ECON 322 Section 1
In 2015, tWOrld Bank se tthe INternational Poverty LINe which identifies extreeme poverty and correpsonds to ?
$1.90 per day - in 1990, 2 billion ppl living in extreme prverty, which dropped to 705 million in 2015
How much is an average earning per day in the bottom 80% of the world? 2/5 of the world live on $2 bucks per day
$10
dimension index
(Actual Value - Minimum Value) / (Maximum Value - Minimum Value)
purchasing power parity(PPP) Ex. if a big mac costs $4, in US, 17 chinese currency, what is purchasing power parity ratio? 1: 4.25 given the PPP ratio, if a chinese earning 100000 chinese currency/year, how much is it in US dollars? $23,529
- PPP as a conversion factor - number of units of a foreign country currency requried to purchase the identical quantity of goods and services in the local developing country market as $1 would buy in the US
O-Ring Theory
- explains existence of poverty traps - production is modeled w strong complementaries among inputs - positive assortative matching in production - implications of strong complementarities for economic development and distribution of income within and across countries
three objectives of development
- increase the availabiltiy and widen the distribution of basic life sustaining goods - raise levels of living - expand the range of economic and social choices
multidimensional poverty index
- measures range of important household deprivations directly - index identifies deprivations across teh same 3 dimensions as the HDI
development as growth and linear stage theories,
- utility of massive injections of capital and historical experience of the now developed countries - emphasis on the central role of accelerated capital accumultional - capital fundamentalization
overall differences of material life, life expectancy, health, education levels, degree of urbanization, are tending to narrow between the rich and the poor countries, or tending to widen.
Convergence and divergence tell us whether
Gini coefficient
A measure of income inequality within a population, ranging from zero for perfect equality, to one, perfect inequality, if one person has all the income.
Capital-output ratio
A ratio that shows the units of capital required to produce a unit of output over a given period of time.
absolute poverty
A situation of being unable to meet the minimum levels of income, food, clothing, health care, shelter, and other essentials.
divergence
A tendency for per capita income (or output) to grow faster in higher-income countries than in lower-income countries so that the income gap widens across countries over time (as was seen in the two centuries after industrialization began).
Lewis two-sector model
A theory of development in which surplus labor from the traditional agricultural sector is transferred to the modern industrial sector, the growth of which absorbs the surplus labor, promotes industrialization, and stimulates sustained development.
economies need to SAVE in order to grow - savinsg buy capital, the faster you d othis, the faster you grow the country
AK model in words?
Average Poverty Gap
APG = TPG/N
increases in labor qty and quality, increases in capital, and improvements in technology.
According to NG theory, output growth results from one or more three factors?
subsistence economy
An economy in which production is mainly for personal consumption and the standard of living yields little more than basic necessities of life - food, shelter, and clothing Robinson Karuso economy(catch coconuts
• Evidence of unconditional convergence is hard to find (MAIN TAKEAWAY) •But there is increasing evidence of "per capita income convergence,"weighting changes in per capita income by population size(side note)
Are Living Standards of Developing and Developed Nations Converging?
yes
Are there any differences between today's developing countries and the developed countries when they start their modern economic growth?
- critical for social mobilization, world needs to be oriented in a direction to fight poverty and achieve sustainable development - create peer pressure, progress must be reported - mobilize epistemic communities. (when goals are set, those communities of knowledge and practice come together - mobilize stakeholder networks, roundtable of constituentes that needs to be pooled together
Why do goals matter?
Solow neoclassical growth model
Y= K^alpha Y: GDP K: the stock of capital L: labor A: the productivity of labor (technology), determined exogenously α: the elasticity of output with respect to capital(the percentage increase in GDP resulting from a 1% increase in human andphysical capital)
total poverty gap equation
Yp is absolute poverty line Yi is income of the i^th person H is sum of individuals
open economies
______ experience income convergence at higher levels as capital flows from rich countries to poor countries.
closed economies
__________ with lower savings rates (other things being equal) grow more slowly in the short run than those with high savings rates and tend to converge to lower per capita income levels.
