Econ Final Review PDF

ECON Final Review Topics midterm 1: Introduction to development Movement up strata o Often, people born on one stratum spend their lives on it, albeit typically making some progress within it o Sometimes, transformative progress is highly visible and takes the form...

ECON Final Review Topics midterm 1: Introduction to development Movement up strata o Often, people born on one stratum spend their lives on it, albeit typically making some progress within it o Sometimes, transformative progress is highly visible and takes the form during a single person’s life What do we mean by development? o Gross National Income (GNI) o Income per capita ▪ Utility of that income? o The New Economic View of Development ▪ Leads to improvement in wellbeing, more broadly understood o Amartya Sen’s “Capabilities” approach ▪ Focuses on the quality of life that individuals can achieve ▪ Influenced the creation of the UN development index ▪ Multidimensional poverty ▪ “The capability theory doesn’t give importance to the commodities or the pleasure one derives from them; it stresses on people’s opportunities to make use of them to achieve well-being Details on Amartya Sen’s capability approach o “Economic growth cannot be sensibly treated as an end to itself. Development must be more concerned with enhancing the lives we lead and the freedoms we enjoy” o What matters fundamentally is not things a person has but what a person is, or can be, and does, or can do o Not just characteristics of commodities consumed as in the utility approach, but the uses a consumer can and does make of commodities Important “Beings” and “Doings” in capability to function: o Being able to live long o Being well nourished o Being healthy o Being literate o Being well-clothed o Being mobile o Being physically secure o Being able to take part in the life of the community o Being happy – as a state of being – may be valued as a functioning More details on approach  o Measuring individual well-being by levels of consumption of goods and services confuses the role of commodities by regarding them as ends in themselves rather than as means to an end. o For nutrition, the end is health and what one can do with good health, as well as personal enjoyment and social functioning. o Measuring well-being with utility is not a sufficient improvement over measuring consumption to capture the meaning of development o Broader view of well-being ▪ The freedoms and capability to make choices Causality and policy evaluation Impact: the casual effect of one factor on another Counterfactual: what would have happened if the program or policy had not been implemented. It is never directly observed. Regression: explains variation in an outcome or dependent variable using a set of explanatory or independent variables The selection problem o Those who are treated are different from the untreated ▪ Africa lives different from the rest of the world ▪ Those who live closer to school from those who don’t ▪ Those who get college degrees different from those who don’t o The goal of evaluation is to figure out impacts by finding a comparison group that is similar o And control for the characteristics that are different in a regression. o After this, if we are convinced that the only difference between the untreated and treated is the treatment, we can be confident the difference in outcomes is the impact of the treatment o However, there is a limit to how many factors we can control for using a regression ▪ Examples for the girls’ schooling regression ▪ Regression will not be able to tell us impacts all the time o If we do not believe the ceteris paribus assumption that everything else is constant… ▪ Comparing the outcome of the treated and untreated does not give us the casual effect of the treatment o If we compare outcomes for those with and without the program the difference will have two parts ▪ That caused by the program (impact) ▪ That caused by underlying differences between participants and non- participants (selection effect/selection bias)  Randomization ensures that we do not have selection bias issues since it provides us with two similar groups. The only difference between them is the treatment. o Therefor we are estimating the treatment effect of a program through a randomized controlled trial (RCT) ▪ We are getting unbiased results within this controlled experiment Mexican Conditional Cash Transfer program evaluated using an experiment, i.e. random assignment o Program was providing cash grants to women conditional on children’s school attendance and preventative health measures including health care visits etc. o Budgetary constraints made it impossible to reach all potential participant communities, so half of the villages were randomly selected to receive the program, and the other half became the control group. o The experimental estimate compared the average outcomes of children in the treated villages with children in the controlled villages ▪ The average health and school attendance outcomes for the treated group were significantly higher than those for the control group ▪ We learn from the experiment that the impact of the CCT program on children’s schooling and health was positive Economic development measures and growth (role of geography vs institutions) Traditional methods of Economic Development o Gross National Income (GNI) o Gross Domestic Product (GDP) o Purchasing Power Parity method instead of exchange rates as conversion factors Defining the Developing World o The world bank ranks countries on GNI per capita ▪ Low-income countries ▪ Lower-middle income countries ▪ Upper-middle income countries ▪ High-income OECD countries ▪ Other high-income countries GNI vs. GDP o GNI: total value of goods and services (output) claimed by a country’s residence whether in the country or not o GDP: National output produced in a country (by residents and foreigners) Adjusting for purchasing power parity o For a clearer comparison of living standards, adjust using PPP  o PPP: corrects for differences in prices between countries when comparing their economic activity, income levels, and cost of living o PPP: using a common set of international prices for all goods and services ▪ Eliminating the differences in price levels between countries o PPPs control for the differences in price levels between economies and equalize the purchasing power of currencies New Human Development Index (NHDI) o Health: life expectancy at birth o Education: combination of average schooling attained by adults and expected years of schooling for school aged children o Income: GNI per capita PPP Why the new HDI is considered an improvement over linear measure such as the traditional HDI? o The HDI is now computed with a geometric mean instead of an arithmetic mean o A geometric mean is also used to build up the overall education index from its two components o Traditional HDI added three components, divided by three (arithmetic mean) o The new HDI takes the cube root of the product of the three component indexes o The traditional HDI linear calculation assumed one component traded off against another as perfect substitutes, a strong assumption o The reformulation now allows for imperfect substitutability – widely considered a more plausible way to frame the tradeoffs o NHDI addresses how well rounded a country’s performance is across three dimensions Ten features of similarities and differences among developing countries 1. Levels of income and productivity - Wide disparities in income across countries over time. South Korea and Taiwan are now high-income countries but were among the poorest countries in the world a few decades ago. China and India also have recent growth. 