Economic Development Test 1 - Erwin Erhardt

Factor Accumulation

An increase in the size of capital stock or the labor force

Boys/Girls

Considerable progress in girls being educated, but it still lacks behind boys 2010: men have completed 7.6 years of schooling - women 6.5 All regions in the developing world have narrowed the gap

Characteristics of Rapidly Growth Countries

1) Macroeconomic and Political Stability: Economic and political Stability are keys to constructive growth. Democratic Republic of Congo (Zaire): between 1990-2002, civil war and border wars with five other nations led to an inflation rate of 2,800%.A Growth rate per year: -7.2%. Life expectancy fell, and infant mortality rose. Low budget deficits, sound monetary policy, realistic exchange rates, stable financial markets, and rule of law are key to good economic and political stability (=growth) 2) Investment in Health and Education: Countries with longer life expectancy grow faster. A healthier population translates into a more productive labor force. A high life expectancy also boosts savings and capital accumulation. Key factors: Clean water and sanitation, disease control programs, and maternal and child health programs are critical (Malaysia has done well with this.) Investment in Education is critical to a nation's growth. This must be applied to girls and boys. Results of investment in education take time to provide a return. The education input must be supported by planned economic growth (so as not to squander the educational investment). 3) Effective Governance and Institutions Nobel Prize-winning economist Douglass C. North of Washington University introduced the necessity of good government and institutions into the developmental equation. Strong government and supporting institutions foster an improved environment for investment (this includes property rights) Key: Strong economic institutions: Central Bank, Ministry of Finance, Ministry of Trade. The most effective governments establish institutions that help rather than hinder economic objectives (economic management, social programs, and a strong private sector) 4) Favorable Environment for Private Enterprise For many developing countries, agricultural policies are critical to economic growth. Price controls retard the development and prosperity of the agricultural sector. (China-1980s). Farmers also need access to investments into the land and rural roads (Indonesia has done well with this) The less regulation the better. Licenses, permits, and other restrictions can drag down growth. 5) Trade, openness, and growth International trade plays an important role in growth. Jeffrey Frankel and David Romer conclude that trade plays an important role by encouraging countries to accumulate both physical and human capital - thus increasing productivity. Outward trade orientation often contributes growth (East Asia - good at this) Inward oriented policies contributed to slow growth in Latin America and Sub-Sarahan Africa. David Dollar: Study of countries with Outward Oriented Policies between 1976 - 1985. Outward 2.9% annual growth. Inward -1.3% annual (negative growth) Jeffrey Sachs and Andrew Warner: Openness to trade has a substantial impact on growth... open countries (between 1970-1989 had average growth rates of 2.7% compared to 1.8 in closed countries) Fransisco Rodrigues and Dani Rodrick questions their findings. 6) Favorable Geography No rich economies between the Tropic of Caner and Tropic of Capricorn except for Singapore and a few oil-endowed countries. Cooler climates vs. Warmer climates (Montesquieu) Isolation from major markets. Landlocked Countries: A particular problem in Africa. Most challenged countries, those near the Sahara Desert with multiple obstacles: Burkina Faso, Chad, Ethiopia, Mali, Niger, and Sudan.

Classical and Neoclassical Models of growth emphasize:

1) New Investment increases capital stock: More investment in capital increases greater production. (However, value of investment must be greater than value of depreciation); this investment greater than depreciation directly adds to the capital stock. Investment must be greater than depreciation and the growth of the labor force for there to be an increase in capital per worker. 2) Investment in financed by saving: To increase investment a nation must improve its savings. 3)Savings comes from current income: Households save what they don't spend; corporations save and reinvest; governments add to savings through tax receipts (or detract if they spend more than tax receipts). GDS (Gross Domestic Saving) - Combines all 3 sources, provides the resources to finance investment Sustaining Economic Growth requires both generating new investment and ensuring that the investment if productive

The solow Residual

A number describing empirical productive growth in an economy from year to year and the decade to decade; Solow defined rising productivity as rising output with constant capital and labor input. It is called a "residual" because it is part of growth that cannot be explained through capital accumulation (or accumulation of other factors) Sometimes this is referred to as "the rate of growth of total productivity" However, in the end, what exactly spurs the growth is difficult to fully discern. Moses Abramovitz referred to the residual as a "measure of our ignorance" about the growth process.

