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ECON 313 Supplementary Required Readings

Topic I: Introduction

1. Economics of Development and the Development of Economics

 Article starts with a humorous way of saying developmental econ is lower than math-econ.
However, model making is something that developmental econ has also started incorporating in the
last few years. The article’s purpose: teach historically dumb generations about the contributions of
developmental econ
 Developmental Econ really took off only after 1940 when Rosenstein-Roden wrote a paper about
the development problems of southeastern Europe.
 Developmental Economics (DE) has always realized the limited usefulness of standard economic
models, but since they disrepute the traditional Walrasian Economics that believed in perfect
markets, pure competition, irrelevant transaction costs and so on. In the process, DE became
marginalized.
 During this recapturing by Walrusians, their own school was breaking because economists were
coming up with models of imperfectionism.
 International agencies were pushing for poor countries to adopt market fundamentalism, but it was
increasingly disliked.
 Efficiency wage theory: 1950s and 60s developmental economists started to study poor countries to
explain the coexistence of significant positive wages and unemployment. One theory by Leibenstein
and Mazumdar said that when wages were too low, productivity of labourers were also too low for
employer to hire.
 This model was one of the first to illustrate that if price affected things more than market functions,
then one gets beyond the confines of Walrusian equilibrium.
o Corollary: Equity and efficiency are not separate. Equitable distribution of land for example,
leads to reduction of malnourishment of currently unemployed, increasing out and thus
economic growth.
 Another theory by initial DE was that positive externalities had a large impact
 Old way of thinking categorized externalities into 2 types:
o Technological: Spillovers from one firm’s investment onto the productivity of another firm’s in
the same sector.
 Learnings were based by doing, for eg, the infant industry argument
 This theory lacked in that it underestimated the difficulty of identifying the few sectors
and locations where the spillover effects may be large and particularly difficult to
internalize
o Pecuniary: money related externalities, revolving around market coordination
 When domestic markets are small (and foreign trade is costly), simultaneous expansion
of many sectors can be self-sustaining through mutual demand support, even if by itself
no sector can break even
 This thought process died out because policy measures found it hard to make
microeconomic activity supply aggregate benefits.
 Multiple Equilibria and Hysteresis:
o The 1950s development theory started with a presumption of multiple equilibria and posed the
essential problem as one of escaping a "low-level equilibrium trap" to a better higher-income
equilibrium.
o One model focused on economic-demographic interactions of income, savings and endogenous
population growth.
 This model emphasized historical and initial conditions of the economy
o The other model focused on increasing returns which generate strategic complementarities
among sectors, through a process of "cumulative causation"requiring a coor dinated "big push"
for industrialization
 This model focused on expectations around high-investment
o Both models are shown to depend on some parameters of the economy (like the discount rate
and the speed of adjustment). In all these models, the desirability of adopting a particular course
depends on how many others are expected to do the same.
 Persistence of Dysfunctional Institutions:
o Focus on long-lasting institutions in poor countries which block economic progress
 Property-rights advocating economists deny this, saying governments and institutions
evolve as new benefit-cost possibilities arise. Recently though, this has been disproved
o Transaction costs (increase entry and exit barriers) and increasing returns from adopting a
particular institution (may have useless institutions enlarge) are the issues
 Principal-Agent Models and Missing Markets:
o Stiglitz's (1974) model of share-cropping viewed it as a compromise between risk and work
incentive effects
o DE economists hate capital market imperfections
 Targeting in the Theory of Economic Policy
o Popular arguments for protection were countered early on by arguments like:
 “if curbing luxury consumption is the objective, the first-best policy is to have a
consumption tax on luxuries”
 “if reducing economic inequality is the objective, progressive income and wealth taxation
may be better than tariffs on luxury imports”
 “If infant industries are not getting off the ground, subsidize credit, not protection”
o General principle: intervention is to be directed as closely as possible to the source of the
distortion, to be applied to the prices the consumers (not the producers) face.
 DE has contributed to Econ as a whole, for eg: the theory of commodity price stabilization has
contributed to the more general literature on risk and saving
 Idea of the paper: As economic theory has turned more toward the study of information-based market
failures, coordination failures, multiple roles of prices etc, it has inevitably turned to questions that
have long exercised development economists. Market rivalry (even when markets work highly
imperfectly) and the pitfalls of reflexive interventionism are what DE advocates for

2. Poor But Rational

 Neo-classical decision maker: unboundedly rational, forward-looking, and internally consistent


