Development Economics Midterm #2
Refer to Chart 2 (Tax levels and composition) on page 2. Describe the differences between developed and developing economies in the numbers depicted in the chart.
- All of the economies seem to have a similar level of corporate income tax - although low income economies do have a slightly smaller percentage while high income countries have a higher percentage. - High income countries major tax generator is personal income tax and they have the highest percentage. - High income countries rely much less on trade - High income countries also appear to have the highest level of consumption tax - The high-income economies have stayed relatively the same while the lower income economies have increased the share of consumption and personal income taxes.
Describe the desirable effects of foreign direct investment for the host (i.e. recipient) country.
- Companies that engage in foreign direct investment are subject to local taxes and as such often significantly boost the tax revenues of the host country - Direct investment also boosts a country's balance of payments as portfolio investment can be volatile, a country's position could be harmed if an investor suddenly pulls out. Direct investment on the other hand is more stable contributor to a country's financial structure - Direct investors do not wish to take actions to undermine the value or sustainability of their investments - Increased employment - Improved productivity - the foreign firms force competitors to increase their productivity, so they do not go out of business - Technology and knowledge transfer: this often happen due to workforce turnover as incoming firms frequently offer more training opportunities than local employers. This knowledge is later transferred to local companies when trained employees leave the foreign enterprise for local businesses. - Improved overall economic growth
What does a "factorial design" mean? What is the purpose of including an intervention group that receives all the interventions in an RCT?
- Factorial design is when one intervention group receives treatment one, one intervention group receives treatment two, one intervention group receives both treatment one and treatment two, and there is a control group. - The benefits allow us to study the individual effect of all of the interventions as well as their interactions with other treatment options - There can be an unlimited number of treatments and groups in a factorial design
Distinguish between greenfield and brownfield direct investment.
- Greenfield direct investment is when the direct investor provides funds to build a new factory, distribution facility, or store, for example to establish its presence in the host country - Brownfield direct investment is when instead of establishing a new presence the company invests in or takes over an existing local company. This means acquiring existing facilities, suppliers, and operations - and often the brand itself.
In the context of an RCT, explain the difference between an "intervention group" and a "control group".
- Intervention Group: the group that is randomly decided to receive the treatment such as free school fees or a reward of lentils for vaccinating children - Control Group: the group randomly chosen to remain the same so that the effects of the treatment can be properly studied.
Explain the circumstances under which RCTs are useful or are not useful as an impact evaluation tool.
- RCTS are useful when o There must be large enough sample size so that the result of the study will be conclusive o There can be clear, measurable impacts of the treatment - things such as improvements in language developments and not when the variables will be hard to measures such as all types of violence against children o RCTs must be planned in advanced and cannot be done afterwards and as such are not suitable when quick results are needed o When there is a low number of units of analysis such as an efficacy campaign at the national policy level as the low number of units won't allow for random assignment or statistical significance.
Refer to Chart 1 (Financing development) on page 2. Describe the differences between developed and developing economies in the numbers depicted in the chart.
- The more advanced economies spend the highest proportion of their tax revenues on social protection while emerging economies spend the lowest proportion on social protection. Many emerging and developed economies spend similar percentages on education. Developed economies spend more on health. Advanced economies spend a higher proportion of their tax revenue on social spending as compared to emerging economies.
Explain the reasons why direct investment may not always be viewed positively from a host country perspective.
- productive companies engage in direct investment and this increased competition they provide may force the least productive local companies out of business. - Foreign - especially brownfield - direct investment is simply an ownership transfer and does not guarantee new jobs - A sudden reversal of direct investment can lead to a fire sale of investments which can drastically reduce their value and in extreme cases force facilities to close and workers to be laid off. - Often direct investment companies have close ties to the local authorities and this entanglement of business and politics may have an adverse effect on the host country. The leverage investors have over policymakers becomes troublesome when a foreign company gains significant control over a sector of the economy of becomes a critical or even the largest employer in the market.
Describe the role of culture in shaping the demand for fertility
Changing parents' perception of the benefits of smaller families can influence fertility demand as seen in Brazil were soap operas featuring only two children seem to have somewhat shaped the demand for smaller families. Demand can also be affected by a change in the intra-household bargaining between wife and husband over the use of contraception Studies have found that only allowing women to make decisions regarding contraception increases contraception use and decreases births.
Discuss the factors that influence and the motivations that drive a company's decision to engage in direct investment in a foreign country.
Factors that influence a company's decision to engage in direct investment include - Analysis of the trade costs with a foreign country - if the costs of trade such as tariffs, trade barriers such as quotas, and transportation - are too higher than the costs of establishing a presence in the foreign country than the business will maximize profits through direct investment - Vertical-direct investment: Some companies may invest with the idea of producing components that will go on to form a larger product that is assembled in another country. This is called vertical-direct investment. This is one of the main types of direct investment in foreign countries. o The motivation of such investment may be abundant or unique natural resources or low labor costs - Horizontal direct investment is when a company invests in a foreign country by duplicating its home country manufacturing processes. o The motivation of such investment is if a country has high trade tariffs or other such trade barriers as this circumvents the trade barriers o Horizontal investment between advanced economies may be motivated by the desire to take advantage of a pool of skilled employees and technology. o Unlike vertical direct investment, horizontal investment may directly compete with local firms - Investment may not be purely horizontal or purely vertical.
