Development Economics

Study material:


Introduction

Uses general economic theories (micro-/macro economics), but focuses on a specific goal. Development economics has been available at least since Second World War, maybe earlier depending on how you define it.

Income inequality in the world high today. Historically, countries were more equal. After the industrial revolution, a set of countries took off.

Income differences between countries are often compared with the gini index of the world countries, weighted with population.

To catch up, the poorer countries must develop faster than the rich countries. The poorest nations haven't started doing this until after 2000. Reasons: Economic policies better (better control over budgets, monetary policy, exchange rates, reduced state intervention) and terms of trade became better (prices on local resources grew, such as oil prices).

Income diffrences within countries are also important. There are, however, cases where average incomes rise, but also income inequality within the country.

The financial crisis didn't hit as hard in Africa as here. Per capita income stagnated, but not declined (like in Sweden). Could be because of lack of intergration in the world, weren't involved in the bank. Still suffered from export losses, but not all else.

Geographical location also crucial. Easier to develop if you're close to richer or fast-developing countries (dense agglomerations). Also access to sea etc. Some also theorize that economies focused on natural resources rather than manufacturing don't get as many positive external effects on the rest of the economy.


Historical development:
In 1970, East Asia & Pacific and China had a lower share of global exports than Sub-Saharan (0.022 and 0.006 vs 0.033), but in 2007, they had 0.115 and 0.077 while Sub-Saharan Africa just had 0.018. Modern companies and consumers don't buy goods and services (e.g. outsource) from Sub-Saharan Africa, but they do from East Asia and China. Requires reliability, which depends on a strong infrastructure. North Africa has done better, Marocko, Egypt etc, but very little in Sub-Saharan Africa. Foreign investments that come in usually based on oil and natural resources, which doesn't generate much local businesses oppurtunities. Investments in general different.

Poorest area today includes: Sub-Saharan and South Asia, whose development has stagnated the last 50 years.
On the other hand, we have East Asia & Pacific and China which have been growing like crazy.
Life-expectancy in Sub-Saharan Africa has just increased from 41-51 in the last 50 years, while the fast-developing countries have gone from 39-72.


Poverty trap
Many countries are in a poverty trap, that is, a spiral of slow development. Without investments, no growth, without growth, no investments. Must increase K/L. Save and invest enough to replace the depreciation of capital stock, and to get tools in the hands of the new people in the labor market.

Milennium goals, the idea was to give them increased aid, which would start a spiral of fast development. However, today we've seen that even countries with good opportunities, such as a lot of oil, still haven't led to development. Economic environment, policies, corruption etc are also extremely important.

Total factory productivity - Increased output in total. Usually new machines, rationalizations, infrastructure etc(?).

"Natural resource curse" - Sachs and Warner (1995). Sitting on natural resources should be good for you. However, historically, we've seen that natural resource dependent countries have done worse than others.
  • Bureaucratic failures/weak institutions - The government earns money on foreign investmnets, but can't handle this because of corruption, bad investment choices etc. Compared to an development country, eg Norway, this has worked better. But not in for example Zambia. Can't only look at exports, because it can show high values because of foreign companies, but still give low growth because of ineffective institutions.
  • Dutch disease (natural resources leads to currency appreciations, which makes other exporters suffer. could also happen with aid money)
  • Crowding out effects

Washington Consensus - Aimed to handle large budget- and current account deficits, balance exchange rates, stabilize interest rates, reduce state ownership of firms etc. However, difficult because it was directed from Washington but implemented locally. Implementation wasn't succesfull.

Why is productivity

Attempts to go beyond the production function, understand the underlying factors. For example, the Three deep explanations from growth litterature:
  • Institutions - Bad institutions of property rights, security etc might lead to lack of investments etc, and in the end slow economic development. This has been identified by some as the most important problem source of the above three.
  • Geography - Good geographical conditions (access to natural resources, sea, fast-developing countries, agglomerations etc) lead to higher economic development.
  • Openness - Much evidence that openness is correlated with economic growth, such as China's latest development. Is it openness that created environment for growth? Or is it the better macro policies? Looks generally at exports vs GDP. Openness to financial intergration is more controversial, considering that it also makes you more exposed to financial crises etc. We also have Infant industry arguments. How much are government interventions worth? Governments lack information and might be corrupted. Maybe a balance is best.

Prospects for growth in Africa
Johson, Ostry, Subramian (2007)
Looked at the factors that lead to success in some countries. What was the situation when these countries took off? Institutions, economic environment etc. Made a check-list and compared it to current statuses of African countries. One important condition was a focus on the manufacturing sector.

Optimistic conclusions: the situation is about the same in Africa today as when these countries took off. Some concerns are that the environment is different today, such as higher transactions costs and exchange rates. But still positive look overall.


Production function

Y = Output, GDP
K = Capital
L = Labor/Workers

Y = F(K, L)

Constant returns to scale:
F(ZK, ZL) = Z * F(K, L)
E.g.
Z = 2
F(2K, 2L) = 2 * F(K, L)

Capital per worker (k):
k = K/L
Output per worker (y):
y = Y/L

Cobb-Douglas production function:

A = Productivity
F(K, L) = AKα * L1-α 

Constant returns to scale:
F(ZK, ZL) = ZF(K, L)
AKα * L1-α = ZF(K, L)
AZKα * ZL1-α = A * Zα * Kα * Z1-α * L1-α 
...
= Z * AKα * L1-α 
Because F(K, L) = AKα * L1-α we get:
F(ZK, ZL) = ZF(K, L)

F(K/L, L/L) = 1/L * F(K, L)
F(K, L) = AKα * L1-α 
= A(K/L)α * (L/L)1-α 
...
= A(K/L)α 
K/L = k = Capital per worker
Y/L = y = Output per worker
So:
y = Akα 

Diminishing marginal product
F(K, L) = AKα * L1-α 
MPK = (α * F(K, L)) / αK
MPL = (α * F(K, L)) / αL

αL = Small change in L

F(K, L) = AKα * L1-α 
so:
MPK = (α * AKα * L1-α ) / αK
MPK = α * AKα-1 * L1-α  


AKα * L1-α 
α = Share of national income paid to capital store
1-α = Share of national income to ...