o Ted Schultz said “poor but efficient” - the poor certainly have bad lives but there is nothing
special about them; they just do the best they can under the difficult circumstances life has
placed them in; their fields are as productive as they can be
 New Paradigm “poor-but-neoclassical” means poor but not necessarily efficient. Best way to explain
this is by 2 approaches: insurance and agricultural investment
o Insurance:
 The poor being poor highly value insurance, which makes it easy to implement. The
close knit community living in turns helps insurers know bona fide claims from
forgery because village word travels fast
 In a village, part of the risk is common to all families: If there is a really severe
drought, it affects everyone. But part of the risk is specific to the circumstances of
specific households: for example, someone's cow may die. So within a village, the
poor should be able to insure each other against the part of the risk that is common
across households
 So in a way, the poor are efficient. People insure each other.
 This was later disproved though, because household members stop working in
anticipation of insurance, then that is inefficient. Village had to strike balance
between need for insurance and necessity of giving people incentive to work.
 If individuals have good information on what others are doing and have a strong
reason to stay together, they should be insuring each other. Family is an example: its
members know each other, expect to stay together, and should therefore be able to
achieve an efficient outcome, at least within themselves.
 This however is also not efficient, since family members can hide consumption from
each other.
o Agricultural investment:
 If this is to be efficient, it shouldn’t matter who operates on the land, just that the
operation is efficient and profits are shared. However, Indian farmers for example,
showed 30% more productivity on their own land than on land which was
sharecropped.
 In this world, productivity should be maximal on owner-occupied land, at least when
the necessary investments are not larger than the maximum an individual can borrow
 Facts however negate this. Pineapples, although yielding 531% ROR, are not
preferred to traditional crops that yield only 24% because pineapples growing
requires large initial investments.
 The poor are wary of undertaking investments because they don’t want to lose
their land.
 Lack of access to credit prevents fertilizer use. Learning about a technology requires
some experimentation, which needs effort, and presumably some losses in the first
years. If the farmer knows that after this initial investment, he will only be able to use
fertilizer on a very small scale for a long period of time (because he cannot have
access to the funds to do it on a large scale), he might rightly consider it worthless to
do the initial investment to master the technology
 Learning to use fertilizers as the main barrier for farmers is also, however, not
plausible, because in a study where select farmers were given training, only 37%
used it thereafter, and after 3 seasons, only 29%
 Another counter explanation is that farmers are not even able to save the little money
for fertilizers, and don’t want to deviate from business as usual. In this case, teaching
them to use fertilizers isn’t the solution, but teaching them about savings is.
 Experiments on this also didn’t give concrete evidence
 Overall, it is clear though that inefficiently low level of fertilizer investment in this
region cannot easily be accounted for in the “poor but neo-classical” paradigm. The
behavior of the decision makers is more important.
 Behavioural economics is the new way of thinking, seeing that models cannot explain everything.
This thinking assumes the following about people:
o Their ability to analyze information, compute, and remember is limited.
o They do not always make choices that are in their best interest in the long run.
o Finally, they are not purely self-interested.
 There may be more to learn about human behavior from the choices made by Kenyan farmers
confronted with a real choice than from those made by American undergraduates in laboratory
conditions
 Applying the theories designed for developed countries to the analysis of the decisions of the poor in
developing countries is fruitless. What is needed is a theory of how poverty influences decision-
making, not only by affecting the constraints, but by changing the decision-making process itself.

Topic 2: Poverty and Inequality

1. Fact checking universal basic income: can we transfer our way out of poverty?

 One estimate, generated by Laurence Chandy and Brina Seidel of the Brookings Institution,
recently calculated that the global poverty gap — meaning how much it would take to get everyone
above the poverty line — was just $66 billion. That is roughly what Americans spend on lottery
tickets every year, and it is about half of what the world spends on foreign aid.
 This doesn’t mean that just $66B is required to alleviate extreme poverty
o You have to ask: Who are the poorest? How much does each person need?
 Several ways to know the amount: Universal Basic income targeted using basic proxy-means tests
(PMT) or some other categorical PMT.

 Observations:
o Universal Basic Income (UBI) reduces the Headcount Index by 14.5 percent
o Categorical targeting (see the last row) performs very similarly to UBI.
o With enough money to eliminate poverty with perfect information and no transactions costs, the
best targeting tools we have available to us reduce the Headcount Index only by 23 percent.
o The difference between the performance of UBI and the best targeting method looks small. But,
that is a little deceiving: note that in a country of 25 million people, such as Cameroon, reducing
the Headcount Index from 17.1% to 15.4% allows close to half a million people escape poverty.
Given the budget neutrality of this result, you may still choose to target transfers to the poor
 This table tells us that either our transfers don’t work, or that given the inefficiency of targeting
measures, UBI is a better tool.
 UBI however, is very misleading because everyone takes home the same transfers, which is about 2
trillion dollars needed for the entire world to get out of extreme poverty.
 Therefore, some other targeting measure has to be found. Geographical targeting (by district,
household etc), for example, showed about twice as good a result in reducing poverty in Cambodia
as compared to UBI, which cost 20% more spending than the targeting.

2. The Future of Not Working. (This whole article is a running commentary by former NYTimes reporter
Annie Lowrey. She’s writing a book on universal basic income)

