Poli Sci 330 Exam 1 (classes 1-10)

what is development?

• the process by which the well-being /quality of life of indivuals is improved

• but how does this relate to

  • income

  • wealth

  • poverty

  • inequality

  • political freedom

• these are non-trivial questions, philosophically and because they have important consequences

origins of development as a societal goal

• emerged in 1940

• unprecendeted prosperity

• the rise of responsive governments

• cold war politics

the standard measure of development: GDP per capita

• The Gross Domestic Product per capita is the value of the goods and services per person produced in a country in a year

  • Not a stock variable (like wealth), but a flow variable (akin to income)

• In what sense does GDP per capita measure wellbeing?

  • It measures the means by which people may pursue wellbeing

• First conceived in 1934, by Simon Kuznets

• Popularized after WW II by the United Nations

the standard measure of development: GDP per capita

• GDP = C + I + G + X (the expenditure approach)

  • C is consumption, I is investment, G is government, X is net exports (exports – imports)

• GDP = W + R + I + PR (the income approach)

  • W is wage income, R is rental income, I is interest income and PR are profits

• GDP = C + S + T

  • C is consumption, S is savings, T are taxes

• GDP = Primary + Secondary + Tertiary sector

  • Primary sector is raw materials based, secondary sector is manufacturing and the tertiary sector is services

how to compare gdp per capita

• Over time?

  • Real (inflation-adjusted) GDP per capita

  • Across space:

  • PPP-adjusted GDP per capita

    • PPP adjusts for the cost of living/prices of different goods and services across countries. The nominal exchange rate only adjusts for these differences partially

    • The PPP exchange rate is the number of units of a country’s currency required to purchase the same of basket of goods and services in the local market that $1 would buy in the USA

• In practice, policy makers and markets focus on growth in real GDP per capita

some problems with both measures of gdp per capita

• ignores distributions

• ignores goods/services without a market

• relies on imperfect pricing due to

  • externalities

  • biases

• annual, not life-time, measures

• measures of means rather than ends

• two responses: fix the calculation or use alternative measures (freedom, education, health, hdi, happiness)

ignores goods that are not sold in a market, and improper pricing

• household productions

  • child care, cooking, cleaning, etc

• subsistence production; the informal economy; the illegal economy

• free government/ngo services

  • air, beaches, some roads, wildlife viewing, volunteer activity ( ex: open source software)

• externalities

  • pollution

• biases

  • job market discrimination

comparing poverty

• a poor person is one who lives on less that $x/day

• Poverty rate: % of the poor

• Countries have different poverty lines (single adult, per year, at market exchange rates)

  • US: $15,960 (2026)

  • UK: $14,900 (2024/25)

  • Argentina: $4,000 (2026)

  • China: $560 (2020, when absolute poverty was declared eliminated)

    • X is often derived from some idea of basic needs (absolute poverty lines), but some notions are relative

where you draw the line matters

• The World Bank’s “extreme poverty” line is a judgment call, not a fact of nature

  • Anchored to the national poverty lines of the world’s poorest countries, converted using PPP exchange rates

• In June 2025, the line moved from $2.15/day (2017 PPPs) to $3.00/day (2021 PPPs)

  • Part of the move is inflation ($2.15 → roughly $2.50); the rest is a real increase in the standard

• The revision moved roughly 125 million people into “extreme poverty”—without anyone’s circumstances changing

  • For 2025: about 808 million people, or 1 in 10, against about 677 million on the old line

• Nobody got poorer. The yardstick moved

economic lives of the poor

• Demography

  • Large families, with many adults and young

• Consumption

  • Food: 2/3-3/4 of expenditure

  • Radios, TVs, bikes: Lots of variation, depending on infrastructure

• Productive assets

  • Few assets, except for land ownership, which varies a lot

• Health

  • Terrible; few calories consumed; poor nutrition

  • Lots of stress

• Education

  • High-ish enrollments, with variation during the year. Low expenditures

• Income generation

  • Multiple occupations; lots of entrepreneurship. Little specialization. Seasonal migration

• All this cumulates into low savings, and a cycle of poverty

Walter Rostow’s Stages of economic growth

all countries develop by passing through the discontinuous stages

1. traditional society

2. preconditions to take-offs

3. take-off

4. drive to maturity

5. age of high mass consumption

Walter Rostow’s Stages of economic growth (take-off)

• take off occurs when

  • investment rate increases from < 5% to . 10%

  • the industrial sector does well

  • saving increase support by a poltical, social and economic framework

Walter Rostow’s Stages of economic growth problem

problems

• historically derived account

  • fits patterns in the developed west well

  • may be inappropriate for the rest

• unclear what drivers of “take off” are

• more description rather than a causal argument

alexander gerschenkron’s economic backwardness in historical perspective

• backwardsness has disadvantages—capital, technology, financial intermediation

• backwardness has advantages- more technological choices, leapfrogging

  • these are realized through substitution, often sometimes via coercion

    • France and Germany required industrial development banks

    • the ussr required massive state intervention

alexander gerschenkron’s economic backwardness in historical perspective

• problems:

• Historically derived account

• more description rather than a causal argument

  • growth might start due to competition between countries

    • substitutions might create problems

arthur lewis two-sector model

• development is the process by which a dual economy becomes one integrated economy

• industrialization in the modern sector causes growth, which requires the movement of labor from the traditional to the modern sector (so labor and capital mobility are required)

• industrial growth is somewhat self-sustaning since it creates a surplus, which may be reinvested

Arthur Lewis two-sector model problems

• Problems

  • there might be a labor shortage

  • as in africa y u.s.

• Labor may not be redeployed easily

  • Moving is costly

• Urban wages often rise

• There might be a capital shortage

  • Including because of capital flight

• Capital might invest in saving labor

• Population might be too large

Harrod-Domar growth model

G= f(K)

• K is capital

  • Capital is a factor of production that spans time

  • Examples: physical capital (machinery, equipment, inventory, working capital), human capital (education, skills, efficiency)

  • In a closed economy Investment = Savings

• Growth is increased by increasing capital

• What causes increases in capital?