Harrod-Domar Model
a model of economic growth that emphasizes the importance of savings and investment
development as growth and linear stage theories
a series of successive stages through which all countries must pass
i. One factor of production: Labor, L ii. Factor payments: Traditional Sector wage= 1, modern sector wage > 1 iii. technology: traditional sector L=Q; modern sectors L= F+cQ, c<1 iv. domestic demand: consumers spend an equal amount (Y/N) on each type of good v. closed economy vi. market structure: perfect competition in traditional sector; limit pricing monopolist in modern sector
six assumptions of big push model, Graphical Model
big push model - graphical model, six assumptions
sometimes market failures lead to a need for public policy intervention
Neoclassic economic theory
suggests promoting efficient production and distribution through a proper, functioning price system is an integral part of any successful development process.
why is the gini coefficient good?
the Gini coefficient is useful, particularly because it allows negative values for income and wealth, unlike some other measures of inequality.Nov 12, 2012
inequality - can be imperfect bc lines can cross(incomes are distributed differently, but are equally unequal
the greater the curvature of the Lorenz line, the greater the ?
greater
the higher the Kuznet ratio, the ? the inequality
unequal
the larger the gini coefficient, the more ? is the population
geometric mean NHDI= H^1/3 x E^1/3 x I ^1/3
the new HDI is calculated with the?
theory (THIS IS MAIN TAKEAWAY OF THE AK MODEL)
the rate of growth of GDP (deltaY/Y) is determined by the net national savings ratio, s, and teh national capital output ratio, c
GDP (Gross Domestic Product)
the total value of goods produced and services provided in a country during one year. total final output of goods
top heavy, as is in the USA
the world distribution of income is?
complementaries between several conditions necessary for successful devlopment
theories of economic development from 1990-2000 emphasize?
functionings achieved
those that they actually select
- Free market approach •Public choice theory •Market-friendly approach
three component approaches of neoclassical counterrevolution of the 1980s
a. The neocolonial dependence model b. The false-paradigm model c. The dualistic-development thesis
three major streams of thoughts in international dependence revolution 1970s
self-esteem
to be a person - sense of worth and self respect, not being used by a tool for other's needs
freedom from servitude
to be able to choose - emancipation from alienating material conditions of life and from social servitude to nature, especially that poverty is predestination
GNI (Gross National Income)
total domestic and foreign output claimed by residents of a country, comprises gross domestic product plus factor incomes accruing to residents from abroad, less income earned in domestic economy accruing to persons abroad
S=I you can now set equations equal to one another, S= sY= cdeltaY=K=I
total net savings determine level of new investment
pre-conditions for take off
transitional stage - people begin to apply new techniques of production in various sectors - specialization, infrastructure development - people accept the importance of education - savings, income, investment, production, purchasing power increase
personal(size) distribution of income - Kuznet's ratio - Lorenz curve - Gini coefficient
two approaches to measuring inequality
1. Technology transfer: it is cheaper to replicate technology than to undertake the original research and development investment 2. Rapid capital accumulation in LDCs due to law of diminishing returns: marginal product of capital (therefore profitability of investment) is higher in developing countries where capital is scarce. Expect higher investment rates in developing countries
two reasons for convergence? do poor countries have a chance to close the gap with the higher income countries?
neoclassical counterrevolution 1980s examples: failures of the public interventionist economies of Africa and Latin America - free market examples: success of economies like South Korea, Taiwan, and Singapore (although, these Asian Tigers are far from the laissez-faire)
underdevelopment results from poor resource allocation due to incorrect pricing policies and too much state intervention by overly active developing nations governments - developing world is underdeveloped bc of the heavy hand of the state and the corruption, inefficiency, and lack of economic incentives
lewis two sector model
underlines the importance of transfers of resources from low productivity to high productivity activities in the process of economic development
the average productivity(total output / total number of ppl working)
wage is ?
higher - high quality workers are paid more when there are more high quality workers to work with - explains the international brain drain
wages will be more than proportionately ? in developed countries
self-discovery of one's comparative advantage - not enough to say developing countries should produce labor intensive products" bc there are thousands of them
we can look at economic development as a form of?
look within nations at how income is distributed to ask who benefits from economic devleopment adn why - very high levels of inequality are found in many middle income countries in Latin America but much lower inequality in Asia - inequality is particularly high in many resource rich developing countries (middle east and sub saharan africa)
we cannot confine our attention to averages, we must?
sustenance
ability to meet basic needs - all ppl have basic needs
international
access to extrenal capital, technology, internatoinal trade - why we see a difference in transition between developing and developed nations
complementarity - returns on investments are dependent on investments made by other agents
action taken by an agent that increases incentives for other agents to take similar actions
How Low-Income Countries Today Differ from Developed Countries in Their Earlier Stages (19thcentury) 1.Physical and human resource endowments 2.Per capita incomes and levels of GDP in relation to the rest of the world 3.Climate 4.Population size, distribution, and growth 5.Historic role of international migration 6.International trade benefits 7.Basic scientific/technological research and development capabilities 8.Efficacy of domestic institutions
what are the differences?
