or no collateral (also an impact of weak institutions; dead capital: have land but no title therefore cannot use land as collateral); when legally possible, MFIs require clients to save, progressively building up a collateral
Net migration rate
immigrants (entering)-emigrants (exiting) per 1000 inhabitants. A positive value represents more people entering the country than leaving it, while a negative value means more people leaving than entering it
Undernourishment
in poor countries, undernourishment can lead to lower productivity; Two consequences on those of the poor who are net consumers of food: larger portion of budget is spent on food, and price increases may lead to a decrease in the nutritional status of the poor and start a vicious cycle--people become less productive and are sick more often
Population Momentum
in regards to stage 2 of the demographic transition (high birth rates and low death rates); there is a growing number of babies and 20 years later there is a larger base of reproductive-age population (aka more people in general so more couples so more babies); self-sustaining population boom (snowball effect); the phenomenon whereby population continues to increase even after a fall in birth rates because the large existing youthful population expands the population's base of potential parents; fast population growth is difficult to control in the short term
Neoclassical counter-revolution
in the 1980s in developed countries: election of conservative governments; in developing countries more calls for free markets due to failing government policies and unsustainable levels of public debt; challenge to the statist model
Green revolution
in the Americas and Asia but not in Africa; Green Revolution led to the industrial revolution which led to urbanization; problem of food security (food available per capita is less than the subsistence threshold); can increase food production by increasing the cultivated area or by increasing yields: enter GR; also use food imports or food aid; R&D and technology transfer initiatives that increased agricultural production around the world; Normal Borlaug; high-yielding varieties of cereal grains, expansion of irrigation infrastructure, modernization of management techniques, synthetic fertilizers and pesticides to farmers; first in Mexico, then India (less successful) then the Philippines with rice (success varied based on whether or not R&D was in their staple crop); GR in Africa? hasn't happened; institutional factors: insecurity corruption and infrastructure; geographical factors: desertification, availability of water for irrigation, high diversity in slope and soil types; in Asia and America it led to a decrease in food prices (higher supply), industrialization, urbanization, development (those who are more suited to farming keep farming and those who are not move to cities); importance of bad public policy in explaining why there was no green revolution in Africa; Effects of GR: supply increases, demand is inelastic, so food prices decrease, better nutrition (leading to better human capital), decrease in labor costs (globalization), higher income for the poor, extra income spent on manufactured goods and services, and underemployed labor in rural sector moves to manufacturing and services; then, increased returns to technologies created in the industrial sector (industrial revolution can lead to agricultural modernization)
lending rates
in the informal market, lending rates are much higher than deposit rates; assumption that if lending rates are high there must be highly profitable investments; credit limit: is often explicitly est to be proportional to the borrower's wealth; default rates: often low (people borrow for investment, not because they are desperate) (but actually high default rates with subsidized credit programs); default rates in microfinance are extremely low
Returns to education
individual level: better job, higher wage; country level: economic growth, higher welfare; lower returns to education if complementary factors (corruption and rent-seeking make a degree less useful-->rather have political connections); higher returns to education in rich countries; private returns: X% increase in wages for each extra year spent in school, initial investments lead to a stream of higher future incomes, productivity effect (depends on skill premium, and therefore supply and demand for skilled workers) and signaling effect (get a degree to signal intrinsic productivity); social returns: X% increase in overall welfare (>private wages) for each extra year spent in school, MRW: higher stock of human capital leads to growth, knowledge, social cohesion and nation building, peer effects: high ability students benefit from having higher achieving schoolmates; social returns>private returns; non-monetary; Parents do not always correctly perceive future returns to education (they under-invest or over-invest); parents tend to believe that returns to primary education are low and returns to higher education are high
Kuznet's Inverted-U Hypothesis
inequality first rises and then falls; theory is in line with modern-sector enlargement: profits for capitalists so inequality first goes up, structural change where rural surplus labor is absorbed by the modern sector and rural wages rise eventually, democratization of capital (entrepreneurs from poorer backgrounds, decreasing marginal returns to capital), safety nets and redistribution; if the rise in inequality is just temporary, it is not necessarily bad for development; Latin America Effect: inverted U mostly explained by LAC countries