2. Human capital attainments - Health education and skills 3. Inequality and absolute poverty 4. Population growth and age structure - High birth rates in low-income countries - The active labor force must support proportionally almost twice as many children as it does in richer countries - The proportion of people over the age of 65 is much greater in the developed nations - Both older people and children are referred to as an economic dependency burden in a sense that they are supported financially by the country’s labor force. 5. Rural population and rural-to-urban migration  - In most low and many middle-income countries, a relatively high share of the population lives in rural areas and correspondingly fewer in urban areas. - A massive population shift is well under way as hundreds of millions of people are moving from rural to urban areas. This rapid urbanization has some challenges, including development of slums. 6. Social fractionalization - Several low- and middle-income countries have ethnic, linguistic, religious, and other forms of social divisions. - This diversity can result in internal strife and political instability - Conflict is one of the most important reasons why the development progress of many low-income countries has been held back. 7. Level of industrialization and manufactured exports - Developing countries have a far higher share of employment and output in agriculture than developed countries. - Low-income countries remain highly dependent on a relatively small number of agriculture and mineral exports leaving them vulnerable to negative commodity price shocks and price volatility. 8. Geography and natural resource endowments - Landlocked economies, common in Africa, often have lower incomes than coastal economies. - Developing countries are primarily tropical or sub-tropical. They suffer more from tropical pests and parasites, endemic diseases such as malaria, water source constraints, and extremes of heat. 9. Extent of financial and other markets - Prevalence of imperfect markets and incomplete information - Poor regulation 10. Quality of institutions and external dependence - Colonial legacy: institutions created during the colonial period often had pernicious effects on development that in many cases have persisted to the present day. - Research shows that even today – over two centuries later – districts covered by the mita system have lower household consumption and higher probability of stunting in children Long run causes of comparative development Two main contenders explain the fundamental causes of cross-country differences in prosperity o Geography o Institutions Geography vs Institutions o Sachs is in the geography or “nature influence” camp ▪ Institutions matter but nor for everything ▪ The role of geography and resource endowments should not be underestimated  ▪ Disadvantage of geography: physical isolation, endemic disease, other local problems ▪ Increase in transaction costs o Acemoglu is in the institutions or “human influence” camp ▪ The most important determinate is whether you have good institutions ▪ A lot of the differences in countries’ incomes can be explained by the type of institutions they have Geography is correlated with income o The countries in the tropics are nearly all poor o Almost all high-income countries are in the mid- and high latitudes o Coastal economies are generally higher income than landlocked economies ▪ Not a single high income landlocked country outside of Europe Why geography matters? o Affect factor productivity ▪ Different agricultural productivity due to climate ▪ Different diseases endemic in different areas o Transport cost ▪ Distance ▪ Physical access ▪ High-cost barrier to trade Coastal vs landlocked o Landlocked countries are particularly disadvantaged even when the distance from one is the same as that of an interior part of a coastal economy ▪ Cross-border migration of labor is much more difficult than internal migration ▪ Infrastructure development possibilities larger within a country and harder across national borders ▪ Neighboring coastal economies might have economic incentives or military considerations for limiting access of landlocked countries to their ports Trade enables growth o Incomes are higher with trade o Without trade, regions are condemned to small internal markets, an inefficient division of labor and continued poverty Morbidity o Climate affects morbidity o Shorter life spans reduce the incentive to invest in human capital How malaria/disease effects incomes o High disease burden leads to lower productivity o This leads to low production and low investment What do we mean by institutions Rules of the game in a society The way we organize society  Equality of access to economic resources and protection under a transparent legal system Institutions are often proxied by measures of protection from expropriation, rule of law, constraints on executive, and surveys of corruption Some societies are organized in a way that defend the rule of law, encourages investment of all kinds, facilitates broad-based participation by citizens, and supports market transactions. 3 elements of good institutions 1. Enforcement of property rights 2. Constraints on the actions of elites, politicians, and other powerful groups 3. Some degree of equal opportunity Acemoglu arguments Two pieces of supportive evidence to argue institutions are more important than geography 1. Reversal of fortunes 2. Natural experiment using experiences across places colonized by Europeans Reversal of Fortunes o Societies like Aztecs and India’s were among the richest in 1500 and are among poorer societies today o Whereas the less developed regions of north America and New Zealand, Austria are now much richer o This is the reversal of fortunes. Societies that were richer in the past should still be among the rich today because geography has not changed But effect on geography can change o Disadvantage of being in North Dakota and Mongolia is smaller today because of roads, air travel, internet o Drip irrigation developed in Israel. o Vaccine/cure for disease Reversal of fortunes can happen and still be consistent with geography being/having been very important Colonization and institutions o Societies that were colonized by Europeans provide us a case study of how countries developed after the introduction to certain types of institutions ▪ There is an extremely strong relationship between institutions put in place by colonizers and incomes today o Two main types of settlements- extractive and settler societies Extractive settlements o Colonizers did not settle there themselves, slave plantations in Caribbean, and forced labor systems in mines of central America  o No property rights or checks against the government o The main purpose of the state was to transfer as many resources as possible from the state to the colonizer with minimum investment possible o Europeans did not settle