LN1 Economic Development Course Lecture Notes PDF

26/06/2024 Course: List of Lectures Development Issues a...

26/06/2024 Course: List of Lectures Development Issues and Business Cycle  1. Economic Development  2. Governance, Institutions and Policy Making  3. Financial Crisis and Pandemics Lecture 1:  4. Agriculture, Climate Change and Natural Disasters Development Economics / Economic  5. Entrepreneurship and Economic Development Development  6. Technology, Growth, Inequality and Poverty  7. Investment in Development Infrastructure, Health, Education Almas Heshmati  8. Circular Economy, Inclusive and Sustainable Development Jönköping International Business School,  9. Artificial Intelligence and Economic Growth and Development Jönköping, Sweden E-mail: [email protected] Research Fellow, UEH University, Ho Chi Minh city July 2024 1 2 1 2 Patel, D. et al. (2021). The New Era of Unconditional Lecture 1. Economic Development convergence. JDE. 1(18)  Patel, D., J. Sandefur, and A. Subramanian (2021). The New Era of  The new era of unconditional convergence: Since WWII, Unconditional convergence. Journal of Development Economics, 152: developing countries have fallen further behind the rich countries. The phenomenon is called unconditional divergence. In 1950 USA 102687. (Replication paper) income was 17:1 of that of India in PPP. By 1990 it increased to  Nunn, N. (2019). Rethinking Economic Development. Canadian 30:1. By 2017 the ratio fall to 9:1 (Nominal, Real or PPP?). Unconditional divergence has reversed course. Journal of Economics, 52: 1349-1373.  Convergence types: β-convergence and σ-convergence.  Spolaore, E. and R. Wacziarg (2013). How Deep Are the Roots of  Solow growth model (1956) predicts that low-income countries with Economic Development? Journal of Economic Literature, 51(2): 325- same technology, but low capital stock and higher marginal product 369. of capital grow faster. Johanson and Papageorgiou (2020) in regression GDP/capit=f(GDP/capio) did not show evidence of convergence.  Researchers have explored controlling for human capital, investment, health, financial sector development, foreign aid, trade, etc. to recover conditional convergence. Non-linearity in the growth process creates convergence clubs. The dispersion in income/capita is called σ-convergence. 3 4 3 4  26/06/2024 Unconditional Convergence, Central facts 2(18) Convergence 3(18)  Here the aim is to explain the reversed economic growth  Neoclassical growth model implies that poorer countries with characterised by unconditional convergence. In recent decades smaller capital stocks per worker growth faster than richer until some developing countries have experienced high growth rate, their income converges. Barro and Sala-i-Martin (1992) specify structural transformation, and unconditional convergence in growth for economy i in period t (1960) and t+s (2019) is function of income and speed of unconditional convergence: Labor productivity.  Building on Patel et al. (2018) the authors focus is on establishing 3 central facts about developing country growth performance:  They estimate β using non-linear LS with heteroscedasticity and  Between 1990 and 2000 the coefficient of the unconditional robust std errors. Figure 1 shows unconditional convergence β for convergence flipped sign becoming significant. The gap can be various starting dates until 2019. Oil exporters and countries closed in 170 years. Convergence is driven by developing countries. with less than 1 million population are excluded.  In 1990 convergence exhibit inverted U-shaped, low and middle- income growth faster than advanced countries.  In Figure 2 convergence changes over time in a rolling window. Red indicate divergence and Blue convergence.  The era of unconditional convergence is associated with lower volatility and higher growth persistence within developing  Also conduct tests estimating the model with linear LS and countries, especially middle-income countries. adding conditional variables like school enrolment and government consumption. 5 6 5 6 Convergence 4(18) Convergence and measurement of its speed 5(18)  Convergence is expected to occur and fast enough to improve standards of living. The standard speed unconditional or conditional is around 2.0% for developed and 4.5% for developing countries. Speed of convergence is length of time required for poor countries to close half of the gap between their steady state and current income levels (τ is estimated 35 years):  β convergence is necessary but not sufficient for σ convergence. β convergence has only reduced the σ convergence since 2008 global financial crisis.  Convergence can be due to slowdown in rich countries or improved performance in poor countries or both. Decompose convergence 1960-2000 and 2000-2019 (see Figure 3). The later period show that poor countries grew, and rich countries performance declined. Regions (Africa and Asia) have different performance. See Table 1. 7 8 7 8  26/06/2024 9 10 9 10 Middle income trap 8(18) Within country growth patterns 9(18)  Gill and Kharas (2015) articulated the idea of middle-income  Unconditional convergence and middle-income trap relate to the cross- trap. It describe economies being squeezed between low wage sectional pattern of growth. We present 2 other facts about within poor countries competition in mature industries and rich country growth behaviour. Figure 4b plot the distribution for the countries innovation in industries undergoing technological within country volatility of growth measured by std dev for high, middle and low-income country groups. change. The situation does not allow to transit out of middle- income status. Empirics show a different picture, middle-income  Volatility for within country growth of rich countries is low. Volatility growth faster than poor countries. for low and middle-income countries decline over time.  