labor in the Lewis two sector model
what gradually migrates from the agricultural sector to industrial sector? - low productivity in rural sector means there is little impact on output of labor -industrial firms offer higher wages and a higher quality of life
infrastructure effects
when one product sector industrializes, it increases size of the market for the use of infrastructure services making the provision of these services more profitable
multiple equilibria
can occur if investment must be undertaken in current period to geta mreo efficient production process in next period
capital constraint
can only save 15% savings gap!, hence, foreign aid or private investment
- there is some active role of government required - with deep interventions, the potential costs of a public role become much larger - need to work toward the development of institutions
chapter 4 conclusions - coordination failure - new perspectives offer some important overall lessons for policy?
development as growth and linear stage theories, theories and patterns of structural change, international- dependence revolution, neoclassical, free market counterevolution
classic theories of economic development(four approaches)
autarky - there was stagnant growth in China and, to a significant extent, India, ultiimately pushed them for an open economy - economies such as Taiwan and South Korea, and China more recently, whcih have most emphasized exports to developed countries, have grown strongly
closed economy that attempts to be completely self reliant
extractors of wealth rather than the creators of wealth, harming development then and now(British Empire)
colonial era institutions often favored ?
Michael Kremer's O-Ring Theory of Economic Development
comes directly as a result of challenger disaster
- people behave to maximize their utility - businesses behave to maximize their profit - consumers/firms make rational decisions
common economic assumptions
dubious assumption - union bargaining power, civil service wage scales, multinational corporations hiring practices
competitive modern sector labor market that guarantees the continued existence of constant real urban wages
are all economic issues
conflicts, environmental isssues, rural and urban area disparity, and women disparity are?
domestic and international
constraints on development?
undernourishmet
consuming too litle food to maintain normal levels of activity
- rate of labor transfer and employment creation may not be proportional to rate of modern sector capital accumulation - capital flight - what if profit is reinvested in sophisticated laborsaving equipments rather than duplicating existing capital
criticism of the lewis model
- not ambitious enough(going little beyond projecting past rates of improvement 15 years into the future) - goals were not prioritized, were treated as stand alone objectives(reducing hunger may leverage achievement of many of the other health and education targets) - setting the end date may discourage assistance if the goals are not met - fails to account for the intensity of poverty
criticisms of MDGs?
output - supply and demand curves are assumed to determine unit prices - fails to take into account the influence of nonmarket forfes in determining these factor prices
each and every factor gets paid only in accordance w what it contributes to national ____ ?
Inverted- U Kuznet hypothesis (GO BACK TO SLIDE)
early stages of economic growth, distribution of income will tend to worsen
Rostow's Model of Development
economic development can be viewed as a series of stages through which all countries must proceed
free market counterevolution
emphasize benefit of free markets
international- dependence revolution
emphasize external institution and policital concstraints
linear stages model
emphasizes the crucial role that savings and investment play in promoting sustainable long-run growth
training effects
entrepreneurs know that the workers they train may be enticed asway with higher wages offerdd by rival firms
Hollis B Chenery and colleagues
examined patterns of development for numerous developing countries during the postwar period
rate of growth of GDP = deltaY/y= (Sraised to G)/c - rate of capital depreciation y is GDP per capita there's a rate of capital depreciation s^g is gross savings
expressed in terms of gross savings (s raised to G)
similar skills for their various tasks
firms tend to employ workers with ?
- personal heterogeneities - environmental diversities - variations in social climate - distribution within the family - differences in rational perspectives(some goods are essential, cell phone)
five sources of disparity between measured real incomes and actual advantages - "capability to function" is what really matters
theories and patterns of structural change
focus on internal processes of structgural change
capability approach
focuses direclty on the quality of life that individulas are actually able to achieve quality of life analzyed in terms of the core concepts of functinoing and capablility
HRV Growth Diagnostics Tree
fsdafsa
theories - often based on a simple observation(when variable A increases, variable B decreases theory: based on my assumption that nothing else changes, this will be in a certain way
generalized causal relationships between two variables
population - at each point along the population distribution, the Lorenz curve shows the total (GO BACK TO SLIDE)
graph the cumulative percentage of income earned by each percentage of the ?
fertility rates
high fertility can be both a cause and consequence of underdevelopment, so birth rate is reported as another indicator
- exchange rates(this doesn't take into account relative purchasing power) - purchasing power parity(PPP) fixes this
how do we classify countries according to GNI per capita?
probably most consequential- index is now computed wiht a geometric mean, instead of an arithmetic mean geometric mean is also used to build up overall education index from its two components revised education comppononetns, now using the average actual educational attainment of the whole population, and the expected attainment of todya's children
how does the new HDI compare with the better known but no longer used Traditional HDI?
