Beruflich Dokumente
Kultur Dokumente
Topic I: Introduction
Article starts with a humorous way of saying developmental econ is lower than math-econ.
However, model making is something that developmental econ has also started incorporating in the
last few years. The article’s purpose: teach historically dumb generations about the contributions of
developmental econ
Developmental Econ really took off only after 1940 when Rosenstein-Roden wrote a paper about
the development problems of southeastern Europe.
Developmental Economics (DE) has always realized the limited usefulness of standard economic
models, but since they disrepute the traditional Walrasian Economics that believed in perfect
markets, pure competition, irrelevant transaction costs and so on. In the process, DE became
marginalized.
During this recapturing by Walrusians, their own school was breaking because economists were
coming up with models of imperfectionism.
International agencies were pushing for poor countries to adopt market fundamentalism, but it was
increasingly disliked.
Efficiency wage theory: 1950s and 60s developmental economists started to study poor countries to
explain the coexistence of significant positive wages and unemployment. One theory by Leibenstein
and Mazumdar said that when wages were too low, productivity of labourers were also too low for
employer to hire.
This model was one of the first to illustrate that if price affected things more than market functions,
then one gets beyond the confines of Walrusian equilibrium.
o Corollary: Equity and efficiency are not separate. Equitable distribution of land for example,
leads to reduction of malnourishment of currently unemployed, increasing out and thus
economic growth.
Another theory by initial DE was that positive externalities had a large impact
Old way of thinking categorized externalities into 2 types:
o Technological: Spillovers from one firm’s investment onto the productivity of another firm’s in
the same sector.
Learnings were based by doing, for eg, the infant industry argument
This theory lacked in that it underestimated the difficulty of identifying the few sectors
and locations where the spillover effects may be large and particularly difficult to
internalize
o Pecuniary: money related externalities, revolving around market coordination
When domestic markets are small (and foreign trade is costly), simultaneous expansion
of many sectors can be self-sustaining through mutual demand support, even if by itself
no sector can break even
This thought process died out because policy measures found it hard to make
microeconomic activity supply aggregate benefits.
Multiple Equilibria and Hysteresis:
o The 1950s development theory started with a presumption of multiple equilibria and posed the
essential problem as one of escaping a "low-level equilibrium trap" to a better higher-income
equilibrium.
o One model focused on economic-demographic interactions of income, savings and endogenous
population growth.
This model emphasized historical and initial conditions of the economy
o The other model focused on increasing returns which generate strategic complementarities
among sectors, through a process of "cumulative causation"requiring a coor dinated "big push"
for industrialization
This model focused on expectations around high-investment
o Both models are shown to depend on some parameters of the economy (like the discount rate
and the speed of adjustment). In all these models, the desirability of adopting a particular course
depends on how many others are expected to do the same.
Persistence of Dysfunctional Institutions:
o Focus on long-lasting institutions in poor countries which block economic progress
Property-rights advocating economists deny this, saying governments and institutions
evolve as new benefit-cost possibilities arise. Recently though, this has been disproved
o Transaction costs (increase entry and exit barriers) and increasing returns from adopting a
particular institution (may have useless institutions enlarge) are the issues
Principal-Agent Models and Missing Markets:
o Stiglitz's (1974) model of share-cropping viewed it as a compromise between risk and work
incentive effects
o DE economists hate capital market imperfections
Targeting in the Theory of Economic Policy
o Popular arguments for protection were countered early on by arguments like:
“if curbing luxury consumption is the objective, the first-best policy is to have a
consumption tax on luxuries”
“if reducing economic inequality is the objective, progressive income and wealth taxation
may be better than tariffs on luxury imports”
“If infant industries are not getting off the ground, subsidize credit, not protection”
o General principle: intervention is to be directed as closely as possible to the source of the
distortion, to be applied to the prices the consumers (not the producers) face.
DE has contributed to Econ as a whole, for eg: the theory of commodity price stabilization has
contributed to the more general literature on risk and saving
Idea of the paper: As economic theory has turned more toward the study of information-based market
failures, coordination failures, multiple roles of prices etc, it has inevitably turned to questions that
have long exercised development economists. Market rivalry (even when markets work highly
imperfectly) and the pitfalls of reflexive interventionism are what DE advocates for
1. Fact checking universal basic income: can we transfer our way out of poverty?
One estimate, generated by Laurence Chandy and Brina Seidel of the Brookings Institution,
recently calculated that the global poverty gap — meaning how much it would take to get everyone
above the poverty line — was just $66 billion. That is roughly what Americans spend on lottery
tickets every year, and it is about half of what the world spends on foreign aid.
