Econ 362 Final Exam

The Urban Informal Sector What is it? (Think Who, what, how, why) What are the positives? (SALLEMW) What are the negatives?

"Informal Sector" - The part of the urban economy of developing countries characterized by: Small competitive individual or family firms Petty retail trade and services Labor-intensive methods Free entry Market-determined factor and product prices New entrants create their own employment/work for small-scale family-owned enterprises Urban informal sector seen as the solution for growing unemployment problem Operate monopolistically competitive firms with ease of entry, excess capacity, and competition driving profits. Workers motivation - obtain sufficient income for survival. Positive aspects of Informal Urban sector: Solution to the growing unemployment problem that the formal rural and urban sectors cannot absorb Allows labor from the rural sector to escape from extreme rural poverty Low capital intensity Low-cost training Employment creation More opportunities for women Waste recycling Negative aspects of the Informal Urban Sector: Lower productivity relative to the formal sectors Workers do not enjoy protection in terms of job security, decent working conditions, old age pensions, in the formal sector Poor working conditions - Large fraction live in shacks and small cinder-block houses that entrepreneurs build in slum areas Threat to infrastructure, public health and social stability Higher levels of urban unemployment from attraction of labor to undesired areas of informal sector/more than what the formal sector can absorb Pollution/congestion Increase in size of slums and ghettos

What are the Key Ingredients in Taiwan's Development Success?(DEHLI EMO) Diff of Ideas Edu High IS LandRef InfraDev Effec Gov Pol Market Incentives Other factors

1. Emphasis on education a. Compulsory 6 years in 1950 and 9 years in 1968 b. Enrollment rates for girls > 90% c. 7 hours of school 5 ½ days/week d. Tax breaks to businesses donating personnel and equipment e. High retention rates f. Teachers taught seriously g. Corruption kept to a minimum 2. Extensive infrastructure development a. Inherited superior infrastructure system from Japanese (ports, highways, railroads) b. Excessive number of soldiers from Chinese Nationalist army voluntarily retired and worked on East-West highway network c. Once press was free it began to expose infrastructure scandals which helped limit it 3. Early and thorough land reform a. Landowners received stock on SOEs in return for transferring land to peasants -> extremely rapid growth in agricultural productivity 4. Very high rates of savings and investment a. Deeply rooted savings ethic resulted in savings rates of 30% to 40% b. Interest rates for savings relatively high and tax free c. Relatively low foreign-capital share in total investment, about 10% 5. Diffusion of commercial ideas a. Success at absorbing commercial ideas from Japan and USA b. Due to diligence of thousands of small companies c. China External Trade Development Council combed the world for ideas on how Taiwanese firms could upgrade their technologies and adapt to enter industrial markets d. E.G. the office in New York did market research on identifying items that could be sold in the U.S. e. Firms in Taiwan would then produce samples with prices for the office to shop them around and then either send orders or tell producers what they needed to do to be competitive 6. Effective government industrial policies a. License exports b. Control direct investment both into and from c. Establish export cartels d. Fiscal incentives for investment in priority sectors e. Concessional credit for favored industries f. 1949 - 1958: State-directed IS policy g. 1958: switched from intervention to export promotion and introduced market forces h. But all this meant was somewhat less of a planned economy i. System of categorizing imports -> prohibited, controlled, permissible j. Importer must prove that domestic suppliers could not meet foreign price, quality and on-time delivery k. So IS stimulates demand and then transforms into exportables l. Government uses international prices to discipline the natural tendency to price-setting behavior of domestic producers m. Stable, consistent macro policies 7. Market incentives a. Incentives to produce wealth rather than merely to seek a larger share of existing wealth b. Solid property rights 8. Other factors a. Work ethic and attitude of the workforce b. Good fortune of pushing export-led growth in the early 1960s when the world economy was taking off and a wide-open US market c. Development through increasingly sophisticated exports d. Indirect incentives to local firms to provide key inputs to high tech exporters

What are the Key Ingredients in South Korea's Successful Entry into World Markets? (Promotion of high-skill exports, Financial incentives for industrial firms to move up, Export oriented industrial policies) Policies: (CuPHITTLED)