Hollis B Chenery- Empirical pattern of development
identified several characteristic features of the development process - i. shift from agricultural to industrial production - ii. steady accumulation of physical and human capital - iii. change in consumer demands from emphasis on food and basic necessities to desires for diverse manufactured goods and services - iv. growth of cities and urban industries as people migrate from farms and small towns - v. decline in family size and overall population growth as children lose their economic value and parents substitute what is traditionally labeled child quality (education) for quantity
higher, lower
if your PPP is lower than the baseline, your prices are relatively? if your PPP is higher than the baseline, your prices are relatievly?
under some conditions, externalities can lead to multiple equilibria, make case for a big push policy - investing firms captures only part of the contribution of its investment to the profits of other investing firms - firms adopting increasing returns to scale technology may have the follwoing effects(raising total demand, reducing fixed costs of later entrants, redistriuting demand to later periosds when other industrializing firms sell - shifting demand toward manufacturing goods(usually produced in urban areas), help defray costs of essential infrastructure, or costs of training and other shared intermediate inputs
in a nutshell: big push mechanisms?
very limited. dependency has a further magnified impact in developing countries
in developing countries, public support for children is?
money
in the context of economic development, what makes you happy?
enough to determine the quality of life or HDI
income, even when adjusted to be the same scale, is not?
PPP
income, therefore development, gaps between countries tend to be smaller when one converts to ?
Kuznets Ratio top 20%/ bottom 40%
index for measuring inequality - ratio of the incomes received by the top 20% and bottom 40% of the population
Dualistic Development Thesis
Dualism: existence and persistence of substantial and even increasing divergences between rich and poor nations and rich and poor peoples on various levels. •embraces four key arguments i.Superior and inferior situations can and do coexist E.g Coexistence of modern and traditional methods in Lewis' model, educated and illiterate, dependent nations and powerful nations. ii. The coexistence is chronic and not transitional iii. The degrees of superiority or inferiority fail to show any signs of diminishing iv. Superior elements does little or nothing to pull up the inferior elements. It may actually serve to push it down- to "develop its underdevelopment."
ethnic and religious diversity need not necessarily lead to inequality turmoil or instability, there can be creativity and innovation
Easterly and Levine find greater ethnic diversity in Africa increases the likelihood of adopting poor policies and underproving growth enhancing goods, however
relative convergence
Examine whether poorer countries are growing faster than richer countries Growth rate of gross national income per capita Developing countries 5% Developed countries 2% • globally, evidence for relative convergence is weak, even for the most recent decades.
sen's concerns
individuals can differ greatly in their abilities to convert the same resources into valuable functionings - evaluation that focuses only on means is insufficient adaptive preferences - evaluation that focuses only on subjective mental metrics is insufficient whether or not ppl take up the options they have, the fact that they do have valuable options is significant - evaluation must be sensitive to both actual achievements(functionings), and effective freedom(capability)
in many other ways than increasing wealth - increasing wealth does not necessarily increase happiness - relative income matters for determining happiness(individual measures of subjective well being)
individuals may not get happier as society gets wealtheir, but happiness can be achieved?
encourage exploration in the first stage - encouraging movement out of inefficent sectors and and into more efficient sectors in teh second stage
industrial policy to identify potential products to specialize by
factors of production(labor, land, capital) - explains share of total national income that each of the factors of production receives
instead of analzying individuals or households, look at?
their growth
institutional, political, and economic rigidities have made developing countries dependent on rich countries for?
social systems - you can have failures of development policies because non economic variables were excluded from the analysis(values, attitudes, institutions)
interdependent relationships between economic and non economic factors
international dependence revolution criticisms
it doesn't really show how to achieve development in a positive sense - if we are to take dependence theory at face value, the best course for developing countries is to pursue a policy of autarky
low - infromation externality, market faliure
it is socially valuable to discover that the costs of producing a particular product or service in a given country are?
implicit assumption that development can be associated w growth - often not a simple matter to find a simple binding constraint, can only make a probabilistic assessment - one constraint is not binding today does not mean we can neglect it, identifying and addressing constraints that are likely to become binding in the future is even more challenging
limitations and criticisms of HRV Growth Diagnostic Framework -these all force the analyst to focus on country specific circumstances and thus to get to know the individual country very well
shares of global income
lower levels of living and productivity
characteristics of the developing world
lower levels of living and productivity lower levels of human capital(health education and skills) higher levels of inequality and absolute poverty higher population growth rates greater social fractionalization larger rural populations but rapid rural to urban migration lower levels of industrialization and manufactured exports adverse geography underdeveloped markets lingering colonial impacts
economic growth has produced incredible wealth
many parts of the world have escaped from economic hardship - for many places in northern ethiopia, tehre is no modern transport no electricity grids, same thing in Nairobi
criticism of harrod domar model - the aid receiving countries there had the structural, institutinoal, and attitudinal conditions like strong markets, an educated workforce, motivation to succeed, and efficient governments - rostow and harrod domar model implicitly assume the existence of teh same conditions in underdeveloped countries
marshall plan worked for europe bc?