Competitive market:
A firm = profit maximizer
Maximize profit (π) = Y - wL - rK
Y = Output
wL - rK = Cost
Max π = AKα * L1-α - wL - rK

First order condition:
(1) απ/πK = AαKα-1 * L1-α - r = 0
(2) απ/πL = A(1-α)Kα * L1-α - w = 0

Y = AαKα-1 * L1-α 
r = MPK
w = MPL

(A) Total payment to K = r * K = ... [Missing notes]

Solow model

Explains:
  1. Differences in income between countries
  2. Change in income over time of a given country
Created by Robert Solow in 1956

Assumptions:
  1. Constant L: No change in labor
  2. Constant A: No change in productivity.
  3. Changes in capital stock (ΔK) can be created by:
    1. Investments (new machines etc) increases capital stock.
    2. Depreciation (broken machinery etc) decreases capital stock

r = investment rate
d = depreciation rate
ΔK = Investment - depreciation
ΔK = ry - dK

Example:
K = 100
r = 20%
d = 5%

ΔK = 0.2(50) - 0.05(100) = 10 - 5 = 5

If in year 0 we have:
Kt0 = 100
Next year, we'll have:
Kt1 = Kt0 + ΔK = 100 + 5 = 105

When ΔK > 0, capital stock is increasing
When ΔK < 0, capital stock is decreasing
At ΔK = 0, we have the so called steady state level. Here rf(K) = dK

In the Solow model, all functions are described per worker:
y = f(K) = output
dK = depreciation
ky = Investments

Combined with a Cobb-Douglas production function:
y = A * K^α
ΔK = r * y - dK
Substitute in y:
ΔK = r * (A * K^α) - dK
We know that at steady state ΔK = 0, so we want:
r * (A * K^α) - dK = 0
Move dK to right:
r * (A * K^α) = dK 
Divide all by d:
(r * (A * K^α))/d = K 
Divide by K^α:
(rA)/d = K/K^α
(rA)/d = K^(1-α)
Put into exponent (1/(1-α)) on both sides:
(rA/d)^(1/(1-α)) = (K^(1-α))^(1/(1-α))
(rA/d)^(1/(1-α)) = K
This is the steady state level of capital (Kss), so:
Kss = (rA/d)^(1/(1-α))

To get the steady state output level (yss) we do:
yss = f(Kss)
yss = AKss^α
Substitute in Kss:
yss = A[(rA/d)^(1/(1-α))]^α
yss = A(rA/d)^(α/(1-α))
...
yss = A^(1/(1-α)) * (r/d)^(α/(1-α))

We see that with larger investment rate (r), larger productivity (A) or lower depreciation rate (d), both the steady state output level of capital (Kss) and of output (yss) will rise. This can be shown in the Solow diagram by shifts in the various curves.

Country comparision:
Let's assume two different countries with same level of productivity (A), depreciation (d) and labor (L) but different investment rate (r) (We're dealing with the long run)

Country i:
yssi = A^(1/(1-α)) * (ri/d)^(α/(1-α))
Country j:
yssj = A^(1/(1-α)) * (rj/d)^(α/(1-α))
Note that only investment rate (r) is different.

yssi / yssj = (ri/rj)^(α/(1-α))

Example:
α = 1/3
ri = 0.2
rj = 0.05
yssi / yssj = (0.2/0.05)^((1/3)/(1-(1/3))) = 4^(1/2) = 2

Predicted difference:
yssi = 2 * yssj
A 45-degree line. However, when comparing with actual statistic data, we generally see that the actual difference is below this line:

Why?

Three possible reasons:
  • The countries defer in productivity (A), Labor (L) or depreciation (d)
  • The countries are not at steady state
  • The countries defer in growth rate levels

So we can conclude that the Solow model cannot predict long-run growth rate at steady state. However, it can predict short-run differences in growth.

Δk = rAk^α - dk
Growth rate of k per worker = Δk/k = (rAk^α - dk)/k = k (should be "k hat", i.e. line above k)
k = rAk^(α-1) - d

If country is at steady state (kss), then k = 0
If k > kss, rAk^(α-1) < d, then k < 0, and k is decreasing
If k < kss, rAk^(α-1) > d, then k > 0, and k is increasing

Let's assume two different countries with same A, d and L:
ki = Poor country
kj = Rich country
They'll have the same production function rAk^(α-1), but same d
The poor can grow faster than the rich: ki > kj

Let's now assume different investment rate (r).
They'll have different production functions riAk^(α-1) and rjAk^(α-1), but same d
ki > kj
because
ri > rj

The model tells us that countries grow differently because they invest differently. But they don't tell us why such differences occur.

There are various explanations:
(1) Saving differences. The same logic can be applied to individuals. Individual income inequalities is based on saving (S) differences.
In a closed economy I = S (the country invests all it saves).

(2) But in an open economy, there can also be:
  1. Foreign investments
  2. Foreign aid
(3) As a third factor, there might be domestic savings

The Solow states that higher S leads to higher I, which leads to higher Y. Savings is exogenous
However, the cause and effect are not necessarily this obvious. Richer countries might save more because they grow faster, not the other way around. In this case, saving is endogenous because its affected by income.

Can we combine the Solow model with endogenous savings?
Why do poor countries have lower savings rate? Possible reasons:
  • All income goes to consumption
    • Lack of care for future, i.e. time discounting/preference (do they want 100 SEK today or 110 SEK after a week? For many poor country the answer is today, because they have to use their money for consuming necessities)
  • Ineffective financial institutions

Differences in saving state:
Let's assume a certain treshold of income and capital at y* and k*
If y < y*, then s1 = r
If y > y*, then s2 = r
s1 < s2
Depending on your income, you save differently.

We have two different functions for the two countries: s1f(k) and s2f(k)
While the poor have a steady state of kss1, the rich will have a higher capital stock at steady state, because of higher savings and thus higher investments.

The poor country is locked into a poverty trap.
Poverty trap: Poor countries save less because they're poor. Small savings make the countries remain poor.
Policy solutions:
"Big push": Injecting large amounts of foreign aid to poor countries to give them a push into fast development. Problems in reality, maybe not all money go to investments. Or investments might not work in practice, because of lack of property rights, institutions etc.


Productivity


Human capital and physical capital cannot explain all income differences between countries. How do we measure the remaining part?

Productivity (A) = the effectiveness with which factors of production are converted into output.
Y = Total output
K = Physical capital (e.g. plant & equipment)
L = Workers in the economy
h = Human capital per worker

Y = A * K^α * (L * h)^(1-α)

We need to determine the relative importance of productivity growth A compared to growth in factors of production K^α * (L * h)^(1-α)

Generally we want per capita output, so we divide by L on both sides, resulting in:
Y/L = A(K/L)^α * h^(1-α)
To simplify, we rewrite:
y = Y/L
k = K/L
Giving us:
y = A * k^α * h^(1-α)

This is essentially:
per capita output = productivity * factors of production

To compare across countries, we divide country 1 by country 2:
y1/y2 = A1/A2 * (k1^α * h1^(1-α))/(k2^α * h2^(1-α))

We can move productivity (A) to the left side:
A1/A2 = (y1/y2) / ((k1/k2)^α * (h1/h2)^(1-α))

How do we define alpha (α)? The consensus is that α = 1/3, which is concluded by various data.
Derived from: 
max K AK^α - rK
We call Y = AK(?)
α * Y/K = r
α = (r*K)/Y
The last step can be measured by data, which in general shows 1/3.

If α = 1/3, we get:
y = A * k^(1/3) * h^(2/3)

Statistically, we can see that countries defer in factors of production and productivity. Countries vary which is relatively the lowest, which tells us if we should focus on the factors of production or productivity to increase the income in the country the most.