Settler societies o Where colonizers settled themselves o They replicated and often improved institutions protecting private property o The settlers in these societies also managed to place significant constraints on elites and politicians Colonizer settlements had good early institution which led to good current institutions and high incomes today Sachs critique of colonization story Acemoglu compared colonies where colonizers settled and brought good institutions with colonies where they did not settle and put in extractive institutions What influences this choice of whether the colonizers settled in a colony? o Whether there was plentiful labor, resources to earn from, favorable climate, tropical disease o Most of these factors are geographical factors ▪ This supports the role of geography in affecting long term development So, Geography led to colonizer settlements which led to good early institution which led to good current institutions and high incomes today Poverty and Inequality Extreme income inequality leads to economic inefficiency o Smaller fraction of population qualifies for credit for business or school o Overall savings rate in the economy tends to be lower o Inequality may lead to an inefficient asset allocation o High inequality of land ownership is inefficient because most efficient scales for farming are family and medium-size farms o The result can be a lower average income and a lower rate of economic growth when inequality is high Extreme disparities undermine social stability and solidarity o High inequality strengthens political power of the rich, and thus concentrates economic and social bargaining power o High inequality facilitates rent seeking Extreme inequality is generally viewed as unfair Measuring Relative Inequality o Size distributions: a straightforward measure, just divide the population into 5 or 10 equal groups based on income or wealth  o The Lorenz curve: a graphical representation of income or wealth distribution. It shows the proportion of the population (x-axis) against the proportion of income or wealth (y-axis). The further the curve is from the diagonal, the greater the inequality. - Sort people in increasing order of incomes - Horizontal axis shows cumulative percentages of the population arranged in increasing order of income - Vertical axis shows the cumulative percent of national income - Lorenz curve begins and ends at 45-degree line o The Gini Coefficient: a numerical measure of inequality, ranging from 0 (perfect equality) to 1 (perfect inequality). It’s calculated based on the Lorenz curve. A higher Gini coefficient indicates greater inequality - Ratio of the area between the Lorenz curve and the 45-degree line, to the area of the triangle under the 45-degree line. - The more bowed the Lorenz curve is, the higher the inequality is. - A more bowed out and unequal Lorenz curve means a higher Gini coefficient. Does growth always increase inequality? o No, Brazil is a notable exception which has had rapid growth and declining inequality. Difficulty in defining poverty o Measure income or expenditure. o Expenditure on specific classes of goods or total expenditure. o Temporary or chronic. ▪ The poor often experience large fluctuations in income. Poverty: a pronounced deprivation in well-being. The poor are those who lack sufficient income or consumption to meet an adequate minimum standard of living. o Poverty can also be tied to specific types of consumption such as being house poor, food poor, or health poor. o The broadcast approach to well-being and poverty focuses on an individual’s capabilities to function effectively in society. The poor frequently lack key capabilities, such as adequate income, education, health, empowerment, or political freedoms. Measuring absolute poverty o Average poverty gap (APG) ▪ APG=TPG/N ▪ Where N is number of persons in the economy ▪ TPG is total poverty gap ▪ Note: normalized poverty gap, NPG=APG/Yp o Average income shortfall (AIS) ▪ AIS=TPG/H  ▪ Where H is number of poor persons ▪ TPG is total poverty gap ▪ Note: Normalized income shortfall, NIS=AIS/Yp Multidimensional Poverty Index o The global MPI has 3 dimensions and 10 indicators. A person is identified as multidimensionally poor if they are deprived in at least one third of the dimensions. ▪ Identification of the poverty status through a dual cutoff ▪ First, cutoff levels within each dimension ▪ Second, cutoff the number of dimensions in which a person must be deprived to be deemed multidimensionally poor. ▪ MPI focuses on deprivations in health, education, and standard of living; each receives equal (that is one-third of the overall total) weight o MPI Indicators ▪ Health – Two Indicators with equal weight Whether any child has died in the family And whether any adult or child in the family is malnourished – weighted equally (each count as one-sixth toward the maximum deprivation in the MPI) ▪ Education – two indicators with equal weight Whether no household member completed 5 years of schooling And whether any school-aged child is out of school for grades 1 through 8 (each count as one-sixth toward the MPI) ▪ Standard of Living – equal weight on 6 deprivations (each count as 1/18 toward the maximum) Lack of electricity Insufficiently safe drinking water Inadequate sanitation Inadequate flooring Unimproved cooking fuel Lack of more than one of 5 assets – telephone, radio, TV, bicycle, and motorbike Is it possible to be trapped in poverty? Sachs believes so o Some countries, because of geography or bad luck, are trapped in poverty o They are poor because they are poor o Emphasized a big push o They cannot be productive without an initial investment to help fix endemic problems o They cannot pay for the investments precisely because they are poor. This is why foreign aid is needed o Millenium village project: apply a proven holistic package of interventions investments designed to help the poorest of the poor get out of extreme poverty  ▪ Agriculture, health, education, infrastructure Easterly at al o Says money is not the problem o $600 billion in aid to Africa has not helped o Africa is still poor o Aid goes to corrupt leaders Poverty and Food Measures of poverty related to whether people have enough to eat and whether they are food insecure Effects of under-nutrition can be severe, particularly among children o Muscle wastage, stunting, susceptibility to disease and infection o Affects cognitive development Among adults, under-nutrition diminished muscular strength, immunity to disease and the capacity to do productive work Nutrition poverty trap. Can’t afford food, makes you less productive and keeps you poor Income and Nutrition We may expect nutrition to increase with income o Good nutrition and health are desirable. People value being well-fed, good physical and mental health As incomes rise, people may spend more on different foods which may not necessarily be more nutritious Poverty trap today based on lack of nutrients rather than lack of calories o Food production increased, getting the required calories is often cheap so most have enough to eat o As income rises, poor spend money on better tasting, expensive calories rather than more nutritious calories Conclusion Policy Implications: Policies that put a lot of emphasis on the quantity of food may be misguided. A