  • Increased savings, sacrifices in current consumption, including through force? (“financial repression”)

  • Foreign aid

• Hugely influential model, in the past and today

• Testing fro economic convergence

• problem: selection on the dependent variable

Harrod-Domar growth model Implications and Problems

• Growth is related to capital accumulation

  • True in the short run, but false in the long run

  • Savings are necessary, but not sufficient for growth

    • There are diminishing returns to capital

    • Capital does not constrain growth in the long run

    • Savings respond to incentives

• Economic convergence

  • Since capital is invested where it has the highest return (i.e., poor countries), there should be convergence (“history doesn’t matter”)

Solow growth model

• investment cannot explain long run growth because it has diminishing returns

• G= F (A ,L, K)

• L is labor

• A is technology

  • technology refers to the way in which k and l can be combined to produce output

  • examples: knowledge, inventions, patents, organization, management

  • accounts for 4/5 of us economic growth

• growth in the long run is caused by improvements in technology

Problems with the slow growth model

• technologyis assumed to be exogenous

  • where does it come from

• implies convergence, if technology is shared

  • but this doesn’t occurred

new growth theory

• Technology (A) changes endogenously, due to investments in human capital

  • Increasing returns to scale

• States should focus on policies to foster human capital

• Implication: Divergence is possible

• Problem: seems ad hoc

Poor macroeconomic policies (hyperinflation)

Hyperinflation

• Caused by the excess printing of money by the government

• More money, "chasing" the same good causes prices to rise massively

• In extremis, people switch to bartering

• Economic activity contracts

Poor macroeconomic policies (autarky)

• Most developing countries closed themselves to the world trade from the Great Depression on

  • World trade fell by 11% because of tariff/non-tariff increases, compounding the effects of the GD

• Who was hurt?

• These effects persisted for a long time thereafter

Poor microeconomuc policies (marketing boards)

Marketing boards

• In many African countries, marketing board prices were set far below world prices

  • This led to a massive transfer of income from African farmers to European empires, later to central governments

• Rationalized by Lewis’ two-sector model

• Sharply curbed the incentives to produce, reduced government revenues in the medium term

what is good policy?

• Dominant view: Letting markets work

  • Getting markets right means getting prices right, which creates the right incentives for investments, including in technology

• But markets might be entirely missing in some instances

• markets might also get prices wrong

why do countires have bad polices?

• lack of knowledge

  • Governments might not be aware about the distorting effects of some of their actions

  • Examples: Agricultural marketing boards

  • Solution: Knowledge

• Political economy

  • Those who would benefit from “bad” policies lobby for them

  • Examples: Industrialists in developing countries, farmers in the US, EU, interior designers in the US

  • Solution: Building new political coalitions

Washington Consensus (William reading)

• Refers to the “standard” reform package promoted by the IMF and World Bank in developing countries in the 1980s

  • Consensus backed by the US Treasury

  • Macroeconomic stabilization

  • Market friendly policies w.r.t trade and investment

  • Expansion of market forces

elements of the washington consensus

1. Fiscal discipline

2. Reorientation of public expenditures

3. Tax reform

4. Financial liberalization

5. Unified and competitive exchange rates

6. Trade liberalization

7. Openness to FDI

8. Privatization

9. Deregulation

10. Secure Property Rights

The Augmented WC (Rodrik) (william reading)

11.Corporate governance

12. Anti-corruption

13. Flexible labor markets

14. WTO agreements

15. Financial codes and standards

16. “Prudent” capital-account opening

17. Non-intermediate exchange rate regimes

18. Independent central banks/inflation targeting

19. Social safety nets

20. Targeted poverty reduction

Lessons learn from the augmented wc

1. Reforms focus on static efficiency not dynamics of growth

2. Objectives of reform (market incentives, macro stability) don’t imply any unique policy actions

3. Different contexts require different solutions to same problems: can’t just copy policy reforms

4. Exaggeration of rules over discretion in government behavior

5. Reform efforts should be selective, focus on binding constraints in growth, not laundry list of reforms

why doesn’t the Washington conus work

• Incomplete implementation?

  • “Meant Well, Tried Little, Failed Much” (Krueger 2004)

• Incorrect policies

  • Not growth, but efficiency, focused

  • Doesn’t account for the low state capacity, interdependencies between policies

  • Not focused on the binding constraints of growth

• Good policies are not enough for growth

  • Necessary but not sufficient

emerging approach

• Policy makers have limited ability to recommend appropriate growth policies

• It’s not policies, but institutions that matter

• Appropriate policies (and institutions) depend on local circumstances

• Experimentation and learning are good ways to find good policies, should be encouraged

geogrpahy affects trades cost, which affects growth

• Various aspects of geography affect trade costs

  • amount of coastline

  • navigable rivers?

  • smooth terrain?

  • distance to world markets

• Trade costs

  • Raise the cost of living, production

  • Reduces trade, incl. in information

policy repsonse for geography

Reduce transport costs via

• Domestic policy

• Ensure port access via neighbors

• Specialize in goods/services where transport costs are not relatively high

• Emphasize industries that require air transport

• Export services electronically

Argument against the geography hypothesis

• reversal of fortune

• the massive reduction in morality and morbidity in large parts of the world

• differences across neighboring countires (north/south kera, east/west germany, mexico, us)

• cannot explain why nations stagnate for long periods and then start growing really quickly

culture

set of beliefs, attitudes and preferences held by a population

weber and the preotestant ethic

• Protestant religious culture, specifically Calvinist culture, spurred capitalism and development since 1500s (Weber 1905)

• Protestant ethic → Spirit of Capitalism →Development

Weber and the Protestant Ethic (weber arugment)

• Catholicism stressed the need to work until immediate needs are met, after which leisure, charity were encouraged. Profit was seen as a sin of desire and greed

• Protestantism was radical cultural force that broke through traditional beliefs and attitudes to give people incentives to accumulate wealth

  • Its ethic was ascetic. Belief in attaining spiritual status through self-denial, abstinence from worldly pleasures

  • Drew on religious texts—“Seest thou a man diligent in his business? He shall stand before kings” (Proverbs xxii 29)

Weber and the Protestant Ethic

• These ideas led to the "Spirit of Capitalism"

  • "We shall ... provisionally use the expression ’spirit of capitalism’ for that attitude which, in the pursuit of a calling, strives systematically for profit for its own sake in the manner exemplified by Benjamin Franklin."