Markets and Market Failures:

Advantages of markets: 1)Consumer preferences, efficient resource allocation, minimization of outputs. 2) Markets are flexible and adaptable; provide incentives for growth and innovation. 3) Markets enhance competition, which motivates everyone to act more efficiently. 4) Decentralization of decision making. (economic pluralism) Sometimes markets fail. What causes this? 1) Monopolies or oligopoly. This could be inevitable in some developing countries. Some government can catch the profits through taxes. (Sometomes corruption and cronyism result in market failure). 2) External economies. Dams/farmers benefit - no more flooding. Dams, roads, railways, and irrigation schemes are all examples of external benefits; government often needs to take the lead in this sector. 3) External diseconomies are not borne by the firm. Pollution - mostly air, water, and sometimes the earth itself. 4) Markets may not facilitate the changes in economic structure required for development. "Infant Industry Argument." (Protective tariff or initial subsidy). Over time - tariffs/subsidies reduced. 5) Underdeveloped institutions exclude large numbers of potential consumers and producers from the market. Inadequate information about markets and products. In short, and overall uneven and problematic development issues. 6) Macroeconomic imbalances - characterize every modern economy. Economy wide markets for labor, credit, and foreign exchange do not always adjust rapidly enough to balance supply and demand as conditions change. This problem may require government intervention in the form of monetary and fiscal policies. 7) National goals. Establishing policies that favor the poor majority.

Labor Force

An increase in literacy or education

Productivity Growth

An increase in the amount of output produced by each machine or worker

Capital Stock

Buildings, factories, machinery, roads, railroads, ports, electricity, etc.

Market Pessimists and Market Optimists

By the early 1970s, the majority of developing countries were mixed economies, with a variety of governmental controls. Governments led the way. Into the 1970s, governments began to make the switch to a more market-based economic approach. 1980s and 1990s, many countries grew. Innovation and competition were needed for sustained development. Problems with government: rents (regulations/higher profits) and rent seeking (corruption) Who to turn to for help? The IMF and World Bank By the 1980s, many low and middle-income countries sought assistance from them. The IMF's main purpose is to provide temporary financing to countries facing significant balance-of-payment problems (shore up foreign exchange reserves and stabilize the currency). The World Bank: provides direct development finance for roads, schools, agriculture, and other projects and programs. Aid from both ties to reforms (reducing budget deficit, inflation, opening trade, privatizing companies, etc). The reform programs implemented under the IMF and World Bank contain two components: 1) Stabilization: Correcting imbalances in foreign payments, government budgets, and the money supply, with the aim of controlling inflation and reducing macro instability. 2) Structural adjustment: Broader; includes reforms aimed at changing the structure of the economy to be more market based, produce more tradable goods, and increase economic efficiency and flexibility. (Include privatization, liberalization, deregulation, trade reform and other reforms.)

Developing World

Developing world has seen a great increase in educational attainment 1960: 55% of population age 15 and over had never attended school 2010: Dropped to 17% Terms to know: Stocks - Refer to the amount of schooling embodied in a population Flows - to the net change in those stocks as a result of school enrollment patterns Grade Survival Rates - Estimate how many children actually complete a certain grade Grade survival estimates that 1 out of 5 children in some of the poorest countries didn't complete five years of schooling The worst GSRs are among the very poor Thus, the chance of achieving universal primary education for all children by 2015 is unlikely Secondary and Tertiary education has expanded Biggest gain: Latin America. In secondary education, Latin America jumped from 38% in 1975 to 90% in 2005. South Asia and Sub-Saharan Africa still lag behind Tertiary Education still lags behind School enrollment rates, combines with age structures in the developing world provide projections of how human capital endowment will look in the future

Pareto Optimality

Efficiency in economic theory was typically defined as a system that could not make anyone better off without making someone else worse off.