better idea would be subsidizing double fortified salt purchase, rather than offering free grain Making it easy to do the right thing. Invent foods people like to eat that are good for you Make school meals rich in nutrition Topics midterm 2: Population and fertility What explains the sudden population growth? Decline in mortality from: o Rapid technological advances in modern medicine o Improved nutrition o Spread of modern sanitation measures throughout the world Unprecedented increases in world population growth, especially in developing countries Population growth today is primarily the result of o A rapid transition from a long historical era characterized by high birth and death rates o To one in which death rates have fallen sharply but birth rates, especially in the least-developed countries, have fallen more slowly from their historically high levels Age structure and Dependency Burdens In developing countries, the population is relatively youthful o 2018: children under the age of 15 constitute 42% of the total population of the low-income countries, 30% of the lower-middle income countries, but just 21% of high-income countries, and just 17% of high-income countries. o The youth dependency ratio (proportion of youth to economically active adults) is very high Thus, the workforce in developing countries must support almost twice as many children as it does in the wealthier countries. Population Pyramids Demographic transition: The fraction of the population of working age first rises then falls The rise in prime working-age citizens entails two potential forces o Potential crisis if many remain unemployed (inequality and potential output loss) o This rise is also an important window of opportunity for strong income and productivity gains Thomas Malthus Agrees that poor countries are poor because they have a high population growth He believed that countries have fixed amount of resources o When there are more people, there are less resources for everyone o Therefore, population growth had to lower incomes per capita and make the country poorer. o He said they would eventually run out of food because populations keep growing unchecked but the amount of land to grow food is fixed so supply of food wouldn’t keep up. Malthus hypothesis  o None of his predictions have come true because even if resources are fixed, technological process has allowed us to produce even more than ever before o The population grew several folds after Malthus, without catastrophic disasters o Main criticisms to Malthus: ▪ Overlooks impact of technological progress ▪ Overlooks microeconomics of family size The Demographic Transition In poor countries, both birth rates and death rates are high o Death rates are high because of poor health, high rates of infectious diseases In rich countries, both birth rates and death rates are low o People have few kids and life expectancy is high At first as incomes grow, death rates fall but no change in birth rates leading to an increase in population growth rate As incomes grow even more o Further reductions in deaths are harder so deaths fall much more slowly o But as incomes keep growing, birth rates start falling o Then the population growth rate falls Stages of the Demographic Transition Stage 1: High birth rates and death rates Stage 2: Continued high birth rates, declining death rates Stage 3: Falling birthrates and death rates, eventually stabilizing Today all the developed countries have completed the transition while many developing countries are still in it. Population control policies Although it is not proven that lowering population growth casually leads to higher economic growth Many developing countries have population control policies as part of their developmental plans o Policies range from the extreme one-child policy in China and stabilization camps in 1970s India to a range of policies that promote family planning. Are large families poorer because they are large? Possibly, larger families must spread their fixed income over many children More expenses with more children so families may have less opportunities to save, invest, and expand income Parents may be less able to invest in the education and health of each child  o Quantity-quality tradeoff o Families with lower number of children can invest more into each child leading to higher “quality” Hard to determine whether there is quantity-quality trade off. Those who choose to have larger families are different in many other ways other than just having more children o Grandparents live close by can invest in kids Look at exogeneous changes in family size o Fertility shocks o Exogenous reduction in family size Fertility shocks Twins Gender o In the U.S., parents want a mixed family. Families that have had one boy and one girl are less likely to have a third child than a family who had two boys or two girls. o In developing countries: further shock due to the gender of the child o If parents prefer having a boy, girls will tend to be born in large families o However, sex may not be random anymore due to sex-selective abortion Impact of forced reduction Since 1978, Chinese government severely restricts the number of children a family can have o Each couple can have only one child, or is subjected to a heavy fine o However, since mid 1980’s, relaxation in some areas if the first child is a girl Nancy Quian compares girls, in areas that had a relaxation policy. o Girls live in larger families in relaxed areas, and they are more educated Microeconomic Household Theory of Fertility Children are considered a special kind of consumption good and in developing countries an investment. Fertility becomes a rational economic response to the consumer’s (family’s) demand for children relative to other goods There is evidence that higher income families have less number of children The demand for children in developing countries First two or three as “consumer goods” Additional children as “investment goods” Work on family farm, microenterprise Old age security motivation  The theory of family fertility concludes when the price or cost of children rises o Increased educational and employment opportunities for women o Rise in school fees o Establishment of minimum-age child labor laws o Provision of publicly financed old-age social security schemes Parents will demand fewer children, substituting quality for quantity or a mother’s income for her child-rearing activities One way to induce families to desire fewer children is to raise the price of child rearing, say, providing greater educational opportunities and a wider range of higher paying jobs for young women Microeconomic Theory of Fertility: Implications It follows logically that fertility will lower where there is: o More female nonagricultural employment, at higher wages o Raised women’s education, role, and status o Expanded schooling opportunities o Increases in family income levels o Reduction in infant mortality, better healthcare o Development of old-age social security plans Additional influences that could be important in affecting fertility: o Lowered prices and better information on contraceptives o Policies that have the effect of reducing boy preference o Direct incentives such as subsidy benefits The choice mechanism from the micro theory perspective is on having additional children