Explain the following statement: "A key challenge for developing economies wishing to strengthen their social protection systems and expand access to education and health is how to raise the necessary revenue in the context of a large informal sector."
In these countries, the informal sector typically has high levels of self-employment, low skill levels, and often multiple and volatile income sources all of which limit the potential to raise tax revenues - especially from these low-income groups. It also means that for social insurance there must be greater reliance on financing through general government revenue sources than on contributory models. Essentially all of these social systems are necessary, but it can be difficult for developing economies to raise these revenues considering that their citizen's income sources can be hard to raise.
1. Refer to the discussion of policies to decrease TFR starting on page 4. In three to four sentences each, describe any one supply-side population policy and any two demand-side population policy to reduce TFR.
One supply-side population policy can be increasing the availability of family planning and birth control for the general public. Though these means, people have more access to both education and tools to limit the size of their families. This new education about the benefits to smaller families as well as access to the tools that can aid in having a smaller family will limit the number of people who have large families. This policy is supply side as it is limiting the supply of children that people produce through family planning. A demand-side population policy is to decrease poverty. People in poverty demand greater numbers of children due to the income and security functions that children present. Thus, by reducing poverty, people need less security and income via children. This decreases the overall demand that people have for children and would thus lower the total fertility rate. Another demand side population policy is to improve social services such as social protection and social assistance as this can reduce the demand for children in their insurance function. If people are able to reply on the government for late life care and assistance, then they do not require as many children to supply this function. This reduces their demand for children and in turn lowers TFR.
Explain the reasons why a higher TFR may be seen as socially desirable. Briefly describe the policy instruments designed to create private incentives for parents to have more children
Reasons why a higher TFR may be desirable include: · the need for a faster growing labor force to sustain a higher GDP growth rate when there are restrictions on international migration, · empty or underused geographical areas that can be settled, · the cost of spreading public goods such as infrastructure, · more soldiers and economies of scale in defense expenditures, · an increase in domestic market size, · pressures on social security with a pay-as-you-go system becoming increasingly costly due to population aging in Western Europe and US. The desire to raise the TFR is especially common in Western Europe. There are many policy instruments designed to create private incentives for parents to have more children. These include cash transfers to large families such as family allowances seen in Western Europe; large families paying lower rates for public services, or the provision of public or subsidized child-care facilities to help balance work and family life.
Refer to the information contained in tables 11.6, 11.7, and 11.8 and the text surrounding those tables. For each one of the three distinct functions that children fulfil for their parents, namely satisfaction, income, and insurance, explain any two variables that determine the importance of that function in affecting the desired Total Fertility Rate (TFR). Thus, you are expected to write about a total of six variables, two each for each of the three functions. For each variable of your choice, be sure to describe the variable as well as the reasoning behind the sign on that variable, i.e. positive or negative.
Satisfaction 1. Parent's Income: As parents income increases the satisfaction function importance increases as does the total fertility rate. This is due to the fact that children are a normal good and as such when total income increases so does the demand for children. Essentially, as income increases parent's desire more children due to the life satisfaction that children can provide. 2. Consumption of Other goods and services will compete with children as an expenditure thus lower the demand for children by the parents and thus driving down the total fertility rate. As the consumption of other goods and services increases, they provide satisfaction to the parents which in turn competes with the satisfaction that children provide. Essentially, parents are deriving satisfaction through the consumption of other goods and services and thus demand less satisfaction from children which lowers the fertility rate. Income 1. Opportunity for child lab via avenues such as farm work or factory work increases the possible income that children could make and thus increase the demand for children. The absence of child labor laws means that children could make money for the family thus creating essentially an opportunity cost from not having children as then you are not adding their possible income to the family income. Thus, it makes more sense for people to make more children as they can increase the total family income. 2. The direction of intergenerational income transfers from young to old increases the "income" that children can provide and thus increases the total fertility rate. If children can easily perform tasks that their parents would normally perform such as household chores or taking care of other sibling or elderly relatives, then they are essentially creating both income and value for themselves. Now tasks that would have been done by the parents or would not have been done at all are being completed with free labor thus adding value to the child and increasing the parents desire for children. Insurance 1. Threats of violence and expropriation increases the insurance value that children hold and thus increases the total fertility rate. If children are in a situation where they can provide physical protection or security in an area where the family lacks property rights (such as property rights in the slums) then having said child increase the overall security of the family and thus increases the parents desire for a child. 2. Children can compensate for market failure in insurance and for deficits in access to social safety-net programs and thus by providing future security for the parents, the parents want more children which raises the total fertility rate. In many instances, children help to fill in the gaps that social programs such as Social Security and Medicare do not cover. Thus, by having children, parents can guarantee that they will be taken care of in old age which increases the parents desire to have children.