The sign and magnitude of γ is a test for the middle-income trap:  The evolution of within country growth persistence is plotted in Figure 4c. Persistence is measured by ρ for all three groups:  High income countries growth is more persistent before 1970 but  After 1985 middle-income countries grow 0.50 to 0.75 percent middle-income countries after 1970. Low-income countries growth is higher. less persistent. Persistence in growth between decades is 0.10-0.30. In convergence period 2000s rich grow 1.5% faster, and 0.65% in 2010s. Middle income countries grow faster than the poor. 11 12 11 12  26/06/2024 Figure 4 shows average growth, volatility and persistence by income group based on Penn World Tables data. Reversal in growth rate 11(18)  The analysis of convergence was at country level which is different than income for individuals. Global earnings inequality is declining. Explosion of top income is not revealed in aggregate figures. At the cross-country growth level: unconditional convergence, middle-income trap and volatile and instable growth within poor countries over time is important.  Since 1990 India, China and some other Asian countries done well. Poor countries outpaced developed countries. Middle- income counties experienced reduced volatility and more persistence growth.  The unconditional convergence of recent 25 years resulting from Chinese growth, cheap finance and country-specific attributes cannot be granted due to impacts of: deglobalization, climate change, labour saving technology. Reversal given way to divergence in growth rates. 13 14 13 14 Figure A5 Unconditional convergence, OLS specification. Β-convergence for 3 data samples. 13(18) 15 16 15 16  26/06/2024 Figure A6 Unconditional convergence, β-convergence for the PWT. Left: Figure A7 σ-convergence, full sample. Oil exporters and population based on stacked NL OLS, Right: OLS. Both 2019 regressed on 1980. 14(18) less than 1 million are excluded from fixed sample. 15(18) 17 18 17 18 Figure A8 Average growth, volatility, and persistence by income Figure A9 β-convergence from OLS, PWT, Dropping regions, group, fixed sample, PWT data. 16(18) unconditional convergence from various starting dates to 2019. 19 20 19 20  26/06/2024 Figure A10, The Middle-income dummy. 18(18) Nunn, N. (2019). Rethinking Economic Development, CJE. 1(9)  Understanding how to eradicate global poverty and improve the economic well-being of the poorest in the world is one of the most important issues facing academics and policy-makers.  Nunn provides a summary, reflection and assessment of the state of economic development in policy and academic worlds.  In development policy the focus is on policy interventions and foreign aid to fix deficiencies of developing countries to obtain sustained economic growth.  In academic research the emphasis is on evaluation of interventions to estimate causal effects using randomized control trials (RCT).  Nunn asks:  Is the current practice the best that we can do?  Are foreign aid and policy interventions the best options to alleviate poverty?  Is there a role for other methods to better understand the local context and more collaboration with local scholars? 21 22 21 22 Foreign Aid, Development Policy 2(9) Other Policy Options 3(9)  Foreign aid is one of the key tools used to alleviate poverty. It is the  In Africa 49-87% of aid to schools went missing. Entrepreneurs engage in zero-sum rent-seeking activities rather than productive activities, aid is transfer of money, commodities and services from a foreign country or increasing corruption, it crowds out domestic saving and increase international organization for the benefit of the recipient country’s consumption of foreign products and higher prices. poor population.  Foreign aid can fuel conflict. Examples are Biafra war, and East of DRC where the Hutu extremist taxed refugees to finance raid Rwanda. US  Aid takes the form of grants or concessional loans and is typically military aid increase conflict and violence, repression and torture by the classified into economic, military and humanitarian (emergency) aid. states. Foreign aid if implemented successfully, can foster development and Official development assistance (ODA) is the most common form, reduce conflict. If poorly implemented, it can lead to more conflict. which is comprised of bilateral grants. Nunn also include transfers  Other feasible options: Trade and industrial policy is another tool. across borders by foundations, religious organizations and NGOs, but Producing cars and household appliances, low interest loans, and tariff production help industrialization. Canada, Italy, South Korea, Finland, not remittances. Baltics are successful examples. Tariffs have declined, but anti-dumping  Foreign aid can have education and health effects, but also unintended duties increased (Figure 2). consequences which lead to underestimation of the adverse effects of  The aggregate effects of antidumping duties for developing countries are not foreign aid. Aid is often determined by strategic or economic needs of fully understood. One case is the anti-dumping duty that was placed against Vietnamese catfish farmers by Mississippi catfish farmers in 2003. The the donor, like purchase of products from the doner, tied aid can effects was studied by Brambilla et al. (2012). The Vietnamese catfish farms increase prices by 15-40% in host countries. real per capita income decreased by 40%. The Millennium Village project began in 2015 to compensate villager for income without antidumping. 