Themes in development

5 sources of disparities between measured real income and actual advantages, citation

Sent (1999)

• personal heterogeneities: disability, illness, age, or gender

• environmental diversities: climate, pollution

• variations in social climate: crime, violence

• uneven distribution within the family

• differences in relational perspectives: local customs and conventions

economic development definition

Todaro and Smith (2020)

The process of improving the quality of all human lives and capabilities by raising people’s levels of living, self-esteem and freedom

Harrod-Domar model what is growth determined by

Economic growth is determined by - ability to save and invest s - ability to convert capital into output θ - rate of capital depreciation δ - rate of population growth n

but exogenous assumptions on s theta and n, equiliibrium is growth, endowment rather than institution

Solow-Swan model

allows for non constant θ and adds effective labour,

means that multiple stable steady states exist

savings has transitionary but not growth effect

but exogenous technology shocks

absolute and conditional convergence

endogeneity issues with development accounting

Klenow and Rodriguez-Clare (1997)

• solow elements are highly correlated, capital increases TFP which increases capital

• more than 50% of differences is due to variation in exogenous A

Hirschman growth linkage

Hirschman (1958)

• forward and backward linkage encourages invesetment in upstream or downstream

• agriculture is a low linkage sector reduces investment and interdependence leading to economies of scale

Lewis Dualistic model

Lewis (1954)

• two sectors

  • traditional sector A with surplus labour and MPL=0

  • modern sector, M initially very small

• use different input factors and in agricultural sector W^A> MPL,

• go into modern sector unitl we dont have surplus labour in agriculture anymore

• Eval

  • is MPLa=0 really realistic

  • Wa=0 not realistic if we account for the fact that familiies usually run farms, cultural subsistence ceiling where community members help each other

  • efficiency wages, paying workers a bit more helps them work harder

  • model assumes profit reinvested

  • constant terms of trade between sectors might not hold if workers demand more food after receiving higher wages

• Schultz (1955) shows that epidemic in india which killed 9% of rural labour force resulted in negative shock implying that MPL does not equal 0

The big push

first developed by Rosenstein-Rodan (1943)

• manufacturing sector more productive so need to move to this to develop

• problem that it requires large fixed costs and higher wages, but increase in wage leads to general increase in demand but only part of the increase in marginal income goes back into the same manufacturing firm

• hence need ig push of lots of manufacturing firms that create positive demand spillover to make it worth investing in the first place

• need central planner to subsidise fixed costs

relation between big push and lewis model

• both have two sector economy

• lewis model only focuses on supply side forces

• big push fixes demand side hole and it is the pre requisit for the lewis model to work

• big push model gives role for policy makers

two different ways of measuring inequality

Lorenz curve then gives gini coefficient by taking area between lorenz and 45 degree line divided by total area under 45 degree line

Kuznets curve

hypothesis of change in inequality

• curve follows inverted U shape with income inequality on Y and development on X

• observation holds for some countries but the theory suggests no mechanism for why inequality has to increase or decrease

• might be due to politics or demand composition

curve that describes saving behaviour for different levels of income

study\theory of why inequality is bad for growth

Alesina and Rodrik (1994)

• explanation of why inequality is bad for growth

• agents endowed with varying levels of capital

• capital tax rate affects growth

• capitalists prefer tax rate that maximises growth whilst others prefer higher tax rate

• median voter theorem means that if high inequality median voter will vote for high tax harming growth

• Results

  • find epsecially large negative effects on growth of land inequality

• BUT

  • Perotti (1996) finds that inequality does not cause higher taxes and higher taxes do not necessarily hinder growth

  • inequality likely works through instability and poor credit market

international poverty line and how many people below it

3$ per day, 831 million people

Problems with objective poverty lines

• PPP changes lead to large changes in poverty

• different energy inputs needed in different climate potentially, shorter people

• improving income to poor but it doesn’t lift someone above poverty line then it is not reflected in this measure