Overall, we see that there are large productivity differences between countries.

Important to be aware of statistical problems ("noise" in the data), which might show up as productivity differences but in reality is just bad data. E.g. human capital as in number of years in schooling can still vary because of quality differences in schooling, which means that differences in factor accumulation across countries would be too ssmall and implied productivity differences would be too large.

Even taking this into consideration, it's still clear that productivity differences are large.

Relative contributions of productivitiy and factors of production per capita. Statistically, we see that the richest country in general share the same level of factors of production per worker, while they defer in productivity. For the poorest countries, we see the opposite, that the factors of production 


Let's compare growth differences between productivity and factors of production:
y = A * k^α * h^(1-α)
Rewrite in logarithimic form:
ln y = ln A + α * ln k * (1-α) * ln h


During 1970-2005, the average annual growth rates for the US are:
y = 0.0157 = 1.57%
k = 0.0215 = 2.15%
h = 0.0028 = 0.28%
The reason we take such a long time period is to avoid normal fluctuations, e.g. business cycle.

By ranking countries by growth rate we see that:
Higher growth group: High growth in both production factors & productivity.
Lower growth group: Positive growth in production factors, but negative productivity growth.

If we want to understand why some countries grow faster than others, it seems that we should focus on productivity differences.

Components

Technology.

Technology = How we use production factors to produce output. A determinant of productivity, just as schooling is a determinant of human capital.

Doesn't come for free, requires research and development (R&D, often denoted by gamma, γ). Generally come from rich countries, poorer countries not good prerequisites for R&D. However, can be spread freely, because it's nonrival. Not like machines, that if I have it you can't have it (rival). Ideas, on the other hand, we can both have at the same time. This is, howoever, also a problem for those that bear the R&D costs, because of the free rider problem, which might lead to less R&D being produced in the world than is demanded.

Two ways how a country can acquire new technology:
  1. Innovate (invent yourself)
  2. Imitate (copy from another country)
Poor countries generally focus on number 2.

Two countries, rich country 1 and poor country 2. Country 1 is the leader (innovator) while country 2 is the follower (imitator). Country 2 can copy the tech from country 1. The leader will have a large share of its population doing R&D, i.e. a cost of innovation (γ).

However, we also have a cost of copying, which generally depend on the difference of technology level between the two countries. Let's assume that the cost of copying is a function of the technology (productivity) gap between the two countries: c(A1/A2). We could call this function μ

Technological growth (A) could be described as A = γ/μ * L. 

Conclusions:
  • If the leader is much more technological advanced than the follower, it'll be cheap for the follower to copy.
  • If the leader is only slightly more advanced than the follower, then it'll be costly for the follower to copy.
Follower will have high but declining growth rate in productivity, until they in the long run meet at the same growth rate at steady state (not same level of productivity, but same productivity growth).

Increasing R&D in the leader leads to permanent higher growth rate for both the leader and its followers.

In the real world, not clear which country is the leader. Different countries lead with respect to different technologies. Should not be taken as a literal discussion how the world works.

Barriers to International Technology Transfer:
  • Appropriate technology: Technology developed in rich countries might not be appropritate in poor countries, e.g. aggricultural technology developed for different climates.
  • Capital-biased technological change: Some innovation might only influence productivity if capital level is high.
  • Tacit knowledge: Knowledge to use the technology that cannot simply be taught through manuals. Skills required to use the technology that are not present in poor countries. Generally requires physical presence of engineers with a lot of education.

Efficiency

Zambia has 14% of that in the U.S. Could this be only because of technology differences? Probably not. How many years behind would Zambia have to be for these numbers to make sense? We would get the answer of 294 years. This seems unreasonable considering Zambia still has cars, computers, mobile phones etc.

We want to define efficiency as the effectivenes with which factors of production and technology are combined to produce output. We want to capute anything that accounts for diffferences in productivity other than differences in technology.

A = T * E
A = Productivity
T = Technology
E = Efficiency

To calculate E we must define T as the rate of technological growth and A as rate of productivity.

Comparing US to India, assuming India is 10 years behind in regard to technology level, we would see that the efficiency of India compared to the U.S. is 0.37 (37%?). The technology gap is just 0.94 (6% less than US?).

Conclusion: Unless lags in technology are extremely large, we should focus on efficiency as it seems to be the crucial factor.

Types of inefficiency:
  • Unproductive activities: Resources are not optimally allocated production, i.e. resources are channeled to unproductive sectors rather than productive ones. For example rent seeking or various forms of crime/corruption. Poor institutions are often the source of the problem.
  • Idle resources: Unemployed workers, underutilized capital stock etc.
  • Misallocation of factors across sectors: Resources are used for production but are producing the wrong things (for the consumers). Has been a big problem in Africa. E.g. import substitutions, that raises prices on domestic goods. Good for domestic manufacturers but not domestic consumers. Why does this happen? Must be some kind of market failure that might need to be fixed:
    • Barriers to mobility: People for various reasons don't move to more sectors where demand for labour is high. Example: Bad infrastructure.
    • Wages not equal to marginal product: Wages doesn't move freely to reflect the demand of labour. Example: Agricultural sector, not run by companies but individual families. Family members probably share the income from their labor. This is their "wage" but it would equal their average product rather than their marginal product. This might result in too much labour in agricultural sector. There will be no private incentives to move to other sectors. Solutions: More information?
    • Governments allocate resources rather than markets?
  • Misallocation of factors across firms: In a well-functioning economy, resources will move from less to more productive firms, but market imperfections can prevent this from happening. The marginal product of labour (MPL) and marginal product of capital (MPC) are not equalized across firms, which is inefficient. Possible reasons:
    • Lack of credit: Firms with good projects cannot implement them without a lot of savings. Capital is not allocated where it would produce the most.
    • Government subsidies: Subsidies that help low productivity firms stay in business.
    • Poor labour market: Workers are not channelled to high-productivity firms.
    • Inefficient competition?
  • Technology blocking: Some influential group in society acts to prevent the adoption of new technology.

Why are there differences?

Paper by Hall and Jones entitles "Why do some countries produce so much more output per worker than others?". The conclusion is that the answer can mainly be attributed to differences in productivity, as a result ot institutions and government polities (collectively called social infrastructure).

Main hypothesis: A strong relation between social infrastructure and output per worker.




Per capita output (y = Y/L) can be decomposed into three parts:
  • Differences in capital-output rations (K/Y)
  • Differences in average human capital (i.e. educational attainments) (h = H/L)
  • Differences in productivity (A)
After calculating statistics for these components we reach the conclusion that:
  • Differences in productivity are the most important factor in explaining differences in output per worker for developing countries.
  • Differences in productivity across countries are substantial
  • Differences in physical capital and educational attainment explain a fairly small amount of the amount in output per worker across countries.
Why is this?
Social infrastructure the main reason.

Social infrastructure: Institutions & government policies that procide the incentives for individuals and firms in the economy. E.g. degree of corruption, barriers to trade, contract enforcement.