1. Summarize the discussion at the top of page 1 leading to the authors' conclusion that "these three negative effects on the demand for children induce a decline in birth rates and a demographic transition, where low birth rates finally catch up with low death rates".
The demand side may be the overall main determinant of a define in the total fertility rate (TFR). Children are sources of income, insurance, and satisfaction for parents. There three determinants change as income rises or other transformation such an urbanization, rising economic opportunities for women, and the role of education in securing a child's future success. Thus, if a demographic transition were to lessen any three of children's role then we may see a likewise decline in TFR. As a note, parent's satisfaction with children does not change but they may decide that they will value the quality if their children rather than the quantity. Any decline in the three roles of children will induce a decline in birth rates and a demographic transition, where low birth rates finally catch up with low death rates.
Describe the "two core choices (that foreign investors have) when deciding how to deploy their capital" in a foreign country.
The two core choices include a. Portfolio investment in terms of buying stock or bonds with the idea of making a short-term speculative financial gain without becoming actively involved in the day-to-day running of the enterprise in which they invest b. Lasting investment is the long-haul approach whereby the investor invests in an enterprise in another economy with the objective of gaining control or exerting significant influence over management of the firm (which usually involves a stake of at least 10 percent of a company's stock). In some cases, investors may build new facilities from scratch, maintaining full control over operations. It is this lasting approach the crucial component of direct investment as most corporations entering a foreign market through direct investment expect to substantially influence or control the management of the enterprise over the long haul.
Explain the reasons why a lower TFR may be seen as socially desirable. Also explain the policy significance of the main finding from the Pritchett (1994) analysis.
There are situations in which the social benefits of more children are inferior to the private benefits such that each additional child creates a gain for the parents but a negative social externality. In these situations, it is desirable to have a lower TFR. Reasons that it may be socially desirable to have a lower TFR include: · High population growth rate reduces per capita income gains from GDP growth through the population tax · Large reservoirs of rural surplus labor contribute to continued poverty in spite of industrialization and growth. Real wages will not start rising with growth until surplus labor has been eliminated. · High youth dependency ratios result in low savings rates, postponing the growth benefits of a demographic dividend discussed earlier in the chapter · It is difficult to meet the public-goods needs of a rapidly growing population in health, education, infrastructure, and housing · There are congestion externalities in urban environments such as overcrowded slums and traffic jams · Environmental stress associated with population density leads to lower growth and high negative externalities on wellbeing such as air and water pollution The main policy finding from Pritchett (1994) is that unwanted fertility plays only a minor role in TFR and that fertility desires explain 90 percent of observed differences in fertility outcomes. This means that policy makers wanting to reduce TFR must first reduce the fertility desires or the demand side and only then focus on a reduction in unwanted fertility or the supply side. In these situations, family-planning programs can be effective in increase the supply side of contraception and reducing the desired demand for children.
Explain the rationale behind the research finding that "countries move to a higher growth path once tax revenue reaches about 15 percent of GDP.
This is in part due to the fact that this higher tax revenue reflects higher social spending. Low tax ratios in turn return in low levels of social spending. A low tax ratio means that countries struggle to provide services to their citizens. A large variation in tax ratios within emerging market and low-income countries suggests that many have ample room for higher taxation. Essentially, higher taxation means that there will be higher social spending.
In what way is purpose and context of FDI important when drawing any conclusions about the impact of FDI on economic growth? [Note: Your answer to this question should describe how the impact of FDI on economic growth depends on the nature of the economic activity (the three broad categories from question 3 above) supported by the funds].
a. Because FDI is so varied, much depends on the specific activity, the actions taken by the MNC and the government, and the reaction by local suppliers, competitors, and customers b. Clearer patterns emerge when researchers take into account the purpose and context of the FDI i. Foreign investment that produces for the domestic market and relies heavily on subsidies or protection from competition is much less likely to be beneficial and may even generate economic loss for a country ii. FDI in natural resource-based industries depends heavily on the impact of the industries themselves 1. Good for some countries and bad for others iii. FDI aimed at firms producing manufactured exports and operating in competitive global markets most often is found to have a positive relationship with growth and development 1. This type of activity tends to be economically efficient and conducive to importation of new technologies, training new workers and managers, and positive spillovers to suppliers and even competitors iv. FDI in protected industries can hinder an economy, as these firms typically use older technologies and operate under restrictions that raise costs, hinder exports, and reduce productivity gains
Discuss at least three benefits and three drawbacks of FDI for the country receiving the FDI.
