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Economics Development Exam Notes.pdf

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Economics (Arts)
ECON 313
Sonya Laszlo

Introduction to Comparative Economic Development Introduction to Development Economics - What is Economics? - What is Development Economics  How is it different from Traditional Economics and Political economy The role of values - Why do we need to study Development Economics? What we know and don’t know… What is Development? 1. K 2. B 3. C 4. D 5. E What is development? - Amartya Sen  development as freedom of availability of commodities, functioning, capabilities - Core values: sustenance, self esteem, freedom - What is the reality? Large disparities between and within countries - To help categorize, developed versus developing countries, LDCs (World Bank definition) So what can we do to achieve what we want from what we have? - Increase the availability and widen the distribution of basic life sustaining goods - Raise standards of living - Expand the range of economic and social choices Developed countries are characterized by: - Low levels of living and productivity - Low levels of human capital - Higher levels of inequality and absolute poverty - Higher population growth rates - Greater social fractionalization - Larger rural populations, but rapid rural-urban migration - Lower levels of industrialization and manufacture exports - Adverse geography - Underdeveloped financial and other markets - Colonial impacts *Note: this is not a comprehensive list of common features. For most of these points, it is unclear if they are causes and/or results of underdevelopment What have we to learn from the past? How does development happen? - The change in economic structure: o Declining share of agriculture in output and employment o Industry gains a lot of ground o Declining proportion of disposable income spent on food - Urbanization o Migration from rural areas to cities (arrival cities!) o Rise of urban poverty - Changes in the scale of production: o On average, the size of producing unit (farm/firm) increases o Due to moving away form agriculture toward more established input markets - Technology: o Becomes more capital intensive - Education o On average increases - Demographic Transition o Population growth begins to rise then falls * Not a comprehensive list  stylized facts But there are differences between developing countries today and developed countries when they used to be “developing”…. - Physical and human resource endowments - Per-capita incomes and levels of GDP - Climate - Population size, distribution, and growth - Historical role of international migration - International trade benefits - Scientific/technological research - Efficacy of domestic institutions Before we can change anything we need to identify and understand the problems - Can we think of a complete list of problems that need to be fixed - Are they the same for all countries? Are these problems the cause or result of other problems? - Step 1  Come up with measures to: (1) Evaluate the situation and whether it has improved (2) Evaluation of policies (3) Set goals accordingly (4) To compare (5) To better understand - Is there a unique/perfect measure for development? Income Measures Traditional measures of wellbeing  GDP, GNP - Gross Domestic Product (GDP): Market value of all goods and services produced within a country in a given period of time - Gross National Product (GNP) Market value of all goods and services produced by permanent residents of a nation within a given period of time Problems with income as measure of well-being - Distribution/ inequality - Ignores things the cannot be/are not measured - Cross country comparisons  difference in relative prices/ exchange rates Purchasing Power Parity (PPP): The purchasing power of a country’s currency the number of units of that currency required to purchase the same basket of goods and services that a US dollar would buy in the US - Does not provide a full picture  growth can happen without improvement in well being Indices (Traditional) Human Development Index (HDI) - HDI: calculates an index based on longevity (life expectancy), education (literacy), and real per capita PPP GDP - Example: GDP per capita of country X - $1870 UN’s Minimum and maximum- $100 to $40,000 Life expectancy of country X – 63.3 years UN’s minimum and maximum – 25 to 8 years Adult literacy of country X – 41% UN’s minimum and maximum – 0 -100% Gross enrollment in country X – 57% UN’s minimum and maximum – 0 – 100% - Index = (country X- minimum)/(maximum – minimum) - HDI = 1/3 Income index + 1/3 Life Expectancy Index + 1/3 Education Index Human Poverty Index (HPI) - Measures deprivation (1) Illiteracy (2) Malnutrition (3) Early Death (4) Poor health care (5) Poor access to safe water - Places emphasis on individuals at the bottom end of the income distribution GINI coefficient - A measure of statistical dispersion developed by an Italian in 1912 - Measures the inequality among values of a frequency distribution (like levels of income) - A coefficient of zero expresses perfect equality where all values are the same and a coefficient expresses maximal inequality among values Once we decide on a measure/index, we can evaluate the current situation and then set goals/targets of what we want to achieve Millennium Development Goals - Signed by 189 countries in 2000 - Millennium Development Goals (MDGs) (1) Eradicate Extreme Poverty and Hunger a. Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day b. Achieve full and productive employment and decent work of all, including women and young people c. Halve, between 1990 and 2015, the proportion of people who suffer from hunger (2) Achieve Universal Primary Education a. Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling (3) Promote Gender Equality and Empower Women a. Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015 (4) Reduce Child Mortality a. Reduce by two thirds, between 1990 and 2015, the under-five mortality rate (5) Improve Maternal Health a. Reduce by three quarters the maternal mortality ratio b. Achieve universal access to reproductive health (6) Combat HIV/AIDS, Malaria and Other Diseases a. Have halted by 2015 and begun to reverse the spread of HIV/AIDS b. Achieve, by 2010, universal access to treatment for HIV/AIDs for all those who need it c. Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases (7) Ensure Environmental Sustainability a. Integrate the principles of sustainable development in country policies and programmes and reverse the loss of environmental resources b. Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss c. Halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation d. By 2020, to have achieve a significant improvement in the lives of at least 100 million slum dwellers (8) Develop a Global Partnership for Development a. Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system b. Address the special needs of least developed countries c. Address the special needs of landlocked developing countries and small island developing states d. Deal comprehensively with the debt problems of developing countries e. In cooperation with pharmaceutical companies, provide access to affordable essential drugs developing countries f. In cooperation with the private sector, make available benefits of new technologies, especially information and communications - Each goal has a number of targets as seen by sub-points - Common concerns - New Challenges Food prices, conflict, climate change Classic Growth Theories Overview - Intro  need for a theory? How does development occur - Where to start? Historical Experience - Types of Models: (1) Linear stages (2) Structural Change (3) International Dependence (4) Neoclassical to Endogenous Growth Linear Stages Rostow’s Stages of Growth (Rostovian Take-off Model) - Argued all developed nations went through a stage of “take off into self sustaining growth”, most underdeveloped nations were either still in traditional society or preconditions - The principle strategy, the mobilization of domestic and foreign saving, to generate sufficient investment Stages of Growth (1) Traditional Society (2) Pre-conditions for take-off into self sustaining growth (3) Take off (4) Drive to maturity (5) Age of high mass consumption ** linear, internally induced growth Harrod Domar Model - A functional economic relationship in which growth rate of GDP depends directly on national net savings rate and inversely to national capital output ratio - Implication: Raising investment through saving is the way to growth/development - Limitation: Saving is necessary but not sufficient in reality  too little focus on output of economcy - Assumptions: No government, no international trade, labor is abundant S  Total Savings s  Savings Rate K  Capital Stock Y  Output of the Economy I  Net Investment - We save a part of income: S = sY - Net investment is the change in capital stock: I = ΔK - Let K/Y = k and ΔK/ΔY = k So k is also the Incremental Capital Output Ratio (ICOR) - Assumptions imply: S = I So  sY = S = I= ΔK= kΔY Or  sY=kΔY We have: sY=kΔY (divide by Y and K)  s/k = ΔY/Y - ΔY/Y = (1/k)s Structural Change Models - How does an economy evolve from rural/traditional/agricultural to urban/modern/industrial? Lewis Model (1950s) - Structural transformation  the process of transforming an economy in such a way that the contribution to national income by the manufacturing sector surpasses the agricultural sector - Assumptions: (1) 2 sectors (2) Agricultural sector has labour surplus  marginal productivity of labour is 0 (3) All profits in the modern sector are re-invested - Reminder: Total Product: The amount of output that is produced during a given time Average Product: The total product divided by the number of units of the variable factor used to produce it (usually thought of as labour) Marginal Product: The change in total output that results form using one of more unit of a variable facto (again usually thought of as labour) Demand (what consumers want for a product at various prices) and Supply (what producers can provide at various prices) Curves Factors of production  labour, capital and land Production function  Q or TP = f(K,L) F(*) can be any function  defines the relationship between inputs and output Increasing returns to scale: the output increases more than the proportional change in inputs Decreasing returns to scale: output increases less than the proportional change in inputs Constant returns to scale: output increases by the same as the proportion change in inputs - The degree to which the modern sector expands is determined by the rate of individual investment and capital accumulation - Assumes rural workers share equally the output so that the rural real wage is determined by the average and not marginal product - Assumes the modern sector is perfectly competitive, the marginal product of labor curves are the actual demand curves of labor - Assumes that urban wage to be above rural wage, this way modern sector employers can hire the surplus rural workers as they want - Given a fixed supply of capital the demand curve for labour is determined by the labour’s declining marginal product - Self-sustaining growth and employment in the modern sector is assumed to continue until all surplus rural labour is absorbed by the modern sector - Implications: (1) Labour transfer and growth driven by output growth (2) Modern sector will absorb all surplus labour from agricultural sector  self-sustaining growth - Limitations (1) Growth in the modern sector might not lead to labour transfer (labour saving technology, capital flight) (2) Surplus of labor in the traditional sector (3) Urban wages stay constant once rural labour is absorbed (minimum wages and unions) (4) Diminishing returns in the modern sector Structural change and Patterns of Development - Pattern of development analysis is an attempt to identify characteristic features of the internal process of structural transformation that is typical developing economy under goes as it generates and sustains modern growth and development - Increase savings seen as necessary but not sufficient condition of growth - Increased investment seen as a sufficient condition - Empirical structural change theorists  