Lorenz curve
may be used to analyze three limiting cases of dualistic development - modern sector enlargement(income goes up, we don't know ab inequality(traditional remains unchanged, modern changes)), this suggests possible inverted-U hypothesis by Kuznet - modern sector enrichment(income goes up, inequality goes up) - traditional sector enrichment(incomes goes up, inequality goes down)
total poverty gap
measures total amount of income necessary to raise everyone who is below the poverty line up to that line
poverty
millions of people are still living in?
Big Push Model - transforming a subsistence econmy into industrialized is challenging, why?
model of how the presence of market failures can lead to a need for a concerted economy wide and public policy led effort to get economic development underway or accelerate it
questionable assumption
more criticism of lewis model - surplus labor exists in rural areas while there is still full employment in urban areas
Amartya Sen's Capability Approach
more framework that proposes that social arrangements should be evaluated accroding to the extent of freedom ppl have incolves concentration on freedoms to achieve in general and the capabilities to function in particuar "poverty" is understood as deprivation in teh capablilty to live a good life
drive to maturity
more refined technology - innovation, diversification - rate of investment increases, 20% of national income - less reliance on imports - exports quantity increases and balance of payment improves - per capita income increases
crude birth rate
number of children born alive each year per 1000 population
The speed of expansion in the sector depends upon the rate of industrial investment and capital accumulation in the industrial sector.
output increase in industrial sector, Labor transfer to industrial sector increases employment growth in the sector: so, ?
Age of high mass consumption
per capita income is very high - durable goods are produced in the country - government prepares social welfare plans - service sector becomes dominant - college education is within the reach of more than half of the population
dependency burden(there is greater of this in developing countries)
percent of population that is below 15 and above 65 years of age
incidence
percentage of people who are poor, or the headcount ratio Hm
quality traps - O Ring effects magnify the impact of local production bottlenecks (multiplicative effect on other population) - bottlenecks also reduce the incentive for workers to invest in skills by lowering the expected return to these skills
potential for multiple equilibria, when there are O-ring effects, one can get caught in an economy wide, low-production ?
inherently multidimensional, as is economic development
poverty is more than a lack of income, it is?
Amartya Sen
poverty is not just an issue of money, it's not being able to realize one's true version of themself
development(big term)
process of improving the quality of all human lives and capabiliites by raising people's levels of living, self esteem and freedom
Lewis point
process of modern sector self sustaining growth and employment expansion continues until all surplus rural labor is absorbed in the new industrial labor sector we only want to take so many workers so the agriculture doesn't lose efficiency, and the industrial still well
traditional society
production is limited - level of per capita income can hardly meet minimum level of consumption - labor force depends upon agriculture - barter economy
The Hausmann-Rodrik-Velasco (HRV) Growth Diagnostics Framework
propose a growth diagnostics decision tree framework for zeroing in on a country's most binding constraints on economic growth
models Example 1: when Pbeer decreases 5%, Qbeer increases 10%
quantitative representations of the problem being analyzed
take off
rate of economic devleopment is increasing - increasing industrialization - rate of employmnet increases, number employed in agriculture declines - savings and investment reach 12-15% of national income
Gini Coefficient - varies between 0 and 1
ratio of the shaded area, A, to the total area of the triangle, BCD
functional distribution of income
recall from econ 201 the factors of production and payment for each - land: rent - labor: wages - capital (and entrepreneurship) * capital (GO BACK TO THIS SLIDE)
domestic
resource endowment, physical and population size, governmnet policies and objectives
food, able to be nourished, nourished, happy
resources > capability > functionings achieved > well being
net savings ratio
savings expressed as a proportion of disposable income over some period of time
empirical research of Chenery and his associates
seeks to document patterns of structural change
assumptions - complexity is by far the biggest problem economists face - simplifying so that we focus only those aspects critical to the particular problem - often a subjective process, can lead to disagreements between economists
serve to simplify the world
capability set
set of valuable functionings that an individual has real access to
LIfe sucks for poor people
several poor people have said that
fractionalization - the greater the ethnic, linguistic, and religious diversity of a country, the mroe likely it is that there will be internal strife and political instability
significant ethnic, linguistic, and other social divisions within a country
structural change and patterns of development
Focuses on the sequential process through which the economic, industrial, and institutional structure of an underdeveloped economy is transformed over time to permit new industries to replace traditional agriculture as the engine of economic growth. -In Contrast toLewis, increased savings and investment are perceived as necessary but not sufficient conditions for economic growth In addition to capital growth, an economy needs as e to f interrelated changes to become modern-think transformation of production ,composition of consumer demand, int'l trade, resourc e use, urbanization, etc
GNI
GDP + incmoes accruing to residents from abroad - incomes to persons abroad but earned in domestic econmy = ?