How do we estimate the effect of social infrastructure? We can define it as an index:

Social infrastructure (S) = (A + B) / 2

A = Index of government antidiversion policies, which would take into account law and order, bureaucratic quality, corruption, risk of expropriation and government repudiation (rejection) of contracts.
B = Index of the degree to which a country is open to international trade.

By doing a regression of this social infrastructure index against per capita output we see that there indeed is a relation. The authors of the paper have focused on instrumental variables (IV) estimates, but we'll look at OLS (ordinary least squares) results which should be sufficient.

The estimated coefficient on social infrastructure (OLS) = 3.29 is highly significant and implies that a 0.1 increase in the index of social infrastructure is associated with an increase in output per worker of about 0.329 log points, about exp(0.329)-1 = 39%.

Conclusion: Differences in social infrastructure across countries cause very large differences in per capita income across countries.

How do we know that there isn't a reverse causual, i.e. that rich countries simply have much better institutions, not that better institutions leads to riches? We use instrumental variables (IV), i.e. extra variables that are correlated with social infrastructure but uncorrelated with the residual E in the per capita output equation.

Choice of instruments:
  • Geographical factors, e.g. distrance from equator.
  • Extent to which the primary languages of Western Europe are spoken as the first languages today.
It turns out that the results are fairly similar, which would not be the case if rich countries would be the cause of better institutions.


Globalization

GDP != GNP

Markets more integrated:
  • A greater ability to move goods and services
  • Financial markets more integrated
  • Labour markets in general more integrated, but perhaps not in African countries
  • Information integration - Internet, cell phones etc
  • Shocks in countries more easily transfer to other countries
  • Asia a much more separate entity, not necessarily influenced by events in the West.
  • Transaction cost much less - ie financial costs and transport costs.
  • Trade policies different, less tariff barriers and non-tariff barriers

Openness

Effects of openness on growth

Definition of openness:
  • Trade: Amount of trade as a share of GDP. Exports (X) / GDP (Y)
    • Problem: For example, even though Zambia have a large export ratio of GDP it might still have many trade barriers. It does trade a lot with the rest of the world, but it might still not be considered open.
  • Sachs-Warner's definitions: Defined a set of indicators that decide openness. Looked at three factors:
    • Tariffs
    • Over-valued exchange rates
    • Export structure: For example, export taxes so that domestic exporters cannot sell for market price on the global market.
There's a general agreement that openness and growth are positively correlated. But is openness a cause of growth?

Different methods:
  • You could compare growth rates of open, less open and closed economies.
  • You could concentrate on changes in a country over time, but there are many other factors to consider. Difficult to decide that openness is independantly the causation of growth, that openness is exogenous. Statisticians make use of Instrumental variables (IV): Tries to explain openness with factors that are obviously not caused by growth, factors such as:
    • Distance to markets: Location compared to other countries, which will obviously affect trade
    • Landlochedness: A land located country will obviously trade less.
    • Country size: Big countries exports a smaller share of GDP than large countries. For example: Sweden export big share of GDP, Japan or US export small share of GDP
The conclusion is that openness is good for growth.


Effects of openness on productivity

Openness gives access to new technology, knowledge etc. One channel is trade. Imports give you access to machines with new technology built in. But not only imports leads to productivity increases, but also exports. Information exchange in general.

Still cause and effect problem. 

Competition as a result of openness is also good for productivity, because companies get an incentive to become more productive. Even if it doesn't lead to productivity increases in domestic companies, bad companies will be knocked out while good and efficient stay. Good for consumers.


Effects of openness on factor accumulation

Mainly foreign direct investments: Foreign companies invest in the country.
But also loans and foreign aid.

Growth with capital mobility in fully open vs closed economies. Small open economies, ie price of capital is given (the small country cannot influence market prices).

Production function for open economy:
y = Output per capita (Y/L)
A = Productivity
k = Capital per capita (K/L)
y = Ak^α
0 < α < 1

Marginal product of capital (MPK) = αAk^(α-1)
Capital price (r) = MPK
Because α < 1, if k goes up, the more MPK decreases.

Because we're dealing with a small open economy, the prices in the country = world market prices:
Capital price (r) = World capital price (rw)
So we get:
rw = αAk^(α-1)
Rewrite:
k^(α-1) = rw / (αA)
k = (rw / (αA))^(1/(α-1))
k = ((αA) / rw)^(1/(1-α))
The capital per capita ratio will depend on world market price (rw). If price of capital goes up in the world, less capital will be invested per capital in Kenya.

Isn't influenced by savings.

We can plug in our k expression in y:
y = Ak^α
y = A(((αA) / rw)^(1/(1-α)))^α
y = A^((1-α)/(1-α)) * A^(α/rw) * (α/rw)^(α/(1-α))
y = A^(1/(1-α)) * (α/rw)
We still see that the main thing that matters for output is rw.

However, we must separate GDP from GNP.
In this case y = GDP
If Savings (S) > Investments (I) we get that GNP > GDP
In Sweden, we've been saving more than we've been investing, trying to pay off dept. Improved our international asset position.

But for a closed economy:
Savings also influence k and y. Savings = Investments

Feldstein-Horiska:
They looked at global data on savings and investments to determine degree of openness, and found that investments are highly influenced by savings.

Correlation between savings and investments:
0 = No correlation
1 = Full correlation. Savings = Investments
In 1964-1980: 0.89
In 1990-1997: 0.60
The correlation has declined, because economies are more open, but there still is a large correlation.

There's also information advantages of domestic investments, so savings might never be equal to investments, but still might decline.

On the whole, developmental economists believe that free trade is good. But financial integration is more controversial. Theoretically should be good to maximize world GDP, but it's more complex, because it also exposes you to international shocks, and you also lose some macro economic tools, such as monetary policies etc.


Opposition to openness

Free trade and capital mobility is good in aggregate terms, i.e. for the whole of the world. But maybe not for each individual sector, area or even country.

In the real world, we have frictions and switching costs, such as when stopping an industry we have a lot of unused machines.

However, if we distort the market we'll have a smaller pie to share.

Aid

Paper: "Aid effectiveness - opening the black box"

Is aid good for growth? Same problems as with openness.

We're talking about aid as ODA (as defined by DAC)

Uses cross-country regression framework to find out if there's a causual effect between aid and growth. Hard to get consensual results.

Problems:
  • If donors would have just given out aid randomly, then it would be easier to do statistical regressions, but it's concentrated to poor countries, which makes it harder to isolate the effects on aid. Also makes use of Instrumental variables (IV).
  • Many other reasons for aid than to increase growth, such as help in catastrophes. Aid comes in to compensate for bad performance rather than to cause growth directly. Aid could in these cases be correlated with poor performances rather than growth.

If you try to redefine aid as the growth-significant part only, then you might be able to isolate its effect.

Seldom people consider aid crucial for growth. The results usually give half a percentage difference in growth or something like that.

Aid is considered a black box. We know nothing of what's going on, but put in money and hope for the best.