Income constraint
initial investments lead to a stream of higher future income; BUT the poor are too poor to invest in education; imperfect credit markets: no one will lend them money (the bank cannot know for sure if they will be able to reimburse, even if the returns are high); increase in parental income will lead to education and development in the long run (?); to what extent are parents actually 'income constrained'?: education is never free, and there may be competition among siblings; income effect of a negative income shock: lower income leads to lower enrollment and child labor increases; substitution effect of a negative income shock: the negative shock decreases the child labor wage which leads to higher enrollment and child labor decreases; in poor countries, the income effect dominates the substitution effect; income effect of a positive income shock: higher enrollment and child labor decreases; substitution effect of a positive income shock: positive shock increases the child labor wage which leads to lower enrollment and child labor increases
Cuddly capitalism
less inequality but also less innovation (but can use innovations invented somewhere else)
Disease ecology
malaria, draft animals not adopted due to Tsetse fly; importance of disease burden; importance for productivity and health
Poverty Mapping
maps on the spatial distribution of welfare; use household surveys to estimate the relationship between income and asset ownership; use exhaustive census data on assets at fine spatial level to recreate local income
Dependency Ratio
measure showing the number of dependents aged 0-14 and 65+ to the total population aged 15-64
Moderate poverty
measured by the World Bank as income being less than $2 per day
Epidemiological Transition
medical breakthroughs, improvement in water supply, sewerage, general personal hygiene
Money lenders
moneylenders are thriving in developing countries because they are close to the poor. they often live in the same village or slum. they know them or their family, which decreases screening costs; they may also be able to impose large penalties if the person tries to flee with the money (paradoxically this will lower the interest rates because it lowers the monitoring costs); but their costs of funding is very high, so interest rates charged will still be high; ex-ante competition but ex-post lock-in: ex-ante you may have many lenders to choose from. but once one lender has paid the fixed cost of getting to know you it would be costlier to switch. plus, knowing that it would be costly to switch, the other moneylenders would be suspicious. THUS you may not be able to switch and your own moneylender can charge you monopoly pricing
Migration
movement by humans from one area to another; International: from a developing to developed countries, from developing to other developing countries; domestic: rural to urban (urbanization) urban to urban or urban to rural (sub-urbanization); involuntary: slave trade, human trafficking, ethnic cleansing, climate refugees; Short-term migrants: seasonal farm workers
Piketty
need to properly measure inequality; Capital in the 21st Century; Return to Capital-->increasing so it leads to a greater accumulation of wealth?; rich keep accumulating; skill-biased technical change: new technologies that favor skilled over unskilled labor by increasing its relative productivity and demand; very poor and very rich often missing from survey data so the level of inequality is systematically under-estimated; income from wages versus income from capital; when the return on capital exceeds the rate of economic growth, inequality rises. Profits and income tend to grow faster than wage income, which is what most people rely on
Crude Birth Rate
number of live births occurring during the year per 1000 people
credit score
no credit score system in developing countries
Criticisms of MDGs
not met; not ambitious enough; goals not prioritized; no emphasis on complementarity; 2015 as end date thought to discourage aid if targets not met; lack of goals on reducing rich country agricultural subsidies; nothing on improving legal and human rights of the poor; no goals for slowing climate change; nothing on expanding gender equality outside of education; 15 years too long to gauge the accountability of leaders; measuring the poverty line by income, not including multidimensional measures
Crude Death Rate
number of deaths occurring during the year per 1000 people
Gini Coefficient
numerical measure of inequality ranging from 0 (perfect equality) to 1 (perfect inequality). Area between line of perfect equality and the Lorenz curve divided by the total area to the right of the equality line; often use household surveys to compute the Gini index
False-paradigm model
part of the international dependence revolution; belief that underdevelopment is attributed to faulty and inappropriate advice provided by well-meaning but uninformed international experts; mainstream economic models are based on a set of assumptions that may not be valid in developing countries; role of traditional social structures, high unequal ownership of land, disproportionate control by local elites over assets, etc.