1. Orientation of its national industrialization strategy toward the promotion of exports of increasingly sophisticated skill and technology content 2. Strong financial incentives for industrial firms to move up the ladder of skills and technology 3. 19 major types of export-oriented industrial policy interventions Currency undervaluation Preferential access to imported intermediate inputs High effective rates of protection for infant industries Import controls Tariff exemptions on inputs of capital goods Tax breaks for domestic suppliers of inputs Lower direct tax on income earned from exports Direct export subsidies Enforcement through moral suasion -> the Monthly National Trade Promotion Meeting Only a relatively small number of activities were supported at any one time Subsidization across divisions within firms as a company enters new export markets, ie.e diversified companies expected to move into new sectors drawing on monopoly rents Technology acquired from abroad largely NOT through FDI Deliberate fostering of large conglomerates (chaebol)

India case study

14% of informal-sector worked in nonwage employment Nonwage workers in informal sector had 47% higher wages than wage workers in the formal sector High barriers to enter nonwage employment, requiring significant skill and capital. Large network of operators controlled nonwage labor entry to occupations not requiring significant skill/capital Low mobility from the informal to formal sector (5-15% per year) Rate of entrance into the formal sector from informal sector was 1/6th-1/3rd of the rate of entry to urban formal sector directly. Informal-sector workers tend to work the same job as those in the formal sector. Average informal-sector worker worked 1.67 jobs over 61 months, average formal-sector worker worked 1.24 jobs over 67 months. Informal-sector workers who migrated into the city tended to work in the informal-sector as well 71% of nonwage workers migrated into the city expecting to earn nonwage earnings Workers who appear underemployed may not consider themselves as such, and thus do not seek modern formal sector employment There is no downward pressure on modern sector wages and thus modern-sector wages may remain above informal-sector wages for indefinite periods of time, despite high urban underemployment Lack of contact between informal sector and formal sector 2/3 of workers who entered formal sector and almost 2/3 of those who migrated from informal to formal sector found jobs through personal contact 43% of Banarjee's sample migrated after receiving a suggestion from a contact. Duration of unemployment after migration was short - 64% of new arrivals found employment within the first week Average waiting time to obtain a first job = 17 days Migrants kept close ties to rural roots - ¾ visited their villages, 2/3 sent on average 23% their incomes back home Concern for family appeared to be a guiding force in migration Determinants of migration in Bihar, Kerala, Uttar Pradesh Chronic unemployment before migration Desperation for employment Expect to participate in informal urban sector in the long run

5 Policy implications of the Todaro theory (RJWIR)

Five Policy Implications: 1. Reduction of urban (especially first-city) bias To do: Minimize imbalances in economic opportunities between the two Consequences of not doing so: Wide differences stimulate more rural migration -> Even more unemployment Gives rise to socio economic problems in the cities Could create labor shortages and less entrepreneurship in the rural areas Reduces overall social welfare 2. Job creation in the urban area is insufficient for resolving the urban unemployment so long as incomes and job opportunities in the rural area don't simultaneously rise -> 2 to 3 times as many rural workers may migrate 3. Indiscriminate educational expansion fosters increased migration and employment (employers may ration by discriminating in favor of those with more education, even if not needed to do the job) To do: Prioritize those with less education opportunities for expansion in education budgets Consequences of not doing so: better educated migrate because probability of getting a job is higher leaving rural areas with less skills 4. Wage subsidies and scarcity factor pricing can be counterproductive To do: Don't try to reduce urban wage costs and thus increase labor-intensity by devices such as subsidies or more government jobs Consequences of not doing so: Wage differentials might be reduced but will remain while the probabilities of getting a job could go up (depending on the remaining differential and the level of urban employment) 5. Rural development programs should be encouraged To do Many-faceted approach to improving conditions in the rural areas while refraining from actions that increase urban demand Consequences of not doing so: Differentials and probabilities increase thus inducing more migration

The Grameen model - successes, questions and difficulties 8 mil borrowers 78k villages 94% women