Benefits: expected income from child labor, usually and eventually financial support for elderly parents Costs: The opportunity cost of the mother’s time, cost of educating children Fertility and Education Empirical studies: negative association between female education and fertility Female schooling o May increase the opportunity cost of childbearing and rearing among educated women o May affect fertility through knowledge and more effective use of contraceptive methods o May lower fertility through better health care decisions which improves child health o Increasing female autonomy and bargaining power in fertility decisions Fertility decisions and contraceptives Expanding access to contraceptives can decrease fertility o No strong evidence that providing contraceptives has a big effect overall o However, the way in which contraceptives are provided matters o Providing contraceptives to teenage girls has a huge effect on reducing teenage pregnancies Intra-household decision making Fertility decisions usually made by a couple with influences from peers Women and men have different desired fertility levels Women in Zambia given a free voucher for contraceptives through an appointment with a nurse o Women given the voucher in private (versus in the presence of their husbands) were 23% more likely to visit the nurse, 38% more likely to ask for a relatively hidden form of contraception and 57% less likely to report an unwanted birth in the next year Fertility decisions and preferences Social Norms o What your neighbor does, role of religion and ethnicity ▪ Women are more likely to adopt contraceptives if others from the same religion were doing so o But also, what you see on TV ▪ In Brazil, fertility declined faster in regions where telenovelas became available first ▪ Telenovelas present the image of a small happy family Do the poor control their fertility decisions? Yes, but some factors are out of their control o Women are pressured by their husbands, mother-in-law, social norms to have more children than they want o In this setting, availability of contraceptives would not be efficient o Affecting social norms is important Children as a retirement investment People in developing countries cannot rely on social security or retirement/pension plans in old age and depend on their children for support  If children are a way to save for old age when one can’t work, it makes sense to have more kids Gender In some countries investing in girls is not as worthwhile Families are not only choosing family size but rather the gender composition of the family In societies where parents don’t expect their daughters to be useful in taking care of them o Parents invest less in daughters o Sex selective abortion o Less investments in education and health Whatever the exact mechanisms of discrimination against girls, the fact is that there are fewer women than biology would predict o Amartya Sen: Missing women Policy Lessons Greater access to contraceptives alone will not be effective Effective social safety nets such as pensions, social security and health insurance that provide resources for those in retirement will decrease demand for large families Economic and financial development that increases incomes and ability to save for retirement will also reduce fertility Missing women theory: The idea that there are millions of women missing from the world’s population due to gender discrimination. Due to several factors such as: Female infanticide: Killing female babies at birth Female feticide: abortion of female fetuses Gender discrimination: Women receive less favorable treatment in terms of medical care and social care Scale of the issue: The number of missing women has more than doubled in the last 50 years from 61 million to an estimated 142 million. China and India are responsible for 90-95% of the world’s missing female births. For each missing women, there are many more women who fail to get an education, a job, or a political responsibility that they would have obtained if they had been men. Misallocating women’s skills comes at a cost For an economy to be functioning at its potential women’s skills should be engaged in activities that make the best use of those abilities. I.e. if women face discrimination in the education market, the labor market, the credit market, or in access to productive inputs more generally, then this reduces total output, as well as the pace of innovation and technology adaptation. Male to female sex ratio has increased with economic growth in recent decades in several countries. Increased availability of prenatal sec-diagnostic ultrasound technology which made sex- selective abortions possible Decline in desired family size o Families that strongly want at least one son are less likely to obtain that son by chance if family size is small ▪ This can increase their use of sex-selective abortion Economic value of women Why is there son preference? o Women are less likely to work outside home, have lower salaries, move away after marriage, provide less financial support for their parents in old age o Preferences: perhaps parents have stronger son preference for cultural or religious reasons, and this isn’t affected when economic reasons change. ▪ Hinduism and Confucianism: importance of sons in some religious rights Women in developing countries worse off in several dimensions o Likely to be poor o Less schooling, low labor force participation o Poor nutrition and health, high rates of maternal mortality o Less bargaining power and decision-making authority o Fewer voting rights and property/inheritance rights Parents invest in girls after they learn about economic returns to investing in girls o Girls get better nutrition and more schooling o Delayed marriage and childbearing o Suggests girls’ education was low due to demand, not high costs or poverty Son preference can be mitigated o Increased opportunities for women in the labor market translate to better outcomes for women o Increased exposure to local female leaders can raise aspirations o Deep-rooted social norms can be changed Human capital: Education and Health Health and education are important objectives of development o Reflected in Amartya Sen’s capabilities approach, and in the core values of economic development Health and Education are also important components of growth and development – inputs in the aggregate production function Education and Health as Joint Investments for Development  Health and education are investments in the same individual Greater health capital may improve the returns to investments in education o Health is a factor in school attendance o Healthier students learn more effectively o A longer life raises the rate of return to education o Healthier people have lower depreciation of education capital Greater education capital may improve the returns to investments in health o Public health programs need knowledge learned in school o Basic hygiene and sanitation may be taught in school o Education needed in training of health personnel Why increasing Incomes is not sufficient Increases in income often do not lead to substantial increases in investment in children’s education and health But better educated mothers tend to have healthier children, at any income level Significant market failures in education and health