• Places with Protestantism developed more than places without i

Confucian culture (chang reading)

• Confucianism is an ethical and philosophical system based on the principles of governmental morality, filial piety (respect for elders), high regard for education, righteousness, and social virtue

• Developed from the teachings of Confucius (551?-579 BC)

• Prevalent in Japan, Korea, Taiwan, Singapore, Hong Kong, China

confucian culture confucianism

• Inculcates important values among people: hard work, respect for education, thriftiness, self-sacrifice, hierarchy etc.

• Provides model for good government: virtuous, meritorious, and non-corrupt

• Created particularly effective institutional basis for government-business and business-labor relations

  • allowed the East Asian countries to function as single, tightly disciplined, and highly efficient, economic units, (“Japan, Inc.” or “Korea, Inc.”)

• rationalizes autocracy, which is “more efficient” than democracy

why mechanisms

• Rich associational life (“social capital”) solves collective action problems

  • The collective action problem stems from the fact that it’s rational for individuals to shirk at providing a collective good

• Rich associational life helps solve collective action problems since

  • people interact repeatedly with one another, which helps them identify and punish free-riders

  • promotes “norms of reciprocity”

Caveats

• Cooperation might be good or bad for democracy

  • Associational life has a dark side too (Berman)

• Not all associational life is created equal (Varshney)

• Some believe that good government is founded on distrust

But where does civic culture come from? How can we establish causality?

• Medieval Italy: a time of violence, anarchy. Insecurity was a constant fact of life

  • In the South: the solution was to strengthen the power of the king, who could then secure the area

  • In the North: the solution was self-governance and mutual aid and defense

• These different solutions had a long-lasting impact on the cultural traditions of these areas. A rich associational life flourished in the North, atrophied in the South

• Furthermore, these cultural traditions emerged well before economic differences became entrenched

• Thus, culture preceded politics and economics

what is trust and how can we measure it

• Trust may be measured as the time that agents do not spend verifying others’ actions

• WVS question: "Most people can be trusted" v. "You can’t be too careful in dealing with people"

where does trust come from?

• Education

• Population homogeneity

• Inheritances, although migrants’ trust converges to non-migrants’ trust levels over time

• Institutions

arguments against the culture hypothesis

• Reversal of fortune

• Differences across neighboring countries (North/South Korea, East/West Germany, Mexico/US)

• Cannot explain why many nations stagnate for long periods and then start growing really quickly

definition of institutions

• Institutions are “a set of rules, compliance procedures, and moral and ethical behavioral norms designed to constrain the behavior of individuals in the interest of maximizing the wealth or utility of principals” (Douglas North 1981)

  • They may be formal (rules, laws, constitutions) or informal (norms, conventions, codes of conduct)

how do instituions spur devlopment?

• They increase expected returns by reducing transaction costs. Reduce

  • uncertainty

  • absence of credit markets, infrastructure

  • possibility of contract failure

  • possibility of expropriation

  • likelihood of conflict

• Constraining institutions

↓

• Promote the division of labor, specialization, trade, accumulation, innovation

↓

• Economic performance

types of instituions

• Political institutions

  • Checks and balances, electoral laws, regime type, etc. which constrain the state

• Economic institutions

• Property rights

• Institutions may be political (separation of powers, regime type) or economic (property rights, contract enforcement)

• Institutions can be extractive or inclusive. Extractive institutions redistribute wealth (slavery, high rates of taxation); inclusive institutions cater to the interests of many

Definition: the state

• The state “is a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory” (Max Weber)

• The state is “an organization with comparative advantage in violence, extending over a geographic area, whose boundaries are determined by its power to tax constituents” (Douglas North)

• State capacity refers to the ability of the state to penetrate society, regular social relationships, extract resources and use them in intended ways

• States may be constrained by some institutions

development before states (bates)

• agrarian societies have large, spread-out families to diversify risk

• security is provided privately, through kinships/lineages, cultures of retaliation, honor etc

• result: some growth; fragile, hair-trigger peace, given to cycles of retaliation

development with states bates

Specialization + Trade

↓

Kinship and lineages to mediate social conflicts

↓

Development, conflict

↓

Militarization of household

↓

Centralization of coercion in a state

how violence was tamed bates

1. predation

2. seduction

• protectionism

• procurement

• empowerment

  • with states development, contention shifted from the social to the political arena

  • elites became willing to “fight it out” by peaceful means

resulted in various state forms (how violence was tamed bates )

• City states (Ancient Greece, Maya, Europe before absolutism)

• Empires (Mesopotamia, Ottoman, Britain, Soviet Union)

• Confederation (Swiss, US)

• Nation-State (France, Japan, Bangladesh)

why is the nation-state prevail over other forms? (tilly)

• War makes states, and states make wars

• Population density → competition → need to extract resources for war → costly activities, incl. army, tax system → greater state capacity

• The nation-state was the most efficient state solution

  • The best at ensuring prosperity and therefore waging war

  • Best at mobilizing troops at low cost

• Observable implications

  • Fewer states

  • Most of them nation-states

what is the value of the stylized accounts of state development?

• accuracy disputed, starting to be subjected to systematic tetsing

• lots of anomalies

• theory building

state building post WWII

Impeded by

• Low external threats, due to UN system, Cold War aid/guarantees (Bates)

• Geography, which makes projecting power to the periphery unnecessary (Herbst)

• Fear of coups/army, which keeps armies small

• Note that in sub-Saharan Africa, the process of political consolidation had also been short-circuited by European conquest in the late-1800s

policy implications from state building in post WWII

• Leave countries alone?

• Foreign aid for institution building?

• Reward success, punish failure?

  • Decertify failing states

  • Recognize new states

• Explore alternatives to states?

constitutions and commitments

• The fundamental problem in political economy: “A government strong enough to protect property rights and enforce contracts is also strong enough to confiscate the wealth of its citizens” (Weingast 1995)

• While the behavior of individuals may be regulated by the state, who will regulate the state?

• But perhaps we don’t need to regulate the state?

  • One might have a good or a weak ruler

• But there are bad and strong rulers, and there are temptations to expropriate

  • It might not matter, if markets constrain the state. States might behave to maintain their reputations

  • But what happens when sovereigns grow old, i.e. when time horizons shorten, or when there are urgent fiscal needs?