The paper tries to go past this by defining the detailed mechanisms of aid:
  1. Donors provide resources (aid) to policy makers (governers in developing countries)
  2. Policy makers implement policies (through governance) using these resources. Sometimes donors more directly influence policies by using conditionalities etc. Controversial if aid is good for governance, if it improves efficiency at government level.
  3. The policies then have various outcomes. This is a major research area.

Important issues:
  • Donor alignment: Donor intentions should be aligned with policy makers, otherwise they could contradict each other with goals that might work against each other.
  • Harmonization: Donor intentions should also be aligned with other donors to avoid conflicting aims.
  • Monetary issues
  • Fungibility: If Sweden invests 100 mil in schools, the government can use 100 mil on military and weapons, because they no longer needs to invest in schools. Probably existing, but not 100%.


Efficiency of free markets

North Korea vs South Korea. Had the same structure and growth until South Korea went for democracy and an open economy.

Perfect competition:
Many small firms that produce very similar goods
  • P = Value placed on a good by society
  • MC = Value of the resources the form uses to produce a marginal unit of the good
Perfect competition leads to P = MC, i.e. the resources are allocated optimally.

Production possibilities frontier - Combinations of goods and services that can be produced if all resources are used efficiently.

When are resources not used efficiently?
  • Market failures
  • Poor institutions (bad governments)

Market failures

When free markets will not produce an efficient outcome. Private firms does not by themselves produce the most efficient outcome but needs government involvement.

Types:
  • Externalities: Effects on third parties not captured by the price of the goods. If externalities exist, there's no reason to expect efficiency of free markets. Might require government regulations (implement laws, impose taxes, subsidize etc).
    • Negative externality: A cost or benefit resulting from some activity or transaction that is imposed or bestowed on parties outside the activity or transaction. Firms only take their own costs into consideration, and these do not reflect all costs. Example: Pollution, noise
      • Real cost to society (SMC) = Cost to producer (MC) + monetary value of externality (ext)
      • The free markets gives P = MC < SMC
    • Positive externalities: For example: Education (Society works better if people are educated, less crime etc.).
  • Public Goods (sometimes considered an externality): Goods that are nonrival and non-excludable. Often needed for the economy to function, for example: National defense, rule of law, infrastructure. Prives firms won't produce the goods because of non-excludability. Likely requires government initiatives.
    • Key features:
      • Non-rival in consumption: One person's enjoyment does not interfere with another's
      • Benefits are non-excludable: Once produced, no one can be excluded from enjoying the benefits.
    • Problems:
      • Free-rider problem: Why pay if you can enjoy the benefits anyway?
      • Drop-in-the-bucket problem. Usually so costly that its provision does not depend on any single person paying, but the whole group.
  • Imperfect competition: An industry in which single firms have som control over price and quantity (raise the market price by reducing their output).
  • Imperfect information: The absence of full knowledge concerning product characterstics, available prices, and so on. For example: Health insurance (the buyer of insurance knows more about his health than the seller), used cars (the seller knows more about the car than the buyer). Solution: Provide institutions for information, while sometimes the market could solve this by itself.
  • Coordination failures: Benificient for everyone if someone just decides what to do. [Related to network effects?] Example: Driving on the same side of the road. Have been used by developing countries in their development strategies, e.g. companies (such as a steel and car producer) afraid of investing because they're unsure if there are builders, but if governments help them get started, the country will be better of. [Related to infant industry argument?]

Poor instutitions

Institutions: The rules of the "game" in a society. The humanly devised constraints that shape human interaction. Consists of:
  • Rule of Law: The quality of contract enforcement, the police
Organizations: The "players", or the humans that interact in society.

Good institutions favor socially beneficial activities (productivity/competition) rather than rent-seeking (seek redundant profit?).

Total production (Y) is determined by:
  • Factors of production:
    • Capital (K) 
    • Labor (L)
    • Land
  • Productivity
    • Technology: Knowledge on how to use the factors of production
    • Efficiency: How efficively the facotrs of production and technology are used.
All of these can be affected by governmental institutions:

Factors of production
  • Physical capital - Direct effects (infrastructure), indirect effects (taxes reduce savings and thus investments)
  • Human capital - Education, health care etc.
Technology:
  • Univirsities
  • Incentive structure
  • Patent laws: Conflict between fixing problems of public goods (inventions) and imperfect competitions (patents creates monopolies)
Efficiency:
  • Taxation
  • Regulation: E.g. environmental regulations
  • Law: Legal structure.

Rule of Law:
Statistically, we can see that rule of law is related to income per capita. Countries with high income generally have better rule of law. Also same relation with factors of production and productivity.

With better rule of law:
  • Capital markets will function better
    • Lenders know they'll get their money back
    • Lower risk premiums
  • R&D will be higher: Inventors can reap benefits of their efforts
  • The investment rate is higher: Owners dare to invest more when property rights are defined
  • Investment ar emore directed at purley productive activities

Why do bad institutions hurt economic growth?
  • Political choices: Side effects from pursuing some other goal, i.e. regulation to stop pollution that might be costly on growth. 
  • Corruption: The extent to which public power is exercised for private gain.
    • Waste of the taxpayers' money. People pay too much/get too little.
    • Policies undertaken simply to gain rents: Create obstacles and spend money on unnecessary things (create roads just to demand toll) just to get bribes.
    • Undermines other institutions, such as property rights.
  • Self-preservation: E.g. dictators that don't want economic growth because they'll lose power.
    • New technologies can create new powerful political groups (e.g. internet can threaten a dictator)
    • More education can introduce destabilizing ideas (political opposition)
    • Openness and international trade can introduce dangerous foreign ideas and values.
  • Government failures: When the result of government action is worse than the free market outcome. THe government might intervene to try to fix a market failure, but might instead lead to even worse results than in the free market. Reasons:
    • Inefficiency: Lack of incentives (no profit-motive, maybe other political goals), incompetence (lack of competition). Nepotism
    • Corruption and over-regulation
    • The market failures could be exaggerated

Examples:
State enterprises: Political control of key firms (banking, heavy industries) which are then run inefficiently.
Marketing boards: Through which farmers had to sell their products. Opportunities for corruption, and didn't give farmers the higher prices they expected.
Trade polities: Import substitution, export 

Even if you have good ideas, it's hard to realize them if the institutions are bad.

Institutions:
Tasks of institutions: Create, regulate, stabilize, legitimize markets.

Several types of instutitions are needed for long-run economic development.
  • Market creating institutions: Requires a good environment, i.e. private property.
  • Market regulating institutions: Every successful market economy is overseen by a wide range of regulatory institutions. Deal with externalities, economies of scale, imperfect competition etc.
  • Market stabilizing institutions: Free economies are not necessarily self-stabilizing. Central Banks, discal policy rules etc. Ensure low inflation, minimize macroeconomic fluctuations.
  • Market legitimizing institutions: Institutions must ensure that we have a legitimate [fair] market. E.g. social protection, insurance, redistribution, conflict management (pension systems, unemployment insurance). Social insurance legitimizes a market economy because it renders it compatible with social stability and social cohesion. Otherwise, there might be a backlash (revolutions etc) which might create economic insecurity and hurt growth.