23 24 23 24  26/06/2024 Figure 3: One observes a clear positive relationship between net antidumping initiatives and GDP per capita. Those initiating duties against other countries tend to be wealthier while those that have duties placed against their products tend to be poorer countries. 25 26 25 26 Other Policy Options 6(9) Rethinking Academic Research 7(9)  The CIA intervene to support puppet leaders to increase export of US  There is diversity in the type and style of academic research, but they products. Some developed nations actions have deteriorating impact follow three steps:  An intervention is believed to have effects beneficial for economic on developing countries. development or well-being.  Other policy options to reduce global poverty are:  The intervention is randomly implemented and rigorously evaluated.  Greater labor mobility, migration increase productivity and income,  If successful, the policy is scaled up and replicated elsewhere. technology and knowledge transfer, Swedish migration to US, African  Step 2 is research process, and step 3 is left for policymakers. students studying and migrating to Canada, Vietnamese migration to USA  Academic research has several characteristics: and France are examples of labor mobility. Study showed that removal of  Significant fixed costs are associated with intervention and data Mexican workers did not help local workers in USA. collection.  Reduced labor restrictions and reduced visa restrictions can have large  If cases are different, scaling up and replication in other locations will growth, income and poverty reduction effects. be flowed.  Methods used are transportable and same in different countries.  Another strategy to combat global poverty is the use of consumer Important for comparability and implementation of best practices. purchasing power to change production and labour standards, increase  If in-depth knowledge of the local context is not necessary. Allow to minimum wage in factories. Consumers in rich countries are willing to pay have projects in different locations. more for a product that improves well-being of producers. Certified  Understanding local context is crucial for development research. Three products is positive to minimum wages. examples of standard development policy are: health and medicine, agriculture, and education policies. 27 28 27 28  26/06/2024 Rethinking Academic Research 8(9) Conclusion 9(9)  Health and medical policies: foreign aid directed to area of  Nunn (2019) reflected on the state of economic development in health have improved well-being of the global poor. Medical both policy world and in academia. Development policy tends to advance have prevented or cured diseases like polio, malaria, use interventions in form of development aid to fix deficiencies yellow fewer, etc. Yet individuals refuse treatment of Ebola in in developing countries. The effect can be positive but also have West Africa, DRC 2014-2016, and HIV/AIDS due to colonial rule experience. Historical and current cultural context of location unintended negative consequences. play an important rule. Africa’s COVID-19 discrimination.  West tariffs, antidumping duties, limits on international labour  Agricultural policies: one importance of local culture and mobility, tied aid for export promotion are active harmful context within agriculture is related to use of water in irrigation policies. and religious rituals in Hindu-based belief in Bali. Use of superior agricultural technologies due to use of one-size-fits-all  Academic research use its general assumptions and West policy can do more harm (increase pest) than good. insights to solve deficiencies in developing countries. Academic research emphasise evaluation of interventions and estimate  Education policies: Indonesia’s and Zambia’s large investment in causal impacts. The methods can be applied in any setting. building schools had positive effects on education of boys and their higher adult income. Higher education of bride gave higher  Fixed cost of infrastructure is high. Local context is neglected bride price. Building schools to increase education attainment of and local scholars less involved in the process. Local context is girls depends on the customs of the population. necessary for proper inclusive analysis and effectiveness of policies. 29 30 29 30 Spolaore, et al. (2013). How Deep Are the Roots of Economic Development?, JEL. 1(18) Geographic factors and human characteristics 2(18)  Spolaore et al. (2013) ask why income per capita is higher in some  The empirical literature on economic growth and development has moved societies and much lower in others? from the study of proximate determinants to the analysis of fundamental factors rooted in long-term history.  In answering, decades ago the emphasis was on accumulation of factors of production and exogenous technological progress. Later, the focus  A growing body of new empirical work focuses on the measurement and switched to policies and incentives endogenously affecting factor estimation of the effects of historical variables on contemporary income by accumulation and innovation. In recent years attention has moved to explicitly considering the ancestral composition of current populations. institutional framework, policies and incentives. The literature seeks the causes of development rooted in geography and history.  