a. Benefits of FDI i. Along with providing new capital, recipient countries hope that FDI will add to the demand for labor and generate employment 1. Not normally a large percentage of employment since it doesn't make up a large percent of GDP, but still significant (especially if investment is in labor-intensive manufacturing jobs) 2. On the whole (obviously there are exceptions), evidence suggests that MNCs pay higher average wages and have better average working conditions than domestic firms do ii. Can help increase specialization in production (especially with FDI in manufactured exports) 1. When firms in developing countries are part of a global production process, they can focus on the particular activity in which they have a comparative advantage and produce most efficiently 2. Although domestically financed investment can also engage in very specialized production, FDI has the advantage of stronger links to other parts of a global supply chain iii. Access to world markets 1. Developing countries capable of producing at competitive costs often find it difficult to penetrate foreign markets iv. Transfer of technology, skills, and ideas 1. Because much of the world's research and development activity takes place within North America, Europe, and East Asia, firms from these areas are a potentially rich source of innovative products, machinery, manufacturing processes, marketing methods, quality control, and managerial approaches 2. MNCs potentially can bring these new ideas and technologies with them, helping reduce costs and increase productivity in the host country 3. FDI is most valuable when these kinds of benefits spread beyond the local affiliate of the MNC itself and help other local firms and enterprises, generating positive externalities called spillovers b. Drawbacks to FDI i. May create air or water pollution or cause other environmental damage (generating a negative externality for the host country) ii. FDI in protected or inefficient activities can lead to net economic losses rather than gains by misallocating capital, labor, and other resources 1. If a government encourages an MNC to invest in a petrochemicals company that can be profitable only with government subsidies or regulations that limit competition (like high import tariffs on competing products), the costs to the country are likely to be higher than the benefits iii. Loss of local control over businesses 1. MNCs can drive out local businesses, and even where this might be economically efficient it can be politically very unpopular 2. A large efficient MNC can drive out small local business that operate at higher costs, particularly in countries with high trade barriers and other regulations where local firms may be relatively weak
Note that birth rate in a society is affected primarily by: (a) change in population shares of different age groups, and (2) total fertility rate. Also, according to the textbook, there are three possible reasons why people have a certain number of children: (i) lack of knowledge about contraception; (ii) people are bound by the society's customs; and (iii) it may be rational to have a large family in some social and economic settings
a. Birth rate in a society is affected primarily by... i. A change in population shares of different age groups (higher percent of 15-45 year old will increase the birth rate: conversely, an increase in the percent of older people will decrease the birth rate ii. TFR b. Three possible reasons why people have a certain number of children... i. Lack of knowledge about contraception ii. People are bound by society's customs iii. It may be rational to have a large family in some social and economic settings 1. In some low-income settings, especially in rural areas, children may supplement family earnings by working 2. Also provide a form of social security for parents, especially important in countries that do not provide good social benefits for their elderly population
Explain the three reasons why under all the three scenarios projected by the United Nations, world population is expected to continue to grow over the next 50 years.
a. First two reasons explain why the TFR may remain above replacement levels i. Desire for larger families ii. Failure to achieve the desired number of children (so-called unwanted children) b. Third reason: population momentum i. Past fertility decisions echo far into the future 1. Even if all the world's couples today were to start having just enough children to replace themselves, the total population would continue to grow for many more decades before eventually leveling off a. This is because today's children, who outnumber their parents, will become tomorrow's parents
Describe any four of the measures that the authors say governments can implement in order to "increase their tax capacity both equitably and efficiently". In your response, you may include the additional tax measures suggested on page 3 of the article.
a. Broad-based consumption taxes: increased revenue from consumption taxes - especially value-added taxes - has been the main driver for most countries that have managed to significantly increase their tax ratio over recent decades. b. Greater Reliance on Excise Tax: "corrective" taxes on such goods as energy, alcohol, tobacco, and sugar-sweetened beverages that are levied on top of the normal VAT can be an efficient source of revenue and help reduce the negative health impacts associated with their consumption. Excise taxes provide an administratively feasible way of increasing revenues over the short run c. Progressive Personal Income Taxes: this is an important source of revenue for advanced economies and a key component of efficient systems for redistribution of income. High levels of tax exception or tax evasion in emerging market and developing economies limit the short-term potential for such revenue d. Additional tax measures: reforms to address corporate income tax avoidance and reduce mutually destructive international tax competition - these may need stronger international cooperation to be effective. a. C-efficiency measures how close a government comes to collecting tax on all consumption in the economy. The rise in VAT revenue in recent decades has been driven primarily by improvements in C-efficiency rather than by increasing tax rates e. Improved spending efficiency: spending items need to be scrutinized to ensure that they are achieving their economic and social objectives. Many countries spend significant amounts on inefficient and inequitable energy subsidies aimed at protecting domestic consumers from volatile international oil prices.
What kind of government functions are funded by capital expenditure? Also, in a sentence or two each, describe any three types of recurrent expenditure incurred by the government of a country.
a. Capital expenditure functions (= development expenditures): development investment expenditures are those that, like investment in general, generate a stream of income or services into the future i. Government typically takes on the task of building a network of highways, and some governments, particularly in developing countries, take responsibility for providing electric power or exploitation of natural resource wealth (for example, petroleum) ii. Education and health expenditures can also be thought of as a form of investment undertaken by government although in practice government budgets often treat them as recurrent consumption expenditures b. Recurrent expenditure: those expenditures are those that a government must make year after year i. They include the salaries of government employees, the purchase of office equipment, and annual payments to families living in poverty and for pensions for retirees. ii. Capital investments to build a highway are often given a high priority but the expenditures needed to maintain the highway once built are often neglected, and the highway is soon filled with potholes 1. This results not only from the neglect of maintenance by developing country governments but also because foreign aid agencies will frequently support a capital project but will seldom support the recurrent costs needed to keep the capital project functioning 2. Another common recurrent expenditure in developing and high-income countries are interest payments on government debt, consumer subsidies, and subsidies to loss-making state-owned enterprises a. The political logic behind consumer subsidies is that certain commodities are considered essential, and government subsidizes these commodities so as to lower their price to the consumer and thus make them available to all regardless of income
Describe the two reasons why developing countries have exhibited higher rate of natural increase than that seen in high-income countries at similar stage in their past.