require policy action The Human Capital Approach Human Capital: education, health, and other human capacities that can raise productivity when increased Analogy to physical capital: o Initial investments in health or education lead to a stream of higher future income o The present discounted value of this stream of future income is compared to the costs of the investment Future income gains from education must be compared with the total costs Education costs include any direct tuition or other expenditures specifically related to education such as books and uniforms Indirect costs, primarily income forgone because the student cannot work while in school Private returns to education are often high However, private returns may be higher than social returns, particularly at higher education levels, when accounting for educational subsidies Child Labor Child labor is a widespread phenomenon The international labor organization defines child labor as o Work that is mentally, physically, socially, or morally dangerous to children o And interferes with their schooling by depriving them of the opportunity to attend school. Obliging them to leave school prematurely, or requiring them to attempt to combine school attendance with excessively long and heavy work  About 70% of children work in agriculture Child labor is concentrated in the world’s poorest countries Sub-Saharan Africa has 86 million child laborers, more than anywhere else Facts about Child Labor Most working children are at home, helping their family in the family business or farm and with domestic chores Most working adults in low-income countries work in agriculture and many children work with their parents Most working children (74%) attend school Impact of child labor depends on type of labor and counterfactual Worst forms of child labor Slavery Trafficking Forced Military Recruitment Drug Production Debt bondage Hazardous work Approaches to Child Labor Policy To discourage child labor, we can make child labor costly or increase the benefit of the alternative Consider child labor an expression of poverty, so emphasize ending poverty generally rather than child labor directly If child labor is inevitable in the short run, regulate it to protect children, and provide support services for working children Ban Child Labor, if impossible, ban child labor in its most abusive forms Activist approach: trade sanctions o Sanctions could backfire when the result is that children shift to the informal sector; and if modern sector growth slows What about passing a law that makes it illegal to hire children? o In India, child labor ban-imposed fines on firms violating child labor laws ▪ This law decreased wages of children ▪ Hiring a child carries the risk of a big fine, most firms do not want to hire children. Demand for child labor falls ▪ Firms will only be willing to hire children if the wage is much lower than that for adults ▪ Leads the wage for children to fall  ▪ Even though the wages fell, child labor increased. From family’s point of view, they are making their children work to make ends meet. Since wages are lower the children need to work more to earn the same amount as before How can we reduce child labor? o Education reform that gets at root causes can help o Help kids get into school. Build new village schools and providing enrollment incentives Issues in Education Supply Side o No schools in remote villages o High transport costs o Shortage of trained teachers o Large class sizes Demand side o Parents won’t necessarily send their kids to school o The need for child labor o No economic resources o Low expectations of returns of school o Perception of the low-quality schooling Supply side Proponents o We need to expand supply because the market will not provide adequately o But doesn’t address quality Demand side Proponents o There appears to be no lack of demand for educated workers in India o Study showed increased rates of enrollment in regions benefitting more from green revolution Supply side o Supply driven policy is popular in many countries o Free education in African countries o Right to education in India Easterly states that supply investments are a waste if parents don’t care about education this approach would lead to waste Ex: Supply Side Interventions o Indonesia used oil money to build schools in places where education levels were initially low ▪ Education and wages grew faster in regions that received more schools ▪ Schools increased education ▪ Caused increase in wages  ▪ Fewer depressive symptoms years later ▪ Better health ▪ Children born to parents who were exposed to INPRES have better human capital outcomes Why would supply-driven education not work? o Improved school access doesn’t always translate to improved learning if the quality of education is poor o If people do not care, there is no pressure on the teacher to deliver o Parents won’t send their children to schools if they’re not delivering useful skills o High student and teacher absence o Low achievement Efforts to get children into school must be accompanied by improvement in the quality of schools that serve these children By decreasing class size the quality can be improved Providing targeted help to struggling children can be effective in dealing with the huge learning deficits Demand Side o Parents compare cost vs benefits to make schooling decisions o What are the benefits of schooling? ▪ Higher wages, better working conditions ▪ Greater awareness and ability to learn more ▪ Less crime o Progresa was effective to increase school enrollment o Labor market gains for women: increase in labor force participation and earnings o Parents believe that education is a lottery ticket o They believe that returns to primary education are lower and returns to higher education are much higher than they are o Parents undervalue primary school ▪ Leads them to give up and not educate children at all ▪ Might lead to unequal treatment between children Teachers o Will help top of class when majority of students are confused o If the teacher feels majority of students cannot pay attention, they tend to blame the students or parents, then lose motivation o Teachers split into two groups to teach top of class and bottom of class. Those assigned to the bottom of the class were upset. Less likely to teach and instead more likely to be having tea in the teacher’s room Students o Get easily discouraged and decide school isn’t for them o High absentee rate  To combat this, you can access the students learning levels then split them into groups based on the learning level attained. Changing unrealistic expectations by providing information o Tell parents the average income gains from spending one more year in school for children Using technology to aid teachers Health Several cheap and effective health investments can save lives Examples include vaccinations, chlorinating water, bed nets Methods are affordable and have huge returns Preventive care if properly utilized would save resources Diarrhea is the third leading cause of child mortality - It is easily preventable and treatable - Chlorine bleach can be used to purify water to prevent spread of diarrhea and other water-borne diseases Ors treatment Dehydration is the main cause of death but can be treated with ORS yet only a third of children were given ORS