The evidence suggests that economic development is affected by traits (quality  Time persistence of effects and specific mechanisms are important. or characteristics) transmitted across generations over the very long run. Spolaore et al. research shed light on the interactions among  This article surveys this new literature and provides a framework to discuss geography, history, and comparative development, to understand different channels that intergenerationally transmitted characteristics may variations in economic development. impact economic development, biologically and culturally.  It is acknowledged that geographic factors (latitude and climate) are correlated with development but through indirect mechanisms such as  An important issue is whether historically transmitted traits have affected initial conditions, human characteristics, social capital, and cultural development through their direct impact on productivity or indirectly as traits affecting income and productivity in long term. barriers to the diffusion of productivity enhancing innovations across  Human characteristics are transmitted from one generation to another, populations. and they affect economic development directly through productivity and indirectly through diffusion of technology and institutions. 31 32 31 32  26/06/2024 Geography and Development 3(18)  The long-term effects of geography: the hypothesis that geography factors affect productivity and development go back long. Spolaore et al. (2013) illustrate the main empirical findings with unified data, regression methodology and country sample.  Table 1, column 1, shows that a small set of geographic variables jointly account for 44% of the contemporary variations in log per capita income. Latitude is the most important factor. Geography indirectly through historical channels affect development (agriculture and domestication).  The neolithic transmission (spread of agriculture): was driven by geographic conditions (climate, continental size, and orientation).  Table 2 illustrates the situation. The geographic conditions account for 70% of the variations in the data of adoption of agriculture. Neolithic transmission contributed to the technological sophistication in the pre-industrial world. 33 34 33 34 Reversal of fortune and the role of institutions 6(18)  Study the direct effects of geography and biogeography in the diffusion of economic development. Diamonds geographic explanation denies a role for differences between populations. Acemoglu, Johnson and Robinson (2002) address the issue whether geography had a direct effect on development documenting a reversal of fortune (change for the worst) among former European colonies (indirect effect). Direct productivity effect of geography is non-persistent in era of technological revolution.  European settlers introduced good (productive institutions) in regions with low mortality and bad institutions in regions with high mortality. An alternative to the institutional explanation to the reversal of fortune is rooted in the composition of the world’s population.  Table 3 shows results related to reversal fortune. When Europe is included in the sample any evidence for reversals of fortune disappears. The coefficient on AD 1500 population density is zero. 35 36 35 36  26/06/2024 Development and the long-term history of populations 8(18)  Recent contributions stress the importance of persistent characteristics transmitted inter-generationally over the long-run. In case of Africa, family structure source of transmission is stronger than environment.  Adjusting for Ancestry: In estimating historical factors effects on contemporary income, researcher accounts for the ancestral composition of current population. Putterman and Weil (2010) examine geographic location vs historical legacy of populations effects. See Tables 4 and Table 5. 37 38 37 38 The role of Europeans and Genetic Distance 10(18)  The role of Europeans: Share of European ancestry settlement in colonies had advantage in development (Easterly and Levine, 2012). See Table 6.  The persistence of technological advantages: the effects of past technological adoption on current technological sophistication are much stronger when considering the history of technology adoption of the ancestors of current populations, using the migration matrix provided. The research point to a key role for persistent traits transmitted across generations within populations in explaining development outcomes over the very long run.  Genetic Distance (FST) and Development: Genealogical links among populations over time and space are at the center of Spolaore and Wacziarg (2009), where they emphasized intergenerationally transmitted human traits as important determinants of development. See Figure 1, Tables 6, 7, 8, 9. 39 40 39 40  26/06/2024 41 42 41 42 43 44 43 44  26/06/2024 The intergenerational transmission of development 15(18) Direct and Barrier Effects 16(18)  1. The mechanisms of intergenerational transmission: The empirical  2. Direct and Barrier Effects: No matter how traits are transmitted, literature on geography and the reversal of fortune and the their effects on economic performance might operate either directly or contributions on the role of ancestor populations suggest that, while as barriers to the diffusion of development. One possibility is that there is significant persistence in development, this persistence is a intergenerationally transmitted traits have direct effects on characteristic of human populations and not of geographic locations. productivity and economic performance.  