  • transfer principal does not hold from social welfare axiom

Total poverty gap

• solves problem of transfer principal from poverty line

• Foster Greer Thorbecke (1984) helps to account for amount of people are how far below poverty line

multidimensional poverty index

takes into account health, education and standard of living measures

Poverty trap

• can be due to credit insurance risk

  • nutrition

  • stress and mental health, more prevalent in developing countries

• poverty can be due to endowment or multiple equilibria

Positiv and negative externalities of population growth

Positive

• increases market for goods and services

• endogenous growth through new ideas

• improves health services as it helps more

Negative externalities

• social norm, upward spiral

• human capital investment, trade off between quality and quantity

• environmental externalities

Demographic transition model

Malthusian model of population growth

• population grows geometrically n, food supply grows arithmetically gy

• avoiding the trap

  • lower n through

    • preventive checks: birth control or one child policy

    • normative checks: disease, war starvation

  • raise gy through investment and industrialisation

• empirics support the idea of land productivity advancing population density but not income in pre industrial era

Household demand model

• four key elements

  • household acts like firm combining time and market goods to produce

  • can produce household services or child services

  • must allocate resources between market activities and child services

  • quantity quality trade off in children, choose how many children to have and how much to invest into them

• results in rising wages reducing child services due to higher opportunity cost and higher price of having children reduces number of children

  • also reproductive costs higher for women

• assumption: relies on a unitary 'household' utility function (assuming the couple always agrees) and assumes families act with complete information

  • assumes fertility maximisation

  • better at explaining changes at the margin than over time

• can however also use children as labour or investment

• empirical evidence

  • economic developoment increases Q demand

  • some association between fertility and female economic activity

  • Cain (1977) children are costless by the time they reach adolescence in poor countries

  • evidence of children being used as pensions

reproductive externalities

Macro externalities

- no. of children: socially optimal 6= privately optimal •

Micro externalities

- intra-family externalities on fixed and variable costs the structure of the family: joint to nuclear higher direct cost lowering fertility

- couple may have different reproductive goals

Human development model with social interactions

• individuals utility not only depends on private consumption but also how decision ligns up with social group

• $$V_i = U(c_i, z_i, x_i) + S^j(c_i, c_{-i}^j) + \epsilon_i$$

• strategic complementarity, meaning the marginal utility of a woman's fertility decision increases if it aligns with the fertility choices of others in her group

• social influences

  • Endogenous effects: Your choices are directly influenced by the choices of your reference group, average fertility

  • Exogenous effects: Your choices are influenced by the general characteristics of your group (e.g., the group's average education level), average characteristics

  • Correlated effects: People in the same group behave similarly simply because they face the same institutional environment or have similar individual traits

• only endogenous effects create a social multiplier where reducing it for one will also reduce for others

empirical study on HDM with social interaction

Iyer and Weeks (2020)

• strong ethnic identity in Kenya, and Kenya experienced on of the most rapid declines in fertility rate

• endogenous effects: the impact of mean fertility in the cluster on individual fertility. difference

• exogenous: impact of mean education

• ethnic groups settle in distinct regions with distinct rainfall climates. So rainfall is essentially proxying for ethnic-region-specific economic conditions that shape cultural fertility norms over generations, not for short-run individual fertility decisions.

• rainfall is a plausibly exogenous source of variation that primarily affects ethnic-region economic conditions over long horizons, and conditional on the controls, the residual variation is more likely to operate through group cultural norms than through other individual-level channels

• Result

  • Endogenous social interaction effects within ethnic clusters are strong; exogenous (contextual) education effects and religion effects are weak or absent

  • this means that there's no extra effect. Group education doesn't operate through aspiration, role-modelling, or social pressure independent of behaviour. It only operates by changing group fertility behaviour

  • effect of targeted treatment depends on if it is effective in flipping cluster norm, need to impact enough people then will have positive multiplier effect

study on slow response to external interventions due to social norms

Munshi and Myaux (2006)

• religious groups that do not mix, contraception differs across groups

• examine low impact of contraceptive policy

• used lagged fertility choice as an IV, same village different religion

• result

  • Strong within-group endogenous effects

  • no cross group spillover

  • need to reach tipping point at which enough people use it to bring other people to use it too, changing group average

• here religion is dominant reference group, in Iyer weeks paper it was ethnicity

study on son preference and daughter aversion in determining family size

Borooah and Iyer (2004)

• son preference pushes family size up, daughter aversion pushes it down

• theory

  • weighing the expected utility of an additional son against the expected disutility of an additional daughter

• findings

  • since Muslims have similar son preference but lower daughter aversion than hindus, muslims should have larger family