Health

Great indicator, those who make it to age five. Graph: Denmark vs. Sierra Leone - why? Access to skilled health worker Malnutrition, stunting - someone under the age of 5 that have a height to age ratio more than two standard deviations below the World Health Organization global reference median. Underweight: Weight to age ratio more than two standard deviations below the WHO global reference median Africa has highest under-5 mortality rate 142/1,000 North Africa/Middle East 78/1,000 Southeast Asia: 53/1,000 What is health WHO: A state of complete mental, physical and social well-being Measurements of health: Mortality: Measures deaths in a population Morbidity: Measures rates of disease and illness Life Expectancy: (Provides a kind of status of health) HIV/AIDS can quickly counter a nations progress in life expectancy WHO has created the Health-adjusted life expectancy (HALE) It reduces life expectancy by years spent with disabilities (according to severity and duration) Samples: injury, blindness, paralysis, and tropical diseases such as malaria Transitions in Global Health 1960-2008 - Life expectancy increased around the world. 50-69 years of age Wealth not always a factor. Latin America, Second highest regional; life expectancy = age 73 Africa: 1960-1980, life expectancy increasing. Turnaround: AIDS children and adults The epidemiological transition 1970: 40% of the population of developing nations were children 14 and younger 2009: 29% Elderly population on the rise The epidemiological transition to a shift in disease pattern. Stage 1: Age of pestilence and famine 2: age of receding pandemics 3: age of degenerative and human-made diseases (4): Emerging and reemerging infectious diseases. Drug-resistant TB. And other new pathogens HIV/AIDS Ebola virus Severe Acute Respiratory syndrome (SARS) Avian and H1N1 Swine flu 20th Century - shift from death from infectious diseases to noncommunicable diseases (cardiovascular) Sub-Saharan Africa: 68% of mortality due to communicable diseases. 25% due to noncommunicable conditions China's Epidemiologic transition is occurring fast, equal to developed countries. (now face noncommunicable diseases like the west) The Determinants of improved health Famines and malnutrition still a problem - particularly in Africa Rising incomes - better nutrition, healthcare, and housing Life expectancy associated with per capita income Public health important: clean water, sanitation, food regulation. Penicillin and anti-biotics revolutionized disease control. Education also plays a role Health, income, and growth: Strong correlation between health and economic growth Income and Health: Increased income leads to more spending - and on goods and services that improve health Water, Sanitation (indoor plumbing), shelter, medical care, and medicine Poor Household Decisions: ORT Oral Rehydration Therapy: Mixture of water, salts, and sugar; effective treatment for diarrheal diseases. Some don't believe it will work. Bed nets (malaria) - often unused. ... lack of information, weak beliefs, and procrastination Health and productivity: HIV/AIDS - less effective workers/lose many days of work attending funerals. If sick parents, children may do the work, and be deprived of an education. Childhood health can affect productivity for years to come: physical strength and cognitive ability. Robert Fogel: relationship between nutrition, body-size, and productivity. Health and Investment: Improves health leads to increased saving and investment Longer lives-more incentives for long-term investments Poor people with catastrophic illness... can lose everything. Diseases... countries will spend more savings fighting diseases Three critical diseases: Industrialization, urbanization, and modernization create