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126 Cards in this Set

  • Front
  • Back
human development
process of enlarging peoples choices by expanding human functionings and capabilities
functionings
valuable things a person can do or be
capabilities
freedom to achieve functionings
HDI
human development index:

Average of life expectancy, school attendance, adult literacy, and average income
Solow Model - assumptions
1. K and L only variables - constant returns to scale on each

2. Diminishing returns to each input

3. All resources are being fully utilized
Solow Model - SR conclusions
1. Population growth reduces income (all else constant)

2. Capital accumulation increases income (all else constant)
Solow Model - LR conclusions
Growth solely based on rate of technological improvement
conditional convergence
Solow - rich and poor countries will only converge if savings and population growth are equal in both countries.
Solow Model - policy recommendations
1. Decrease population growth
2. Increase savings
Lewis Model - assumptions
Agricultural sector

1. MPL = 0
2. Agricultural Wage = APL
3. Subsistence sector (no savings)

Industrial Sector

1. Industrial wage fixed slightly higher than Wa.
2. All wages spent on consumption goods
3. All profits by firms reinvested
MPL/APL
Marginal productivity of Labor/ Average Productivity of Labor
Lewis Model - policy recommendations
development is contingent upon rural-urban migration, since the industrial sector is the only sector that influences economic growth.
Neocolonial dependence model
Variation of dependency theory that blames colonialism for past and present underdevelopment.

In the past, colonialism consisted of resource extraction to fuel industrialization in home country.

Today colonialism is continued by MNCs exploiting resources and cheap labor.

Perpetuated through existence of elites friendly with the developed countries who benefit from the status quo.

All leads to a situation where LDC exists as a resource hub for MDC, and cannot develop.
False-Paradigm Model
Variation of dependency theory that blames inappropriate development policies for lack of development.

Inappropriate policies originate from foreign trained advisors unfamiliar with LDC.

Development is not based on domestic institutions and inevitably fails.
Dualist-Development
Variation of dependency theory that focuses on a dualism that exists between countries and classes throughout the world.

Not only is there a divide between rich and poor countries, but a divide between rich and poor people in each country that has been institutionalized.
Dependency theory - policy recommendations
nationalization of foreign industry

regionalism - favoring trade with other LDCs

autarky - reducing dependence upon international trade
delinking
central goal of dependency theory policies, and refers to cutting ties to MDCs in order to reform insititutions that have emerged that have dependence upon the developed world at their core.
Endogenous Growth theory - assumptions
1. There are constant returns to capital

2. Capital includes human capital and knowledge. No diminishing returns to knowledge.
Endogenous Growth theory - policy recommendations
Subsidize R/D
Invest in education
Avoid protectionism (creative destruction)
Amartya Sen - democracy and development
decrease fertility
increase transparency
increase education
increase status of women
Mancur Olsen - criticism of development theories
They assume that efficient allocation and use of resources occurs, which in fact is not always the case.
Daron Acemoglu - institutions
Good institutions:

1. enforce property rights
2. constrain the actions of elites, politicans, and other powerful groups.
3. ensure some degree of equal opportunity for broad segments of society
Geography - factors that influence development
1. Diseases
2. Resource endowments
3. Climate
4. Accessibility
5. Technology diffusion
Daron Acemoglu - institutions > geography
Historical examples that show that countries with the most abundant natural resources have had the hardest time developing, due to increased exploitation.
Rodrik and Subramanian - institutions
1. market regulating
2. market stabilizing
3. market legitimizing
market regulating insitutions
those that deal with externalities, economies of scale, and imperfect information.

Ex) Regulatory agencies in telecommunications, transport, and financial services.
market stabilizing institutions
those that ensure low inflation, minimize macroeconomic volatility, and avert financial crises.

Ex) central banks, ER regimes, budgetary and fiscal rules
market legitimizing institutions
Those that provide social protection and insurance, involve redistribution, and manage conflict.

Ex) pension systems, unemployment insurance schemes, and social funds.
Jeffrey Sachs - institution critique
If underdevelopment is due to bad institutions, MDCs have an excuse to not help in development of LDCs since bad insitutions prevents successful improvement.

Meanwhile, people continue to suffer.
Quintile Ratio
measurement of inequality. Found by partitioning a countries population into five equal quintiles based on income, the dividing Q5 (the richest) by Q1 (the poorest).

Q5/Q1
Lorenz Curve
Found by comparing cumulative shares of income to cumulative shares of the population.

x-axis contains cum. shares of population.

y-axis contains cum. shares of income.