Grameen Bank of Bangladesh - Excellent illustration of how credit can be provided to the poor while minimizing the risk that resources will be wasted Successes Over 8.25 million borrowers among the poor and formerly poor Over 2,400 branch offices throughout the country and works in 78,000 villages Finances all its outstanding loans from borrowers' deposists Enabled several million poor Bangladeshis to start or upgrade their own small businesses 94% of the borrowers are women Questions Whether microcredit institutions should limit themselves to making loans or also engage in other social development activities Grameen Bank is technically a bank and not an NGO Is Grameen subsidized and how much subsidy makes sense? Analysts argue that microfinance institutions should not provide loans at subsidized rates so that as many total loans can be made as possible plowing back all the profits into new loans Funding for subsidies are limited The more subsidy per loan, the fewer subsidized loans can be made Difficulties Environmental shocks such as severe flooding Competition among microcredit providers is growing In Bolivia the increase in competition in microcredit providers was partly responsible for a financial crisis Cultural challenges Rising women's incomes, self-esteem, and business clout have caused backlash in the conservative Islamic culture of rural Bangladesh where women are expected to be secluded from social activities

Discuss the principal issues impacting on the supply side of the agriculture economy. (CLEW PTF) Climate Energy Land Water Population Tech Fisheries

Land - increasing land under cultivation Remaining arable land 12%-23% in developed countries. 64% in developing countries Differences result in differences in whether or not to include forests for arable land and the degree to which current land under cultivation is already degraded to a point where major investments would have to be made to expand output There is competition in land use - urban sprawl, infrastructure, carbon sequestration, and biofuels Water Agriculture currently accounts for 70% of world water use Larger world population is consuming more water per capita even as freshwater availability is constant or declines Irrigation will need to increase if yields are to go up and it is possible this increase can be more efficient - drip irrigation - but it will need to guard against salinization Water tables are falling, threatening the supply of water to over 3 billion people Energy Current energy inputs into the food supply chain: Planting, cultivating, harvesting, irrigating, manufacturing of fertilizers and pesticides milking machines and computerized control shipping, storing, refrigerating processing, distributing, preparing meals Linkage between higher fuel costs and higher food prices + issue of biofuels Climate Rising temperatures between 1-3 degrees are likely to lead to higher output in higher latitudes and lower output in lower latitudes, though temperature rise is problematic everywhere Sea levels rising Unpredictable and sudden weather shocks Population (almost exclusively in developing countries) Subdividing land HIV reducing number of able workers to work the land Technology Reduced Funding for R&D targeted to conditions in developing countries that also anticipates the issues of land degradation, water availability, fuel inputs and sustainability Fisheries Rate of growth in aquaculture production increased from 94 to 142 million tonnes Some feed stock for aquaculture is coming from fish mean from wild fisheries

What is microfinance, its potential and its limitations?

Microfinance Supply of credit, saving vehicles, and other basic financial services made available to poor and vulnerable people who might otherwise have no access to them or could borrow only on highly unfavorable terms Potential Group lending schemes- By joining together, group of small scale borrowers can reduce the costs of borrowing and because the loan is large, can gain access to formal commercial credit Repayment rates compare favorably with formal-sector borrowers Availability of credit is a binding constraint for microenterprise development 3 factors have made it difficult to relax credit constraints to lower income female microentrepreneurs Poor microentrepreneurs have little or no collateral Difficult for conventional lenders to determine borrower quality Small loans are more costly to process per dollar lent Village banking hopes to solve these problems through "collateral of peer pressure" Small microentrepreneurs are organized into credit cooperatives to which seed capital is lent -> must have other members cosign loans with them Once a member of a cosigning group receives a loan, no other member may borrow until the first borrower has established a regular repayment record Village banks make use of the information "embedded" in the village tabout who is reliable and capable borrower Dynamic incentives Micro Borrower is made eligible for a larger loan in the future if he or she repays the current smaller loan Limitations Majority of rural and urban poor have little to no access to formal credit Until legal reforms are enacted, the financial systems of most developing countries will remain unresponsive Many people in developing countries like Peru or Bangladesh give up their microfinanced enterprises in favor of a regular job A predictable wage offers insurance against the irregular wage of microenterprise proceeds Even laid off professionals in rich countries only go into self employment only until they can find a suitable replacement job Primary problem may be a lack of available jobs paying a steady wage "Transitional Institution" Most borrowers were middle-class entrepreneurs, rather than graduates from its microfinance activities Funding for microfinance follows from the belief in its value for poverty alleviation, but the poor face many problems, some of which cannot be solved solely by relaxing credit constraints It is possible that other activities like agricultural training could be underfunded Performance of microfinanced institutions vary substantially depending on local conditions MFI performance should be evaluated in the context of local conditions Microfinance is powerful but needs to be complemented with other growth, poverty reduction, financial-sector development, human capital, infrastructure building, and conventional job creation policies