their own health problems -Pollution, tobacco and alcohol, stress, processed foodstuffs/decline in activity - obesity and diabetes. HIV/AIDS Recognized in 1981. It has spread around the globe 2009= 33 million people living with HIV/AIDS 1 out of every 200 in the world. Worldwide HIV/AIDS is the leading cause of death among adults aged 15-59 worldwide. To-date 25 million deaths. Sub-Saharan Africa has 2/3s of the world's infections (1/10s world's population) 1 in every 20 adults carries the virus HIV epidemics seem to be stabilizing or declining Uganda: ABC program: Abstinence, faithful one partner, condoms. Counter evidence, high mortality... falling rates HIV/AIDS leaders: South Africa Nigeria India Women: more than 1/2 of women and girls have HIV Africa: Women age 15-24, 8 times more likely to be infected with HIV. Infected partners who practice high-risk behavior. Many don't know they're infected. Lack of education and medicine. Children: from a pregnant mother, labor, or breast feeding. Antiretroviral Drugs: reduce mother to child transmission (ARVs) Late 1980s, life expectancy in Africa reversed itself after close to 3 decades of progress. Costly to society-especially South Africa. Worldwide: There are now 16.6 AIDS orphans who have had one or both parents die of AIDS. Until cure, strong prevention, care and treatment needed. Drugs (Antiviral - huge investment - discount prices; generics; intellectual property rights and patents. Funds needed to fight disease. Malaria Claims the lives fo 2,000 children every day. (mostly developing world) WHO half the world's population is at risk of malaria in over 106 countries 800,000 deaths each year 225 million cases of severe illness 91% of the world's malaria deaths 1/5 of children under 5 die from malaria ...this one has a disproportionate impact on the poor. Slums, countryside... less likely to receive treatment when it strikes. Treatments, nets, spraying with insecticides. Vaccination on the way... not enough commercial opportunities. DDT: interior wall of dwellings - minimal impact on environment. Has not been found harmful to humans. Not used significantly in Africa. Tuberculosis: 20 years ago, TB was considered conquered It has recently reemerged as a virulent killer. 2 billion people (1/3 of ppl on earth) are infected with TB bacterium. Each year 9.4 million ppl develop active TB. Leads to 1.7 million deaths each year. 90% of which are in developing countries. 25% also have HIV, making them more likely to develop TB. TB = prevalent in India (2/4xs higher in low income and no schooling). Overcrowding, airborne bacterium, along with inadequate sanitation. Therapy? DOTS: Directly observed treatment. Regular TB drug dosage with clinical observation visits. Some stop taking medicine, because they begin to feel better. This can lead to the emergence of a drug-resistant TB. "Multi-resistant TB." A problem in India and Russia. 1.8 million fail to get access to TB treatment each year. Smallpox, which affected 10-15 million people globally in 1966 and resulted in 1.5-2 million deaths, has been completely eradicated. Last recorded case: Somalia, 1977. Polio? What next? 1988: 125 countries were endemic for polio; 350,000 cases annually. 2006, number of cases dropped below 1,400 and only 6. countries still remained polio endemic: Afghanistan, Egypt, India, Niger, Nigeria and the Palestinian territories. It still has the potential to spread. Preventing deaths from Diarrheal Disease. Diarrheal disease - one of the leading causes of death among children. 20% of all child deaths. Worldwide, dehydration from diarrhea kills between 1..4 and 2.5 babies each year. ORT - the most cost-effective means for treating dehydration. Strong leadership Program champions Affordability Delivery System