in India Eliminating malaria increases income Sachs explanation - Huge benefits from preventative measures but the poor cannot afford to pay - Developed countries, should give them aid and help fund measures - However, the examples are cheap and still underutilized, so this is not a classic poverty trap Underutilization - Poor families in low-income countries cannot afford pipping water - But a bottle of chlorin costs.18 USD PPP and lasts a month - Discounted heavily and people still didn’t want to buy - Malaria and bed net experiment - For bed nets the demand is not sensitive to income. People aren’t much likely to buy one when they’re richer The poor care about health and visit health facilities regularly - They spend a substantial amount on health - When faced with serious health problems, they sell assets and borrow - They spend a lot on treatments and cures but not prevention The issue isn’t how much the poor spend on health, but what the money is spent on. Which is often more expensive cures rather than cheap prevention Faith vs Information Taking an action that prevents something from happening is beneficial in the future, but poor people don’t see the immediate benefit Learning about health is difficult for the poor Primary goal of health care policies in poor countries should be to: Regulate the quality of treatment Make it easy for poor people to receive preventative care Maintain trust Topics post midterm 2 Environment and development Global warming: the long-term heating of the Earth’s surface observed since the pre-industrial period (between 1850 and 1900) due to human activities, primarily fossil fuel burning, which increases heat-trapping greenhouse gas levels in Earth’s atmosphere. Climate Change: Long-term change in the average weather patterns that have come to define Earth’s local, regional, and global climates. Mitigation: A problem mostly caused by developing countries. Growing sources of emissions from developing countries. o Rapid industrial growth, especially in Asia: coal plants, autos, etc. o Worsened by perverse policies e.g. fossil fuel subsidies o Deforestation in developing countries (about 20%+ of emissions) Strategies for mitigation o Taxes on carbons o Caps on greenhouse gases (generally with “carbon markets”) o Subsidies to encourage technological progress. Solutions and Approaches to Climate Change Mitigation o Phase out fossil fuels o Renewables  o Green tech o Electric mobility o Curb Deforestation o Reforestation o Reduce meat consumption o More plant-based diet o Curb population growth o Carbon capture and storage facilities Examples of adaptation policies o Tracking ecological resources of the poor o Implementing early warning systems to anticipate environmental emergencies and to prevent disasters. o Expanding natural ecosystem barriers such as reforestation and mangrove expansion. o Constructing infrastructure to serve the poor while accounting for likely climate change. o Ensuring better voice and empowerment for the poor and their organizations. o Demanding more government transparency and accountability. Mitigation Vs. Adaptation o Mitigations are actions to reduce emissions that cause climate change. ▪ Sustainable transportation ▪ Clean energy ▪ Energy efficiency o Adaptations are actions to manage the risks of climate change impacts ▪ Disaster management and business continuity ▪ Flood protection ▪ Infrastructure upgrades Vox Dev Reading o Recent research: use short-run changes to weather to examine how climate impacts outcomes such as GDP, mortality, human capital, etc. o Unanticipated extreme events: Hurricane o Warmer years and rainfall shocks adversely impact GDP per capita and growth, larger effects in developing countries, crime and violence including gender-based violence, educational attainment for children and child labor, worker and firm productivity. Vox Dev Lit Findings o Extreme weather events: o Developing countries experience the higher occurrence of natural disasters and have the highest number of affected people ▪ Reduce economic growth ▪ Child health and cognitive development ▪ Local economic productivity ▪ Educational attainment  ▪ Lack of appropriate infrastructure ▪ Lower access to safety-nets Vox Dev Lit Summary of Research Adaptation Responses o At the individual/firms level ▪ Credit and Insurance Access to weather insurance Take-ups remain low ▪ Technology adoption Improved seeds, irrigation Sometimes high cost ▪ Switching sectors, migration o Policies ▪ Disaster aid Mitigation recently a problem from developing countries o Rapid industrial growth o Worsened by perverse policies e.g. fossil fuel subsidies o Deforestation in developing countries (20% of emissions) Strategies for mitigation o Taxes on carbons o Caps on greenhouse gases o Subsidies to encourage technological progress Market failures related to the environment o Privately owned resources o Inefficiencies are likely to result from imperfections in property rights The tragedy of the commons o Social and private incentives differ ▪ Private incentives outweigh the social incentives ▪ Arises because of negative externality Allowing one to graze on common land reduces quality for other families ▪ People neglect this external cost, resulting in overuse of the land Common resources o Clean air and water ▪ Negative externality: Pollution ▪ Regulations or corrective taxes o Congested roads ▪ Negative externality: Congestion ▪ Corrective tax: toll ▪ Tax on gasoline o Fish, whales, wildlife ▪ Fishing and hunting licenses ▪ Limits on fishing and hunting seasons ▪ Limits on fish size ▪ Limits on quantity  Government can solve the problem o Regulation or taxes to reduce consumption of the common resource ▪ Impose corrective tac on the use of the land ▪ Regulate use of the land ▪ Auction off permits to allow use of the land Nobel Laureate Elinor Common Property Design Principles o Defined boundaries of the resource system o Proportional equivalence between benefits and costs o Collective-choice arrangements including those affected o Monitoring, with those who audit accountable to users o Graduated sanctions o Conflict-resolution mechanisms o Recognition of right to organize Public goods and bads o Public good is anything that provides a benefit to everyone and the availability of which is in no way diminished by its simultaneous enjoyment by others ▪ Clean air, economic institutions, national defense o A public bad is any product or condition that decreases the well-being of others in an inexhaustive manner ▪ Air pollution and water pollution o Regional environmental degradation o Increased exposure to the forces of erosion, excessive drying of the soil, regional loss of groundwater, pollution of water supplies are all public bads associated with the clear-cutting or burning of trees o Environmental conservation through the protection of trees provides a benefit to all and is thus a public good Environmental problems of Urban Slums o Health threatening pollutants ▪ Indoor pollution from fuel cooking ▪ Poor ventilation ▪ Respiratory illnesses o Unsanitary environmental conditions ▪ Infectious diseases o Serious impact on poor ▪ Exacerbated by food insecurity and malnourishment Urban development and the environment o Problems of congestion, clean water, and sanitation ▪ High health and economic costs