Economics of Development - Chapter 17 PDF

Chpt 17: The Economics of Development Upcoming: [Attendance]: Chpt 15-17 Quiz: Thurs, 17th Apr, in-class Chpt 18 Quiz: Tues, 22nd Apr, in-class Assignments: *Open-ended; answer/ask/state whatever you’d like*...

Chpt 17: The Economics of Development Upcoming: [Attendance]: Chpt 15-17 Quiz: Thurs, 17th Apr, in-class Chpt 18 Quiz: Tues, 22nd Apr, in-class Assignments: *Open-ended; answer/ask/state whatever you’d like* Chpt 15 & 16 HW: Sun, 20th Apr, midnight Extra Credit: Thurs, 24th Apr, midnight ○ No extensions ○ Canvas → Assignments → Extra Credit Announcements: Good Friday: Fri, 18th Apr, no class Final Exam Review: Thurs, 24th Apr, in-class Final Exam Q&A: Tues, 29th Apr, in-class ○ Also the last day of class Chpt 17: The Economics of Development The History of Economic Development Overall there’s been tremendous economic growth since the advent of industrialization, trade, and better institutions Quality of life and income increases ○ Time it takes to earn a family meal fell by 91% for blue collar workers, and 87% for unskilled labor between 1919 and 2019 Less time to earn a meal means more time to spend on leisure/productivity to maximize your day ○ Modern sewage wasn’t heavily used in cities until 1850’s which meant that health, safety, and productivity were all at risk when waste was dumped in the open-street ○ Developing countries catch-up to developed countries through trade as they trade away common goods that are considered rare abroad Increases wealth for developing countries and provides them with new technology, methods, and goods Chpt 17: The Economics of Development The History of Economic Development Overall there’s been tremendous economic growth since the advent of industrialization, trade, and better institutions Diversity in goods and services ○ Spices like nutmeg was once more expensive than gold, and today we can get it from any grocery store Shortfalls in harvest used to mean famine, and today it means import more food ○ Knowledge and cultural exchange has increased especially across all fields of research Allows learning different methods and technology from others Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 1) Malthusian Theory of Development ○ Malthusian trap: Theory that income per person can never rise much above subsistence level If it does, population will grow rapidly and drive the income per person back to the subsistence level If the population is too high, then resources are so scarce that everyone ends up in poverty ○ Resources and development don’t grow quick enough to keep up with population increases This appeared relatively true until the industrial revolution when output increased drastically ○ The availability and convenience of goods and services increased quality of life Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 1) Malthusian Theory of Development ○ Malthusian trap: Theory that income per person can never rise much above subsistence level If it does, population will grow rapidly and drive the income per person back to the subsistence level Economies generally return to long-run equilibrium, but belief that resource scarcity will drive the population to the brink has been the motivation for many forced sterilization programs such as: ○ China’s one-, two-, and now three-child policy which limited number of children per family ○ Japan’s eugenics law from 1948-1996 which sterilized those with mental disabilities and hereditary diseases ○ The Emergency in India in 1975 which forced sterilized 6.2 million men to curb population growth Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 2) Colonialism, European Settlements, and Institutions ○ It’s difficult to argue that colonialism’s effects aren’t still felt when many countries around the world have a parliament or system of governance styled after the British system There are two effects that came about from colonialism a) Beneficial if the institutions were set up with an incentive to long-term commitment ○ Colonies setup for long-term commitment meant engaging with the local population and setting up protections for their investment, trade, and ‘discoveries’ ○ Same road networks from colonial times are still used today ○ Similar commitments to democracy and rights were adopted by colonies after the empire’s dissolution Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 2) Colonialism, European Settlements, and Institutions ○ It’s difficult to argue that colonialism’s effects aren’t still felt when many countries around the world have a parliament or system of governance styled after the British system There are two effects that came about from colonialism b) Extractive if the institutions were set up for short-term gains ○ Heavy exploitation where little development occurred and institutions existed only to extract resources ○ Little incentive to protect the population or resources lead to stagnant growth Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 3) Neoclassical Production Function Theory states that economic growth is reliant on 3 things: a) Physical capital b) Human capital c) Technology An argument against the Malthusian Trap, and explains the economic miracles of Japan and Germany post-WW2 Population increase is not an issue since capital and technology will allow more efficient use of resources to increase output ○ The increase in output lowers scarcity so we wouldn’t be impoverished Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 