One size does not fit all. Might not be possible to create "blueprints" that works for all countries. Policies that improve on type of institution might also destroy others which as a whole might not be growth-enhancing, e.g. reform programs like the SAPs (structural adjustment programs).

Institutional improvements:
  • Deal with powerful elites. Either force them out (by growing opposition) of strike a bargain with them.
  • Improve inventives: For example, if promised potential EU-membership when improving rule of law you would see positive effects.
  • Indirect improvements: Press freedom, gender equality, transparency. Might lead to stronger domestic groups that fight corruption etc.

How do we explain the positive correlation between income and institutions?
Causation? Do good institutions lead to higher income or income lead to good institutions? Probably both. The question is which come first, or which should be prioritized.

History also important, 22 of the 30 most corrupt countries in the world are former European colonies:
Colanization -> Bad governments -> Low income

Bad institutions are not always an impediment to growth (Europe/US started out with pretty corrupt governments).

Inequality

Lorenz curve
Kuznets curve
Theil index

Not the main determinant of income, but still 

Income per capita vs income of the bottom quintile shows that there's a clear relation between average income in the whole country and the average income for the poorest group. There are, of course, different types of growth that have different effects on income for the poorest and differences between countries, but in general, to improve poverty you must improve the average income level in the country.

The same thing goes for income redistribution, that it could be especially important for some countries, but for most country poverty reduction is mainly needs growth.

Some studies have showed that inequality is generally consistent during growth, which means that the poorest groups will benefit from increased overall growth.

Sources of inequality
  • Human capital - To reduce inequality, you must build up the poor people's human capital. For example, education of the poor (also good for growth).
  • Regional differences - Partly explain by education, but also location, infrastrcture etc. To reduce inequality, we might require regional policy, extra focus on specific regions.
  • Assets - The rich have better access to assets such as capital and land.
  • Production - Depending on which production dominates we see differences in inequality.

Education
Statistics have shown that the highest return come from tertiary education, rather than secondary or primary, although the latter are probably required for tertiary and good for a number of other things. 

There are two statistically observed effects of education, that could be important for deciding policies for inequality reduction:
  • Generally, lower returns on education are related to lower inequality.
  • More similar levels of education between people are related to lower inequality.

Returns to education is calculated by looking at different levels of education between people and the income they recieve afterwards in combination with the lost years of income during education.

Factor price equalization: The relative prices for two identical factors of production in the same market will eventually equal each other because of competition. That is, cheap labor in poor countries is more demanded than expensive labor in rich countries, which will lead to jobs moving to poor countries until this equalizes.

Marginal products of physical and human capital: Two ways of investing resources: Physical capital (buys machines) or human capital (educates himself). Physical capital will give an even return (marginal product) while human capital have deminishing returns. In poor countries, the return of human capital is higher than physical capital. Growth today is more skill-intensive than it used to be. An explanation why inequality might be less important today in fighting poverty. Also, if investments are not determined by domestic savings but international savings, it might be even less important.

Is taxing the rich a viable solution?
Relationship between income inequality and the desired tax rate: Assumes proportional tax. The persons with median income decide the tax rates. The lower the median income, the higher the tax rate. If inequality goes up, the taxation pressure will increase and the median income will fall. High taxes reduce investments, which might slow growth.

Complex issue:
Inequality might sometimes be good for incentives, but inequality could also lead to increased social tensions.

Mobility also important:
Society should be given a proper education so that they can move up in social groups.
Intergenerational income mobility in Canada: Large mobility between income groups, because the society allows it.


Paper "Inequality among world citizen" (Bourguignon and Morrison):
Tries to calculate gini for world popultion between 1820-1992. The result shows that inequality went up until about 1950 and then stagnated. Maddison computed world GDP over this period, then used income levels (per decile, or actually for 11 income groups, separate for 90-95% and 95-100%) for as many countries they could find. Six regional blocks. Estimates:
Gini, Moderate poverty, Extreme poverty
1820: 0.5, 94.4, 83.9
1950: 0.64, 71.9, 54.8
1992: 0.657, 51.3, 23.7
A period of drastic reduction of global poverty.

Using the Theil index, compared inequality within countries, between countries and total: 
In 1820, Inequality was generally a result of domestic income inequality rather than inequality between countries.
But in 1950-1992, the gaps between countries is now the main explanation of world inequality, while domestic income inequality declined.

Culture

Can culture explain why some countries are rich while others are poor?

Culture: The values, attitudes and beliefs prevelant in a society.

Culture, when defined this way, apparently affects how people act. We want to identify regularities, where the majority of people share some kind of values or beliefs.

Culture can be seen as a set of social norms or informal institutions

"Protestant ethic": Max Weber claimed that a key cause for why northern European economies grew rich from the 16th century onwards was due to the "protestant ethic" (i.e. celebrating hard work and accumulation of wealth)

"Asian values": A fondness of strong and stable leaders, social harmony, collectivism and economic rather than political well-being. Sometimes argued as a reason for the success of the Asian Tiger economies compared to African economies.

However, difficult to quantify and measure, thus hard to prove right or wrong. Without quantification you cannot test different arguments and see which has the strongest support in reality.

Weil defines six cultural traits important for growth:
  1. Openness to new ideas: Learning from others is necessary for growth. Some countries more restrictive than others when it comes to foreign influence. Contrast China (self-sufficient) with Europe (willingness to copy best practices) in 15th century. Or Japan after the Meiji Revolution in the 2nd half of 19th century when they opened up more.
  2. A positive attitude towards hard work: Is the West rich because Westerners like to work hard? Because they have a goal to become rich? In Europe historically, manual labor was bad ("work is for slaves"), however after the protestant reformation "men are created to work" (i.e. if you work hard, you go to heaven). Today, looking at value of work (relative to leisure) vs GDP per capita, we see the opposite, that developing countries value work higher than leisure, while developed countries do not. Yet, this might look differently historically. Overall, difficult to draw conclusions.
  3. Saving for the future
  4. Trust
  5. Social capital
  6. Social capability: The social and cultural qualities that allow a country to take advantage of economic opportunities. Socities more used to large-scaled organizations (firms, beureaucracies etc) are able to take advantage of the market economy (specialization, trade). Also an outlook compatible with empirical science. Social capability speeds up the convergence process (poor countries "catching-up" to rich countries).

Geography

Can geography explain why some countries are rich while others are poor?