Total Factor Productivity (TFP)

He first looks at the inputs of labor and capital to total production, then adds a term to capture TFP TFP measures the contribution to production of efficiency, technology, and other influences on productivity. The final equation shows how the growth in output depends on the growth in inputs and the growth in the productivity of those inputs.

Random Notes

If markets could not correct inequality, then governments should. Charities and NGO's could also play a role, but lack the same level of resources possessed by the government. Many governmental policies during the 60s and 70s were simply irrational... with some leading to corruption. 1970s and 80s, World Bank became critical of its developmental practices. Gunnar Myrdal (Nobel Prize Winner) an early supporter of import substitution to mobilize labor, came to see that intervention often led to corruption. Changes: OPEC: 1973-79 - huge oil revenues. Oil exporting countries witnesses big influx of cash revenue, which expanded the role of their governments. Stockpiling of cash led to low interest rates on loans throughout the world. Large debt taken on by many countries. Inflation was rising (in part due to OPEC), and the FED contracted the US money supply... all this led to a rise in interest rate. Many loans in developing countries were ties to variable interest rates. Countries had trouble making payments, and some defaulted on their loans. The problem became so bug in Latin America that the 80s is referred to as "the lost decade." Once again, the role of government was questioned. Different experience: The Four East Asian Tigers: South Korea, Taiwan, Hong Kong, and Singapore. By the late 70s, phenomenal growth. All four built their rapid economic growth on the export of labor-intensive manufacturers. ( This proved superior to import substitution strategies). A lot of government direction out of the gate, but these governments had a clear, productive strategy. They also welcomed foreign investment. The four Asian Tigers influenced China and Vietnam in their economic direction. Structural Adjustment, The Washington Consensus, and the end of the Soviet Model. By the late 1980s, most developing economies in South Asia, Latin America and Africa were failing to achieve rapid economic growth. World Bank promoted "Structural Adjustment" - which primarily involves moving to a more efficient market-based system, more open to international trade, and more centered on the production of tradable commodities. (Change conditional and linked to more aid from World Bank). A major problem was price distortions (subsidies) and high tariffs. Political consequences. By the late 80s, early 90s, state set prices in Russia, Vietnam, and China were being eliminated. The views toward structural adjustment eventually coalesced into THE WASHINGTON CONSENSUS. Economist John Williams laid out the core principles of the consensus: 1) Fiscal Discipline: Balance the budget 2) Reordering Public Expenditure Priorities: Cut back on subsidies - spend money on education, health, and infrastructure. 3) Tax Reform: Set realistic tax rates - and expand the tax base. 4) Liberalization of interest rates: Let the market determine interest rates and credit. 5) Competitive Exchange Rates: Exchange rates: should be determined by market forces; hopefully one that facilitates the expansion of exports. 6) Trade Liberalization - cut tariffs and quotas 7) Liberalization of Foreign Direct Investment: Remove restrictions of foreign direct investment in order to facilitate the inflow of capital, skills, and know-how. 8) Privatization: Private public enterprises. 9) Deregulation: Reduce or eliminate government regulation. Allow free entry and exit of firms. 10) Secure Property Rights: Private property - for both domestic and foreign investment reasons. These points are all directed at correcting market distortions. Removing them leads to growth; keeping them can leaf to market failure - and government failure.

Measuring Inequality

Income is one way of measuring the "wealth of a nation"; consumption must also be taken into consideration. Consumption may be a more reliable indicator of welfare than income. Frequency distribution: tells how many families of individuals receive different amounts of income. Size Distribution: Calculates the degree of inequality present in underlying distribution. Data from a Size distribution can be used to draw a Lorenz curve: in this curve, income recipients are arrayed from lowest to highest income along the horizontal axis. (If everyone had the same income the curve would be flat). The further the curve bows away from the 45 degree line, the greater the inequality. The Gini coefficient (attempts to describe in a single number - the distribution of income. The ratio is best understood as the value of area A divided by area A+B. the larger the share of the area between the 45-degree line and the Lorenz curve, the higher the value of the Gini coefficient Kuznets: one of the first economists to speculate on the relationship between growth and inequality, and that inequality might first increase as a nation makes the transition from an agricultural economy to an industrial one. W. Arthur Lewis: predicts rising inequality followed by a "turning point," which eventually leads to a decline in inequality. The "turning point" is reached when all the surplus labor has been absorbed and the supply of labor becomes more inelastic. Wages and labor's share of income then start to rise and inequality falls. Lewis' model argues that inequality IS THE CAUSE of economic growth. Government policies may provide the greatest influence on the distribution of income, What else causes inequality? History and Politics, patterns of land ownership, and resource endowments. Since economic development concerns itself with poverty reduction, one must understand that the degree of inequality plus the level of income determines the level of poverty -South Africa -South Korea, Eastern Europe, Central Asia Inequality can slow down economic growth Measuring pverty - the "Bottom quinline" The Poverty Line... One common poverty line measure - $1.25 per day -50% of Bangladeshis are considered to be in absolute poverty Head Count Index: ration of the number below the poverty line to total population Poverty Gap: How many people fall below the poverty line and how far are they from that line.

Schooling vs Education

Income isn't everything: Korea and Poland Education leads to a better life; and most parents want their child to have a better life. People with more schooling earn more than people with less schooling (Opportunity Cost)

1956

Robert Solow (MIT) developed the most effective, influential, and enduring model for examining economic growth

Technological Change

New ideas, new machines, or new methods of organizing production can increase output. (Countries to adapt to new technologies usually experience more rapid economic growth)

Random Notes

Only 16% in high income nations 84% in low and middle income nations China - 20% of World's population Population growth in high income countries is a result of immigration 2.1 children need to be born to each set of parents to maintain the current population Germany, Italy, Japan, and Russia below the replacement level 2050 - World population will peak out at 9-11 billion Causes of population growth: Why Birth rates decline: 1) Contraception and abortion 2) Only if it is in their interest to do so 3) The imposition of costs on the parents Gary Becker, Chicago: Constraints faced by parents are 1) Time 2) The cost of purchased goods and services Population growth and economic development No exact correlation Population and Accumulation Population Pessimist - Population growth harms economic development Population optimists - population growth benefits the nation and its economy. Pop pressure induces tech breakthroughs... Julian Simon... a large population contains more entrepreneurs and other creators. Human ingenuity - The ultimate resource that can overcome any depletion of other resources.