A line from the origin to the top right corner is the line of perfect equality, where each quintile has the same number of shares.

The deeper the curve is away from the line of equality, the higher the inequality is.
Gini Coefficient
Area of the belly of the Lorenz curve divided by the Area of the triange formed by the x-axis, y-axis, and line of equality.

Offers a numerical measurement of the Lorenz curve.

0 is perfect equality
1 is perfect inequality
Benefits of inequality
increased aggregate savings
incentives
Drawbacks of inequality
Lower economic participation
Reduces domestic demand
Problem of collateral
Breeds redistribution
Social unrest
poverty
inability to achieve a certain minimum standard of living.
poverty incidence
indicates how widespread the poverty is.

also called the PHR, or poverty headcount ratio.

Calculates by adding up the number of people below the poverty line and dividing by entire population.
poverty depth
indicates how poor the poor are, by finding how far below the poverty line each impoverished person is, on average.
poverty gap
Average shortfall divided by the poverty line.
rural residence and poverty
Rural areas in LDCs tend to have a higher percentage and concentration of those in poverty.
gender and poverty
Women more likely to be impoverished:

education access
gender roles
access to high paying jobs
property rights
child investment
disguised unemployment
Lewis model - situation in agricultural sector where labor surplus forces production surpluses to be consumed by those not producing anything.

It is disguised because families usually share food even though some may be very unproductive.
factor-price distortions
when factors of labor and capital differ from suggested market value.

In LDCs this usually translates into artificially high values for labor, due to unions that fail to reflect productivity, and artificially low levels for capital, due to subsidization and ER manipulation.
Todaro - policy recommendations on removing inequality
1. Eliminate factor-price distortions
2. Redistribution of asset ownership (land reform)
3. Redstribution of incomes from rich to poor (progressive taxation)
progressive to regressive taxation?
while rich are theoretically taxed more, they can often evade taxes much more easily, wheras low and middle income brackets contribute mostly through paychecks and sales taxes that cannot be avoided.
CCTs
conditional cash transfers, such as Bolsa Familia in Brazil, offer government stipends in exchange for families to participate in development, often through keeping kids healthy and in school.
Demographic transition
Explains that back in the day both BR and DR were high, keeping population low.

As medical science improves, DR reduce causing population to increase but also influencing lower BR over time.

After fully developed, population growth is low again due to low BR and low DR.
Caldwell Hypthesis
Fertility is a rational decision, made based on perceived cost/benefit analysis of having an additional child.

If net wealth continues to flow from child to parent, the family will continue to crank 'em out.
Endogenous Growth Theory - investment flows
Keep them domestic, since returns to capital do not diminish. This contrasts with Solow model, where diminishing returns encourage money flows to LDCs.
Coale and Hoover
population pessimists who attributed high population growth to reduced levels of savings.

Parents have to spend more on consumption goods for kids rather than saving.
dependency ratio
ratio of adults to dependents (children usually). High dependency ratios are bad for development according to population pessimists.
Paul Simon
population optimist who believes that low fertility prevents LDCs from having more geniuses born.
Population optimists
population growth can stimulate development.

1. economies of scale created for infrastructure and firms
2. more geniuses
3. density forces strains that influence tech. innovation
Population pessimists
1. capital shallowing
2. environmental strains
3. high dependency ratio
4. less resources to save
5. lower health for women
6. resource shortages
Harris-Todaro Model of Urban Migration - Assumptions and Outcome
1. Manufacturing Wage is institutionally fixed above free market level

2. Wm > Wa

Migrate if expected value exceeds agricultural wage.
Harris-Todaro - expected value
Wm * percentage of urban employment
Portfolio Investment Theory
migration is motivated by desire to allieviate income risk.

- centered around social network, such as family
- remittances are part of co-insurance agreement
- goal is to lower income variance not to have higher income
- marriage patterns reflect similar desire
- policies that increase rural income no influence
private return to education
Y1 - Y0
_______

n(Y0+C)

Y1= literate income/year
Y0= illiterate income/year
n= number of years
C= costs of education
social rate of return
benefit of society having a more educated population.