• Absolutist states will tend to expropriate wealth and undermine the economy. This happened in 17th century England

reversal of fortune

• some wealthy countries in 1500 are poor/non-existent today

• some poor regions in 1500 are rich today

• institutions explain this outcome

the colonial orgins of comparative development

• Starting in the 1600s, Europeans emigrated to certain areas

• Where the disease burden was low (temperate zones, highlands, semi-tropics), they set up inclusive institutions since they benefited from these

• Where the disease burden was high, people set up extractive institutions since they benefited from these

• These institutions persisted, and explain contemporary levels of development

alternative explanation of colonial development

• Note that the disease environment gets things going. Could this have a direct effect today?

  • Current disease environment is statistically controlled for

  • Mortality rates were for Europeans, and not for indigenous populations, or for current populations

  • Robust to only using (eradicated) yellow fever mortality

• Settler mortality might have affected

  • Human capital

  • Culture

  • Technology

  • The state

why economic insitutions matter

• Note that we can distinguish between

  • “Property rights” institutions: protect citizens from expropriation

  • “Contracting” institutions: determine the terms and ease of contracting between citizens. E.g., legal system, judicial efficiency, bankruptcy law

• Property rights institutions more important than contracting institutions for development

• Contracting institutions important only for the form of financial development (debt vs. equity)

  • Plausible: without protection against elite and government expropriation, little that good contracts between citizens can achieve

why is indsitiuional change difficult?

1. Power begets power, economic and political institutions reinforce one another

2. Losers block reform

3. Partial reform is subject to the see-saw effect

Reading: The concept of development by Amarta sen (bullet points)

• Sen’s main argument: Development is NOT the same as economic growth. Development should be judged by whether people's lives actually improve.

• Economic growth = increase in income, production, or GNP.

• Development = improvement in people's well-being, functionings, capabilities, and freedom.

• GNP is not enough because it measures means/resources, not what people actually achieve with those resources.

• Why GNP is limited: It ignores income distribution, non-market conditions, differences between people, long-term life outcomes, and actual achievements.

• Functionings = what people actually do and are. Examples: being healthy, well-nourished, educated, or able to move freely.

• Capability = the set of things a person is actually able to choose to do or be.

• Functioning vs. capability: Functioning = what you actually achieve; capability = what you have the opportunity/freedom to achieve.

• Freedom matters: Two people can have the same outcome but different levels of well-being if one chose the outcome and the other had no choice.

• Fasting vs. starving: Fasting involves a choice; starving because you have no food does not. This shows why freedom/capability matters, not just the final outcome.

• Commodities are means, not ends: Having food is not the same as being well-nourished; having money is not the same as having a good life.

• Public goods matter: Health, education, medical care, and public services can strongly affect people's functionings and capabilities.

• Kerala example: Kerala had relatively low GNP per person but better outcomes in areas like education and life expectancy, showing that higher income does not automatically mean greater development.

• Value-heterogeneity = different people may have different ideas about what is valuable.

• Value-endogeneity = people's values can change as development occurs.

• Partial ordering: We may not be able to completely rank every society or outcome, but we can still determine that some outcomes are better than others.

• Dominance: If one situation is better in every relevant respect, it can be judged superior.

• Sen's capability approach: Evaluate development through functionings + capabilities + freedom, rather than just income/GNP.

• BIGGEST THING TO REMEMBER: More money ≠ automatically more development. Development is about people's ability to live valuable lives.

Sen Argument (SUMMARY)

Sen argues that development is not simply economic growth or having more income. What matters is whether people’s actual lives improve. He focuses on functionings (what people actually do and are), capabilities (what people are free and able to do or be), and freedom. GNP is limited because wealth does not automatically lead to better health, education, or well-being. Overall, development should be measured by people’s ability to live valuable lives, not just by how rich a country is.

Lerner reading Argument (SUMMARY)

Lerner argues that modernization happens when traditional societies become more connected to the outside world and people begin wanting new opportunities and ways of life. The Grocer represents the modernizing person who wants better things, city life, money, and exposure to the wider world, while the Chief represents traditional values like obedience, loyalty, duty, and staying in the village. Balgat’s transformation—roads, buses, electricity, new jobs, stores, radios, and movement to Ankara—shows how modernization changes both the economy and people's attitudes. The most important point is that the Grocer saw the coming changes before the others did, and eventually the rest of Balgat began following the path he represented.

Lerner reading (Key bullet points)

• Modernization = society becomes more connected to the outside world and people develop new aspirations, attitudes, and ways of life.

• The Grocer = represents the modernizing individual who wants better opportunities, wealth, city life, and exposure to the wider world.

• The Chief = represents traditional values such as obedience, loyalty, duty, family, and staying connected to the village.

• Balgat = starts as a poor, isolated village but rapidly modernizes.

• Transportation & communication matter — roads, buses, radios, and movies expose people to new possibilities.

• Economic changes = people move from farming into factory/construction jobs, earn cash, and buy modern goods.

• Political change = villagers increasingly support political leaders who provide modernization and infrastructure.

• Modernization changes values, not just the economy—people begin wanting different jobs, clothing, lifestyles, and opportunities.

• The Grocer “saw the future” before most villagers did; eventually, the village followed the path he imagined.

• Main takeaway: Lerner shows that modernization happens when exposure to new possibilities changes what people want and how they live.

Pritchett Reading (Summary)

Pritchett argues that the main pattern of modern economic development is divergence rather than convergence. Over the last 150 years, rich countries have generally become much richer, while many poor countries have grown more slowly, stagnated, or declined, causing the income gap between rich and poor countries to increase. Although developed countries have tended to converge with one another, developing countries have followed very different growth paths. Some countries, such as Korea and Taiwan, experienced rapid catch-up growth, showing the “advantage of backwardness,” where poorer countries can adopt existing technology to grow faster. However, successful catch-up is relatively rare and is not guaranteed. Pritchett’s main point is that there is no single path to development, and countries face different problems that require different explanations and policies.

Pritchett Reading (key bullet points)

• Divergence = rich and poor countries becoming further apart economically.

• Convergence = poorer countries catching up with richer countries.

• Pritchett says global divergence has been the dominant historical pattern.

• Developed countries have generally converged with one another.

• Developing countries have had very different growth experiences.

• Richest/poorest income ratio: 8.7 (1870) → 38.5 (1960) → 45.2 (1990).

• Advantage of backwardness = poor countries can potentially grow rapidly by adopting existing technologies.

• But catch-up growth is possible, not automatic.