private information
people may hide some thing from each other: personal income, information about prices, etc.; factors that affect bargaining power of individual family members: individual incomes, assets, education, etc.; Nava Ashraf 2009 (Spousal Control and Intra-Household Decision Making) 2010 (Household Bargaining and Excess Fertility); even when the information set is the same for both partners, they may bargain over family decisions; things likely to affect women's bargaining power: property rights, ability to earn an independent income, education, marriage markets
Geography
physical geography: climate, topography, hydrology, coastal geography, endowment of natural resources; key determinant of economic geography: disease burden, transport costs, technological innovation; nearly all the countries in the tropics are poor, people on the coast are wealthier, population density is higher along rivers and canals, resource rich countries are poorer than resource poor countries; geographic determinism: economic conditions are shaped by geographic conditions. Technology is seen as the only way to mitigate associated risks
Poverty/Underdevelopment trap
poor countries are stuck in a low equilibrium, or a poverty trap; underdevelopment perpetuates itself over time
Boserup Effect
population pressure promotes innovation
Harris-Todaro Model
potential migrants compare rural wage to the probability of a job in the formal sector in the destination minus and mobility costs (Wr vs. pWf-d); there will be migration so long as the expected urban wage is greater than the rural wage and will continue until they are equal; BUT there is also the informal sector, so must consider that as well: Wrural vs. pformalWformal + (1 - pformal)Winformal - d; experience effect: the probability of (formal) employment may increase the longer the time spent in the city; mobility costs: transport costs, borders (visa, illegal border crossing), loss of social networks, information costs; imperfect information: the expected urban wage (or in the destination country) is over-estimated. Previous migrants 'lie' about their real situation. If lowly paid and suffering from discrimination, may distort the reality when they call their village (another example is television); multiple generations: migration if high expected return for children; limitations; push factors: things that are unfavorable about the area that one lives in (few economic opportunities, poor infrastructure, natural disasters, man-made disasters); pull factors: things that attract one to another area (better living conditions, education, better medical care, attractive climates, security, political and/or religious freedom, family links, better chances of marrying); migration is always 'rational' and leads to a more efficient spatial allocation of resources
Multidimensional poverty index
poverty cannot be measured with income; there are negative interaction effects when people face multiple deprivations; identifies main deprivations across the same three dimensions as the HDI (education, health and standard of living); use household surveys and build measures of poverty at the household level; takes into account the multiplied interactive harm done when multiple deprivations are experienced by the same family; shows number of people who are multidimensionally poor and their number of deprivations; capabilities are treated as substitutes up to a point but then as complements; 2 health indicators (whether a child has died and whether any adult or child is malnourished); 2 education indicators (whether no household member completed 5 years of schooling and whether any school-aged child is out of school for grades 1-8); 6 standard of living indicators (lack of electricity, insufficiently safe drinking water, inadequate sanitation, inadequate flooring, unimproved cooking fuel, lack of more than one of 5 assets listed); income is not measured; headcount ratio multiplied by average intensity of deprivation (the percent of weighted indicators for which poor households are deprived on average)
History and Development in Africa
precolonial period: precolonial centralization has led to positive effects today in Nigeria, Ghana, Swahili towns and Botswana (urbanization and social capital); slave trade led to inter-ethnic raids; during the colonial period, colonies took the identity of the colonizer (common law: more flexible and pro-business, civil law: more rigid); extraction vs. settlement and direct vs indirect rule; both slave trade and colonization led to weak states
Development
process of improving the quality of all human lives and capabilities by raising people's levels of living, self-esteem and freedom; development economics: the study of how economies are transformed from stagnation to growth and from low-income to high-income status, and overcome problems of absolute poverty; traditional economic measures: raise in overall income per capita, change the economic structure and hope for 'trickle down' to the masses; new economic view: avoid 'growth without development', income and wealth are not ends in themselves but instruments; development must be conceived of as a multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as the acceleration of economic growth the reduction of inequality and the eradication of poverty; (AS) process of expanding capabilities, giving people the freedom to realize more and better functionings; poverty reduction; increase the availability and widen the distribution of basic life sustaining foods, to raise levels of living and to expand the range to economic and social choices available