Traditional trade strategies for development Outward looking (CETMEP) Why? (TEAD) Inward looking (RICE MLA) Why? (ADD FeeUeq)

Outward-looking development policies - policies that encourage exports, often through the free movement of capital, workers, enterprises, and students; a welcome to multinational corporations; and open communications Export promotion - governmental efforts to expand the volume of a country's exports through increasing export incentives, decreasing disincentives, and other means in order to generate more foreign exchange and improve the current account of its balance of payments or achieve other objectives. Comparative advantages are targeted to compete in world trade Expanding Exports of manufactured goods Trade liberalization to reduce incentives to produce for home rather than foreign homes More market based because countries are forced to compete on the world market Economies of scale Prevent bottlenecks related to the agricultural sector Make sure that farmers produce as much as possible More likely to attract new technical knowledge DCs have generally reduced trade barriers more for manufactures than other commodities Why Countries might adopt Export Promotion (i.e. trade optimists) Technical efficiency increased, promotes competition (economies of scale) Economic or allocative efficiency improved Accelerated technical progress Decreased shortages of foreign exchange and restricted commodities Inward-looking development policies - policies that stress economic self-reliance on the part of developing countries, including domestic developing countries, including domestic development of technology, the imposition of barriers to imports, and discouragement of private foreign direct investment Import substitution - deliberate effort to replace consumer imports by promoting the emergence and expansion of domestic industries Replace commodities that are being imported with domestic supply Industrial growth is key to development Comparative advantage in primary products because of countries stage of development Earn foreign exchange to finance growth from readily available source (to reduce current account deficit) Market for the good already exists in the country Linkage effects -> forward, backward, consumption -> value added contributes to positive job, spending on income cycle Accumulation of learning and knowledge are the primary sources of development Why countries might adopt Import substitution (Trade pessimists) Adjustment and dislocation Dynamic comparative advantage including infant industries Declining terms of trade Fluctuating export earnings with dependence on exports of a handful of primary exports (due to weather uncertainties on the supply side and developed country business cycles on the demand side) Strategic trade policy arguments Unequal bargaining power

Strategies for Agricultural and Rural Development: Discuss the principal sources of agricultural progress (TBAG) and the basic conditions essential for rural development (L(reform)S(BBC)I(EDA).

Principle Sources of Agricultural progress: 1. Technology and innovation Introduction of machinery to replace human labor -> increase productivity Creates unemployment in rural areas without lowering production costs Increases poverty due to expensive machinery Widens inequality gap between men and women if machinery work excludes women 2. Biological, water control, and chemical innovation Indirectly increasing output per worker Improved irrigation, fertilizers, and pesticides are seen as "Scale Neutral" (applicable to farms of all sizes) Effective in tropical climates but coverage needs to extend to Africa Requires no heavy input from capital or machinery 3. Government policy and social institution to introduce technology Policies that benefit both large and small land-owners Most large farmers reap benefit of low-interest government credit Small farm owners have to retort to moneylenders Government Failure: Low price of commodities to supply cheap food for urban modern sector workers Low price = no incentive to produce/expand output Creates local food shortage and retortion to imports to compensate shortage What is needed: Incentives to expand output + appropriate institution and credit market 4. Adapting to new opportunities and constraints Abundant opportunities in horticulture (fruits, vegetables, cut flowers) and aquaculture Coffee and spices are good opportunities for higher-value exports Need for collective action for small farmers "Smallholders can bargain better as a group than as individuals" Land Grabbing - foreign investment in developing country land 15-20 million hectares of developing country farmland has been transferred. Ex. South Korea acquiring 690,000 hectares in Sudan (2008) Benefits: better-paying job creation, training, better techniques, new export markets Risks: Local farmers losing access to traditional rights to use land, net job losses, water shortages and environmental degradation from lack of oversight Biggest constraint: Global Warming and Climate Change Smaller and poorer farmers are in more risk because of lower capacity to adapt, though absolute income loss from environmental factors may be less than large farm owners Agricultural extensification increases risk of soil degradation and lower water and air quality Conditions for Rural Development: Land Reform Farm structures and land tenure patterns must be adapted to increasing food production and promoting a wider distribution of benefits of agrarian progress to reduce poverty Tenure rights to Farmers More equal distribution of agricultural incomes Supportive Policies: Better rural institutions that control production (e.g. moneylenders, seed and fertilizer distributors) Better supporting government aid and services (e.g. education, public credit agencies, rural transport) Coordination success of all factors affiliated with agriculture production Integrated development objectives: Efforts to raise both farm and non-farm rural real incomes through job creation and rural industrialization, along with health and nutrition, housing, and social welfare Decreasing inequality in distribution of rural incomes, reduction in urban-rural inequality in income and economic opportunity Attention to need for environmental sustainability Limiting extension of farmland into remaining forest and fragile areas Promoting conservation and prevent use of harmful agrochemicals Capacity of rural sector to sustain and accelerate pace of improvements over time World Bank - Five critical components of a rural development strategy: Fostering an enabling environment for broad-based sustainable rural growth Enhancing agricultural productivity and competitiveness Fostering non-farm economic growth Improving social well-being, managing risk, and reducing vulnerability Enhancing sustainable management of natural resources