Geopgraphy:
  • Climate: Distance to the equator
  • Openness and spillover effects: Sea acess, rivers etc give higher natural openness. "Good" neighbours that can give high "spillover effects" (ie spread knowledge etc)
  • Wealth of natural capital (and the "resource curse"): Resource curse = Countries that rely on natural resources tend to grow slower than countries that do not. How come they're not richer if they can export a lot? Contradiction. One explanation is that the wealth of resources can affect culture (forward-looking behaviour, less need for hard work, lower pressure for modernization because of a steady and effortless incomes). Can lead to overconsumption (excessive lending in anticipation of high future income, a so called "dept overhand"). Secondly, the dynamics of industrilzation, i.e. the Dutch disease can affect other sectors negatively (high incomes from resource exports -> appreciation of the currency -> hurts the manufacturing sector). Thirdly, political factor, if there are a lot of natural resources availlable it can cause corruption, rent-seeking behavior and greed-driven rebellions. Strong institutions before finding the resources might be able to protect against such bad consequences.
  • Institutions and state capacity
Geography is fixed and not something a country can change. Instead you have to adapt to your environment and make the best of the situation.

Distance from equator seems to strongly affect income, both towards to the south and north, which suggests that there is a geographical component. Poorer countries are more often in the tropics, while the temperate zones are richer. Even within Africa, countries get poorer as they get closer to the equator.

Climate affects economies in various ways:
  • Productivity (agriculture especially): Statistically, it has be shown that distance from the equator decides the value produced by agriculture (worse closer to the equator). Also technologies spread much more easily to regions that are similar to the region where they were developed. Hard to use the same machines or agricultural tools in tropical zones as in temperate zones. Sachs (2001) claims that this is the core explanation for income differences.
  • Human input in production (disease, effort level): Today, malaria is concentrated around the equator, which is connected to lower growth. Causes higher medical costs, premature mortality and less productive workers. Also hard to work hard manually in hot climates.
  • Placement of human settlement: 

Other factors:
Access to the ocean: Necessary for countries to be a part of the global economy. Leads to bigger markets, specialization, exploiting comparative advantage and diffusion of knowledge.
Role of neihbours: Can have both positive and negative effects

"Landlocked" countries are countries with no access to the Ocean. In Europe, landlocked countries are still okay because of good neighbours. But landlocked countries with bad neighbours have had a very hard time to grow.

Guns, Germs and Steel: Diamond (1997) claims that geographical facts have determined the fates of societies. Historically, 10500 years ago in the fertile crescent and the Neolithic revolution (humans transformed from nomadic hunter/gatherers into sedentary farmers). This lead to more dense populations allowing more social stratification (specialization, organization etc). Eventually, this lead to capitalism and the industrial revolution. This is an explanation why this happened in Eurasia and not America. Knowledge could spread more easlily between countries in Eurasia, and in the end America & Africa were colonized. But still doesn't explain why Europe and not Asia became rich in the end.

Another explanation for Europe's success is that Europe has a fragmented geography, and fierce competition between many small states. Many relatively small competing states separated by natural barriers, 500 political units by 1600, and 25 states by 1900. Some consider China having four bigger "natural" units, while it was completely united in 221 BC, which might have meant less competition.

Geography fragmentation can be both:
Bad: A unified state implies a bigger market, more specialization, easier spread of ideas and less war
Good: Competition between states, acting as a disciplining device. Can discourage corruption and dictatorship. Small and more efficient governments.

A drastic example: China banned ocean-going ships in 15th century, but when Columbus was rejected by many he could find support form the Spanish. If Europe had been like China, Columbus may bever had set sail.

Different stories:
Diamnod's story (1997): Some societies developed earlier and have since had an advantage.
Acemoglu et al. (2001) story. Colonizes set up different institutions in areas with different geographical characteristics.
Sachs' (2001) story: Some areas have always been poorer, and have therefore had worse institutions.

Obviously, one story doesn't exclude another, and there are many factors determining growth, with causation often going in both ways. The question is which is the most important. Where should money be spent, to give the highest possible return?

Rodrik and Subramanian (2003) combine geography, trade, and institutions in one regression:
Institutions = Rule of Law
Integration (trade) = X-M / GDP
Geography = Distance from the equator
ln(GDP/capita) = alpha + beta0 * Institutions + beta1 * Integration + beta2 * Geography + E

Once the positive effect of institutions is accounted for neither better geography nor more trade is associated with higher incomes.

Institutions seems to be the most important.


Natural capital: The value of a country's
  • Lands (agricultural soil), pasture lands, forests
    • In low tech areas, requires a lot of labor (low-tech subsistence farming), otherwise little (industrial farming).
  • Resources (subsoil), including metals, minerals, coal, oil and natural gas
    • Often requires a lot of knowledge for extraction. Generally little labor.
Physical capital:
Productive, produced, limited used, earns a return, wears out.

The difference is that natural capital is not produced. Instead, it's used to produce physical capital, with the help of human capital.

GDP (Y) = Sum of goods/outputs. Output is produced by combining human capital (labor, K) with physical capital (K).
So:
Y = f(L, K)

Land: A lot of workers, farmers that produce for themselves.
Resources: Concentrated ownership, few workers.

Different channels:
Market - Forward linkage: Local supply of other goods. Production for another company(?) Products used locally. 
Market - Backward linkage: Local demand of output. If products are bought abroad, there's no local demand.
Political: Increases in government budget, tax revenues.

In cross-country comparison there's a negative relationship between GDP and natural resources. How come?

Probably more channels:
Market - Dutch disease: When exporting resources, you appreciate the exchange rate. This makes it more difficult for the manufacturing sector (often big in developing country) to export, which causes losses to GDP.
Political - Government behaves myopic: Over-consumption of budget.
Political - Corruption: The increase income doesn't lead to more income for the population but disappears in corruption.
Politlcal - Conflicts: For example, rebels control certain areas of the country, financing themselves by controlling natural resources. Or rebels attack oil fields.
Pollution

Mehlum, Moene and Torvik (2006) states that the negative correlation between natural resources and GDP depends on institutional quality. No relation if there are good/strong institutions, but negative if there are bad/weak institutions.

Unclear policy implications: Should countries avoid finding natural resources??

Example of within-country comparisons studies:
Study 1:
Nigeria. What is the impact of natural resources (oil)?
How would GDP evolved in absence of its oil endowments?
Counter-factual: Is there a situation/country similar to Nigera but without oil?
Cross-country comparison: A neighbour. Might still be too different for direct comparisons.
Within-country comparison: Nigera before oil discovery(?), or different regions within Nigera. Hard to control for Dutch disease, civil wars or central government behavior (as they affect the whole country)

Study 2 - USA:
Backward linkages, Black et al (2005)
Price of oil goes up -> demand of coal increases (substitute goods) -> price of coal goes up -> demand of coal workers goes up -> earnings in mining sector goes up.

Impact on non-mining sector?
Compare coal-rich to coal-poor sectors (counties)

Does econometric comparison on the data. We see that the employment in non-mining sector also increases as coal prices increases. Difference between traded/export-driven and local/non-tradeable sector (construction, services, retail). Traded sector not so affected, but local sector strongly so. The bust is worse than the boom.