• Korea and Taiwan are important examples of successful catch-up.

• Some developing countries experienced stagnation or negative growth.

• There is no single development path that explains every country's experience.

• Big takeaway: Economic growth has historically produced a world where income differences across countries have generally increased rather than disappeared.

Banerjee & duflo reading (summary)

Banerjee and Duflo examine what everyday life actually looks like for people living in extreme poverty, especially those living on around $1 a day. Using household data from 13 countries, they show that poor people still make choices about how they spend money, work, save, and invest, but those choices are heavily limited by their economic environment. Poor households often have several jobs or small businesses instead of specializing in one occupation, partly to spread risk and because they lack access to capital. They also have limited access to formal credit, savings accounts, insurance, quality education, health care, and infrastructure. The authors’ main point is that understanding poverty requires looking beyond income alone and examining the choices, constraints, risks, and institutions that shape the economic lives of the poor.

Banerjee & duflo reading (Key points)

• Extreme poverty: The paper focuses mainly on people living on about $1 per day.

• Poor people have choices, but their choices are heavily constrained by their circumstances.

• They do not spend all available money on food; money is also spent on things such as festivals, alcohol, tobacco, and entertainment.

• Many poor people are entrepreneurs/self-employed, but their businesses are usually extremely small and have few productive assets.

• Poor households often have multiple occupations rather than specializing in one job.

• Having several jobs helps them spread risk, but lack of specialization can also prevent them from earning higher incomes.

• Credit is difficult and expensive to obtain. Poor households often rely on moneylenders, relatives, friends, or shopkeepers rather than banks.

• Saving is difficult because many lack safe and reliable savings accounts.

• Poor households have little formal insurance, making illness, unemployment, crop failure, and other unexpected events especially damaging.

• Children often attend school, but the quality of education can be poor, especially when public schools are dysfunctional.

• Access to health care, clean water, electricity, sanitation, and other infrastructure varies greatly and can be very limited.

• Main takeaway: Poverty is not simply a lack of income. The poor face interconnected problems involving markets, credit, risk, infrastructure, education, health, and limited opportunities, which shape the decisions they are able to make.

Easterly READING (ARUGMENT SUMMARY)

Easterly argues that a major mistake in development policy was the belief that simply increasing investment and foreign aid would automatically create economic growth. Development economists used ideas such as the Harrod-Domar model and the financing gap, which assumed poor countries lacked enough savings and investment, so foreign aid could fill the gap and generate growth. However, Easterly argues that the evidence does not show a consistent relationship between aid, investment, and economic growth. Simply giving countries more money for machines, factories, and infrastructure does not guarantee development. Drawing on Solow’s growth model, he emphasizes diminishing returns to capital: adding more machines eventually produces smaller increases in output. Long-run growth therefore depends heavily on technological progress, productivity, and incentives, rather than capital accumulation alone.

EASTERLY READING ( KEY POINTS )

• Early development economists believed investment was the key to economic growth.

• Harrod-Domar model: higher investment → higher economic growth.

• Financing gap: poor countries do not save enough to finance the investment they supposedly need, so foreign aid is used to fill the gap.

• Easterly argues that the financing-gap approach did not work well in practice.

• More foreign aid does not automatically produce more investment or growth.

• More investment does not automatically produce faster economic growth.

• Incentives matter: people and governments must have reasons to invest productively rather than simply receiving additional resources.

• Solow model: capital experiences diminishing returns—each additional machine or unit of capital eventually adds less to output.

• Capital accumulation can help growth during a transition, but it cannot explain sustained long-run growth by itself.

• Technology/productivity is crucial for sustained increases in output per worker.

• Poor countries were expected to catch up because capital should have higher returns where capital is scarce, but many countries did not catch up with rich countries.

• Easterly points to the growing gap between rich and poor countries as evidence that simple investment-based development theories are inadequate.

• Main takeaway: Development cannot be achieved simply by giving poor countries aid to finance more investment. Capital, technology, productivity, and incentives all matter for growth.

WILLIAMSON READING (SUMMARY ARUGMENT)

Williamson explains and defends the original meaning of the Washington Consensus, which he created in 1989 to describe a set of economic policies that Washington-based institutions generally believed would help development in Latin America. He argues that the term later became incorrectly associated with neoliberalism or “market fundamentalism,” meaning the belief that markets should handle almost everything and government should have a very limited role. Williamson says this was not his original argument. His Washington Consensus supported policies such as fiscal discipline, trade liberalization, privatization, deregulation, secure property rights, and spending on health, education, and infrastructure. He believes most of these policies remain useful, but they are not enough by themselves to reduce poverty and promote development. Development also requires strong institutions, financial regulation, human capital, attention to inequality, and an appropriate role for government.

WILLIAMSON READING KEY POINTS

• Washington Consensus: Originally a list of economic reforms that Williamson believed Washington institutions generally supported for Latin America in 1989.

• It was not originally the same as neoliberalism or market fundamentalism.

• Market fundamentalism = the extreme belief that markets can solve almost everything and government should play a minimal role.

• Williamson argues that market fundamentalism is not an effective strategy for reducing poverty.

• The original Washington Consensus contained 10 major reforms:

  1. Fiscal discipline

  2. Redirect government spending toward health, education, and infrastructure

  3. Tax reform

  4. Financial/interest-rate liberalization

  5. Competitive exchange rates

  6. Trade liberalization

  7. Liberalization of foreign direct investment

  8. Privatization

  9. Deregulation

  10. Secure property rights

• Good policies allow markets to work, but Williamson does not argue that government should disappear.

• Privatization can help, but how it is implemented matters. Poorly designed privatization can benefit elites instead of the broader population.

• Financial liberalization requires regulation and supervision; otherwise it can contribute to financial crises.

• The original policies are potentially pro-poor, but they are not a complete poverty-reduction strategy.

• Williamson argues development thinking increasingly recognized the importance of institutions because bad institutions can undermine good economic policies.

• Development should consider not only economic growth but also income distribution and environmental conditions.

• Main takeaway: The Washington Consensus should not simply mean “free markets and no government.” Williamson supports many market-oriented reforms but argues that good institutions, government policies, human development, and poverty reduction must accompany them.