Usually less that private return since social costs tend to be higher.
credentialism
education as a function to increase status rather than actually transfer skills.
Problems with ILS - International Labor Standards
- push children into potentially more harmful sectors
- may push households into greater poverty
- cost of institutions
Patterns of Land Tenure
1. Large Estates
2. Family Farms
3. Fixed-rent tenancy
4. Sharecropping
5. Communal Farming
6. Collectivized Agriculture
Large Estates
- owned by one person/family
- plantations
- much labor/wages/cash crops
- Americas
- may lead to more efficient production if economies of scale are significant.
Family Farms
- small to large plots
- sub-Saharan Africa/Asia
- food crops
- highest productivity incentive, due to long term investment possibilities
Fixed-rent tenancy
- pay rent each year on the land
- higher incentives to be productive than sharecropping since gains and losses are not shared.
Sharecropping
- share crop with landlord, but no rent in terms of money
- preferrable for tenants over fixed-rent since risk is alleviated.
Communal Farming
- land not owned by people, but by community
- no property rights
Collectivized Farming
- land owned by country
- Maoist China
- facilitates labor mobilization for infrastructural projects.
Land reform
generally means transition from large to small estates in an effort to reduce inequality and poverty by distributing assets and wealth that land provides.
Green Revolution
movement to create crops better suited for LDCs, such as HYVs suitable for climate, drought, and insects.
Agriculture and technology
Increase labor productivity

more machines, capital

Increase land productivity

HYVs, fertilizer, methods
Agriculture and specialization
potential to increase productivity, but risky for poor individuals due to price volatility and weak access to markets for consumer goods.

People more inclined to produce food therefore with land.
ICOR
Incremental Capital Output Ratio

Delta K / Delta Y

the increase in the capital stock needed to raise GDP by $1/year for several years into the future.
Calculating savings, GDP, and ICOR
S/Y = (g+n)*ICOR

S= total savings
Y= total output
g= GDP/capita change
n= population growth change
Total Saving
St = Sg + Sp

Sg= government saving
Sp= private saving
Private Saving
Sp = Y - T - C

Y= income
T= taxes/transfers
C= consumption
Government Saving
Sg = T - Gc

T= taxes
Gc= government consumption
Taxation and Total Saving
Taxation increases total savings only if the private propensity to save is lower than the government's propensity to save.
inflationary financing
when government has access to money production and produces more money in order to spend more money to finance projects.

Causes inflation because a fixed amount of goods and an increase in money supply lowers the value of each unit of money.

Society largely pays for this policy with higher prices.
domestic saving
saving that comes from individuals, households, government, and corporations within the country.
foreign saving
saving by foreign countries that is used to finance development.
resource gap
investment - domestic saving
Factors determining private saving
- Age distribution (under 18s and over 65s dont save)
- Fiscal policy (higher taxes = Sp)
- Economic growth (more money = more savings)
- Urbanization
- Financial sector strength
Challenges of taxation
- existence of informal economies in LDCs
- bureaucracy of tax infrastructure
- institutional problems
real interest rate
nominal interest rate - rate of inflation
Fisher equation
R + πe = i

R= desired real interest rate
πe= predicted inflation
i= nominal interest rate
shallow finance
low rate of financial assets compared to GDP.

often seen during hyperinflation.

people will take out loans for consumption since they are better than free.
financial liberalization
1. remove interest rate ceilings

- politically difficult
- incentives are low
- may not keep up w/ inflation

2. lower inflation

- monetary contraction

3. financial competition

- avoid collusion
- allow new banks (difficult)
interest rate ceilings
common in LDCs in order to keep credit artificially cheap to stimulate investment.

can be disastrous if inflation is higher than ceiling, causing real interest rates to be negative, meaning loans are better than free.

also causes factor price distortions to capital since money is better than free, allowing buying of machines.
informal financial markets
credit markets not regulated by authorities aimed at satisfying borrowers not reached by the official system

ex) loan sharks, family, microcreditors
Grameen Bank
largest microcredit bank in the world, based in Bangladesh and started by economist Muhammad Yusuf.

Characterized by groups of creditors, low loans, interest payed back biweekly or weekly, typically women.
Ramsey rule
Also known as inverse elasticity rule.

Theory that taxes should be highest on items that are most inelastic.

Problem is that such policy is regressive, since inelastic demand is oftentimes on good such as foods, which the poor need desperately.
recurrent costs
government costs to maintain development and investment projects.
Why informal credit is distributed
- less red tape than formal sector
- forced payments/reduced risk
- no paper trail
- more info on borrowers
comparative advantage
when a country can produce a good for a lower opportunity cost
absolute advantage
when a country can produce a good for a lower monetary cost
primary exports
unprocessed goods (no industrial manipulation)

ex) timber, food, oil, metals

Goods that LDCs typically have comparative advantage in
manufactured goods
goods that require some degree of processing, implying capital and skilled labor.

ex) cars, textiles, machines
primary export-led growth
LDCs focus on primary exports, use export revenue to import capital, and develop. Economically the most efficient option due to comparative advantage.