3) Neoclassical Production Function Theory states that economic growth is reliant on 3 things: a) Physical capital b) Human capital c) Technology An argument against the Malthusian Trap, and explains the economic miracles of Japan and Germany post-WW2 Japan and Germany took roughly 10 years to recover post-WW2 with support from Europe and the US ○ Heavily attributed to the influx of capital into both countries, sharing technology previously banned, and increased trade to absorb their exports Motivated the IMF to extend debt to developing african nations in the 90’s ○ This failed to increase growth drastically as institutional support was missing such as protection of property rights, and an enforced legal framework Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 4) Geography and development: Climate, location, and resource availability determines growth and development ○ Landlocked countries struggle with trade due to increased transportation costs, and restricted options for trade since there was no access to the coast, and - until airplanes - only used roads ○ Consistent natural disasters or tough living environments reduces countries ability to grow Supply shocks are short-term since they’re recoverable, if it happens all the time, then it starts having a cumulative effect on the economy over time Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 4) Geography and development: Climate, location, and resource availability determines growth and development These restrictions dictate how a country grows and the type of policies they enact ○ Japan relies heavily on nuclear energy despite 5 accidents since 1981 because they have no natural resources They rely on trade for oil and coal, and maintain nuclear reactors out of necessity which other countries have the option of rejecting ○ Redirects government spending such as building seawalls to combat rising coastlines Opportunity cost as to what else could’ve that money been spent on ○ Poor geography means longer time to get medical treatment, receive goods, and communicate information Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development There are 4 theories of development that explain how institutions and sources of economic growth changes how countries develop and adopt policies 4) Geography and development: Climate, location, and resource availability determines growth and development ○ Resource curse: Countries with abundant resources underperform economically ○ Graph presents countries heavily reliant on a handful of resources vs. their growth rate Countries with heavy reliance on natural resources struggle to grow while countries without grew the fastest due to trade policies Countries without natural resources must engage in diplomacy and compete with the world to afford anything Countries with natural resources can afford to selectively trade and dictate price ○ Higher income without exposure to trading Chpt 17: Creating an Environment for Growth and Prosperity Theories of Development These 4 policies dictate how and why growth and development is different between countries and regions These theories aren’t mutually exclusive and each has an impact on countries Used jointly to explain differences in growth rates where geography could favor development, but lack of institutions and capital means it’s unproductive and grows slower 1) Malthusian Theory of Development ○ Malthusian trap: Theory that income per person can never rise much above subsistence level 2) Colonialism, European Settlements, and Institutions ○ Beneficial if the institutions were set up with an incentive to long-term commitment ○ Extractive if the institutions were set up for short-term gains 3) Neoclassical Production Function Theory states that economic growth is reliant on a) Physical capital, b) Human capital, and c) Technology 4) Geography and development: Climate, location, and resource availability determines growth and development Chpt 17: Creating an Environment for Growth and Prosperity The Transportation-Communication Development Transportation and communication is the backbone of trade, diplomacy, technology, and development Without quick and convenient communication, we’d struggle to trade – let alone understand the other person Consider that 95% of all data is transported through underwater internet cables that allows us to engage in business internationally, communicate demands for goods and services, and smoother economic transitions ○ A good idea that is highly demanded can be quickly seen and reproduced – More competition, lower prices ○ Increases consumer base for firms to expand their market and develop new goods to meet different taste Telephone operators used to be a job that connects you to the person you’re trying to call, which practically vanished as a job in the 1930s as phones could directly connect you to the other person ○ Through creative destruction, cost of communication went down as there wasn’t a middleman to pay ○ Today we’re dealing with cloud computing and storage to overcome our current use of physical data storage Cuts cost and trash since it avoids using USBs or storage devices Chpt 17: Creating an Environment for Growth and Prosperity The Transportation-Communication Development Transportation and communication is the backbone of trade, diplomacy, technology, and development More efficient methods of transportation leads to lower transportation cost ○ Shipping cost used to be $5 per ton