United Nations International Comparison Program (ICP)/PPP

Quality? Correction made in 2005 Household Surveys improved - 2005 Success stories: China and South East Asia Failures: Sub-Sahara Africa; population 1981: 214mil. / 2005: 391 mil. Sub Sahara Africa's Poverty gap: 20% China 39% to 4% World Bank's 1990 World Development Report Strategies: 1) Promote Market-oriented growth 2) Direct basic health and education services to the poor. 3) Develop social safety nets Market-oriented growth included many of the recommendations of the Washington Consensus. 1996 UN Report: Structure and quality of growth most important. Pro-Poor Growth When income among the poor rises faster than average income growth. Pro-poor growth calls for increased growth with more opportunities for the poor. Does the Washington Consensus favor the rich? No, it depends on how policies are pursued. (China is better off). Macroeconomic stability and economic openness are major elements of the Washington consensus. Important, but sometimes government spending fails to reach the poor - urban bias. Unsustainable budget deficits also leads to price inflation, which leads to depreciation of the currency, rising prices in the import sector - all of which hurt the poor. Positive Side to increased openness: Trading a commodity for which a nation possesses a comparative advantage (Particularly a product that can utilize untrained workers) - can lead to national economic growth and eventually an increase in wages. Foreign direct investment can result - leading to an influx of technology and capital accumulation. Trade may also bring about better pricing - thus the poor pay less for products. Trade provides mixed results; it can help some people, but possibly hurt others (in developing and developed nations)! To take advantage of growing opportunities, the poor must be educated and have access to better health. Growth in rural economy helps everyone (growth in urban area only - only helps urban area). Most of the poor live in the rural/agricultural sector. Land reform and titles to land also critical to the poor. Chronic poverty means some form of income transfer must exit. Conditional Cash Transfers: increasingly in use. -go to school, health clinics; both increase human capital (role of women) Social Safety Nets: To help middle and poor households during "shortfalls" Set wages... days per year worked. Global (International) Inequality. How do you measure or compare? By comparing income or consumption of each individual, regardless of where they live. Gini coefficient measures .6-.8 as the range for global inequality.

Professor vs Plummer

Rate of Return to schooling Factors that determines the private return on schooling Two streams of income: one has finished primary school (up to 11 years), and the other secondary school (18) Costs are associated with the decision to remain in school. (foregone earnings - rural costs.) Direct costs to household in sending a child to school. (School or uniform fees, payment for books and materials, transport costs, and other unofficial fees. Cost to a poor family could be significant. One needs to consider the rate of return on education. School is not only a private investment, it is a social one Social Returns to Schooling - Social return includes the costs for the provision of schooling. Benefits - Individual will achieve higher earnings, and school may produce a positive externality: to society, family, crime, political participation, and employment. Returns are highest for primary schooling Private returns to schooling - they are higher, if pursuing a secondary or university degree. (more costs, investments, opportunity costs) Dilemma of Private Returns There is a higher return on the education of women: reduces child mortality, reduces fertility, reduces maternal mortality, helps reduce the spread of HIV/AIDS. Thus, there is a huge return on educating women. Schooling is important to potential growth of GDP Challenge - How to make schooling a better investment - for students and families (and better for governments and donors) Rates of return on schooling depend on what happens in both schools and the labor market after students graduate. High unemployment after education often is the result of low returns to education have a lot to do with failure to increase the demand for labor. High unemployment among school leaving students, is often the result of failures in promoting economic economic growth rather than school failures. Argentina and Egypt However, there are problems with schools as well Underinvestment. Many developing countries spend too little on education. More money doesn't mean it will be spent well. The larger the population, the further the money must be spread Misallocation: Government decisions on how to spend on primary, secondary, and tertiary levels. Social returns are highest for primary schools, followed by secondary and tertiary. Costs are much higher for the later 2. Governments should allocated more money to primary schools Once universal primary education is achieved, more resources should be devoted to secondary schools. Counter arguments: Debate over private vs government investment. (Columbia, Mexico, and Brazil) Outcomes could be regressive One answer: Have university students pay for some of their education. Higher education will have higher private rates of return Improving schools: Inefficient use of resources and lack of accountability within schools are a problem Randomized controlled trials (RTC's); what causes differences in outcomes. The school building, teachers, principle, and parents. Reducing the cost of going to school Why aren't children in school? Location/Distance Household demand Inability to pay fees. Incentivization of schooling Conditional Cash Transfers: families paid to send students to school Inefficient use of resources Teachers/school supplies/desks/books... Teachers untrained Students undernourished or sick 80s: building schools 90s: quality of schools; however improvement in outcomes elusive New: Health: immunization against hookworms (1/4 of world's population) With treatment (in Kenya) school absenteeism decreased 25% meaning more years in school Reforms: School reform Better motivation to teacher. (incentives) verification Community ties; school boards, accountability