Allows for import of technologies, and stimulates linkages as well.
backward linkages
growth of a supplying sector due to growth in primary export sector.

ex) growth in rail industry used in transporting agricultural products in the US

or

growth in the shipping industry caused by expansion of primary exports in Malaysia.
forward linkages
growth in manufacturing sectors due to growth in primary sector.

ex) increases in timber production, combined with imported capital, lead to the expansion of furniture industry
consumption linkages
growth in export sector allows for more imports, increases consumption possibilities of consumers
ladder of comparative advantage
Knowledge intensive goods

Capital intensive goods

Skilled Labor intensive goods

Unskilled labor intensive goods

Primary goods
primary export trap
situation where country fails to exit dependence upon primary exports.

Reasons why primary exports may fail to help development:

- prices set by world market my decrease
- technology creates alternatives to primary goods
- Engle's law forces MDCs spend less on food
- subsidization in MDCs
- poor governance/distribution
- poor financial markets
- lack of skilled labor/education
- price volatility
Engle's Law
as income increases, share of spending on food reduces
ISI
Import substitution industrialization

1. Identify sector to develop
2. Procure technology
3. Establish barriers to imports
infant industry
LDC industry that cannot compete with established industries, and therefore needs protection in order to have time to grow.
IS and ER policy
Exchange rates are often kept artificially high during IS in order to make imports (capital) cheaper.
Problems with IS
- increased trade deficit
- decrease in exports
- price distortions
- monopoly power
- increased inequality
- decreased productivity
- lack of incentives
- difficult to remove
- increased costs of goods
Export promotion
Similar to IS, but firms are geared towards exports instead of capital intensive goods for domestic use.
fiscal linkages
increased rents from primary exports can be gained through taxation by the government.
official saving (2)
money received from foreign governments or multilateral organizations.

Take the form of:
- concessional flows (foreign aid)
- commercial loans from IMF/WTO.
foreign private saving (5)
money received from private foreign sources.

Takes the form of:

- FDI
- commercial bank lending
- portfolio investment
- export credit
- private concessional flows
FDI
Foreign direct investment - investment by foreign corporations that involves foreign control of productive activities in the LDC.
Benefits of FDI (9)
- higher wages
- job creation
- increased exports
- increased investment
- tax increases
- exposure to new technology/practices
- access to more products
- infrastructure
- linkages
Costs of FDI (9)
- pollution/env. degradation
- higher inequality
- lack of reinvestment
- crowding out
- inappropriate technology
- inappropriate products
- waste natural resources
- limited linkages
- corruption
Factors of Financial collapse (2)
1. excessive borrowing
2. overvalued ER
IMF SR Stabilization Policy (2)
1. Monetary contraction

- Reduce money supply
- Increase interest rates
- Higher returns slow capital flight

2. Fiscal contraction

- lower government spending
- increase taxes
- reduces borrowing

Problems:

- increased interest rates
- decreased investment
- decreased aggregate demand for currency

Reduced GDP

- lower government spending
- lower consumption
- lower aggregate demand for currency

Reduced GDP

Double contractionary policy lowers growth considerably.
Types of Foreign Aid (2)
1. Bilateral aid
2. Multilateral aid
IMF LR Stabilization Policy
Institutional Reforms
Foreign Aid Flows (3)
1. Monetary flows
2. Commodity transfers (food, medicine)
3. Technical assistance (human capital)
World Bank
International organization in the business of giving foreign aid to improve development
IMF
International Monetary Fund - organization whose function is to maintain global financial stability through advice and occassional loans.
WB: Sound Economic Management (2)
1. Good Policies

a. low inflation
b. fiscal discipline
c. trade openness

2. Good institutions

a. rule of law
b. low corruption
c. effective public bureaucracy
tied aid
aid that is "tied" to a certain project.

often criticized due to the inefficiency that is common with such forms of aid - in failing to get where it should be.
What attracts FDI?
- potential for profits
- institutional/political stability
- large domestic markets
- complementary factors

MNCs look for places abroad that have productive labor, necessary infrastructure, large markets, and low risk of expropriation or failure.

70% of FDI is within MDCs.
28% of LDC FDI is in China.
Functions of the IMF (2)
1. Providing advice, assistance, and training to help build good financial institutions

2. Providing temporary financing of balance of payment crises