This doesn’t mean that just $66B is required to alleviate extreme poverty
o You have to ask: Who are the poorest? How much does each person need?
Several ways to know the amount: Universal Basic income targeted using basic proxy-means tests
(PMT) or some other categorical PMT.
Observations:
o Universal Basic Income (UBI) reduces the Headcount Index by 14.5 percent
o Categorical targeting (see the last row) performs very similarly to UBI.
o With enough money to eliminate poverty with perfect information and no transactions costs, the
best targeting tools we have available to us reduce the Headcount Index only by 23 percent.
o The difference between the performance of UBI and the best targeting method looks small. But,
that is a little deceiving: note that in a country of 25 million people, such as Cameroon, reducing
the Headcount Index from 17.1% to 15.4% allows close to half a million people escape poverty.
Given the budget neutrality of this result, you may still choose to target transfers to the poor
This table tells us that either our transfers don’t work, or that given the inefficiency of targeting
measures, UBI is a better tool.
UBI however, is very misleading because everyone takes home the same transfers, which is about 2
trillion dollars needed for the entire world to get out of extreme poverty.
Therefore, some other targeting measure has to be found. Geographical targeting (by district,
household etc), for example, showed about twice as good a result in reducing poverty in Cambodia
as compared to UBI, which cost 20% more spending than the targeting.
2. The Future of Not Working. (This whole article is a running commentary by former NYTimes reporter
Annie Lowrey. She’s writing a book on universal basic income)
(Starts with a long intro about how the non-profit in question, ‘GiveDirectly’, will give the 220
people in a village 22$ a month, for 12 years, alleviating them from extreme poverty. They have
done this for 40 villages in Kenya. They are based in NY, and are carrying out a UBI scheme)
Left wing countries like Canada, Scotland and Netherland are pushing for UBI these past years
because it is a simple and cost efficient way of pulling people out of poverty (GiveDirectly argues)
Automation and artificial intelligence can and will wipe out jobs, so although Silicon Valley giants
are pushing for UBI, they are doing so knowing that the people alleviated today will be left without
a job anyway by 2050
GiveDirectly has attracted $24m, mainly from people who want to test the concept of a basic
income. Experiments have happened in this field before, but have never tackled an entire village
and for an extended period of time
Founders of GiveDirectly were Harvard development students who learned from overseas projects
that cash was more valuable than the common in-kind charity, to the villagers in poor areas. “If
you’re hungry, you cant eat blankets”
At the time of these experiments, there was virtually no banking system. Then In 2007, Vodafone
and the British Department for International Development together built a system, called M-Pesa,
for Kenyans to transfer actual shillings from cellphone to cellphone. An estimated 96 percent of
Kenyan households use the system today.
o This system greatly aided the process of aiding groups with money
Original founders gave random Kenyans $500 out of their own pocket. Children were 42% less
likely to go hungry in a day and domestic violence reduced. The $5000 distributed and used so well
boosted confidence in the start up
At first, GiveDirectly handed out large lump sums, generally $1,000 spread into three payments
over the course of the year. The nonprofit’s field officers would locate low-income villages in
Kenya, then find the poorest families in each individual village using a simple asset test (whether a
family had a thatched roof or not). The field officers would introduce themselves to the town elders,
explain their purpose and return to provide mobile phones and training to recipient families. Then
GiveDirectly would push a button and send the money out.
Villages visibly flourished after a few years. Ponds, lakes, well fed cows, etc. Drunken men whose
wives had left them started businesses and got cows and drank less.