 (Starts with a long intro about how the non-profit in question, ‘GiveDirectly’, will give the 220
people in a village 22$ a month, for 12 years, alleviating them from extreme poverty. They have
done this for 40 villages in Kenya. They are based in NY, and are carrying out a UBI scheme)
 Left wing countries like Canada, Scotland and Netherland are pushing for UBI these past years
because it is a simple and cost efficient way of pulling people out of poverty (GiveDirectly argues)
 Automation and artificial intelligence can and will wipe out jobs, so although Silicon Valley giants
are pushing for UBI, they are doing so knowing that the people alleviated today will be left without
a job anyway by 2050
 GiveDirectly has attracted $24m, mainly from people who want to test the concept of a basic
income. Experiments have happened in this field before, but have never tackled an entire village
and for an extended period of time
 Founders of GiveDirectly were Harvard development students who learned from overseas projects
that cash was more valuable than the common in-kind charity, to the villagers in poor areas. “If
you’re hungry, you cant eat blankets”
 At the time of these experiments, there was virtually no banking system. Then In 2007, Vodafone
and the British Department for International Development together built a system, called M-Pesa,
for Kenyans to transfer actual shillings from cellphone to cellphone. An estimated 96 percent of
Kenyan households use the system today.
o This system greatly aided the process of aiding groups with money
 Original founders gave random Kenyans $500 out of their own pocket. Children were 42% less
likely to go hungry in a day and domestic violence reduced. The $5000 distributed and used so well
boosted confidence in the start up
 At first, GiveDirectly handed out large lump sums, generally $1,000 spread into three payments
over the course of the year. The nonprofit’s field officers would locate low-income villages in
Kenya, then find the poorest families in each individual village using a simple asset test (whether a
family had a thatched roof or not). The field officers would introduce themselves to the town elders,
explain their purpose and return to provide mobile phones and training to recipient families. Then
GiveDirectly would push a button and send the money out.
 Villages visibly flourished after a few years. Ponds, lakes, well fed cows, etc. Drunken men whose
wives had left them started businesses and got cows and drank less.
 Problems with this scheme on the recipients:
o Other villagers thought people who got money were biased. They threatened to burn house down
of selectors.
o Some people with transfers were cheated by others. “I gave my phone to xyz to get cash from
the M-Pesa. Never returned”
 Problems with the implementation of this scheme:
o Many popular forms of aid have been shown to work abysmally. PlayPumps — merry-go-round-
type contraptions that let children pump water from underground wells as they play — did little
to improve access to clean water. Buy-a-cow programs have saddled families with animals
inappropriate to their environment. Skills training and microfinance, one 2015 World Bank study
found, “have shown little impact on poverty or stability.”
o Non-profits do little, have no impact assessment of their work, and the aid is useless. People get
free Toms slippers from NGOs and just sell them in markets. 94% of aid is non-cash
o Cash however seems harder to market. It is not easy to persuade American oligarchs, British
inheritors and Japanese industrialists to fork over their money to the extremely poor to use as
they see fit. “There’s the usual worries about welfare dependency, the whole ‘Give a man a fish’
thing,”
 This is plausible for workers in the developed countries, not for the hunger-stricken kids
who don’t have the luxury to fall back on a safety net and eat off donations.
o The idea of showering money on poor, unstable countries is detested. “The visual of putting a
pill in a kid’s mouth is so much more attractive to people,”
o Institutional inertia: “Our mandate is Health so cash transfer are not our priority”
 “It’s easy to muster evidence that you should be giving cash instead of fertilizer”. “The harder argument
is: You should shut down your U.S.A.I.D. program, which is bigger than the education budget of
Liberia, and give the money to Liberians. That’s the radical critique.” If cash transfers flourished,
“the whole aid industry would have to fire itself.”

3. Policy Brief: Impacts of Unconditional Cash Transfers

 While the previous article ‘Future of not working” described the GiveDirectly M-Pesa initiative in
words, this report is a more formal representation with stats and figures of the same initiative. To recap:
GiveDirectly selected random areas, without any bias regarding business owners or not, male or not etc.
They then transferred money through M-Pesa, and asked the residents to spend it as they pleased.
Results were recorded, and 3 parameters were isolated:
o Recipient was husband or wife?
o Recipient got a lump sump or installments over 9 months?
o Size of transfer, either $300 or $1100?
 Results of the initiative summarized:
1. Transfers allow poor households to build assets - These increases occurred primarily through
home improvements and increased livestock holdings: households receiving transfers are 23
percentage points more likely to have an iron roof as opposed to a grass-thatch roof, and
livestock holdings increase by 51% (PPP USD 85)
2. Transfers increase consumption - Recipients spend cash transfers on a very broad variety of
goods and services, particularly food, medical, and social expenses.
3. Transfers reduce hunger - With an increase in food consumption by 20%, significant reductions
in hunger and food insecurity were observed, e.g. a 30% reduction in the likelihood of the
respondent having gone to bed hungry in the preceding week
4. Transfers do not increase spending on alcohol and tobacco - no evidence of increased
expenditure on temptation goods such as alcohol, tobacco and gambling.
5. Transfers increase investment in and revenue from livestock and small businesses
6. Transfers increase psychological well-being of recipients and their families - Unconditional cash
transfers lead to a 0.18 SD increase in happiness
7. Transfers affect many, but not all, indicators of poverty - little to no impact found on health or
education over the time horizon considered in the data. Suggestive evidence found that cash
transfers reduce domestic violence and increase female empowerment in both recipient
households and other households in the same village
8. Specific design features of cash transfer programs differentially affect impacts and imply policy
trade-offs –
 Monthly transfers have stronger effects on food security than lump-sum transfers, while
lump-sum transfers show larger effects than monthly transfers on particular types of
assets such as metal roofs.
 Large transfers produce larger treatment effects than small transfers on most outcomes,
but with decreasing marginal returns.
 No significant differences in outcomes when making transfers to the female vs. the male
in the household.
 Together, these results suggest that when policy-makers consider different design choices
for cash transfers, they may come to different conclusions depending on how they weight
different potential outcomes relative to one another