Discuss the steps governments should take to increase the impact of women on development. (Educational attainment Access to information POSLA)

Raising the economic status of women: Educational attainment of women (improvement in their role and stauts) Increase women's access to information concerning child nutrition and hygiene Expanded public health programs, better nutritional status, and better medical care for mother and child Increasing range of economic alternatives to increase opportunity cost of their time (inc non agri wage employment opportunities) Development of old-age and other social security systems outside the extended family network to lessen the economic dependence of parents, especially women, on their offspring Community-based environmental programs need to work closely with women as their day-to-day activities may determine patterns of resource use Women's ability to meet family needs depends on sustainable management of water and fuel supplies Expanded schooling opportunities so that parents can better substitute child "quality" for large numbers of children Family-Planning programs Improvements: Increasing female participation rates in education and training programs Formal-sector employment Agricultural extension programs Legalizing informal-sector employment where the majority of female labor force is employed

What lessons learned from their experiences should other developing countries seek to apply in today's global economic environment? SSD Neo

South Korea 1. Stages of Growth Confirms linear-stages views, albeit in a limited way High levels of investment "Drive to maturity" by mastering the range of currently available technologies "Maturity" is achieved some 60 years after takeoff beings 2. Structural Patterns Rapidly increasing agricultural productivity Shifts of labor from agriculture to industry Steady growth of capital stock and of education and skills Demographic transition from high to low fertility Growth in per capita income 3. Dependence Revolution Received a large part of its national budget in the form of U.S. aid and exported and imported a great deal form developed countries like US and Japan Nation's development was "conditioned" by export opportunities to developed countries Pursued policies that the dependence school would applaud Active industrial upgrading policy Sharply limiting the role of multinational corporations Deliberately establishing indigenous industries as an alternative Using debt rather than direct foreign equity investment to finance extraordinary levels of investment Land reform programs Strong emphasis on primary rather than university education 4. Neoclassical Counterrevolution Extensive use of development planning Using a wide range of tax breaks and incentives to induce firms to follow government directives and interventions Setting individual company export targets Orchestrating efforts in various industries to upgrade average technological level Coordinating foreign technology licensing agreements Using monopoly power to get the best deal from competing multinationals Inducing firms to move rapidly up the ladder of comparative advantage These policies addressed real technology and skill-raising market failure problems of development

Discuss the role of women and the contribution they make to development in these economies (JESCImpGenBiHE)