Problems with this scheme on the recipients:
o Other villagers thought people who got money were biased. They threatened to burn house down
of selectors.
o Some people with transfers were cheated by others. “I gave my phone to xyz to get cash from
the M-Pesa. Never returned”
Problems with the implementation of this scheme:
o Many popular forms of aid have been shown to work abysmally. PlayPumps — merry-go-round-
type contraptions that let children pump water from underground wells as they play — did little
to improve access to clean water. Buy-a-cow programs have saddled families with animals
inappropriate to their environment. Skills training and microfinance, one 2015 World Bank study
found, “have shown little impact on poverty or stability.”
o Non-profits do little, have no impact assessment of their work, and the aid is useless. People get
free Toms slippers from NGOs and just sell them in markets. 94% of aid is non-cash
o Cash however seems harder to market. It is not easy to persuade American oligarchs, British
inheritors and Japanese industrialists to fork over their money to the extremely poor to use as
they see fit. “There’s the usual worries about welfare dependency, the whole ‘Give a man a fish’
thing,”
This is plausible for workers in the developed countries, not for the hunger-stricken kids
who don’t have the luxury to fall back on a safety net and eat off donations.
o The idea of showering money on poor, unstable countries is detested. “The visual of putting a
pill in a kid’s mouth is so much more attractive to people,”
o Institutional inertia: “Our mandate is Health so cash transfer are not our priority”
“It’s easy to muster evidence that you should be giving cash instead of fertilizer”. “The harder argument
is: You should shut down your U.S.A.I.D. program, which is bigger than the education budget of
Liberia, and give the money to Liberians. That’s the radical critique.” If cash transfers flourished,
“the whole aid industry would have to fire itself.”
While the previous article ‘Future of not working” described the GiveDirectly M-Pesa initiative in
words, this report is a more formal representation with stats and figures of the same initiative. To recap:
GiveDirectly selected random areas, without any bias regarding business owners or not, male or not etc.
They then transferred money through M-Pesa, and asked the residents to spend it as they pleased.
Results were recorded, and 3 parameters were isolated:
o Recipient was husband or wife?
o Recipient got a lump sump or installments over 9 months?
o Size of transfer, either $300 or $1100?
Results of the initiative summarized:
1. Transfers allow poor households to build assets - These increases occurred primarily through
home improvements and increased livestock holdings: households receiving transfers are 23
percentage points more likely to have an iron roof as opposed to a grass-thatch roof, and
livestock holdings increase by 51% (PPP USD 85)
2. Transfers increase consumption - Recipients spend cash transfers on a very broad variety of
goods and services, particularly food, medical, and social expenses.
3. Transfers reduce hunger - With an increase in food consumption by 20%, significant reductions
in hunger and food insecurity were observed, e.g. a 30% reduction in the likelihood of the
respondent having gone to bed hungry in the preceding week
4. Transfers do not increase spending on alcohol and tobacco - no evidence of increased
expenditure on temptation goods such as alcohol, tobacco and gambling.
5. Transfers increase investment in and revenue from livestock and small businesses
6. Transfers increase psychological well-being of recipients and their families - Unconditional cash
transfers lead to a 0.18 SD increase in happiness
7. Transfers affect many, but not all, indicators of poverty - little to no impact found on health or
education over the time horizon considered in the data. Suggestive evidence found that cash
transfers reduce domestic violence and increase female empowerment in both recipient
households and other households in the same village
8. Specific design features of cash transfer programs differentially affect impacts and imply policy
trade-offs –
Monthly transfers have stronger effects on food security than lump-sum transfers, while
lump-sum transfers show larger effects than monthly transfers on particular types of
assets such as metal roofs.
Large transfers produce larger treatment effects than small transfers on most outcomes,
but with decreasing marginal returns.
No significant differences in outcomes when making transfers to the female vs. the male
in the household.
Together, these results suggest that when policy-makers consider different design choices
for cash transfers, they may come to different conclusions depending on how they weight
different potential outcomes relative to one another
Neoliberalism: markets over government, economic incentives over social or cultural norms, and private
entrepreneurship over collective or community action
Started by Charles Peters in 1982, but the people whom he quoted as exemplifying neoliberalism were
against markets and for big governments. Today, it has radically changed to the opposite, and is often
hated upon because of the failures associated with it
The use of the term “neoliberal” exploded in the 1990s, when it became closely associated with two
developments, neither of which Peters mentions:
o One was financial deregulation, which would culminate in the 2008 financial crash
o The second was economic globalization, which accelerated thanks to free flows of finance
The problem isn’t markets, private entrepreneurship, or incentives. Their use lies behind the most
significant economic achievements of today. The problem is that mainstream economics dwells too
much into ideology, constraining the choices that we appear to have and providing cookie-cutter
solutions
Take property rights for example. Property rights are good when they protect innovators from free
riders, but they are bad when they protect them from competition
o In China, they did not switch directly from state owned to private, rather they applied a mix of
policies.