RODRIK READING (ARUGMENT SUMMARY)

Rodrik argues that development thinking is moving away from the old Washington Consensus, which emphasized universal policies such as liberalization, deregulation, privatization, and free markets. Instead of assuming that the same policies will work everywhere, the newer approach recognizes that context matters and that different countries face different obstacles to development. Successful countries share some broad characteristics—such as macroeconomic stability, investment, participation in the global economy, market incentives, and reasonable governance—but there is no universal rulebook for achieving them. Rodrik supports a more pragmatic, gradual, and experimental approach, where governments identify their country's biggest constraints, try targeted policies, evaluate what works, and adapt. His central argument is that each country must develop its own solutions based on local circumstances rather than simply following policies designed in Washington.

RODRIK READING (KEY POINTS)

• The traditional Washington Consensus was losing influence, creating a need for a new approach to development.

• The old approach emphasized liberalization, deregulation, privatization, and free markets.

• Rodrik criticizes “cookie-cutter” policies that assume the same reforms will work in every country.

• Context matters: countries face different economic and political circumstances.

• There is “no universal rulebook” for development.

• Successful economies generally:

  • Participate in the global economy

  • Maintain macroeconomic stability

  • Encourage saving and investment

  • Provide market-oriented incentives

  • Have reasonably good governance

• However, countries can achieve these goals in different ways.

• The new approach is diagnostic: identify the country's most important bottlenecks and constraints first.

• Instead of trying to reform everything at once, governments should prioritize the biggest problems.

• Policy experimentation is important—try targeted solutions, monitor them, and determine what actually works.

• China is an important example because its development since 1978 relied heavily on experimental gradualism rather than following one universal development formula.

• Rodrik rejects both market fundamentalism (“just let markets work”) and institutional fundamentalism (“just get governance right”).

• Main takeaway: Each country needs to find its own development strategy. Foreign experts can provide ideas, but ultimately “the rulebook must be written at home, not in Washington.”

DIAMOND READING SUMARY

Diamond argues that geography and the environment strongly influence how societies develop. He uses Polynesia as a “natural experiment” because Polynesian societies came from similar ancestors but settled islands with very different environmental conditions. His main example compares the Maori of New Zealand with the Moriori of the Chatham Islands. The Maori lived in an environment that supported agriculture, larger populations, specialized occupations, stronger political organization, and military technology. The Moriori lived on colder, more isolated islands where agriculture was difficult, resulting in a smaller population, simpler technology, and less centralized political organization. When the two groups eventually encountered one another, the Maori were able to conquer the Moriori. Diamond argues that differences in climate, geography, resources, island size, population density, and isolation helped produce these very different societies even though they shared similar origins. His larger argument is that differences between societies can often be explained by environmental conditions rather than biological or racial differences between people.

DIAMOND READING KEY POINTS

• Polynesia acts as a “natural experiment” because Polynesian societies had similar ancestral origins but developed in very different environments.

• Maori vs. Moriori is Diamond's main example.

• Both groups descended from Polynesian farmers, but their societies developed very differently after settling in different environments.

• Moriori – Chatham Islands: colder climate, isolated, small population, agriculture was difficult, simpler technology, and less centralized political organization.

• Maori – New Zealand: environment supported agriculture, larger and denser populations, specialized occupations, stronger political organization, and more advanced military technology.

• When Maori reached the Chatham Islands in 1835, they were able to conquer the Moriori, illustrating the consequences of their different development paths.

• Important environmental factors include:

  • Climate

  • Island size

  • Geography/terrain

  • Natural resources

  • Isolation

  • Opportunities for food production

• Better conditions for agriculture and food production can support larger populations.

• Larger and denser populations allow greater specialization of labor—such as craftsmen, soldiers, chiefs, and other specialized roles.

• Population size and density can also contribute to more complex political organization.

• Isolation affects whether societies can trade, communicate, and exchange technology and ideas with other societies.

• Diamond shows that Polynesian societies ranged from relatively egalitarian villages to highly stratified societies with powerful chiefs and military forces.

• The different Polynesian societies demonstrate that similar people placed in different environments can develop in very different ways.

• Main takeaway: Diamond argues that geography shapes development because environmental conditions influence food production, population density, technology, specialization, and political organization, which can eventually create large differences in power between societies.

SACHS, MELLINGER & GALLUP READING SUMMARY

Sachs, Mellinger, and Gallup argue that geography plays an important role in explaining why some countries are rich while others are poor. While institutions and economic policies matter, countries do not begin with the same geographic opportunities. Coastal and temperate regions tend to be richer, while countries that are landlocked, tropical, or located in deserts face greater barriers to development. Geography affects development mainly through transportation costs, disease, and agricultural productivity. Coastal countries benefit from cheaper international trade, while landlocked countries face higher transportation costs. Tropical countries experience greater burdens from diseases such as malaria and often have lower agricultural productivity because of climate, soil, pests, and drought. These disadvantages can reinforce poverty over time. However, the authors do not argue that geography completely determines a country's future—institutions and policies also matter. Their main argument is that development strategies must address geographic disadvantages directly rather than assuming that better economic policies alone will produce development.

SACHS, MELLINGER & GALLUP READING KEY POINTS

• Geography + institutions both matter; geography is not the only explanation for development.

• Coastal regions tend to be richer than inland or landlocked regions because they have easier and cheaper access to trade.

• Sea transportation is much cheaper than transportation over land, giving coastal economies an advantage.

• Temperate regions tend to be richer than tropical regions.

• The poorest regions often face two disadvantages at once: they are far from sea trade and have a tropical or desert climate.

• Geography affects development through three major channels:

  1. Transportation/trade costs

  2. Disease

  3. Agricultural productivity

• Disease: Tropical climates make diseases such as malaria easier to spread throughout the year.

• Disease lowers worker productivity, increases mortality, and can make it harder for families to invest in children's education.

• Agriculture: Tropical regions often have lower agricultural productivity because of poor soils, high temperatures, variable rainfall, drought, pests, and parasites.

• Geographic disadvantages can become self-reinforcing: low agricultural productivity can lead to smaller cities and slower technological development.

• Geography is not destiny. Good institutions and policies can still make a major difference.

• The authors use North vs. South Korea and East vs. West Germany to show that places with similar geography can have very different outcomes because of their institutions.

• Governments and international organizations should address geographic barriers through public health, disease prevention, agricultural technology, infrastructure, and economic diversification.

• Poor countries may need financial assistance from richer countries because they may not have enough resources to overcome these geographic disadvantages themselves.