Decelopement Thinking after WWII

Smith: Markets and tech progress David Ricardo: Saving and investment and accumulation of capital Karl Marx: Capital accumulation Harrod-Domar model: Put investment and capital at the center of growth Poor countries suffered from the "vicious cycle of poverty" 1960w: They couldn't save (capital accumulation), os rich countries should contribute to aid them. 1960s: Hollis Chaney's two model gap: 1) Savings gap 2) Foreign exchange gap (the major constraint on development) - thus rich countries needed to send aid, to fill the savings and foreign exchange gap. Marshall Plan (had reinforced this theory): 25 billion sent to Western Europe to help rebuild Europe - with dynamic results. Japan also rebuilt. These stories were success stories- but one element was missing - they had supporting institutions to support economic (re)development. [A lot of the physical structure was gone, but the knowledge contained within the people was there] By the 1960s, when the same approaches to foreign aid, capital and foreign exchange were taken to developing nations, the critical institutions were missing. Developing poor countries was quite different from redeveloping developed countries. There was also mixed feelings about economic direction after the war: Prior to the war - the Great Depression, and the rise of Totalitarianism. Socialism was being view as an alternative in Britain and Scandinavia after WWII. Paul Roesentstein-Rodan, author of the "big push" idea, claimed you could start industry in developing countries, but its own citizens wouldn't be able to afford the products. Government planning was needed. Alber Herschman: emphasize industries with strong linkages so the creation of one industry, would create demand in another. (machinery, steel, coal, etc.; sometimes known as backward linkages). Another alternative, pursuing the Soviet Model. Exploit agriculture to build industry. Government makes all the decision. (Why interest - myth that they had transformed a backward, poor country into an "industrial powerhouse." In the 1950s, many governments were inspired by this. -Ghana, India, and China -Brazil, Argentina, Columbia, and Chile had begun developing industry before WII, but hid behind high protective barriers, known as important substituting industrialization. During the 1950s and 60s, South American countries continued to pursue these policies. In the end, most of the benefits of trade from the practice of these policies went to the industrialized nations. Government planning and intervention was the centerpiece of the economies of these countries. During this same era, many western industrialized nations were dismantling tariffs - first through GATT (1949) to today's World Trade Organization (WTO). Even the Harvard Institute for International Development (funded by Ford Foundation), provided economic/analytical support and training to planning commissions in places like Pakistan, Iran, Malaysia, and other countries through the early 70s. Characteristics of developing countries during 60s adn early 70s: High levels of governmental intervention and investment in the economy. Role of developed countries: Provide Aid. As the 70s progressed a reaction to this model of development was growing among economists, policy makers, and developed governments. African countries were experiencing little or no growth. Latin America: import substitution and high tariffs had run their limit. By the 1980s, the soviet model was being seen as no longer viable - and China led the way in breaking from it. Debate of what went wrong: Some analysts believed too much attention was directed toward the growth of the GDP, and not enough to where the benefits were going. Some argued all the benefits were going to the wealthy and members of the government. In short, some countries were experiencing GDP growth, but the people had nothing to show for it.