Tradable sector goes down if workers move to non-tradable or exchange rate appreciates

Study 3 - Peru:
Backward linkages, Aragones and Rud (2009)
Compare households that live close to the mine and those living far away.
If close to the mine:
  • Prices of local goods go up
  • Poverty goes down
  • Maybe environmental damages? However, we see that health problems decrease, must mean that people can afford to buy more medicines and that possible pollution etc is negligable for the local people in this time period.
  • Crime stays the same

We find evidence for backward linkages in many countries.


Study 4 - Brazil:
Political - Public expenditure mechanism, Caselli and Michaels (2009)
Does the finding of oil have a positive effect on household welfare? Or is there a natural resource curse?
Is there evidence of increases in public budget and expenditure as a result of finding oil?

Oil production goes up -> Tax revenues goes up (oil is taxed) -> Government expenditures goes up -> What happens to the households welfare?

We must exclude all other channels to focus only on the political.
That's why the pick offshore oil fields, so that it doesn't affect the local market. The only way the oil fields interacts with the households is through the government.

Results:
  1. Oil production goes up -> Tax revenues goes up (oil is taxed):
    1. Strong positive relationship
  2. Tax revenues goes up (oil is taxed) -> Government expenditures goes up:
    1. Strong positive effects. Government spends more impact on housing and infrastructure etc.
  3. Government expenditures goes up -> Household welfare:
    1. Strange result - The population that lives in good areas decreases. How come, if government spendings increase?
    2. Some positive effects on education.

Summary:
Positive impact on gov revenues
Positive impact on gov expenditure
Disappointing impact on HHs welfare measures

There's a miscorrespondance between twhat the government report it's doing, and what is actually happening.

Study 5 - Brazil:
Political - Public expenditure + election mechanism, Moneiro and Ferraz (2009)
Is there evidence of misreporting/corruption in areas with oil revenues?
Do politicians use natural resource revenues to buy wealth or their own re-election?

Buying re-election: Visible changes just before election. Patronage, give benefits to friends or supporters. Vote-buying: Give someone money to get a vote (that's why it shouldn't be public what someone votes for, so it cannot be controlled).

Are politicians good or bad?

Results - Are politicians "bad"?:
  • No impact on the propability to be reelected (per royalty payment change).
  • Assumption that higher average of years of schooling of politicians means better politicians. This decreases, which is bad results.
  • Campaign expenditures (posters etc). A strong increase in median campaign expenditures.


Study 6 - Colombia:
Political - conflict, Angrist and Kugler (2008)
Is there evidence of increases in conflict when finding natural resources?
Colombia major exporter of coca to the US.

What decides where it's good to produce coca? Climate, soil, politics or infrastructure

Compare coca producing areas with non-coca producing areas.

Results for coca producing areas:
  • Positive impact on the log income of farmers (they grow coca and earn more money). But no impact at large for the population.
  • Increase in violent deaths, but no difference in diseases. This suggests increase in local fights.
Net impact of increase in coca production can be considered negative.


Study 7 - Colombia:
Political - Conflict, Dube and Vargas (2008)
Is there evidence of increases in conflict because of coffee or oil production?

Why do people become rebels? It's like a job, they get food, living, sometimes even wages. Also possibility to threaten people, earn money. Or even belief in political power. Big organizations.

A possibile relationships:
Price of coffee goes up -> more people become farmers
Price of coffee goes down -> more people become rebels

Different areas that produce coffee and that have high oil production (measured by closness to oil pipes).

Results for coffee producing municipalties(??):
  • Decrease in guerrilla attacks, paramilitary attacks, clashes and casualities.

Results for oil producings:
  • Increases in some types of violent conflicts.

Putting the two things together:
Positive impact of oil production on paramilitary attacks
Negative impact of coffee production on all outcomes

Main reference: Michaels (2010) "Challenges for research in resource-rich countries"

[TODO: Check missed excercise lecture]


HIV/AIDS

[TODO: Check missed lecture notes]

Dependancy ratio - People of working age relative to people of non-working age. A ratio of 1 would mean one worker per non-worker, which is very high. Index calculation: Below 15 and over 64 divided by those aged 15-64.

Statistics on HIV available from: US Aid - Demographic and health survey

HIV positive women generally have more children in younger years but later in negative years than those that are HIV negative.
There might be behavioural effects on general population.

Different opinions in litterature:
Young (Year?) argues that HIV causes you to have less kids because you want to avoid infecting people/your children with HIV.
Kalemli-Ozcan (2006, 2010), Lorentzen et al. (2008): Young is wrong, fertility increases because of adult mortality
Both mechanisms might actually be true.
Durevall and Lindskog (2006) in Malawi: HIV reduces fertility slightly due to both biological and behavioral reasons (The strong negative impact on fertility that Young reports has not been reconstructed, but a slight effect is visible). The effect is small because older women have less children, younger women have more children (or give birth earlier). Dependency ratio does not improve.

Education:
Reduced life expectancy reduces expected income. Many kids repeat or drop out from school. Why go to school if I will die early? (Many people even overestimate their likelyhood of dying early).

Education that informs of sexual diseases might be important for prevention, but are lacking in many areas in practice. Sex is somewhat tabu in many areas, and also difficult to influence in a society where you generally marry and have kids young, which makes it harder to advocate condom usage or sexual abstinence in younger years. Also illness and death among teachers (and incentive to not report it), and bad school management.

Fortson (2006): Less average years of schooling in countries with higher rate of HIV
Beegle et al (2006): Child in Tanzania who loses mother early in life has one year less of schooling and is 2 cm shorter.

Income distribution and poverty
HIV/AIDS might raise poverty even if impact on GDP is small (Salinas and Hacker, 2006)
Many households that become poor will become chronic poor.
UN millennium goals of reduced poverty are probably in jeopardy in several countries due to AIDS.
Strong income inequality, a few who are very rich.
Food price inflation might be more important.

To analyze effects on income and distribution you must look at the household composition and follow them for a number of years. The solution has been to support households that takes the hardest hit, when both parents have died etc.


Globalization paradox - Dani Rodrik

Financial globalization
"Tobin tax" and back to Bretton Woods?
Politicians should regulate bankers rather than the other ways around.
Find a balance between markets and regulations (which are both imperfect).



The Plundered Planet - Paul Collier

Industrialization not an option for developing countries, because the RoW is already so far ahead in efficiency. Must instead develop through natural assets. However, this requires functional institutes  regulating property rights.

Propinquity = We care for the people close to us. Leads to less sharing with the rest of the world. Also leads to overconsumption today, since we don't know the people of the future.

Natural assets curse?

Negative effect of natural assets:
Sierra Leaon - A lot of diamonds, but mainly lead to civil war
Nigeria

Positive effects of natural assets:
Botswana & Norway

Difference between agricultural commodoties and non-agricultural commodities (e.g. oil) because the first are renewable.

What differentiates the prospect of Middle-East compared to Africa?
Good governance, or the harnessing of natural capital in productive sectors like infrastructure.

"Natural assets are living dangerously: lacking natural owners they are liable to be plundered"

The value of natural assets should be captured by government, not third-parties.


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