• Main takeaway: Countries with favorable geography often have an economic advantage, while tropical and landlocked countries face additional barriers. Development policy therefore needs to address geography as well as institutions and economic policy.

PUTNAM READING SUMMARY

Putnam argues that differences in how well governments and democratic institutions perform can be explained largely by differences in civic community and social capital. Studying Italy’s regional governments, he finds that the northern regions generally have more effective governments than the southern regions. The strongest-performing regions tend to have citizens who participate in community organizations, trust and cooperate with one another, follow norms of reciprocity, and engage in public affairs. In contrast, regions with weaker civic traditions tend to have less trust, less cooperation, more hierarchical social relationships, and poorer institutional performance. Putnam argues that these differences have deep historical roots and can persist over long periods, meaning that effective democracy depends not only on formal political institutions or economic wealth but also on the social relationships and civic traditions of a community.

PUNAM READING KEY POINTS

• Putnam compares the performance of regional governments in Italy.

• Northern Italy generally has stronger institutional performance than Southern Italy.

• Civic community involves citizens participating actively in public and community life.

• Important characteristics include:

  • Civic engagement

  • Political participation

  • Trust

  • Cooperation

  • Norms of reciprocity

  • Associational membership

• Social capital refers to social connections, trust, and norms that make cooperation easier.

• Regions with stronger civic traditions tend to have better-performing governments.

• Regions with weak civic traditions tend to have lower trust, less cooperation, and more hierarchical relationships.

• Putnam examines whether economic development causes civic community or whether civic traditions contribute to development.

• His evidence suggests that historical civic traditions are important predictors of later institutional performance.

• Civic traditions can become self-reinforcing and persist over generations.

• Formal institutions alone cannot guarantee effective government; the social environment surrounding those institutions matters.

• Main takeaway: Democracy and government work better where people have strong traditions of trust, cooperation, civic participation, and social capital. Putnam uses differences between northern and southern Italy to show how these civic traditions can help explain long-term differences in institutional and economic performance.

ZAKARIA & LEE KUAN YEW READING SUMMARY

In this interview, Lee Kuan Yew argues that culture plays an important role in shaping a country's political, social, and economic development. He contrasts Western values, particularly American individualism, with what he describes as East Asian values that place greater emphasis on family, community, discipline, education, hard work, and social order. He argues that Western political and social institutions cannot simply be transferred to Asian societies because different cultures have different histories, values, and social structures. According to Lee, East Asia's economic success was influenced partly by cultural values that encouraged education, saving, hard work, and responsibility. However, Zakaria's conclusion is more cautious: culture matters, but it is not destiny in a simple or permanent sense, because cultures change over time and cannot by themselves explain development.

ZAKARIA & LEE KUAN YEW READING KEY POINTS

• Lee Kuan Yew argues that there is not one universal model that every country should follow.

• Western/American culture emphasizes the individual, personal freedom, and individual rights.

• East Asian culture, according to Lee, places greater emphasis on family, community, social responsibility, discipline, and order.

• Lee argues that the individual exists within the context of the family and wider society, rather than completely independently.

• He believes family stability is especially important for maintaining a successful society.

• Lee criticizes excessive individualism because he believes it can weaken family and community responsibility.

• Education is extremely important to development. Lee emphasizes discipline, learning, and developing people's abilities.

• Cultural values such as hard work, thrift/saving, education, and respect for learning helped contribute to East Asia's economic success.

• Lee argues that countries should adapt policies to their own cultural circumstances rather than simply copying Western institutions.

• He is skeptical of the assumption that Western-style democracy is automatically appropriate everywhere.

• Economic and technological development can also change culture over time, especially between generations.

• Lee argues that Asian societies can modernize without necessarily becoming completely Westernized.

• Zakaria is more cautious about Lee's argument. In his conclusion, he says culture is important but is complex, constantly changing, and difficult to use as a complete explanation for economic success.

• Zakaria points out that cultural explanations can change depending on circumstances—for example, Confucianism was once blamed for economic stagnation but was later credited for East Asian economic success.

BATES READING SUMMARY

Bates argues that the development of strong states is closely connected to violence, security, taxation, and economic development. In agrarian societies, people originally relied heavily on kinship and lineage groups for security because governments were often unable to protect them. As rulers faced increasing threats of war, they needed more money to finance armies and defend their territories. This gave rulers an incentive to promote economic growth because a more productive economy created a larger source of tax revenue. Governments therefore began providing greater security, protecting property, encouraging production and trade, and building stronger institutions. Bates's central argument is that rulers did not necessarily pursue development simply because it benefited their citizens; they often promoted prosperity because they needed resources to survive political and military competition. In this way, war and the need for revenue helped drive state formation and increases in state capacity.

BATES KEY POINTS

• In early agrarian societies, governments were often too weak to provide reliable security.

• People therefore depended heavily on kinship and lineage groups for protection.

• Violence and insecurity made it difficult for people to safely produce, trade, and accumulate wealth.

• Rulers needed money to fight wars and protect themselves from rivals.

• To obtain that money, rulers needed tax revenue.

• A stronger and more productive economy creates a larger tax base.

• Therefore, rulers had an incentive to encourage economic development and prosperity.

• Governments increasingly provided security and protection for economic activity because productive citizens could provide more revenue.

• War → need for revenue → stronger taxation/state institutions → incentives for economic development.

• Political leaders did not necessarily promote development because it was simply “the right thing to do.”

• Instead, development could serve the ruler's own political and military interests.

• State capacity increases as governments become better able to raise revenue, provide security, and exercise control over their territory.

• War can therefore contribute to state-building by creating pressure for governments to become more capable.

NORTH & WEINGAST READING SUMMARY

North and Weingast argue that political institutions are crucial for economic development because they can constrain government power and protect property rights. Before the Glorious Revolution of 1688, English monarchs had considerable power to change rules, seize wealth, impose taxes, and fail to repay loans, making people uncertain that their property and investments were safe. After the Glorious Revolution, institutional changes strengthened Parliament, limited the Crown, increased judicial independence, and made property rights more secure. These changes created a credible commitment that the government would honor agreements and would not arbitrarily confiscate private wealth. As a result, investors became more willing to lend money to the government, government borrowing increased, and England gained better access to capital. Their main argument is that constraining political institutions promote economic development because secure property rights and credible government commitments encourage investment and functioning markets.