Following Jablonka and Lamb (2005), the authors consider four  3. A general Taxonomy: The distinction between barrier effects and inheritance dimensions: genetic, epigenetic (changes in organisms), direct effects, and the different forms of intergenerational behavioural, and symbolic. In general, the economic effects of transmission, can be captured in the following matrix: Sum effect? human characteristics result from interactions of biological and cultural factors, with the effects of genetic or epigenetic characteristics on economic outcomes changing over space and time.  In sum inheritance dimensions and their complex interactions can be aggregated in three broad sets: (a) biological transmission (genetic and epigenetic, and their interaction), (b) cultural transmission (behavioural and symbolic, and their interaction), and (c) dual, capturing the interactions between biological and cultural transmission. 45 46 45 46 Conclusion – Messages from the new literature 17(18) The role of historical factors 18(18)  The recent literature on economic growth and development has  The role of historical factors is essential for policy assessment. One could obtain misleading conclusions about the effects of specific policies and increasingly focused on very long-run effects of geographic, historical, institutions when not considering the role of long-term variables. and cultural factors on productivity and income per capita.  Firstly, long-term history, while very important, is not deterministic.  This line of research is reviewed and presented evidence documenting Historical variables do not explain all the variation in income per capita. such effects. We have learned the followings from this new literature:  Secondly, such variations, exceptions and contingencies are unlikely to take place in a purely random fashion but are affected by human actions.  A first message is that technology and productivity tend to be highly  Thirdly, a cautiously optimistic outlook can emerge if we interpret the persistent. A major finding is the indirect and persistent effect of effects of history and relatedness in terms of barriers to the diffusion of prehistorical biogeographic conditions. development and innovations.  A second message is the importance of controlling for populations’  The diffusion of modern development to East Asia, which started in Japan and spread to nearby societies, is an example of successfully overcoming ancestry: long-term persistence holds at the level of populations rather long-term barriers. Another interesting example is the role of Hong Kong than locations. A focus on populations helps to understand both in China’s development. Romer (2009) argues that the fast rate of persistence and reversal of fortune, and sheds light on development. economic growth in China has a lot to do with the demonstration effect of Hong Kong from where modernity was able to spread.  The third message, is that long-term genealogical links across  In conclusion, there is still room for development policies in a globalized populations play an important role in explaining the transmission of world to reduce barrier effects and to accelerate the spread of ideas and technological and institutional knowledge and the diffusion of innovations across populations. The research can help us assess both the economic development. potential and limits of these policies. 47 48 47 48  26/06/2024 Take away  Patel, et al. (2021) suggest that since WWII, developing countries have fallen further behind the rich countries. The phenomenon is called unconditional divergence. Patel aims to explain growth characterised by unconditional convergence. Solow growth model predicts that low-income countries with same technology, but low capital stock and higher marginal product of capital grow faster. Researchers have explored controlling for human capital, investment, financial sector development, foreign aid, trade, etc. to recover conditional convergence.  Nunn (2019) reflected on the state of economic development in both policy world and in Thank You for Your Attention! academia. Development policy tends to use interventions in form of development aid to fix deficiencies in developing countries. The effect can be positive but also have unintended negative consequences. West tariffs, antidumping duties, limits on international labour mobility, tied aid for export promotion are active harmful policies. Academic research emphasise evaluation of interventions and estimate causal impacts. Local context is necessary for inclusive analysis and effectiveness of policies.  Spolaore and Wacziarg (2013) review the recent literature on economic growth and development focusing on long-run effects of geographic, historical, and cultural factors on productivity and income per capita. We have learned? First, technology and productivity tend to be highly persistent. Second, the importance of controlling for populations’ ancestry: long-term persistence holds at the level of populations rather than locations. Third, long-term genealogical links across populations play an important role in explaining the transmission of technological, institutional knowledge and the diffusion of economic development. 49 50 49 50