Topic 3: Growth Theories Part 1 – The Solow Model

1. Pro-Poor Growth: A Primer


 Pro poor growth has two definitions:
o A situation in which any distributional shifts accompanying economic growth favor the poor,
meaning that poverty falls more than it would have if all incomes had grown at the same rate
 Growth rate of income is the focus here
o Poor people benefit in absolute terms, as reflected in an appropriate measure of poverty
 This focuses on rate of change of poverty itself
 How is pro-poor growth measured?
o Real consumption and income
o Main problem is how to decide the poverty line
 The line can be absolute (one fixed income) or relative (a line that varies with mean
income; this method can show rising poverty even when the levels of living of the poor
have in fact risen. )
o After determining line we use the headcount index (how many are below the line)
 This tells us nothing if the poorest person becomes poorer
o Poverty gap index takes care of this problem by reflecting avg levels of living of the poor, but at
the same time cannot tell about the distribution among the poor
o Watts index, very popular, penalizes inequality amongst the poor.
o Growth Incidence Curve: measures impacts of aggregate economic growth over a wide range of
the distribution, giving the rate of growth over the relevant time period at each percentile of the
distribution. Thus at the 50th percentile, the figure gives the growth rate of the median income
 A growth process is said to be “distribution neutral” if the growth incidence curve is
perfectly flat, in that incomes at all percentiles grow at the same rate, leaving inequality
unchanged
o Weighted mean growth rate: obtained by weighting each point on the growth incidence curve
with the weights appropriate to the specific measure of poverty used
o Lorenz curve
 Studying the impact of growth on poverty means using:
o National stats
o Surveys used when poverty stats are being determined
 This has the added advantage for aligning growth stats perfectly with the timeframe of
poverty stats.
 Disadvantage is that there can be an overestimation of the correlation between poverty
reduction and growth
 Is growth typically pro poor?
o A common empirical finding in the recent literature is that changes in inequality at the country
level have virtually zero correlation with rates of economic growth
o Problems with this evidence:
 Timelines don’t correlate
 An inequality index such as the Gini index may not reflect well how changes in
distribution have impacted on poverty
 People could gain and some could lose creating net effect, a misleading effect, of 0
o Typical example: 95% confidence interval implies that a 2% annual growth rate in average
household income will bring anything from a modest drop in the poverty rate of 1% to a more
dramatic 7% annual decline
o Answer to this question is really “depends”. Growth tends to distribution neutral while poverty
doesn’t.
 Two sets of factors can be identified as the main proximate causes of the differing rates of poverty
reduction at given rates of growth:
o The Initial Level of Inequality:
 While the evidence suggests that one cannot expect absolute poverty to fall without
positive growth, the higher the initial inequality in a country the less the gains from
growth tend to be shared by the poor
 The argument works in reverse too; high inequality will help protect the poor from the
adverse impact of aggregate economic contraction
 Poverty responds slowly to growth in high inequality countries; or (to put the same point
slightly differently) high inequality countries will need unusually high growth rates to
achieve rapid poverty reduction
 Poverty is relatively unresponsive to growth in specific countries
 For high inequality countries, growth will be quite a blunt instrument against poverty
unless that growth comes with falling inequality
o How Inequality Changes Over Time:
 Geographic locations of poor people are extremely important in determining whether
aggregate growth affects everyone equally
 Higher growth in a number developing countries has come with widening regional
disparities and often little or no growth in lagging poor areas
 Making growth more pro-poor requires a combination of more growth, a more pro-poor pattern of
growth and success in reducing the inequalities that limit poor people from sharing in the opportunities
of a growing economy.
 Is poverty an impediment to future growth?
o Poor have no money > cant partake in investment > declining marginal product > lower rate of
growth
 Things govt can do for pro-poor growth:
o Help poor people acquire the skills and maintain the good health needed to participate in the
growth process
o Help them stay out of poverty in long term

2. Savings Economics from Neoliberalism

 Neoliberalism: markets over government, economic incentives over social or cultural norms, and private
entrepreneurship over collective or community action
 Started by Charles Peters in 1982, but the people whom he quoted as exemplifying neoliberalism were
against markets and for big governments. Today, it has radically changed to the opposite, and is often
hated upon because of the failures associated with it
 The use of the term “neoliberal” exploded in the 1990s, when it became closely associated with two
developments, neither of which Peters mentions:
o One was financial deregulation, which would culminate in the 2008 financial crash
o The second was economic globalization, which accelerated thanks to free flows of finance
 The problem isn’t markets, private entrepreneurship, or incentives. Their use lies behind the most
significant economic achievements of today. The problem is that mainstream economics dwells too
much into ideology, constraining the choices that we appear to have and providing cookie-cutter
solutions
 Take property rights for example. Property rights are good when they protect innovators from free
riders, but they are bad when they protect them from competition
o In China, they did not switch directly from state owned to private, rather they applied a mix of
policies.
 For example, Household Responsibility System gave farmers the incentive to invest in
and improve the land they worked on, while obviating the need for explicit privatization
 Special economic zones provided export incentives and attracted foreign investors
without removing protection for state firms.
 Western policy cannot be applied everywhere. You cannot say, although it may be true, that Chinese
policy will converge on Western-style institutions to sustain its economic progress
 What, after all, are Western institutions? The importance of the public sector, for example, in the club of
rich OECD countries varies from a third of the economy in Korea to nearly 60 percent in Finland. In
Iceland, 86 percent of workers are members of a trade union; the comparable number in Switzerland is
just 16 percent.
o The idea that any one of these models of taxation, labor relations, or financial organization is
inherently superior to the others is belied by the varying economic fortunes that each of these
economies have experienced over recent decades
 Economists create models and improve them. But progress of model making is measured not by settling
on the right model or theory to answer such questions, but by improving our understanding of the
diversity of causal relationships
 Economists tend to be very good at making maps, but not good enough at choosing the one most suited
to the task at hand.
 Economists’ contributions to public debate are often biased in one direction, in favor of more trade,
more finance, and less government. That is why economists have developed a reputation as cheerleaders
for neoliberalism
 Globalization good or bad?
o Most economists will say good, quoting China, Japan, Chile and Korea embracing globalization
early and benefiting from it. What they will not say is that neoliberal principles were violated in
the process.
 South Korea and Taiwan heavily subsidized their exporters, the former through the
financial system and the latter through tax incentives.
 China shielded its large state sector from global competition, establishing special
economic zones where foreign firms could operate with different rules than in the rest of
the economy
 None, with the sole exception of Chile in the 1980s under Pinochet, followed the
neoliberal recommendation of a rapid opening-up to imports. In all cases, governments
intervened
 Countries like Mexico who liberalized trade (NAFTA) and financial systems and the
whole neoliberal package didn’t have much economic growth
 Globalization has to be saved from hyper globalization. Large international firms, rendered footloose
by the new rules, have acquired special privileges. Foreign enterprises and investors are given the right
to sue national governments when changes in domestic regulations threatens to reduce their profits.
 All in all, neoliberalism’s principles have been isolated out of context and logic, which is why they fail
today. Economic growth is the only common element in all forms of neoliberalism.
 Non-economic things like social change and inequality are perhaps more important than economic
progress. But neoliberals are not wrong when they argue that our most cherished ideals are more likely
to be attained when our economy is strong and growing. Where they are wrong is in believing that there
is a universal recipe for improving economic performance, to which they have access.