Gross National Income
GDP + incomes accruing to residents from abroad, including expatriots
Developed countries Low income countries < $1006 Lower middle income countries $1006-$3955 Upper middle income countries $3956-$12235 Developed countries High income countries > $12, 235(this is below poverty line in US)
GNI/capita(per capita income) classifcations
external dependence
Less well organized and influential in international relations -agreements within the World Trade Organization (WTO): agricultural subsidies in rich countries. •weaker bargaining positions than developed nations in international economic relations •cultural dependence, from news and entertainment to business practices, lifestyles, and social values. •environmental dependence -global warming is projected to harm developing regions more than developed ones
- incidence - intensity of people's poverty
MPI combines two aspects of poverty
historical role of international migration
Relief for locally depressed areas •Remittances https://www.migrationpolicy.org/programs/data-hub/global-remittances-guide •Brain Drain(most skilled portion of population, leave to get educated and get jobs in other countries) •"Brain gain"(some of that created demand, stays domestically)
GNI per capita - LIC, LMC, UMC, HIC(lower income country, higher income country) Degree of international indebtedness - severely, moderately, less indebted Level of human development - healht, education attainments (low, medium, high, very high) the least developed countries - low income, low human capital, high economic vulnerability
START SECTION 2 4 common ways of classification of developing world?
across individuals wihtin a country
STARTING CHAPTER 5 traditionally we use GNI per capita to measure economic development, but incomes vary ____
development economics - has a greater scope than traditional neoclassical economics and political economy, has political scope - deal with the economic social, political, and institutional mechanisms to bring rapid and large scale of improvements
The study of how economies are transformed from stagnation to growth and from low-income to high-income status, and overcome problems of absolute poverty.
Total Poverty Gap
The sum of the difference between the poverty line and actual income levels of all people living below that line.
the total poverty gap
The sum of the difference between the poverty line and actual income levels of all people living below that line.
convergence
The tendency for per capita income (or output) to grow faster in lower-income countries than in higher-income countries so that lower-income countries are "catching up" over time.
traditional HDI calculation assumed one component traded off against another as perfect substitutes, a strong assumptoin reformulation now allows for imperfect substitutability, which is widely considered a more plausible way to frame the tradeoffs - poor performance in any dimension is directly reflected in the geometric mean. 1% decline in index of life expectancy has same impact on HDI as 1 percent decline in teh education or income index - more respectful of the intrinsic differences across dimensions than a simple average
why calculate with a geometric mean?
- capital market failures - agency costs(cost of monitoring managers) - communication failures - limits to knowledge - lack of any empirical evidence that would suggest this is possible
why can't the problem be solved by a super-entrepreneur?
- contribution of income diminshes as incomes rise - a high income wo being translated into other human development outcomes is of less relevance for human development. If Gni per capita > $75,000, only the first $75,000 contriutes to human development - higher income is prevented from dominating the HDI value
why is there a maximum of GNI per capita at $75,000?
- emphasize diminishing marginal utility of transforming income into human capabilities - increase of GNI per capita by $100 in a country where the average income is only $500 has a much greater impact on the
why logarithm of income component?
- nature of structural change - returns to education
why might inequality worsen during ealry stages of economic growth?
poverty, inequality, and social welfare
why should we be concerned with inequality among those above the poverty line?
recognizes all income received by residents of a nation, regardless of whether it is earned within the country or overseas - GNI is a good proxy of the consumption of nationals - consumption is a good proxy of well being/welfare - can use GNI per capita for comparing welfare between countries and GNi growth as an indicator of social progress iwthin a society
why use GNI?
low skill firm
workers performing the same task earn higher wages in a high skill firm than in a ? - apple will hire the best programmers and best designers and also best janitors and will pay the most
Where-to-meet dilemma(coordination failure) - only way you meet them is by chance - farmers in a region do not know what to specialize in
you and several friends made plans to meet in NYC july 4th but haven't settled on a specific location within the city where should you go to meet them?