in 1956, and today it is roughly 16¢ per ton due to the development of the shipping container we commonly see today ○ Canals helped the US grow by cutting transportation cost by 90% and time cost by half, until the development of the railway network Faster transportation and communication means time and money is saved for consumers and producers ○ For consumers, it means lower prices, less time waiting for a good to arrive, and less effort communicating demands to suppliers ○ For suppliers, it means lower costs, providing a quicker service, and better adaptability to receiving feedback from consumers Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development Transportation-Communication Revolution: Large reductions in transportation and communication costs that propelled higher growth rates of GDP per capita beginning around 1970 ○ The acceleration of economic growth in developing countries was particularly strong due to this ○ Leads to lower costs for suppliers and lower prices for consumers, diverse goods and services available, increased quantity (output), and improvements in quality of life and institutions There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 1) Expand the volume of international trade and increases gains from specialization 2) Larger gains from entrepreneurship and the adoption of advanced technologies and business practices 3) Increased incentive to adopt economic policies more consistent with growth and development 4) Virtuous cycle of development Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 1) Expand the volume of international trade and increases gains from specialization Lower transportation cost leads to increased trade as businesses can dedicate more resources to producing goods and services rather than paying for transportation costs Specialization means businesses and workers focusing on a specific field/area to become proficient in ○ Lower transportation costs allows businesses to focus on their specialty ○ Allowing them to increase quality and quantity sold The result is countries adopting mass production techniques Benefits countries growth since they can now get goods more cheaply and easily compared to before when it was more expensive and rarer Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 1) Expand the volume of international trade and increases gains from specialization China and India being heavily industrial manufacturing nations are examples of this Both went from being primarily agriculture based economy to manufacturing due to large populations that make it cheaper to produce intermediate goods The US specializes in natural resources, agriculture, and technology development Vietnam has reoriented their economy for over the last 6 years to do exactly this by becoming a hub for assembling technological goods to export to the rest of the world Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 2) Larger gains from entrepreneurship and the adoption of advanced technologies and business practices As people trade with each other, they also learn from each other such as how the other conducts business practices, type of technology they use, and much more. The shared knowledge from trade leads to growth ○ As people engage with each other and trade, they are exposed to each others culture which leads people to cherry pick the best parts ○ Learning the best parts from other cultures leads to marginal increases in growth and output over long periods of time Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 3) Increased incentive to adopt economic policies more consistent with growth and development As countries trade and are exposed to each others culture, people eventually start comparing their standards of living and the practices their government adopts ○ As other countries experiment with different policies, so will they learn from each other to pick ones that increase economic growth Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 3) Increased incentive to adopt economic policies more consistent with growth and development Portland, OR experiment with drug decriminalization was inspired by Portugal’s own decriminalization 2001 law ○ For Portugal, they saw large decreases in drug use and lost the title of “Heroin capital of Europe” after this law was implemented → Less spending on health care, improved workforce, and increased output ○ For Portland, OR they repealed the law due to increases in drug use which had the opposite result Consider any former communist bloc country such as Hungary, Poland, Czech Republic, Romania, East Germany, Bulgaria, and Vietnam which have adopted democratic and market-oriented principles ○ Adopting trade oriented policies and deregulating away from heavy restrictions led to large increases in economic growth and quality of life Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 4) Virtuous cycle of development: The reduction in the birth rate, slower population growth, and increase in the share of population in the prime working-age categories that generally provide a boost to productivity and economic growth once per capita GDP begins to grow. This pattern is nearly always observed soon after a country begins the growth process This basically means that as a country gets richer (GDP per capita increases): ○ Birth rate and population growth decreases: Increased quality of life, childcare expenses, access to contraceptives, and opportunities all contribute to declining birth rates