  • some evidence of sex selection at birth, abortions better treatment of infant boys

model of marriage

• Friedberg and Stern (2005)

• changes utility function as couples share household services

• advantages

  • share public goods

  • women have a comparative advantage in child raising

  • gender pay gap means men have comparative advantage in labour market

• thus marriage is good for specialisation

age dependency ratio and support ratio

channels between health and poverty

• stature is significantly positively correlated with income

• poverty results in malnutrition

• control for infectious disease

study of link bewteen health and education

Miguel and Kremer (2004) deworming project

• deworming drug randomly given to different schools

• analyse school absenteeism, externalities, cost

• decompose effects into directe effect and within school externaltiy and cross-school externality

• different groups given treatment at different times over 5 years

• Result

  • school absenteeism fell 25%

  • found large within and cross school spillover for close schools

  • no significant improvement in health score in short term

coordiantion and multiple equlibria

only need child labour if wages drop too low, but since this increases labour supply wages fall,

if all parents took children out of labour wages would be high enough

also positive externalities of education which are not internalised by private choices

one way to increase teacher absence

Intra-household allocation model

• households pool resources

  • but unequal distribution (lifeboat problem, feed highest earner in extreme poverty),

  • can have paterfamilias(dictatorship) or individual members bargain over resources,

• theta is the fraction of household income that an individual can control, in paterfamilia husband controls100%

  • but Hoddinott and Haddad (1994, 1995) show that increasing womens share of income directly raises share of budget spent on food

• boys also get more investment into education

  • parents can either borrow and get standard interest rate return, or invest long term into child and get returns later

  • since financial returns for boys are higher this is what they invest in, pecuniary gap

  • this leads to even larger attainment gap, boys gain from having a sister as they get a larger share of the pie

O ring theory of production

• links education and growth

• tasks are sequential and interdependent, if any stage fails whole product fails

• $$y = (q_1 \times q_2 \times q_3 \times ... \times q_n) \times nBk^\alpha$$

• production function is multiplicative where q is the skill of the worker and gives probability that the task will be a success

• Positive Assortative Matching:Because highly productive firms can afford to pay more to protect their production chain, workers of similar skills end up working together

• more skilled workers will earn exponentially higher wages because they work together

• specialisation, developed countries with well educated labour can specialise in complex products

• creates bottleneck in developmnet since there is no incentive to invest heavily in education because have to work together with other low skill individuals

• need to raise broad education

• empirical

  • Kremer and Maskin (1996) finds that workers do segregate by skill

Agglomeration and congestion

agglomeration

• localising sectors in specific area

• cost advantage to producer and consumers

linkages of lower transport cost and pool of workers with specific skills, links back to o ring

Congestion

• land prices, pollution traffic

• city size determined by CBD model and geographical restrictions

agglomeration effect study

Ahlfeldt et al. (2015)

• berlin study look at floor space to ground ratio

• how much more productive does a city become purely because density increases

• produciton externalities: surrounding density of workers, environemntal production fundamentals (topography or natural supply of water)

• residential externalities: surrounding density of workers, residental fundamnetals ( access to forests)

• congestion: limited land, commuting costs

• results

  • elasticity of productivity with respect to employment density is about 0.07

  • agglomeration spillover is highly localised

Harris-Todaro model

• rural urban migration model

• why do people migrate even though urban unemployment is so high

• Assumptions

  • two sectors rural urban

  • labour demand is MPL with free movement

  • urban wage institutionally determined and fixed

  • rural wage efficiently determined Wm>Wa

• leads to the urban rural wage parity

• indifferent once urban unemployemnt becomes sufficiently large, wage in agriculture is equal to wage in urban times probability of getting a job

Potential costs and benefits of globalisation

benefits

• growth

• poverty alleviation, foreign aid, cheaper goods

• human capital improvements

• technological innovations

• FDI

• labour mobility, remittances

costs

• inequality, intra and inter

• dependence

• environment

• cultural and political issues

rough overveiw of Heckscher-Ohlin model and comare to ricardian

• Ricardian model

  • specialise in sectors that you have a comparative advantage in to minimise opportunity cost, complete specialisation

• HO model

  • same production technology differen t factor endoments

  • specialise in production for which you have relative factor abundancy

  • factor price equalisation

  • all countries gain from trade but does not predict full specialisation

local labour market impact of globalisation study

Autor et al. (2013)

• China joined WTO led to massive increase in Chinese exports to US

• created American geographical areas that specialised in specific goods

• used IV of chinese imports of specific goods to other high income countries

• The paper found that local labor markets highly exposed to Chinese import competition experienced severe, cascading economic damage. The assumption that workers would smoothly transition to new jobs was entirely wrong.