For example, Household Responsibility System gave farmers the incentive to invest in
and improve the land they worked on, while obviating the need for explicit privatization
Special economic zones provided export incentives and attracted foreign investors
without removing protection for state firms.
Western policy cannot be applied everywhere. You cannot say, although it may be true, that Chinese
policy will converge on Western-style institutions to sustain its economic progress
What, after all, are Western institutions? The importance of the public sector, for example, in the club of
rich OECD countries varies from a third of the economy in Korea to nearly 60 percent in Finland. In
Iceland, 86 percent of workers are members of a trade union; the comparable number in Switzerland is
just 16 percent.
o The idea that any one of these models of taxation, labor relations, or financial organization is
inherently superior to the others is belied by the varying economic fortunes that each of these
economies have experienced over recent decades
Economists create models and improve them. But progress of model making is measured not by settling
on the right model or theory to answer such questions, but by improving our understanding of the
diversity of causal relationships
Economists tend to be very good at making maps, but not good enough at choosing the one most suited
to the task at hand.
Economists’ contributions to public debate are often biased in one direction, in favor of more trade,
more finance, and less government. That is why economists have developed a reputation as cheerleaders
for neoliberalism
Globalization good or bad?
o Most economists will say good, quoting China, Japan, Chile and Korea embracing globalization
early and benefiting from it. What they will not say is that neoliberal principles were violated in
the process.
South Korea and Taiwan heavily subsidized their exporters, the former through the
financial system and the latter through tax incentives.
China shielded its large state sector from global competition, establishing special
economic zones where foreign firms could operate with different rules than in the rest of
the economy
None, with the sole exception of Chile in the 1980s under Pinochet, followed the
neoliberal recommendation of a rapid opening-up to imports. In all cases, governments
intervened
Countries like Mexico who liberalized trade (NAFTA) and financial systems and the
whole neoliberal package didn’t have much economic growth
Globalization has to be saved from hyper globalization. Large international firms, rendered footloose
by the new rules, have acquired special privileges. Foreign enterprises and investors are given the right
to sue national governments when changes in domestic regulations threatens to reduce their profits.
All in all, neoliberalism’s principles have been isolated out of context and logic, which is why they fail
today. Economic growth is the only common element in all forms of neoliberalism.
Non-economic things like social change and inequality are perhaps more important than economic
progress. But neoliberals are not wrong when they argue that our most cherished ideals are more likely
to be attained when our economy is strong and growing. Where they are wrong is in believing that there
is a universal recipe for improving economic performance, to which they have access.
1. Behavioural Development Economics: Lessons from Field Labs in the Developing World
The report shows that current differences in trust levels within Africa can be traced back to the
transatlantic and Indian Ocean slave trades.
Cultural anthropology says: in environments where information acquisition is either costly or imperfect,
the use of heuristic decision-making strategies, or “rules-of-thumb,” can be optimal
o These rules-of-thumb do not develop by themselves but rather evolve according to which ones
yield the highest payoff.
Article hypothesis is that in areas heavily exposed to the slave trade, norms of mistrust towards others
were likely more beneficial than norms of trust, and therefore they would have become more prevalent
over time
o An alternative explanation is that more slaves were supplied by ethnic groups that initially were
less trusting, and that these lower levels of trust continue to persist today.
Influence of unobservable factors would have to be between three and 11 times greater than observable
factors in determining whether slave trade really affects trust
Within Africa, there is a strong positive relationship between distance from the coast and trust. Places
farther from the coast had fewer slaves taken, and therefore exhibit higher levels of trust today.
o If distance from the coast affects trust only through the slave trade, then there should be no
relationship between distance from the coast and trust outside of Africa, where there was no
slave trade.
o This seems to be true Looking at samples from Asia and Europe, there is a statistically
insignificant relationship between distance from the coast and trust.
Ethnic groups whose ancestors were heavily enslaved in the past are less trusted today
No point writing out pages and pages, which have not shown up in either of the midterms in any way. So
instead I’m going to scan through the readings now and put in only the most important ideas.
1. Child Labor: Cause, Consequence, and Cure, with Remarks on International Labor Standards
There is no specific policy that can be implemented. Each policy depends on the economic scenario of
the situation
The main policy divide is between legal interventions and collaborative interventions, that is, public
action which makes parents prefer to withdraw their children from the labor force
o The availability of good schools, the provision of free meals, and efforts to bolster adult wages
are examples of collaborative intervention
o These are generally much more feasible. However, lack of govt funds reduces their provision
and also results in adult wage hikes.