Topic IV: Institutions

1. Behavioural Development Economics: Lessons from Field Labs in the Developing World

 Behavioral experiments as a method of testing economic hypothesis.


 There is a considerable amount of cooperation among people in developing communities; however,
there is variation and although egoists are not the dominant type, they do exist.
 Communities rich in trust and reciprocity are thought to be more productive
 The survey by the two writers of this report suggests that the variation in experimental measures of trust
and reciprocity are indeed correlated with important economic indicators like the growth rate of GDP
 The report is basically about various experiments about trust and individual preferences and other soft
measures, and their correlation to economic decisions

Preference Experiments Conducted in Developing Communities


 Research on the cooperativeness of individuals in developing countries has used three different
experiments: the prisoner’s dilemma, the voluntary contribution mechanism, and the common pool
resource game. Each game sets up a social dilemma for the participants in which one strategy leads to
the social optimum, while the dominant strategy (or best response function) leads to a socially
inefficient outcome.
o Prisoner’s Dilemma (PD) has been done countless times in 230 so no explanation here
o Voluntary contribution mechanism (VCM): At the beginning of each round, participants are
given an endowment of tokens that they can place in two accounts: a private account that only
benefits the decision-maker and a public account that benefits everyone in the group. The
amount contributed to the public account is a measure of the cooperativeness of the participant.
o Common pool resource game (CPR): one player’s extraction reduces the resources available for
others to extract
 Looking at results of the 3 games played in various scenarios, only a minority free ride as a first
impulse. Approximately one-third of players cooperate in the PD, and contributions of half the
endowment are common in the VCM
 However, there is considerable variation in play. College-aged participants in the United States show
only moderate rates of cooperation that tend to decline in repeated versions of the VCM, while
cooperation rates are higher and sustained among poor participants in Africa and Southeast Asia
o This suggests an inverse relationship between norms of cooperation and development
 It appears that students are less cooperative than other participants. However, the difference may be age
driven and not really by schooling
 In the CPR game, simply allowing participants to discuss the game between rounds has an effect similar
to social sanctions
 The Ashraf (2005) experiment: married couples of Filipinos were asked to make family saving
decisions. People were allocated money and had to decide whether to deposit it in an account that only
the decision-maker benefitted from, or in one that benefitted the entire family. When their wives can
find out what they have done, men allocate as much money to the family as women do but, when they
can hide their choices, men are likely to keep more.
o Cash transfers and grants, intended to benefit children, for example, should either be given
directly to mothers or mothers should know when the family has been given money.
 If informal enforcement mechanisms are provided locally and cooperation is enforced. I do not need to
feel very cooperative towards you if we can write an enforceable contract but when we cannot, then you
demonstrating your cooperativeness matters a lot.
 Lessons from cooperation field experiments:
o There is now plenty of evidence suggesting that informal institutions may outperform formal
institutions because local solutions are often better informed but, if local norms and rules are less
stable than enforced laws this may not hold.
o Cross-national results on the relationship between age and cooperativeness have implications for
fostering collective action
o Group composition is an important predictor of cooperation.
o Groups composed of mostly poor people conserve common property better than groups which
are mixed between poor people and more affluent local property owners. Likewise, mixed
groups of students from different countries in a CPR game perform noticeably worse than
homogenous groups and these differences are partially explained by conservation attitudes.
o Gender composition matters: In Vietnam, homogeneous groups of women are more cooperative
but, in Thailand it is the men that are more cooperative

Trust and Reciprocity


 In the investment or trust game (TG), two players are endowed with money as a show-up fee (typically
around $10). The first-mover is given the chance to send as much of her endowment to an anonymous
second-mover as she wishes. The second-mover then sends back as much he wishes.3
o The subgame perfect prediction is straightforward. The second-mover has no incentive to send
any money back and therefore, realizing this, the first-mover should not invest anything in the
partnership.
o Despite this prediction, on average, first-movers send 50 per cent of their endowment and
second-movers return 30 per cent of what they receive.
o In general, as with the cooperation experiments, average play is nowhere near the prediction
based on egoistic preferences. There is an upward sloping relationship between trust and
reciprocity
 What is important for development is the fact that conditional reciprocity (interest based money lending)
is socially efficient

Fairness and Altruism


 Measured using the ultimatum game: two players are provisionally allocated a pie to split. The first-
mover (proposer) offers a share to the second-mover (responder) who accepts or rejects the offer.
Accepted offers are implemented; and rejections result in both players receiving nothing. No responder
will reject because something is better than nothing.
o Results of game: The mean allocation to the second person is substantially greater than zero and
low offers are routinely rejected which suggests that fairness norms are enforced
 Those societies in which team work is essential to production have strong sharing norms, while societies
composed of small bands of isolated and independent family groups are not particularly generous
towards outsiders (nor do they expect the outsiders to be generous).
o These data also support Hirschman’s (1982) theory of civilizing markets. People in societies that
are more integrated into markets have more experience dealing with strangers and this
experience seems to foster more fairness.
 Community level differences explain much more of the variation in play than individual differences.
o This supports the idea that distributional norms are local phenomena and, therefore, may vary
with local economic conditions.
 Data also confirms that distributive norms are supported by costly punishment.