Subordination of Women: Women bear the disproportionate burdens of poverty, poor education, and limited social mobility Inferior roles, low status, and restricted access to birth control leads to high fertility Improvements in Women's health, education, and economic well-being, role, and status will lead to smaller families and lower population growth Women and children experiences the hardest deprivation More likely to be poor and malnourished, less likely to receive medical services, clean water, sanitation, and other benefits Female-headed households, lower earning capacity of women, limited control over spouses' income contribute to gender inequality. Women have less access to education, formal-sector employment, social security, and government employment programs Female-headed households lack the strength of a male's income and thus are poorer Women are barred from higher-paying occupations Women usually are restricted to illegal, low-productivity jobs Legislation and social custom often prohibit women from owning property or signing financial contracts without a husband Government employment or income-enhancing programs are primarily occupied by men Female-headed households are located in poorest areas Little or no access to piped water, sanitation, and healthcare Household members are more vulnerable to illnesses and are less likely to get medical attention Children are less likely to be enrolled in school and more likely to be working to provide additional income Gender bias within households toward men significantly reduce rate of survival among female infants Men control family's income as women are often not paid for their work Development policies to increase productivity worsens gender inequality as most of these are tailored to men Formal-sector employment is geared to men Women in the Informal Sector: Women predominate among rural-urban migrants and comprise the majority of the urban population - Many accompany their spouses but many also migrate to seek economic opportunity Only a small minority of these migrants is able to find work in the formal sector, which is generally dominated by men Women represent the bulk of the informal-sector labor supply -> working for low wages at unstable jobs with no employee or social security benefits Urban women supposedly enjoy greater social, political opportunities and freedom than rural women, but the gender gaps in labor and employment, decent work, pay, tenure rights, access to assets, personal security and safety, representations in formal structures of urban governance show that women are the last to benefit from prosperity of cities Dropout rates among children who live in households headed by women are much higher because children are more likely to be working to contribute to household income Many women run small business ventures or micro enterprises that require little or not start-up capital and often involve the marketing of homemade foodstuffs and handicrafts Contributions of Women: Subsistence food production in agriculture are performed by women Women are responsible for most agricultural tasks that follow men's tasks Successful agricultural reform will require raising women's productivity and ensuring that gender-specific policies are at the core of rural development strategy Women provide 60-80% of agricultural labor in Africa and Asia Women significantly cultivate cash crops - crops produced entirely for the market Men are responsible for the production and profits from commercial crops, Women are responsible for weeding and transplanting. Increasing population density and land fragmentation increases burden on women as they have to endure longer walks in hotter climates Women also carry the burden of performing domestic household duties Women's income in the house tend to be devoted to children's health and education relative to men's incomes Agricultural inputs and training are rarely provided to female applicants Cultural and social barriers to women's integration into agricultural programs remain strong because women's income is perceived as a threat to men's authority Projects are most likely to remove the engagement of women when resources are placed directly under their control Projects that depend on the labor of women are likely to obtain minimal support Implications: Long run, low status of women is likely to translate into slower rates of economic growth Consequences of Gender Bias in Health and Education: Expansion of basic education of girls yielded highest return rates of any investment in developing countries Cost of failing to educate girls = $92 Billion a year Education of girls has been shown to be one of the most cost-effective means of improving local health standards A girl from a poor rural family in South Asia will perceive no suitable alternatives in life than serving a husband and his family. More educated girl is considered "less marriageable" More strenuous efforts are made to save the life of a son than a daughter Girls generally receive less schooling than boys Poorer treatment of girls results in "missing women" in developing countries Greater mothers' education generally improves prospects for their children's health and education, more so for girls

Economic Theory of Rural-Urban Migration

Todaro model of Migration Worker's decision based on knowledge of the present value of the wage differential, direct costs of moving and his sense of the probability of finding employment over sequential time periods Consequence: More urban jobs generates both more employment and unemployment as new jobs induces great number of migrants who believe the probability of getting one has just increased - their influx in turn drives down the probability to its previous level Shortcomings: Actual wage is known and fixed over time No consideration that migrant may move again Migrants will wait an indefinite period until they find a job Modified version (1980) Probability of getting a job is the function of the fraction of the urban workers employed. Summary of four basic characteristics of Todaro Model: Migration stimulated by rational economic considerations of relative benefits and costs, mostly financial but also psychological Decision based on expected rather than actual urban-rural real-wage differentials based on two variables - actual differential and probability of successfully obtaining employment Probability of obtaining urban job directly related to urban employment rate and inversely related to the urban employment rate Migration rates in excess of urban job opportunity growth rates are possible and rational especially where differentials are high -> high rates of urban employment are inevitable