  • high unemployemnt

  • wage decline

  • geographical labour rigidity

trade liberalisation on firm productivity

Bustos (2011)

• southern common market agreement

• exporting firms are more likely to innovate

• technology adoption most prominent amongst exporting firms

• increases wage inequality between exporting and non-exporting firms

environmental Kuznets curve

- environmental degradation rises with early industrialisation

- further growth leads to worsening pollution

- post-industrial stage: cleaner technologies

Resource curse

(Humphreys, et al. 2007)

• over reliance on natural resources for growth

• soil erosion and deforistation

• slower developmnet, corruption

• need effective institutions

two factors that have made environment worse in developing countries

• Rural-urban migration

• Globalisation

8 conditions for managing shared environmental resources

Elinor Ostrom (2005)

property rights as a solution to tragedy of the commons

Costello et al. (2008)

• overfishing because of lack of property rights over ocean

• implemented catch shares, can trade permits for how many fish you are allowed to catch, tradeable property rights

• 11 thousand fisheries globally over half a century

• fisheries that implemented this saw drastic reduction in collapse rates

reasons why developing countries are more exposed to climate change

• agricultural sensitivity

• direct impact on productivity of heat, especially without climate control technology

• studies for which IV is used as rainfall?

study of temperature change on growth

Dell et al. (2012)

• take annual temperature fluctuations over half a century and 120 years

• country and time fixed effects

• find significant negative long and short term effects of rises in temperature but these are only significant for developing countries

solutions to protect environment with citation

Dasgupta (2021)

• use Comprehensive wealth as a measure

• economic solutions

  • direct subsidies away from fossil fuels and agriculture

  • green taxation

  • global cooperation

  • natural capital accounting

  • equity concerns

Monetary policy in developing countries

• weak institutions undermine effectiveness

• vulnerable to global interest rates, commoditiy prices and exchange rates

• important to expand access to credit and cooperate with international institutions

• Goncalves and Salles (2006) found inflation targeting to lead to greater drops in inflation and growth volatility, but constrains flexibility

  • alternative studies suggest not ideal for developing countries due to more susceptible to external shocks and central bank credibility

exchange rate volatility and growth

Aghion et al. (2009)

• exchange rate volatility is more damaging with poor financial development

• exporting firms experiencing an appreciation in ER will see slump in profits

  • to overcome liquidity shock need to borrow in short term

• strong robust evidence supports this from 83 countries over 40 years

problems with fiscal policy

• low tax base requires reliance on indirect taxation

• natural resource dependence

• vulnerable to external shocks

• struggle to undertake large reforms which yield highest returns?
  

Case for Restricting Fiscal Policy Discretion

Fatas and Mihov (2003)

• Key finding

• - governments that use fiscal policy aggressively induce significant macroeconomic instability

• - 1 pp volatility of output lowers growth by more than 0.8 pp

• - prudent use of fiscal policy is explained by political constraints and other political and institutional variables

• • Too much flexibility

• - procyclical behaviour, exacerbating economic fluctuations, undermining long-term growth

• - constraining discretion by imposing institutional restrictions

FDI costs and benefits

Financial globalisation study

Kose et al. (2009)

• integrated global financial system

• micro data shows benefits and distortionary effects of capital controls

• macro evidence inconclusive

• Channels

  • - supplement domestic savings

  • - technology transfer and managerial

  • - productivity and competitiveness in domestic firms

Remittances impact

- investment in education, health

Aggarwal et al. (2011) - positive impact: savings and lending activities - more likely to open bank accounts

• Potential issues - Brain Drain and local labor market effects - inequality - consumption or investment

Foreign aid cost benefits

meausuring the fiscal multiplier in developing countries

Kraay (2012)

• look at loans from world bank to aid depend countries

  • IV comes from world bank bureaucracy which means that timing of aid is exogenous

• he found short term multiplier of only 0.5

• due to import leakages

• anticipation effects close to zero due to credit constraint

• doesnt look at long run

I