Time and Risk


 A recurring theme in development literature has been that people in underdeveloped countries have high
discount rates and are risk averse, so that it is impossible for them to save and take the risks necessary to
begin to accumulate capital.
o Irving Fisher wrote: A small income, other things being equal, tends to produce a high rate of
impatience, partly from the thought that provision for the present is necessary both for the
present itself and for the future as well, and partly from lack of foresight and self-control.
 Accept/Reject Lotteries experiment used to measure risk: Participants are presented with two columns
of pair-wise lottery choices and they must accept one lottery per line and reject the other. Initially, the
first column dominates the second in terms of expected payoff and variance in the payoffs but,
eventually, as the probability of the high outcome in the second column increases, the expected value of
the second column starts to dominate.
o Those who are more risk averse will choose the first column for longer.
 Overall, there does not appear to be much support for the idea that poor people in developing countries
are more risk averse than richer people in developed countries
 Time preference experiments are unreliable because the participants have a preference for the present
and they do not trust the experimenter; they also prefer choosing a payment today versus a promised
payment in the future.
o The experimental data may thus be biased towards higher discount rates offered
o A way to solve this is front end delays. People choose, for example, between money tomorrow
and more money in a week
 The evidence on whether poor people are more impatient is mixed
o Those with larger incomes do appear more patient. Conversely, research on the horticulturalists
of the Bolivian rainforest show that discount rates are correlated with age (positively), education
(negatively) and income (negatively) but, that they are not correlated significantly with wealth
 Interpretation of the risk and time preference data is a little harder than with the social preference data
o In some estimates, when participants are told that an outcome has a 50–50 chance of occurring,
they behave as if the chance was as low as 10 per cent.
o The obvious lesson from this is that with half the people underweighing the likelihood of good
outcomes, it becomes even harder to rally support for change.
 Most economists still assume exponential discounting, whereas hyperbolic discounting is about the
same in terms of results.
 In sum, there is little evidence of differences in risk and time preferences between people in developing
and developed economies

Reflections of the author on conducting all the above research


 There are good reasons why students are known as a ‘convenience’ sample of the population. Students
are mostly literate, numerate, are somewhat used to thinking abstractly and are accustomed to being told
what to do. All these attributes make the running of decision-making experiments go more smoothly.
o In the field, however, one should never take literacy or numeracy for granted.
 Simple instructions that rely more on pictures, diagrams and examples are more successful than those
using complex grammar and pay off functions
o In particular, many people have no idea about the basic laws of probability
 Both the protocol and the experimenter have to be credible. Field experimenters are rightly criticised by
anthropologists for ‘helicoptering’ into a site to conduct an experiment, after spending no time with, and
knowing nothing about the participants.
 Given that the researcher has spent a lot of grant money to get to the site, recruitment often becomes like
big game hunting.
o This means that recruitment is much more likely to happen by word of mouth and, therefore,
peer effects might add to the sampling problems
 Simple things can help increase the quality of the data gathered in the field.
o Paper and pen experiments, which are often more difficult to design and take longer to run, are
actually preferred to computerised experiments in the field because you do not need to worry
about computer literacy
o Reading the instructions aloud, using several examples and providing large posters of the
decision sheets greatly improves the understanding of the participants
o Strategy method should be used: participants are asked to provide a full strategy of behaviour
instead of responding to whatever choice they are given. A second-mover, for example, in the
UG provides a full strategy by stating which offers she will accept and which offers she will
reject, rather than just accepting or rejecting the offer that she is presented with.

Conclusions of the report


 Economic outcomes might be sensitive to the distribution of social preferences
 Experiments suggest that information is an important determinant of individual cooperativeness because
most people are conditionally cooperative.
 Disputes are more likely to be adjudicated through the family than through a formal system of courts.
o If this is indeed the case, then field experiments should be the obvious way to identify the norms
of fairness and altruism at the core of these family structures.
 The evidence gathered suggests that poor people are not more risk averse (or risk-loving) than rich
people and there is mixed evidence on whether poor people are more impatient than rich people.
 People traditionally think of informal institutions as existing before formal institutions are established –
not true.
o There are plenty of cases in which formal and informal institutions coexist; there are cases in
which formal institutions crowd out informal institutions
 External validity: do the behavioural results that we capture in experiments correlate with economic
activity outside the field lab?
 Experimental work on the distribution of resources within a household is extremely important, given
that grantors typically assume conditional cash transfers must be put in the hands of mothers, to get
resources to children
 So far, there is little evidence that people remain poor because they are risk averse and the evidence on
the relationship with time preferences is mixed. However, once the preferences have been measured
more precisely, the results may point to more effective policies