market friendly approach
• Accepts market failure argument especially in developing countries • Considers missing and incomplete info, externalities in skill creation and learning, and economies of scale in production are endemic in the markets in developing countries • Successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy in areas where the market is inefficient
False-paradigm model
• Developing countries have struggled to develop because the developed nations told them the wrong things to do • stressed over accumulation of capital and market liberalization rather than appropriately addressing the needed social and institutional change -Faulty and inappropriate advice by well-meaning but often uninformed, biased and ethnocentric international "expert" advisers
public choice theory
• Government can do nothing right • Politicians, bureaucrats, citizens and states act solely from self-interested perspective •Unavoidable rent-seeking behavior •Minimal government is the best government.
absolute convergence
• Long run income convergence between rich and poor nations as the faster-growing LDCs catch up with slower-growing advanced countries •Empirical evidence for absolute convergence is not present in the data -Income divergence in the world sample
free market approach
• Markets alone are efficient • Technology is freely available and easy to absorb • Perfect and costless information •Government intervention is distortionary and counter-productive
Conditional coverage
• When countries are hypothesized to converge not in all cases but other things being equal (particularly savings rates, labor force growth, and production technologies), • Long run income convergence between countries of similar economic structure (i.e.20 high income OECD countries) • Explanation for conditional convergence: similar savings rates, population growth rates, capital depreciation rates, production technologies, etc.
Robert Solow
•Nobel Laureate 1987 •Born in Brooklyn, New York, 1924 •Accepted by Harvard at 16, joined US army at age 18 •Taught in MIT•Contributions to the theory of long-term macroeconomic growth •The "Solow neoclassical growth model"
Traditional Human Development Index (HDI)
1/3(income index) +1/3(life expectancy) + 1/3(education index)= ?
William Arthur Lewis - lewis two sector model
1979, nobel laureate, died in 1991 - born in St. Lucia, his parents were school teachers immigrated from Antigua - homeschooled, smart - wanted to be an engineer
- real income per capita adjusted for purchasing power - health as measured by life expectancy, undernourishment, and child mortality - educational attainments as measured by literacy and schooling
3 basic indicators of development UN decided on
Intertemporal effects Urbanization effects Infrastructure effects Training effects
Big push may also be necessary when there are
Lorenz Curve - larger quintiles take home a much larger percentage of income 90 percentile takes home 75% of income
Graph showing how much the actual distribution of income differs from an equal distribution
simple illustration of O-Ring Theory
HR Department has 4 workers, 2 H types and 2 L types; two tasks for the production, one worker per task - in a simplified model, let Q= (qi)(qj) - how to allocate? {HH, LL} or {HL, LH} - we know that H^2 + L^2 > 2HL because : (H-L)^2 > 0 So, w strong complementarity it always pays to do assortative matching
underdeveloped markets
Imperfect markets and incomplete information •Lack:-legal system that enforces contracts and validates property rights; -a stable and trustworthy currency; -an infrastructure of roads and utilities; -a well-developed and efficiently regulated system of banking and insurance, -substantial market information -social norms that facilitate successful long-term business relationships
International trade benefits
In the nineteenth century, European and North American countries were able to participate in this dynamic growth of international exchange largely on the basis of relatively free trade, free capital movements, and the unfettered international migration of unskilled surplus labor. • In the twentieth century (except a few Asian countries) many developing countries faced formidable difficulties in trying to generate rapid economic growth on the basis of world trade. Their terms of trade declined over several decades • Terms of trade: the price they receive for their exports relative to the price they have to pay for imports
adverse geography
Landlocked economies •Resource endowment -Oil rich Persian Gulf states; -Chad, Yemen, Haiti, and Bangladesh, where endowments of raw materials and minerals and even fertile land are relatively minimal; -DRC shows vividly, high mineral wealth is no guarantee of development success •Geography is not destiny
necolonial dependence model - This exists bc Powerful elites (Landlords, Entrepreneurs, trade union leaders) oppose reforms that might benefit the wider population
Marxist thinking - underdevelopment exists bc of the historical evolution of unequal international capitalist system of rich poor country relationships, externally induced phenomenon - unequal power relationships between the center and the periphery (center is the economically developed world, periphery is the developing countries)
slower
Per capita income (or output)grows ? in higher-income countries than in lower-income countries
Y: GDP S: Net Saving s: net savings ratio I: Net Investment K: Capital c: Capital-Output ratio K=cY
The AK Model S= sY I= deltaK deltaK= cdeltaY S=I
literacy rate
The percentage of a country's people who can read and write.