Globalization
process of international integration arising from the interchange of world views, products, ideas and other aspects of culture; importance of transportation and communication technologies; episodes of globalization: empires, European age of discovery, Industrial Revolutions, colonization, transportation revolutions, multilateral trade agreements, tourism
Subsistence Level
refers to income level of countries (and people) before rapid growth take-off
Mankiw, Romer and Weil (1992)
rich countries accumulate not only physical but also human capital by investing in education and health; human capital is labor that is skilled in production; developing countries have mostly unskilled labor and developed countries have mostly skilled labor; diminishing returns to physical capital but human capital can increase the returns to physical capital because machines and skilled workers are complements; human capital is a source of increasing returns: the wealthier you are, the more you can invest in human capital and this increases your returns to physical capital; theory of unconditional divergence among countries with different levels of human capital but once we compare countries with same level of human capital there is a tendency for poor countries to grow faster which means there is conditional convergence; human capital is a form of technological progress-->growth becomes endogenous
Divergence
rising inequality between and within countries; a tendency for per capita income to grow faster in higher-income countries than in lower-income countries so that the income gap widens across countries over time;
Institutions
rules of the game of economic life; property rights, contract enforcement, rule of law; chicken-and-egg problem: institutions are influenced by geography and the impact of geography is affected by institutions; institutional reversal: extractive colonization in countries with high population density versus settlement colonization in countries with low population density; reversal of fortune: colonies that were relatively rich in 1500 are now relatively poor whereas some colonies that were poor in 1500 are now relatively rich; institutional persistence: institutions are costly to change and have persisted since independence
Channels of Inequality, Savings and Demand
saving rate: the higher the saving rate the higher the investment rate and the higher the growth rate BUT: conspicuous consumption-->the rich do not save more, they spend a lot on luxury goods; imperfect credit markets: many projects are not funded because the good entrepreneurs are not all rich, and can only obtain the needed funds by paying high interest rates, thus raising the returns to capital for the rich demand composition: the rich spend more on luxury goods, creating new sectors which leads to innovation versus the poor spend more on consumption good which leads to a returns-to-scale and mass industrialization (caused by redistribution of wages from luxury manufacturing) political inequality: economic oligarchy; the economic system protects rent holders and thus discourages innovation OR class struggles lead to political instability which lead to economic instability Human capital: unequal societies lead to fiscal federalism, public goods are underfunded and less human capital accumulation occurs
Investment and Saving
savings equal investment; higher savings lead to higher investment which leads to more growth; poor countries have a low s initially which leads to a 'savings gap', they cannot invest so they remain poor; capital flight: high s does not mean high I if the investments are abroad
Age Pyramids
show share of population per age group and by gender in the form of a pyramid
Extreme Poverty
similar to absolute poverty; measured by the World Bank if income is less than $1.25, rounded to $1 per day
New Human Development Index
since the 2010 Human Development Report; geometric mean instead of arithmetic mean: low scores in one area will significantly impact overall score and makes the indicators imperfect substitutes; revised components (GNI replaced GDP, maximum values increased to the observed max., lower goalpost for income has been reduced); index of the potential human development that could be achieved if there is no inequality
Absolute Poverty
situation of being unable to meet minimum levels of food, clothing, healthcare, shelter and other essentials; According to the world bank if income is less than $1 a day (PPP adjusted)
Coordination Failures
state of affairs in which agents' inability to coordinate their behavior (choices) leads to an outcome (equilibrium) that leaves all agents worse off than in an alternative situation that is also an equilibrium; in poor countries there are lower levels of productivity, human capital, higher levels of inequality and absolute poverty, higher population growth rates, larger rural populations, greater social fractionalization, civil conflicts, adverse geography, underdeveloped markets, poor roads, power failures, etc; BUT there are increasing returns across these dimensions (i.e. complementarities); development should include solving coordination failures; inability to coordinate the different sectors and aspect of an economy towards economic growth