2. The Slave Trade and the Origins of Mistrust in Africa

 The report shows that current differences in trust levels within Africa can be traced back to the
transatlantic and Indian Ocean slave trades.
 Cultural anthropology says: in environments where information acquisition is either costly or imperfect,
the use of heuristic decision-making strategies, or “rules-of-thumb,” can be optimal
o These rules-of-thumb do not develop by themselves but rather evolve according to which ones
yield the highest payoff.
 Article hypothesis is that in areas heavily exposed to the slave trade, norms of mistrust towards others
were likely more beneficial than norms of trust, and therefore they would have become more prevalent
over time
o An alternative explanation is that more slaves were supplied by ethnic groups that initially were
less trusting, and that these lower levels of trust continue to persist today.
 Influence of unobservable factors would have to be between three and 11 times greater than observable
factors in determining whether slave trade really affects trust
 Within Africa, there is a strong positive relationship between distance from the coast and trust. Places
farther from the coast had fewer slaves taken, and therefore exhibit higher levels of trust today.
o If distance from the coast affects trust only through the slave trade, then there should be no
relationship between distance from the coast and trust outside of Africa, where there was no
slave trade.
o This seems to be true Looking at samples from Asia and Europe, there is a statistically
insignificant relationship between distance from the coast and trust.
 Ethnic groups whose ancestors were heavily enslaved in the past are less trusted today

History and background


 Unlike most other environments of conflict and insecurity, the slave trade had one unique feature:
individuals could partially protect themselves by turning against others within their community
o By engaging in trickery, local kidnappings, or other forms of small scale violence, one could
exchange slaves (with Europeans, or slave merchants) for guns and iron weapons
o People living close to ports pretended that they wanted to give random passerbys shelter. After a
few days passed, they would persuade them that they have friends on the ships, and that they
would like to take them and have a party. But when they got to the ships, the port dwellers sold
the strangers.
o A German missionary recorded, from a sample of 144 slaves, that 40% had been simply
kidnapped. 20% sold by relatives and friends.
o Another method of procuring slaves was the judicial system: includes accusing others of crimes
such as witchcraft, theft, adultery, or murder in order to obtain slaves (if the accused were found
guilty)
 Complementarities between cultural norms and domestic institutions model: individuals inherit norms
of cooperation from their parents and make political choices (through voting) that determine the quality
of domestic institutions.
o When there is a negative shock to internal norms of cooperation, the next generation will not
only be less trusting, but also will choose institutions with weaker enforcement, resulting in poor
behavior and low levels of trust among future generations.

Effects of the Slave Trade on Internal Norms versus External Factors


 Those exposed to the trade became less trusting, and their descendants remain less trusting today.
However, a second explanation is also possible. The slave trade may be correlated with lower trust
today because it resulted in a deterioration of pre-existing states, institutions, and legal structures
 Individuals with heavily threatened ancestors have less trust today in their local government.
o Individuals may mistrust their local government council not because they have developed
internal norms of mistrust, but rather because the council is not trustworthy
 When individuals relocate, their cultural beliefs, norms, and values move with them, but their external
environment is left behind.
o Therefore, if the slave trade primarily affects trust through internal factors, then mistrust should
be most strongly correlated with the extent to which individuals’ ancestors were affected by the
slave trade.
o If the slave trade affects trust primarily through external factors, like the deterioration of
domestic institutions, then mistrust should be strongly correlated with the slave trade’s impact on
the environment in which the individual lives today.
 Over the 400 years of insecurity generated by the slave trade, general beliefs or “rules-of-thumb” based
on mistrust evolved. These beliefs were then transmitted from parents to children over time, and they
continue to manifest themselves today, more than 100 years after the end of the slave trade.

Topic V: Labour and Human Capital

No point writing out pages and pages, which have not shown up in either of the midterms in any way. So
instead I’m going to scan through the readings now and put in only the most important ideas.

1. Child Labor: Cause, Consequence, and Cure, with Remarks on International Labor Standards

 There is no specific policy that can be implemented. Each policy depends on the economic scenario of
the situation
 The main policy divide is between legal interventions and collaborative interventions, that is, public
action which makes parents prefer to withdraw their children from the labor force
o The availability of good schools, the provision of free meals, and efforts to bolster adult wages
are examples of collaborative intervention
o These are generally much more feasible. However, lack of govt funds reduces their provision
and also results in adult wage hikes.
 There has to be some minimal legal restrictions, such as children being prevented from working in
hazardous occupations or under bonded labor conditions, are worth enforcing legally, even though there
can be a few cases where such laws work against children
 What about a complete ban on child labour? There are circumstances where, even if such a total ban
were feasible and costless to implement, it should not to be implemented. There are worse things that
can happen to children than having to work: starvation
o Even poor parents do not in general like to send their children to work if they can help it.
 Despite this, there are circumstances where a total ban may be desirable from the point of view of the
well-being of the children. This is because, whereas a single parent with drawing the child from work
cannot influence equilibrium wages, a large scale withdrawal of child labor can cause adult wages to
rise so much that the working class household is better off
o This is unlikely for poor and likely for rich countries
 A good way to enforcing a ban is to make schooling compulsory. This is because a child's presence in
school is easier to monitor than a child's abstention from work. Children could work before and after
school to bypass this method but at least full time employment is avoided.
o In poor countries, work + schooling is desirable in healthy amounts
 Ban on child labour in export industries is undesirable, since this could result in children being diverted
to less desirable or more hazardous work. In general, it is better to take economy-wide measures against
child labor and, if there is to be a sector-specific ban, this should be based on the working conditions of
that sector, rather than the destination of the goods
 International labour standards can cause certain countries to lose their comparative advantage and thus
cause a flight of capital.
Topic V: Land, Agriculture and Development