The Human Development Index (HDI)
United Nations Development Program (UNDP) formulates HDI as a weighted average development index of per capita income, health conditions, and educational attainments in a country - new HDI ranks each country on a scale of 0(lowest human development) to 1(highest human development) based on three goals of development
Millenium Development Goals (MDGs) - they have been effective. proportion of undernourished ppl in developing regions has fallen by almost half since 1990, increased school enrollment from 83% in 2000 to 91% in 2015 in developing regions, have reached gender parity in education(90% of countries have more women in parliament since 1995), child deaths have decreased from 1990 to 2015 from 12.7 million to 6 million, maternal mortality decreased by 45% worldwide, HIV infections fell in many regions of the world, 91% of the global population uses an improved water source, up from 76% in 1990, ozone depleting substances have been virtually eliminated since 1990, ozone layer is expected to recover by middle of teh century
adopted by 189 member states of the United Nations (UN) in September 2000 at the Milennium Summit - strongest statement yet of international commitment to end global poverty - eight goals were agreed upon, concerning poverty, health, education, gender equality, environmnental sustainability, maternal health, infections, develop global partnership for development
launched the successor, sustainable development goals - universal agenda for all countries. Leave no one behind, put sustainable development at the core, transform economies for jobs and inclusive growth, build peace and effective institutions, forge a new global partnership
after MDGs expired, the UN?
coordination failures - this can occur when actions are complementary, actions taken by 1 agent reinforces incentives for others to take similar actions, can occur even when agents are fully informed - simply cannot get there due to coordination, different expectations, or waiting to make the first move
agents' inability to coordinate their actions leads to an outcome that makes all agents worse off
international-dependence theorists
alert us on how the decisions made in the developed world can affect the lives of millions of people in the developing world
missing markets, limited information and social stratification
although modernizing in many regions, rural areas are poorer and tend to suffer from ?
identification, aggregation
any household experiencing 30% or more of the weighted deprivations is poor - MPI formula is MPI= Hm x A (Incidence x Intensity)
the capability approach x 2
approach to the interpersonal comparison of advantage under which an individual's level of advantage depends on his or her capacity to function or to act in certain listed ways-for example, to be well nourished, mobile, and literate.
AK Model - $3 is necessary to produce $1 stream of GDP if a country wants to increase GDP by $10, what shoudl it do? - increase capital by $30 Y= AK
assumes there is some direct econnomic relationship between the size of the total capital stock and total GDP
increasing returns prevail
assumption of diminishing returns in the modern sector - evidence: ?
Average Income Shortfall AIS= TPG/ H
average amount by which income of a poor person falls below the poverty line
life expectancy
average number of years newborn children would live if subjected to mortality risks prevailing for their cohort at the time of birth
intensity of people's poverty
average percentage of dimensions in which poor people are deprived, A
causality example: observing developed country patterns of - decline of the share of the labor force in agriculture over time, many developing country policymakers have been inclined to neglect that vital sector - important role of higher education, policymakers may be inclined to emphasize the development of an advanced university system even before a majority of the population has gained basic literacy
by emphasizing patterns rather than theory, this approach runs the risk of leading practitioners to draw the wrong conclusions about?
1b Harrod-Domar Growth Model or the "AK Model" - growth rate of GDP depends directly on the national net savings rate(s) and inversely on the national capital output ratio(c)
based on a linear production function with output given by the capital stock times a constant Y= AK
Solow Neoclassical Growth Model output growth results from 1 or more of 3 factors - increases in labor quantity and quality(through population growth and education) (THIS IS THE NEW ONE FROM THE AK Model) -increases in capital (through saving and investment), and - improvements in technology
basic framework for the study of convergence across countries - economies will conditionally converge to the same level of income if they have the same rates of savings, depreciation, labor force growth, and productivity growth
between rural and urban areas
big gaps exist between the poorest and the richest, and ?
big push model
big push
structural change models 1970s
deals with policies focused on changing economic structures of developing countries - specifically the transition from traditional agricultural economies to modern and industrially diverse manufacturing and service economies - recognizes the fact that developing countries are part of an integrated international system that can promote their development
there is more work to be done
definite progress was made since 1990 due to the MDGs, but still?
growth(low capital output ratio (c) is desirable, technological efficiency
depends on how much output can be produced by a unit of capital
output per worker vicious cycle economic stagnation->low income-> low investment->low productivity->
developing regions lag far behind the developed world in productivity measured as?
income per capita= GNI/population
development has traditionally meant achieving sustained rates of growth of income per capita to enable a nation to expand its output at a rate faster than the growth rate of its population
reduction or elimination of poverty, inequality, and unemployment within the context of a growing ecnomy - leads to improvement in wellbeing, more broadly understood - multidimensional process involving major changes in social structures, popular attitudes, and national institutions, as well as acceleration of economic growth, reduction of inequality, and eradication of poverty
during the 1970s, economic development cam eto be redefined in terms of the?