a. Earlier age at marriage à naturally leads to a trend of more children per marriage, as the couple is together during a higher number of fertile years b. Decline in death rates in developing nations began at much lower levels of per capital income and fell much faster than it had historically in the now-developed countries i. This was largely due to the transfer of public health interventions and other medical advances from developed nations to developing nations, such as vaccines and improvements in water and sanitation services
Explain the meaning of Foreign Direct Investment (FDI). How is FDI different from portfolio equity? Explain the three broad categories of activities in developing countries that typically attract FDI.
a. FDI: A long term investment in which ha non-resident entity exerts a significant management control (usually at least 10% of voting stock) over an enterprise in the host country b. Portfolio equity: An investor takes a smaller stake in an enterprise, either through a direct purchase or through a stock exchange c. Three categories that countries use to attract FDI i. Natural resource-based activities 1. Such as petroleum, minerals, and agricultural production 2. Firms engaged in these activities tend to be quite large and the investments capital intensive 3. These investments are usually negotiated directly with the host government, and the government is often a partner in the investment ii. Manufacturing and services aimed at the domestic market in the host country 1. Including consumer goods (such as processed food or apparel); capital-intensive products such as steel or chemicals; and a range of services such as transportation, communication, finance, electricity, business services, and retail trade 2. In many cases, these activities are protected at least partially against competition from imports through tariffs or other restrictions iii. Labor intensive manufacturing aimed for export on world markets 1. Including apparel, electronics, food processing, footwear, textiles, and toys 2. Firms in these activities tend to be efficient and competitive, but they also can move quickly from one country to another in response to changes in production costs or macroeconomic or political instability
Discuss any three of the implications of viewing childbearing as an economic decision. Note that the first four of the five implications listed on page 234 have empirical support. Describe why the fifth assertion, i.e., higher income should lead to higher TFR, is not observed in the real world.
a. Fertility should be higher when children earn income or contribute to household enterprises than when they do not i. If children cannot make money (due to child labor laws or other things), people have no economic incentive to have more children b. Reducing infant deaths should lower fertility because fewer births are needed to produce a given desired number of surviving children i. No need to have "backup" children in case of one of your children dying if that is extremely unlikely (if infant deaths are low) c. Introduction of an institutionalized social security system should lower fertility by reducing the need for parents to depend on their children for support in their old age i. No need to have may children to financially support you in your old age if government supports you then d. Fifth assumption not seen in real world: fertility should be higher when income is higher because the explicit costs are more easily borne i. Opposite seen in real world studies: fertility is usually negatively related to income ii. Beckner claims that the fall in fertility as income rises is due to the cost of children tending to rise, especially because the opportunity cost of the parents' time, particular the mother's, goes up iii. As a woman's market wage rises, her income also rises, leading to an increase in her demand for any normal good, presumably including the demand for more children (income effect) iv. But as a woman's wage rises, the opportunity cost of her time also goes up, so the price of raising children rises v. As a result, her demand for any activity that is intensive in the use of her time decreases, including child rearing (substitution effect) vi. If the substitution effect is greater than the income effect, couples may decide to have fewer offspring.
Describe the following three measures of school attendance: (a) gross enrollment rate, (b) net enrollment rate, and (c) grade survival rate. Explain the meaning of the following quote: "Gross enrollment ratios that exceed 100 often are a mixed blessing."
a. Gross Enrollment Rates: the total number of children enrolled in a given school category divided by the number of children of the age group that officially correspond to that level of schooling. i. For primary school, for example, a gross enrollment rate above 100 can indicate that children from older grade levels are currently in primary school. This is a mixed blessing as it indicates that lots of children are enrolled in school but also implies that many children are having to repeat grades. In some poor countries, grade repetition rates can be so high that gross enrollment rates are high even though a substantial number of children never actually attend school b. Net Enrollment Rates: the enrollments of only those of the relevant age group for that grade level c. Grade Survival Rates: estimates how many children actually complete a grade level.