NORTH & WEINGAST READING KEY POINTS

• Credible commitment = the government must be able to convince people that it will honor agreements and respect their property rights.

• Before 1688, the Crown had significant arbitrary power and could change rules in its own favor.

• The Stuarts used methods such as forced loans, monopolies, and property seizures to raise revenue.

• This made property rights insecure and discouraged investment, because people feared the government could take their wealth.

• The Glorious Revolution of 1688 was the major turning point.

• After the Glorious Revolution:

  • Parliament became more powerful.

  • The Crown's power became more limited.

  • Parliament gained control over taxation and government spending.

  • The judiciary became more independent.

  • Property rights became more secure.

• These institutions prevented the monarch from unilaterally changing agreements or confiscating wealth.

• Investors therefore became more confident that the government would repay its debts.

• After 1688, government borrowing increased dramatically—within nine years, borrowing increased by more than an order of magnitude.

• This explains why interest rates fell after the Glorious Revolution: investors believed they were more likely to be repaid.

• Strong institutions create better incentives for investment and economic activity.

• Constraining institutions are important because they prevent rulers from using government power purely for their own benefit.

ACEMOGLU, JOHNSON & ROBINSON READING SUMMARY

Acemoglu, Johnson, and Robinson argue that institutions are a major cause of differences in economic development across countries. European colonizers established different institutions depending largely on whether Europeans could safely settle in a colony. Where European mortality was high, Europeans were less likely to settle and instead established extractive institutions designed to transfer resources to colonizers. Where mortality was low, Europeans settled in larger numbers and established institutions with stronger property rights and checks on government power. These colonial institutions tended to persist after independence, influencing countries' institutions and economic performance today.

ACEMOGLU, JOHNSON & ROBINSON READING KEY POINTS

• The argument follows this basic chain:
  Settler mortality → European settlement → early institutions → current institutions → current economic development.

• High settler mortality → fewer European settlers → extractive institutions.

• Low settler mortality → more European settlers → stronger property rights and checks on government power.

• Extractive institutions: Institutions designed primarily to extract resources from a colony rather than protect the population's property rights. The Belgian Congo is a major example.

• Settler colonies / “Neo-Europes”: Places such as the United States, Canada, Australia, and New Zealand, where Europeans settled and established institutions similar to European ones, emphasizing private property and limits on government power.

• Institutional persistence: Colonial institutions often continued after independence. New political elites could benefit from keeping the extractive systems they inherited.

• The authors use European settler mortality as an instrument to study the causal effect of institutions on economic development.

• Figure 1 on page 4 shows a strong negative relationship between historical settler mortality and modern income: colonies with higher European mortality tend to be substantially poorer today.

• Once the authors account for institutions, being in Africa or being closer to the equator does not independently explain lower income in their main instrumental-variable results. This supports their argument that institutions, rather than geography alone, drive the development differences they study.

• Most important takeaway for an exam:
  Colonialism itself was not simply “good” or “bad” for development. The type of institutions created during colonization mattered. Extractive institutions harmed long-run development, while institutions protecting property rights and constraining government were associated with greater development.

R.C. ALLEN READING SUMMARY

Allen argues that the Industrial Revolution began in Britain because Britain had unusually high wages and very cheap energy, especially coal. Because workers were expensive but coal and capital were relatively cheap, British businesses had strong incentives to invent labor-saving technologies that substituted machines and energy for workers. Britain’s high wages and cheap energy were connected to its success in international trade, mercantilism, imperial expansion, and abundant coal resources.

R.C. ALLEN READING KEY POINTS

• High wages → labor-saving inventions. Because labor was expensive, businesses had an incentive to replace workers with capital and machines.

• Cheap coal → energy-intensive technology. Britain had large, accessible coal deposits, making energy particularly cheap in industrial areas.

• Britain’s unusual economic conditions came from two major sources:
  international trade/global economic success + abundant cheap coal.

• Trade, mercantilism, and imperialism mattered. International trade increased British urbanization and labor demand, helping maintain high wages even as the population increased.

• Coal alone wasn't enough. The growth of London and international trade increased demand for fuel, encouraging Britain to expand its coal industry.

• Factor prices matter: Inventors had incentives to create technologies that saved whichever input was relatively expensive. In Britain, labor was expensive, so innovation became labor-saving and capital/energy-using.

• Examples include the steam engine, coke-smelted iron, and cotton-spinning machinery. These technologies used more capital and energy while reducing labor requirements.

• These technologies were initially more profitable in Britain than elsewhere because other countries had cheaper labor and/or more expensive energy.

• Education also mattered: High British wages allowed more people to obtain education and training, contributing to higher literacy, numeracy, and technical skills.

HA-JOON CHANG READING SUMMARY

Chang argues that today’s developed countries did not become rich through free trade and laissez-faire policies, even though they now encourage developing countries to follow those policies. Instead, countries such as Britain and the United States used tariffs, subsidies, and other government interventions to protect and develop their infant industries while they were catching up. Only after becoming economically powerful did they move toward free trade. Chang calls this “kicking away the ladder” because rich countries are discouraging developing countries from using the same policies that helped them develop.

HA-JOON CHANG READING KEY POINTS

• “Kicking away the ladder” = developed countries used protectionist policies to become rich, but now discourage developing countries from using those same policies.

• Infant industry protection = governments temporarily protect developing domestic industries from foreign competition so they have time to become competitive.

• Chang challenges the “official history of capitalism,” which claims that Western development was mainly driven by free markets and free trade.

• Britain was not originally a free-trade economy. It used high tariffs, subsidies, and other policies to promote domestic industries.

• Britain moved substantially toward free trade after it had already developed a technological advantage, especially after the repeal of the Corn Laws in 1846.

• The United States was highly protectionist. From 1816 through World War II, it had some of the world's highest tariffs on manufactured imports.

• The U.S. became a major supporter of free trade only after World War II, when its industrial dominance was firmly established.

• Developed countries used more than tariffs. Policies included export subsidies, directed credit, investment planning, R&D support, and government support for industries.

• Chang argues there is no “one-size-fits-all” development strategy. Different countries may need different combinations of policies.

• Chang argues that developing countries should have greater freedom to use tariffs and subsidies to promote their own industries rather than being required to adopt free trade immediately.