Trade
the country needs a trade surplus to pay for imported foodstuffs (also food aid); trade increases vulnerability; food insecurity: cities depend on world food prices, while rural farmers produce their own food; Africa in 1980s: collapse of commodity prices vs Africa in 2000s-2010s: food price spikes due to both short-term and long-term factors; the problem here is that resource rich countries that did not experience a Green Revolution are heavily dependent upon food imports
Modern Sector Enlargement
the economy develops by enlarging the size of its modern sector while maintaining constant wages in both sectors (Lewis model); growth results in higher income and less poverty but an ambiguous effect on the relative distribution of poverty
Replacement Fertility Rate
the level of fertility at which a population exactly replaces itself from one generation to the next; in developed countries, replacement level fertility is about 2.1 children per woman; it is 2.5-3.3 in developing countries
moral hazard
the poor borrowers will have a tendency to take extra risks because the costs that could incur if they default will not be felt by them but by the bank
Convergence
the tendency for per capita income to grow faster in lower-income countries than in higher-income countries so that lower-income countries are 'catching up' over time; Conditional convergence when countries converge not in all cases but other things equal; no convergence among the group of developing countries; yes convergence among the group of developed countries; yes convergence if weighting the importance of a country's growth rate proportionately to the size of its population; no convergence if looking at the world-as-one-country because of rising inequalities within countries
Savings
there are many temporary income shocks in poor countries, so people save and borrow money to smooth consumption; savings constraints: if you are poor and you want to save, where can you keep the money? banks may be reluctant to keep a small savings account due to various transaction costs; external savings constraints: opening fees (for a savings account); internal savings constraints: present-bias and hyperbolic discounting
Adverse selection
there are safe borrowers and risky borrowers. when banks and borrowers have asymmetric information (banks don't know how risky borrowers are), the bad borrowers are more likely to get a loan, which is costly for banks
Multiple Equilibria
there aren't just low and high outcomes for economic development, there are middle-range outcomes as well (as evidenced by the middle-income poverty trap); we live in a world with strong complementarities; in general, when jointly profitable investments may not be made without coordination, multiple equilibria may exist in which the same individuals with access to the same resources and technologies could find themselves in either a good or a bad situation;
Population growth
there has been dramatic population growth in the last century; the population growth rate peaked in 1963; migration; urbanization; population growth rate; P(t)-P(t-1)=(CRB(t-1)-CRD(t-1))P(t-1)+(I(t-1)-E(t-1))
Capital-output ratio (ICOR)
theta equals capital over income K(t)/Y(t); amount of capital required to produce a single unit of output; measure of the productivity of capital
Malaria eradication
tied to MRW model on the importance of human capital; poor countries have many diseases (and a poor health system) and this impacts their productivity; easy technology to prevent malaria: bed nets; two readings: one on subsidies for malaria bed nets, one on selling of fake malaria medicine, weakening trust in healthcare system
Gross Domestic Income
total domestic and foreign value added claimed by a country's residents without making deductions for depreciation; total sum of individual incomes; calculated by subtracting income earned in the domestic economy by non-residents and adding the income earned by residents who live abroad from GDP;
Gross Domestic Product
total value for final use of output produced by an economy by both residents and non-residents; value added in an economy; focus on within country production; more often used because it is easier to measure production than income; but production is often underreported in developing countries
Structural Change/Transformation
transition from rural-based agricultural economy to urban-based manufacturing and service economy; examples include the Industrial, Green, and Service Revolutions; change in employment and GDP shares; decline in agriculture, rise and fall of manufacturing; rise of services
Growth without development
trickle-down effect absent; economic growth is occurring but it is concentrated in the elite and the effects are not shared by the population as a whole therefore impeding development
impact of microcredit