There has to be some minimal legal restrictions, such as children being prevented from working in
hazardous occupations or under bonded labor conditions, are worth enforcing legally, even though there
can be a few cases where such laws work against children
What about a complete ban on child labour? There are circumstances where, even if such a total ban
were feasible and costless to implement, it should not to be implemented. There are worse things that
can happen to children than having to work: starvation
o Even poor parents do not in general like to send their children to work if they can help it.
Despite this, there are circumstances where a total ban may be desirable from the point of view of the
well-being of the children. This is because, whereas a single parent with drawing the child from work
cannot influence equilibrium wages, a large scale withdrawal of child labor can cause adult wages to
rise so much that the working class household is better off
o This is unlikely for poor and likely for rich countries
A good way to enforcing a ban is to make schooling compulsory. This is because a child's presence in
school is easier to monitor than a child's abstention from work. Children could work before and after
school to bypass this method but at least full time employment is avoided.
o In poor countries, work + schooling is desirable in healthy amounts
Ban on child labour in export industries is undesirable, since this could result in children being diverted
to less desirable or more hazardous work. In general, it is better to take economy-wide measures against
child labor and, if there is to be a sector-specific ban, this should be based on the working conditions of
that sector, rather than the destination of the goods
International labour standards can cause certain countries to lose their comparative advantage and thus
cause a flight of capital.
Topic V: Land, Agriculture and Development
1. From the Green Revolution to the Gene Revolution: How will the Poor Fare?
The transformation of global food production systems defied conventional beliefs that agricultural
technology does not travel well because it is geographically specific
Over the past decade the locus of agricultural research and development has shifted dramatically from
the public to the private multinational sector.
Developing countries are facing increasing transactions costs in access to and use of technologies
generated by the multinational secto
Green revolution R&D: Access and Impact
o Crossing plants with different genetic backgrounds and selecting from among the progeny
individual plants with desirable characteristics, repeated over several cycles/generations, led to
plants/varieties with improved characteristics such as higher yields, improved disease resistance,
improved nutritional quality, etc
o Prior to 1960, there was no formal system in place that provided plant breeders access to
germplasm. Thereafter, CGIAR (an international public sector) managed networks of
international nurseries for sharing crop improvement results evolved in the 1970s and 1980s
o Small countries behaving rationally choose to free ride on the international system rather than
invest in large crop breeding infrastructure of their own
Impacts of food crops improvement technology
o Crucial role played by the international germplasm networks in enabling developing countries to
capture the spillover benefits of investments in crop improvement made outside their borders
o Much of the increase in agricultural output, over the past 40 years, has come from an increase in
yields per hectare rather than an expansion of area under cultivation
o High returns to the Green Revolution strategy of germplasm improvement
o Several studies have provided empirical support to the proposition that growth in the agricultural
sector has economy-wide effects
o Although the favorable, high-potential environments gained the most in terms of productivity
growth, the less favorable environments benefited as well through technology spillovers.
According to David and Otsuka, wage equalization across favorable and unfavorable
environments was one of the primary means of redistributing the gains of technological change
Changing Locus of agricultural R&D: From national public to international private sector
o From the 1960s to the 1980s, private sector investment in plant improvement research was
limited due to the lack of effective mechanisms for proprietary protection on the improved
products
o This changed when hybrids came along.
o The seed industry in the developing world was started by multi-national companies based in the
developed world, and then led to the development of national companies
o Despite its rapid growth, the private seed industry continued to rely, through the 1990s, on the
public sector gene banks and pre-breeding materials for the development of its hybrids
o The proprietary protection provided for artificially constructed genes and for genetically
modified plants provided the incentives for private sector entry
o Agro-chemical companies moved into crop improvement was that they foresaw a declining
market for pesticides
o A clear division of responsibilities in the development and delivery of biotechnology products
has emerged, with the multinational providing the upstream biotechnology research and the
local firm providing crop varieties with commercially desirable agronomic backgrounds
o If we look at public expenditures for biotechnology alone, the figure comes out to be
substantially smaller for the developing world as a whole
o Private research expenditures now exceed public sector expenditures