as income increases ○ As child mortality rates decreases → More resources dedicated to ensuring their success rather than survival such as providing education and healthy food ○ Increase in education → Higher human capital to further increase economic growth and quality of life Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 4) Virtuous cycle of development: The reduction in the birth rate, slower population growth, and increase in the share of population in the prime working-age categories that generally provide a boost to productivity and economic growth once per capita GDP begins to grow. This pattern is nearly always observed soon after a country begins the growth process This basically means that as a country gets richer (GDP per capita increases): ○ Birth rate and population growth decreases: Increased quality of life, childcare expenses, access to contraceptives, and opportunities all contribute to declining birth rates as income increases ○ As child mortality rates decreases → More resources dedicated to ensuring their success rather than survival such as providing education and healthy food ○ Increase in education → Higher human capital to further increase economic growth and quality of life Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development Employment penalty for mothers Graph shows % of women who leave the labor force upto 10 years after birth compared to men ○ Wealthier countries have a large gap compared to poorer countries ○ Overall the world still has a large gap due to cultural norms as well such as Bangladesh ○ For low-income countries, women can’t afford to leave employment Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development High opportunity cost for women to have children Wage penalty for mothers ○ After pregnancy, there is a permanent loss to future income for women ○ Men show a slight decline, but eventually return to their original income ○ The US shows up to a 40% loss in income for women upto 10 years after their first child Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 4) Virtuous cycle of development: The reduction in the birth rate, slower population growth, and increase in the share of population in the prime working-age categories that generally provide a boost to productivity and economic growth once per capita GDP begins to grow. This pattern is nearly always observed soon after a country begins the growth process This basically means that as a country gets richer (GDP per capita increases): ○ Working-age population increases: As the population shrinks, there is a stronger incentive to invest in additional improvements in human capital ○ There is a scarce amount of labor so people must become more specialized to fulfill increases in demand ○ The increase in human capital further increases economic growth and quality of life Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development There are four main ways that improvements in transportation and communications have lead to overall increases in economic development: 4) Virtuous cycle of development: The reduction in the birth rate, slower population growth, and increase in the share of population in the prime working-age categories that generally provide a boost to productivity and economic growth once per capita GDP begins to grow. This pattern is nearly always observed soon after a country begins the growth process Korea is facing a declining birthrate but has invested heavily in automation which compensates for having less workers available ○ This helps economic growth as people are incentivized to increase development Chpt 16: Creating an Environment for Growth and Prosperity The Transportation-Communication Development All of these results from lower cost in transportation and communication as evidenced through various points in history as it has fuelled countries growth and development through trade 1) Expand the volume of international trade and increases gains from specialization ○ Lower transportation costs allows businesses to focus on their specialty allowing them to increase quality and quantity sold ○ Benefits countries growth since they can now get goods more cheaply and easily compared to before when it was more expensive and rarer 2) Larger gains from entrepreneurship and the adoption of advanced technologies and business practices ○ Learning the best parts from other cultures leads to marginal increases in growth and output over long periods of time 3) Increased incentive to adopt economic policies more consistent with growth and development ○ As other countries experiment with different policies, so will they learn from each other to pick ones that increase economic growth 4) Virtuous cycle of development ○ Birth rate and population growth decreases, & working-age population increases leads to increases in human capital and technological development to increase growth Chpt 17: The Economics of Development Upcoming: Chpt 15-17 Quiz: Thurs, 17th Apr, in-class Chpt 18 Quiz: Tues, 22nd Apr, in-class [Q&A]: Any questions, comments, or Assignments: Chpt 15 & 16 HW: Sun, 20th Apr, midnight concerns? Anything confusing that might need to go over again? Extra Credit: Thurs, 24th Apr, midnight ○ No extensions ○ Canvas → Assignments → Extra Credit *Open-ended; answer/ask/state whatever you’d like* Announcements: Good Friday: Fri, 18th Apr, no class Final Exam Review: Thurs, 24th Apr, in-class Final Exam Q&A: Tues, 29th Apr, in-class ○ Also the last day of class