In about four to five sentences each, describe the three broad strategies used by developing countries that are interested in attracting FDI.
a. Improve the general investment environment i. Improving the general investment environment is the least controversial approach to attract FDI and brings benefits beyond those associated with FDI itself. To do this, governments can improve road and ports infrastructure, invest in utilities to make them more reliable and less expensive, reduce trade tariffs, strengthen the judicial process and the rule of law, and reduce unnecessary regulations and red tape that add to the cost of doing business. These steps should help attract new investment, both domestic and foreign, and help make existing investments more productive and profitable. b. Introduce policies aimed specifically at attracting FDI i. There are three specific policies that are commonly used by governments to specifically try to attract FDI. The first is for host governments to provide effective and timely information to potential investors that markets might not provide on their own, to increase knowledge about the country that an investor might not know much about. The second is for governments to undertake specific expenditures aimed at making their country more attractive to investors, such as establishing industrial parks or export-processing zones (EPZs) to increase investment. Finally, governments can provide specific incentives to MNCs to increase their profitability, including protection from import competition, subsidies, or tax breaks; this is the most controversial approach. An example of this is a tax holiday, which exempt firms from paying taxes on corporate income, usually for three to six years. c. Impose requirements and restrictions on MNCs i. Imposing requirements and restrictions on MNCs are a strategy that governments use in an attempt to capture as much as possible of the expected benefits locally from FDI. Many host countries require foreign investors to sell a specified share of equity, usually at least 51%, to local partners to form joint ventures. Many countries also impose domestic content requirements on MNCs, requiring them to purchase a certain share of their inputs locally (instead of through imports), often with the share increasing over time. This encourages the use of local suppliers and stronger links between MNCs and local firms.
Describe the cause-effect relationship between health and economic growth of a country. In other words, does higher income lead to better health or does improved health lead to faster economic growth in a country? Or is it both? Be sure to present adequate reasoning for your choice.
a. In both rich and poor countries. There is a strong positive relationship between better health and economic growth i. Both channels are likely at work (between health à more economic growth and vice versa) ii. Better health and higher incomes work together in a mutually reinforcing and virtuous cycle, in which improvements in health support faster economic growth leading to higher incomes, and higher incomes facilitate even better health b. Proof of economic growth à better health i. Economic growth à higher incomes à individuals and household being able to increase spending on healthy food, which is strongly correlated to better health Proven: as incomes rise, child height (an indicator of long-term nutrition) tends to increase in many low-income countries ii. Also, with higher incomes, there is more money in society as a whole to spend on public health clinics and hospitals, train more doctors and nurses, and pay for public health services such as immunization campaigns Proven: a 10% increase in income leads to a 2-4% decline in child mortality rates c. Proof of better health à economic growth i. Better health affects both fundamental causes of economic growth: productivity gains and increased investment - Healthier people tend to be more economically productive because they are more energetic and mentally alert a. If you are healthy, you can harvest more crops, assemble more computers, etc. - As people expect to live longer, they have greater incentives to make long-term investments in their farm or other business and their human capital b. Contrast to sick people who have to divert more of their income into medical expenses, reducing the capacity to save c. True at government level as well i. Governments facing endemic diseases must allocate more of their spending to those purposes, reducing the amount available for building roads or other capital investment ii. Proof: Has been found that a 10% improvement in life expectancy at birth translates into an increase of .3-.4 percentage points per year in economic growth
According to the UN population projections, China, India, and the United States will continue to be the three most populated nations in the year 2050. In what way are the causes of population growth in the three countries between now and 2050 different?
a. Increases in each of the three countries differ i. In USA, it will be due primarily to immigration (already true) ii. In China, it will be due exclusively to population momentum (since TFR is already well below replacement levels) iii. In India, both population momentum and fertility above replacement levels will continue to cause a huge increase in population b. Compare today to 2050?
(a) Describe the meaning of life expectancy, which is a measure of a country's health status. (b) Explain at least one factor that can lead to an increase in life expectancy and one factor that can lead to a decrease in life expectancy in a country over time. (c) In the African nation of Sierra Leone, the life expectancy at birth was 49 years in 2008. In the same year, the life expectancy for the 5- to 9-year-old age group was 60 years. Explain how it is possible for an older age group to have a higher life expectancy compared to a younger age group.
a. Life expectancy: tells the probability of surviving from one year to the next assuming that today's age-specific death rates remain unchanged into the future i. Is a synthetic mean (life expectancy is an average with variance around the mean): many people live longer or shorter than the life expectancy listed for a country ii. Often broken down into subgroups based on gender, race, etc. b. Increase/ Decrease in life expectancy i. Increase in life expectancy: age-specific deaths could decrease due to rising incomes and advances in medicine ii. Decrease in life expectancy: new fatal diseases gaining ground (such as HIV/ AIDS) c. This is because Sierra Leone has a very high infant mortality rate i. So, if the child survives past its early years, then its life expectancy goes up ii. Basically, the 49 number accounts for all of the babies that die very early and drag the average life expectancy down
Explain the difference between monetary policy and fiscal policy. Describe the main objectives of fiscal policy.
a. Monetary policy: When government efforts rely on the central bank to adjust the money supply and interest rates to raise or lower individual and corporate expenditures b. Fiscal policy: When a government raises its expenditures or cuts taxes on individuals and corporations so that they can raise their expenditures i. Objectives ii. The first function of fiscal policy is to manage government expenditures used to fund whatever activities government policy makers and the people they represent think the government should support iii. The next closely related function of fiscal policy is to find a way of financing those government expenditures, either through the collection of taxes, issuance of government bonds, or in more desperate cases by printing money
Population policies pursued by governments of several countries around the world are aimed primarily at lowering birth rate by: (a) reducing the share of population of reproductive age, and (b) reducing the fertility rate. Describe two ways each of achieving the two goals.