associated ▪ Drag on development ▪ Impact on poor ▪ Private wells have led to land subsidence and flooding Policy options in developing and developed countries o Proper resource pricing o Community involvement o Clearer property rights and resource ownership o Improved economic alternatives for the poor  o Improved economic status of women o Investments that yield returns regardless of the shape of climate change, such as better road network o Industrial emissions abatement policies ▪ Taxation of emissions, tradable emissions permits, quotas o Proactive stance toward adapting to climate change What can developed countries do? o Emissions control o Research and development on green tech and pollution control o Transfer tech to developing countries o Restrictions on unsustainable production Cont. o Lower developing country costs for environmental preservation o Trade policies ▪ Reduce barriers o Debt relief o Developmental assistance Risk and insurance Insurance: helps us cope with risk Informal insurance: relies heavily on social networks Urdy spent one year in Nigeria and recorded the terms of the loans that villagers give to each other: When borrowers have adverse shock, they pay less When the lender has adverse shock, the borrowers pay more This type of insurance may have limitations Limits of informal insurance: Moral Hazard: “Temptation to slack off”. People get involved in a risky event knowing that she/he is protected against the risk and other party (insurer) will incur the cost Limited commitment Aggregate shocks: Farmers can only insure each other if they know themselves relatively well. Which gives a limited scope for insurance. Limited size of arrangement: In practice most insurance seems limited to bilateral relationships, not a larger pool. This is not very well designed to deal with large shocks. Seems to be no informal insurance even for close relatives Health shocks can be expensive to deal with (costly hospitalization) and you may need further treatments Important keywords of market failures in insurance (and credit):  Moral Hazard Adverse Selection: When the insured person knows something that the insurer does not know (asymmetric information). The insurer cannot differentiate between high-risk and low-risk individuals. Shocks in an S-Shaped world A very small business may not be profitable, while a somewhat larger one is One shock may plunge a small business owner into a poverty trap EX: Ibu Tina Clothing Business o Her and her husband had 4 employees and enough money to buy raw materials and use their sewing machines to make clothes ▪ Profitable o They suffer a theft ▪ Bad check from business partner ▪ Went to the police to help recover but phase extortion o Try to bounce back by getting a loan and start a clothing-trading business o Could not recover Negative shocks can change the poor’s trajectory toward poverty traps Risk and Stress o Shocks can cause poverty, but stress can make it worse ▪ Stress affects decision making ability ▪ Fight or flight response might help you in a crisis ▪ Researchers found a strong association of the amount of cortisol in your body and poverty Mechanisms to cope with risk (Costly strategies) o Avoid risk o Knowing that risk is present and would be costly, the poor try to avoid it o Avoid more profitable but more risky investments o Diversify portfolio of activities o Migrate for a short period of time o Small plots of land in different locations Better Mechanisms to cope o Agriculture: profit rates would be higher with investment in fertilizers and seeds Health insurance o Moral hazard ▪ Too much curative care expenditures already ▪ Too little preventative care o Adverse selection ▪ Only people who are sick may sign up o Fraud  ▪ Charge for services that aren’t performed Solutions o To avoid moral hazard and fraud ▪ Offer only catastrophic health insurance o To avoid adverse selection ▪ Make insurance compulsory for a pre-selected group of people Crop insurance o Pays out based on actual crop yield o It is subject to moral hazard and adverse selection ▪ Take care of crop (your effort) ▪ Choosing insurance for a field you know is prone to disaster o Offer weather insurance instead ▪ Based off rainfall index ▪ No fraud, little administrative cost, no adverse selection, no moral hazard ▪ No one controls the weather Poor people have little interest in insurance and take up is low o Lack of understanding o Mistrust o Credibility o Difficult to think ahead about a negative event o Time inconsistency ▪ When deciding to buy the insurance, we need to think now and pay the premium but the payout if any would take place in the future Policy implications o Public policy can complement the market to insure social protection ▪ Cash transfers ▪ Free primary health care ▪ Mandated health insurance ▪ Subsidize insurance offered by the market Credit and microfinance Access to formal credit is limited for the poor o Several reasons ▪ No collateral ▪ Risk of default is higher ▪ Gathering information, screening, and monitoring is costly ▪ Very high interest rates Microfinance and the group lending solution o The transformative aspect is group lending ▪ In traditional loan arrangements, the lender must keep tabs on the borrower and continuously monitor/pressure the borrower to repay on time.  This makes lending to the poor costly and the lender doesn’t know when they’ll get money back ▪ In microfinance, a group of 10-20 women is formed who know each other The same size of loan is provided to each woman in the group and the group is liable for total repayment With group liability, the group wants to ensure everybody repays o Failure to repay means the entire group defaults and everybody loses the ability to borrow in the future ▪ This social pressure from people who know the members of the group ensures high repayment rates because these people know each other’s financial situations. ▪ Repayment is done together at the group’s meeting, so everybody knows if somebody defaults and hurts the group. (Using group pressure/shame) ▪ Group members can pitch in if somebody genuinely can’t repay in a certain month due to a hardship with the expectation that everybody has each other back. ▪ Group liability attempts to solve moral hazard and adverse selection The limits of Microfinance o Clear evidence that microfinance is not the magic bullet that will end poverty is that not everybody is rushing to get these loans o Some limitations as the traditional model were rigid: ▪ It can work well in small communities where people know their neighbors well and are willing to take on group liability ▪ Loan size is small and fixed ▪ Weekly repayments starting a week later limit what can be done with the money and types of enterprises started ▪ Group liability works against those who want to take risks (and may hinder innovation) The microfinance revolution Muhammad Yunus founded the Grameen Bank and pioneered microfinance o Started Grameen Bank after banks rejected his proposal to provide small loans to the poor ▪ Grameen has dispersed 5.3 billion to 7 million borrowers with no collateral ▪ Recovers 98% of loans, interest rates up to 20% ▪ 96% recipients are women who meet in a group each week ▪ Women have lower default risk and are more likely to spend the money on household/children’s welfare e.g. health and education