1. From the Green Revolution to the Gene Revolution: How will the Poor Fare?

 The transformation of global food production systems defied conventional beliefs that agricultural
technology does not travel well because it is geographically specific
 Over the past decade the locus of agricultural research and development has shifted dramatically from
the public to the private multinational sector.
 Developing countries are facing increasing transactions costs in access to and use of technologies
generated by the multinational secto
 Green revolution R&D: Access and Impact
o Crossing plants with different genetic backgrounds and selecting from among the progeny
individual plants with desirable characteristics, repeated over several cycles/generations, led to
plants/varieties with improved characteristics such as higher yields, improved disease resistance,
improved nutritional quality, etc
o Prior to 1960, there was no formal system in place that provided plant breeders access to
germplasm. Thereafter, CGIAR (an international public sector) managed networks of
international nurseries for sharing crop improvement results evolved in the 1970s and 1980s
o Small countries behaving rationally choose to free ride on the international system rather than
invest in large crop breeding infrastructure of their own
 Impacts of food crops improvement technology
o Crucial role played by the international germplasm networks in enabling developing countries to
capture the spillover benefits of investments in crop improvement made outside their borders
o Much of the increase in agricultural output, over the past 40 years, has come from an increase in
yields per hectare rather than an expansion of area under cultivation
o High returns to the Green Revolution strategy of germplasm improvement
o Several studies have provided empirical support to the proposition that growth in the agricultural
sector has economy-wide effects
o Although the favorable, high-potential environments gained the most in terms of productivity
growth, the less favorable environments benefited as well through technology spillovers.
According to David and Otsuka, wage equalization across favorable and unfavorable
environments was one of the primary means of redistributing the gains of technological change
 Changing Locus of agricultural R&D: From national public to international private sector
o From the 1960s to the 1980s, private sector investment in plant improvement research was
limited due to the lack of effective mechanisms for proprietary protection on the improved
products
o This changed when hybrids came along.
o The seed industry in the developing world was started by multi-national companies based in the
developed world, and then led to the development of national companies
o Despite its rapid growth, the private seed industry continued to rely, through the 1990s, on the
public sector gene banks and pre-breeding materials for the development of its hybrids
o The proprietary protection provided for artificially constructed genes and for genetically
modified plants provided the incentives for private sector entry
o Agro-chemical companies moved into crop improvement was that they foresaw a declining
market for pesticides
o A clear division of responsibilities in the development and delivery of biotechnology products
has emerged, with the multinational providing the upstream biotechnology research and the
local firm providing crop varieties with commercially desirable agronomic backgrounds
o If we look at public expenditures for biotechnology alone, the figure comes out to be
substantially smaller for the developing world as a whole
o Private research expenditures now exceed public sector expenditures

 Emerging trends in biotechnology research, development and commercialization in the developing


world:
o Only three countries – China, India and Brazil – have extensive research programs in all areas of
biotechnology
o Many developing countries, including some higher-income countries, lack intellectual property
rights protection and biosafety procedures
o Subsistence agriculture remains the dominant agricultural system in much of the developing
world.
 Commercial cultivation of crops in the GM world:
o Transgenic crops were commercially planted on 81 million hectares in 2004, in 17 countries, 12
of them developing
o Herbicide tolerance and pest resistance remain the main GM traits that are currently under
commercial cultivation
 The main crops are soybean, maize, canola and
 In addition to these major crops, China also produces small quantities of virus resistant
tomatoes and peppers and delayed ripening tomatoes
o Most of the GM varieties grown in developing countries in 2004 were developed by
multinational companies for the developed country markets of North America
o This suggests that globalization and the international transfer of technology have been essential
factors in promoting the commercial spread of GM crops in developing countries
 Accessing biotechnology knowledge and products for the poor
o The role of the private sector is greater than the public sector’s when it comes to transgenic
crops simply because of level of investment and market incentives required.
o The options available for public research systems in developing countries to capture the
spillovers from global corporations are limited
o Public sector research programmes are generally established to conform to state or national
political boundaries
o Direct country to-country transfer of technologies has been rare
o Although private sector agricultural research expenditures seem very large, the reality is that
they are focused only on the development of biotechnology related plant varieties, and for a very
small number of crops
 A large part of the private sector investment is concentrated on just four crops: cotton,
corn, canola, and soybeans. Private sector investment on the world’s two most important
food crops, rice and wheat, is insignificant in comparison
o Will the poor benefit from any of the technological advances that are taking place today in the
private sector?
 Knowledge generated through genomics, for example, could have enormous potential in
advancing the quest for drought tolerant crops in the tropics.
 The question that needs to be asked is whether incentives exist, or can be created, for
public/private sector partnerships that allow the public sector to adapt technologies
developed by the private sector for the problems faced by the poor
o The public sector may have to purchase the right to use private sector technology on behalf of
the poor
o Pingali and Traxler (2002) suggest three possible avenues for public sector institutions in
developing countries to gain access to transgenic technologies:
(i) directly import privateor public-sector transgenic varieties developed elsewhere
(ii) develop an independent capacity to develop and/or adapt transgenic varieties (this is
very costly though)
(iii) collaborate on a regional basis to develop and/or adapt transgenic varieties (this
requires a lot of cooperation)
o Given that technologies that are on the shelf today have not yet reached farmers’ fields, there is
no guarantee that the new biotechnologies will fare any better.
o There is a need for a third wave of globalization to ensure that international spillovers from the
gene revolution make their way to the poor.