a. Reducing the fertility rate i. Provide more information and free contraceptives 1. Will prevent accidental pregnancies ii. Practices that decrease infant mortality will also decrease fertility 1. Prenatal care, better birthing practices, and health initiatives directed at the young 2. Grants for better post birth care for low income families b. Reducing the share of population at reproductive age i. Need to increase the average age of women at childbearing age slows down population momentum, and in time, leads to a reduction in the share of population at reproductive age ii. Providing women with better education and better employment options / opportunities can help to reach this goal 1. Grants for women's education 2. Creating a similar system to affirmative action for women in jobs and schooling to 3. Women with more education have a higher opportunity cost of time and choose to have fewer children a. Could create education grants for girls
Describe any three of the factors that have led to improved health and increases in life expectancy around the world.
a. Rising incomes generally allow for better nutrition and housing and improved survival rates i. Life expectancy rises rapidly with income, especially at low levels of income ii. Increased income allows people, especially the poor, to buy more food, better housing, and more health care b. Public health measures such as clean water, sanitation, food regulation, and vaccinations contributed to the decline in child mortality in the late nineteenth century and continue to do so today c. Education plays a crucial role in improving health i. This is a more recent trend, as education did not used to affect health outcomes ii. Now, however, better educated individuals acquire and use new information more quickly iii. This is backed up by the fact that there are huge differences in child mortality based on the mother's education within developing countries
Briefly explain the four stages of demographic transition experienced by today's high-income countries. For each stage, describe the relevant trends in birth rate, death rate, and the rate of natural increase in population.
a. Stage I: High birth rates are matched by high death rates, and the natural increase in population was close to zero. b. Stage II: Death rates are declining more quickly than birth rates. Rate of natural increase in population rises (to around 1.5% in Finland, the example country). i. At that rate, the population would double in just under 50 years. c. Stage III: Birth rates fall more quickly than death rates. The rate of natural increase in population slowed to 1.2 %. d. Stage IV: Population growth falls close to zero, with low death and birth rates. Finland now grows .2% per year.
Explain the concepts of total fertility rate (TFR) and replacement rate (RR). Describe the broad trends in TFR observed over the last forty years or so in developing as well as developed countries of the world. What do those trends predict about the demographic future of the planet?
a. Total fertility rate (TFR): Is a synthetic measure: it sums the age-specific fertility rates refer to the average number of children born to women of a specific age (usually 15-19, 20-24, ..., 40-44) i. In other words, TFR is the number of children the average woman would have in her lifetime if age-specific fertility rates remained constant ii. TFR is a reliable indicator of the number of children women are currently having b. Replacement rate (RR): Number of children that a couple would have to have over the course of their reproductive years to replace themselves (average of 2.1 à higher than 2 to account for deaths before reproductive age and the sex ratio of 105:100 boys to girls) c. In 1967, in Africa, Asia, and Latin America, TFR was 5.5 children or more d. Only high income economies and the nations of Europe and central Asia had reached low TFRs of fewer than three children i. Over the next four decade, at varying speeds, fertility rates fell in every region ii. Sub-Saharan Africa's demographic transition took longer to begin, but even in the poorest part of the world, TFR, now at 5.1, has fallen by more than one child since 1987 iii. Today, almost all population growth in high-income countries is due to immigration 1. TFR in many high income countries is already below replacement rate, and in some countries (Japan, Germany, & Italy, which have low TFR and immigration rates), policy makers are concerned for a population implosion instead of explosion iv. Neither Africa, Latin America, nor the Middle East has progressed as far along its demographic transitions, implying faster growth in population and an increasing share of the world's total population e. Demographic future i. Population growth is hard to predict for the future, because fertility rates are likely going to continue to fall, as they have for the last four decades (after accelerating for more than two centuries) 1. Population is unlikely to double during my lifetime 2. World population will continue to grow for next fifty years
In four to five sentences each, describe how investments in schooling can be made more productive by addressing the following problems: (i) underinvestment, (ii) misallocation, (iii) reducing the cost of attending schools for families, (iv) inefficient use of resources within schools, and (v) school reforms such as addressing lack of accountability among teachers.
