Challenges of Sustainable Development Professor Jeffrey D. Sachs Midterm March 10, 2010 Time allotted: 1hr Part I.

Please Analyze Economic Growth in the Following Economy (20 minutes, 30 points) You have been invited to an IMF talk on poverty in the Republic of East Africa (REA). An IMF economist stands at the podium and describes the economy of REA as follows: The REA has 1 million people in it, and has very strict anti-trade policies, so no goods flow into or out of the country. The only formal sector is the urban sector, which produces manufactures: M = ALUK where A is the productivity, LU is the size of the urban population, and K is the physical capital in manufacturing. The economist explains that people in the cities save a constant proportion of their income, and use it to invest in capital: S = sM = I And physical capital depreciates at a constant rate: D = dK a) Write down the equation for Kt+1 as a function of Kt, s, A, and d, as we learned in class. Youll notice that LU will also find its way into your equation. b) According to the IMF economists model, what is the growth rate of the economy? What must be true if there is positive economic growth? c) The economist therefore concludes that the only way to improve the countrys lot is to increase urban productivity (A), since s, d, and LU are not things that policy can change. You raise your hand and propose an extension to the model: The farming sector (which the IMF official was dismissing as the informal sector and was therefore not considering) produces units of food (F) according to F = LR where LR is the size of the rural population. Each person requires units of food. You argue that rural people dont save, they use all their income for consumption. Only the people in urban areas are saving according to the equation given by the IMF official. Given that the rural population feeds the whole country, solve for the rural percentage of the population. Show your work.

d) Now that you can express the rural (and the urban) percentage of the population, you can replace the LU term in the growth equation you derived in part (b). What must be true, in terms of d, A, s, , and if there is to be positive economic growth? e) Would increasing rural productivity improve growth? Explain to the IMF official why he was wrong to think that improved manufacturing productivity was the only way to go. f) REA has had trade barriers in place. Would it help REA to start trading, even though it is very unproductive in all sectors (low A and low ) compared to the rest of the world? Give two reasons why or why not. Part II. Briefly (1-3 sentences) define the following terms or provide the requested data. Be sure to mention how the term is relevant to the issues we are studying. (20 minutes, 30 points) 1. Approximate percentage of U.S. workforce engaged in agriculture 2. Approximate Total Fertility Rate of a sub-Saharan African country in 2005 3. Structural change (of an economy) 4. Capital Threshold Trap 5. Intertropical convergence zone 6. Cf (temperate moist) Koppen-Geiger Climate Zone 7. Prizes for R&D 8. Negative Externality 9. Recharge Rate & Maximum Sustainable Yield 10. Explain the relevance of the map below to this course:

Part III. Choose Two out of the following four questions. Provide short and wellorganized answers, not long answers. (10 minutes on each, 20 points each) Question 1 Sub-Saharan Africa's failure to develop as quickly as other parts of the world is often blamed on institutional or political failure. Does this make sense in light of subSaharan Africa's specific challenges? Mention at least three characteristics that make Africa different from the rest of the world. Question 2 According to Jared Diamond, why was it so relatively easy for Europeans to conquer the Americas? Why isnt it that the Americas conquered Europe? Why wasnt it so easy for the Europeans with Africa? What does any of this have to do with our analysis of poverty in todays world? Question 3 Malaria currently kills roughly 1 million people per year in sub-Saharan Africa, and is the number one killer of children under five. Despite this burden of disease, no vaccine for malaria exists. Assuming a malaria vaccine is technically feasible, explain why the vaccine still does not exist (what is wrong with the current incentive structure?), and two potential policy steps that could be taken to solve the problem. Be sure to mention the advantages and disadvantages of each of your proposals. Keep in mind that patent protection law already exists, so your two policy proposals cannot include patents. Question 4 The Brundtland Commission was the first to provide a working definition of Sustainable Development. How did the Commission define it? Keeping in mind that the production function for economies includes natural capital, explain why achieving sustainable development is such a challenge, and whether you think it is feasible.