very little evidence on whether or not microcredit actually helps the poor; the fact that clients borrow means there is a need vs. the fact that they borrow may mean that they are over-borrowing and falling into debt traps; Banerjee, Duflo, Glennerster and Kinnan--main reason to take up a loan: expand business (22%--households with an existing business at the time of the program invest in durable goods, and their profits increase. their consumption also increases), start a new business (30%--households with high propensity to become business owners see a decrease in non-durable consumption, consistent with the need to pay a fixed cost to enter entrepreneurship. also lower consumption of temptation goods), repay old loan (22%--households with low propensity to become business owners see nondurable spending increase. those who do not start a business but need to repay an old loan--their consumption increases right away); microcredit serves its purpose: some people take advantage of it when its available but not everyone may want to become an entrepreneur; microcredit then may help them to save? credit may work as a commitment device
Families
we can ignore family dynamics when: everybody has the same preferences or one person decides for everyone even if there are heterogeneous preferences; while the family is patriarchal in developing countries, women still make a number of decisions or participate in them; it is not completely obvious how decisions are made; unitary model: homogeneous preferences or dictatorship, family overall income is important, personal income is never concealed, consider prices of things, information is available to anyone in the family; collective model: the members have different preferences and bargain between themselves for a bigger share of the pie, private information (people may hide some things from each other), factors that affect bargaining power of individual family members: individual incomes, assets, education; family efficiency: if the family is efficient, it will maximize the size of the pie, before thinking of how to share it
institutional resource course
when institutions worsen as a result of rent-seeking; politicians try to capture the resource rents
Famine
widespread scarcity of food; many people die; famines are due to government policies. With globalization and trade, you can always import from somewhere else; government mismanagement; malnutrition; food prices: war time inflation and increase in income for those related to war time production: increasing food demand and food prices--wages did not follow the price trend: the entitlement of farm laborers and unskilled urban workers in terms of food decreased drastically
nutrition-based poverty trap
with your wage, you buy food, which gives you strength, which allows you to work; It creates an S-shape relationship between income today and income tomorrow; relationship between income and nutrition: you can afford to eat more as income increases; relationship between nutrition and productivity: you can work more if you eat enough; if there was an S-shaped curve between nutrition and productivity, the poor should eat as much as they can (the share of food in their consumption budget should be very high; if you have unavoidable expenses, expenditure on food would first increase more than proportionally and then less than proportionally); BUT poor people do not behave as if there was a nutrition-based poverty trappolicies that focus on the quantity of food may be misguided, in terms of the benefits they bring; the quality of food matters too; puzzle of nutrition: the poor are not particularly hungry for extra calories, yet they are still not well-nourished; wage and nutrition; iron deficiency anemia; good nutrition in childhood as an investment; Children who were in utero during Ramadan earn less as adults; Kremer and Miguel worms randomized experiment in Kenya; nutrition and productivity: the poor have lower work capacity which leads to poverty; nutrition and productivity: does eating more make people more productive?
Missing women
woman who is not alive but should be; the sex ratio at birth is assumed to be 105 boys to 100 girls, but girls have a higher life expectancy so this is expected to change to 100 boys for 105 girls; We use SSA as a benchmark for poor countries (the ratio is 1.02); missing women are either not born (selectively aborted) or have died earlier than men, which reflects mistreatment; girls are more affected when there are droughts (but they are not common enough to explain magnitude); medical determinants: Hepatitis B virus--carriers have offspring sex-ratios of 1.5 boys for each girl and it is common in many Asian countries (but this was not very significant when tested properly--Oster was lucky and Luoh used a more representative (census) measure); culture vs. economic factors: in China, women have a comparative advantage in picking tea, while men have a comparative advantage in orchard production-->hence an increase in relative value of tea increases total income and increases relative female income in tea-producing households; results show that an increase in relative female income has an immediate and positive effect on the survival rate of girls; PROBABLY mostly about economic returns to girls; discrimination may not drive fertility/mistreatment decisions per se, but gender discrimination affects future economic outcomes for girls and women, which then conditions mortality
Demographic Dividend vs. Population Curse
younger population means a larger working age population which leads to a lower dependency ration and higher income per capita in the aggregate OR a younger population means there are more unemployed people because they cannot feasibly be absorbed by labor markets and this leads to lower income per capita in the aggregate