i. Underinvestment: Many developing countries underinvest in education despite the clear economic benefits and returns to schooling. Determining the amount to invest in education can be difficult as the estimates of rates of return are imprecise and spending more on education does not guarantee that the money will be spent efficiently. Education is often one of the first government services to be cut during times of economic hardship which can leave an entire generation of children undereducation which will hurt the economy in the long term. Overall, governments should work to properly invest in education as while in the short term it may be tempting to underinvest in education, in the long run society will benefit from the investment. ii. Misallocation: Governments need to decide on how much to spend at the three levels of education - primary, secondary, and tertiary - considering that primary school investment has the higher societal returns while tertiary investment has the lowest returns. Neglecting tertiary education, however, may hurt governments as it may lead to a chronic shortage of trained professionals. A government should examine the gap between how much they are spending at each level of education and the percentage of their population partaking in that level of education to examine how effectively they are spending their money. To correct for some of the misallocation, university students could pay for some of their fees however this may end up being a regressive expenditure as students of higher socioeconomic status already attend university in higher levels. Governments should ensure that they are investing in education wisely and not overspending in certain areas and underspending in others. iii. Reducing the cost of attending school for families: Many households cannot afford to send their children to school due to their being no school located near the family or on the demand side the families may not be able to afford the fees to attend school, pay for textbooks, or purchase school uniforms. Eliminating such school fees are an effective way of increasing school attendance but eliminating the fees may hurt education budgets that relied on said fees to pay teachers and pay for buildings. Governments may be able to reallocate funds to have larger class sizes in return for an elimination of fees which will lead to lower dropout rates and often lower rates of teen pregnancy. Other countries have created targeted programs referred to as conditional cash transfers (CCT) whereby poor families are given small payments for their children attending school. It should be noted that these programs must be careful to not include families that were previously sending their children to school. iv. Inefficient use of resources within schools: It can be difficult to determine if money should be spent on student resources such as textbooks, teachers, or building maintenance. Often in developing countries, donors will pay for the construction of schools but neglect to provide for the recurrent costs such as teacher salaries and maintenance. The approach has since changed to focus on quantity and availability of schools so that resources were instead redirected to recurrent costs. One effective measure for increasing attendance is to provide the students with medication to prevent common illness such as ring worm as this medication is inexpensive and improves both attendance and retention. There are also efforts to decrease class size, provide instructional materials, and improve teacher quality. Studies involving the providing of textbooks showed that it did not help the average student but did help high performing students. There is no single intervention of resources that can be used and as such a combination of researched strategies should be used. v. School reforms such as addressing lack of accountability among teachers: in many developing countries, teachers fail to show up or properly teacher their students. It does not appear that higher pay or more years of education increases the attendance of the teacher nor do stronger ties to the community. This may be due to the fact that teachers generally face little fear of being fired and this lack of a repercussion for absenteeism may be an explanation for the high rates. There is no need to improve curriculum or student attendance if there is no teacher to implement these other improvements.
Describe the following potential problems in using the RCT methodology for impact evaluation: (1) selection bias, (2) attrition, (3) contamination, and (4) ethical concerns.
§ Selection bias: if one of the groups has a higher education level, gender imbalance, age differences, income differences etc. this may affect the results of the experiment as the groups were not properly randomized and as such one group has a much higher level of a desirable characteristic for the study such as higher education if you are looking at wage. § Attrition: individuals dropping out of the study - the program may work for some and not others. If the participants who are not getting good results drop out and their data is not included, then the results for the treatment may appear to be more favorable than they really are. § Contamination: individuals in the control group access the treatment through other means such as a separate donor. To guard against this, it is important to research the treatment and services received by the control group. § Ethical concerns: is it fair that one group receives an intervention that may improve their lives? RCTs should only be done when it is not certain that the intervention is beneficial. In some cases, it is possible to roll out the program to everyone if the program is beneficial. There is also the issue of informed consent so that participants are properly informed of any risks of benefits they may encounter due to the experiment. It is important to have a good design to stop the trial if it is found that harm is being done.
Describe any three positive externalities associated with education.
· Health spillovers: the children of educated mothers tend to be healthier which benefits children in other families because it reduces the transmission rate of certain diseases · Reductions in crime: · More informed political participations and decisions · More schooling especially that of higher education can lead to technological process that is not fully captured by private returns
Below is a quote from page 404 of the deJanvry and Sadoulet (2016) book. Note that page 404 is not a part of required reading #3. However, you should be able to answer this question based on what you studied about the difference between positive economics and normative economics in your principles class and using your understanding of population trends and policy from this class. "There are both positive and normative questions associated with population growth. Positive questions include: what are the determinants of fertility behavior? Why do countries go through a demographic transition with a phase of exploding population growth? Why is there a decline in population growth as per capita income rises? How do countries benefit from a one-time demographic dividend as fertility declines while the share of elderly people in the population is still relatively low? Normative questions include: how can we reduce population growth if it is deemed excessive? If contraception is the main instrument to reduce fertility, when is it more important to focus on the supply side and when on the demand side of contraception?" Select any one question from each list from the quote above and explain why that question is either positive or normative. Thus, you are required to explain one positive question and one normative question.
· Positive economics is the study of real economic phenomena and studies the economy as it is o What are the determinants of fertility behavior? - This question is positive as it asks about the realities of fertility behavior. It does not seek an answer for how to alter or better this behavior but instead seeks to understand the influences on said behavior. The question seeks to understand the supply and demand aspects of children that determine the overall TFR. · Normative economics is the study of what the economy should be or what the ideal economy would be o How can we reduce population growth if it is deemed excessive? This question is normative in that is asks about how to solve a problem in a hypothetic rather than looking into the present realities of the situation. The answer is that the economy should first focus on demand side policies as these are more effective and then slowly more to supply side measures such as introducing contraception access.