Sources of Growth Analysis

Solow sought to quantify the contributions of increased output: Capital Accumulation, Labor Accumulation, and Productivity gains. (An accounting framework based on actual economic data). How do these impact growth? A way to examine how factors accumulation and productivity growth affect output and economic growth is through the production function, which characterizes how inputs (capital and labor) are combined to produce various levels of output

Growth Accounting or Sources of Growth Analysis

Solow's method for measuring the relationships between investment and productivity gains

Enhanced Efficiency

Specialization, streamlining production, etc.

The Harrod-Domar Model

They both developed, in the 1940s, a fixed-coefficient, constant-returns-to-scale production function (Fixed proportion production function) This was done to explain the relationship between growth and unemployment in advanced capitalist societies. Finally, it came to focus on capital accumulation in the growth process. The Harrod-Domar model has come to be used in developing countries to explain the relationship between growth and capital requirements. Based on continual labor growth with restrained capital. Capital-output ratio provides insight into the capital intensity of the production process. Two countries: Agricultural Tractors: Higher output (Capital intensive) Manual Labor: Lower output (Labor intensive) Efficiency needs to be taken into consideration as well. Economists frequently calculate the incremental capital-output (ICOR) to determine the impact on output of additional or incremental capital. ICOR measures the productivity of additional capital Capital created by investment is the main determinant of and that savings makes investment possible. Key conclusion (Two key components of growth): Savings and productivity of capital. In short, save more and make productive investments and your economy will grow. Strengths and Weaknesses: Strength: Simplicity It can perform adequately when it comes to estimating expected growth rates in countries over a short period of time. Key role of savings - the decision of investing in savings or consumption is a key determinant in economic growth. Savings, according to the Harrod-Domar model, are critical for economic growth, as well as growing incomes over time! Weaknesses: Savings, alone, is not sufficient Investments must pay off - not all do so successfully. Government policies, world prices, etc., can alter the success of investments and growth. Investments must be productive over time. Proper allocation of resources over different sectors and firms is critical to future output and growth. The model also is idealistically flawed in that it assumes fixed capital-to-labor, capital-to-output, and labor-to-output ratios - all which imply little flexibility in the economy over time. This means that capital, labor, and output must all grow at exactly the same rate which is unlikely to happen. This problem in the Harrod - Domar model has become known as the "knife-edge" problem. Why? Because as soon as either the labor force or capital stock grow faster than the other, the economy falls "off the edge" and continuously growing unemployment of either capital or labor. While the model may , in fact, be accurate in the short run, over the long run it will become increasingly inaccurate as the ICOR changes. Incremental capital - output ratio. It also doesn't allow for and substitutions between capital and labor in the production process. (Fixed-proportion production function) Final weakness of the Harrod-Domar model: the failure to discuss the role of productive growth; the ability to produce increasing quantities of output per unit of input.

The Solow (Neoclassical) Growth Model

nhen aRobert Solow's model was the next big step forward in analyzing economic growth. Problem with Harrod-Domar: Fixed-coefficient production function; solution: neoclassical production function - which provided more Originally for . developed countries, it is now used to analyze all countries, and remains influential in economic development studies. Changes in labor and capital are now taken into consideration. Capital per worker is now seen as fundamental to the growth process, and the determinants of that change. Considers "determinants" - population growth, depreciation. Savings and investment add to capital per worker; Labor force growth and depreciation reduce capital per worker. The process by which an economy increases the amount of capital pre worker is called CAPITAL DEEPENING When an increase in capital stock just keep pace with the expanding labor force and depreciation, it is known as CAPITAL WIDENING In the end, the Solow model is an improvement because it introduces the role of population growth as well as substitution between labor and capital (savings still central) Another key: Technological change However, most technology is adopted from the developed countries, and the impact isn't great. Rich countries are displaying slower growth Sachs and Warner include openness to world trade