see differences in developing nations is due largely in part to domestic and international constraints - Hollis B. Chenery found several characteristics of developing nations: (1) Agriculture to Industry (2) Accumulation of physical and human capital (3) Change in demand from necessities to manufacture goods (4) Growth of cities (5) Decline of family size - Limitation with this is that in the long run it can end up looking like causality International Depedence (1970s) Neo-colonial dependence - Indirect growth of Marxist thinking - Model whose main proposition is that underdevelopment exists in developing countries because of continuing exploitive economic, political and cultural policies of former colonial rulers towards less developed countries - Attributes underdevelopment to unequal power relationships between the center and periphery  hard to be self-reliant - Comprador elite with ties to developed countries perpetuate this system of inequality - Underdevelopment is induced externally  revolutionary struggles and major restructuring of the world capitalist system is needed/required to free dependent developing nations - Limitations: this is not exactly true, countries like the Asian tigers have seen unprecedented growth through an associated-dependency on developed nations, does not focus on internal problems The False Paradigm - Approach is much less radical - Model whose main proposition is that developing countries have failed to develop because their development strategies have been based on an incorrect model of development (mostly Western) which overstress capital accumulation and investment - Most developing nations have a strong and resilient traditional social structure which inhibits Western polices for acting as they should - Argues that intellectuals whose education occurred in developed nations unwittingly serve an unhealthy does of “alien” concepts which are in applicable The Dualistic Development Thesis - the concept that two or more situations/ phenomena that are mutually exclusive to different groups in society can coexist, for example poverty and affluence, modern and tradition economic sectors  all of which show and increasing divergence - Embraces 4 key arguments: (1) Different sets of conditions can coexist given space (2) Coexistence is chronic not merely transitional (3) Not only do degrees of superiority and inferiority fail to show any signs of diminishing but they have a tendency to increase (4) Interrelations between superior and inferior elements are such that superior elements do nothing to help the inferior ones Problems with Dependence Theory - Gives no insight to how countries initiate or sustain development - The actual economic experience of developing nations who have pursued radical restructuring is mostly negative - Autotarky is a closed economy that attempts to be completely self restrained Neo-Classical Counterrevolution (1980s) - Background: government intervention distorts free markets Free Market Approach - Argues that markets left alone are efficient - There is no need for government - If markets are efficient and information complete the market will fix everything Public Choice Theory - Argues that governments can do nothing right and government players ruin development - Self-interest guides all individual behavior and governments are inefficient and corrupt because people use government to pursue their own agendas - Net result: self interest leads to the misallocation of resources and a general reduction of freedom Market Friendly Approach - Acknowledges the there is a need for government because there are imperfections in markets and information - World Bank: successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene only selectively in the economy where market is inefficient - Accepts notion of market failures and the inability to deliver its theoretical benefits due to market imperfections is more wide spread in developing nations Neo-Classical Growth Theory: The Solow Model - Follows the Harrod-Domar style of modeling, but adds labour (second factor) and technology (independent variable) where: Y = GDP K = stock of capital (human and physical) L = labor A = productivity of labor α = the elasticity of output which is assumed to be less than 1, yields diminishing terms in both capital and labor Note  constant returns to scale Denote  y=Y/AL Denote  k = K/AL α Then  y= f(k) = k - Let δ be depreciation, s be savings rate, n be population growth rate, all are constant Then: Steady State is when y*, k* such that Δk = Δy = 0 - If Δk = 0 then k = K* For any k0 For any k>k*: Δk< 0 Steady state….. How does an economy grow? Implications of the Solow Model - If two countries have the same capital depreciation rate, population growth rate, saving rate and productivity growth, they will have the same steady state level of capital/output  convergence More formally, - Unconditional convergence: parameters are the same in all countries (1) All countries will have the same k* and y* (2) In the long-run, all countries have growth rate 0 (3) In the short-run, poor catch up with rich - Conditional convergence: parameters different (1) Countries converge towards different steady-state In the long run, all countries have a growth rate of 0 (2) In the short-run, growth rates depend on the position in respect to equilibria Other Implications of Solow Model - Growth rate will be 0- or all countries once the reach steady state no matter how much capital stock they have - Different values of the parameters will give different levels of steady output - Two countries have the same steady state level of output. The one further away from the steady state will grow faster than the one closer to it (diminishing returns to capital). Explains why poorer countries have higher growth rates than richer countries - Difference from Harrod Domar: increase in savings will not increase long run growth rather, only increase level of steady state output - Technology is exogenous Exogenous Growth Theory - The main implication of the neoclassical theory  without exogenous shocks, all economies will end up with 0 growth rate  no satisfactory - Gets rid of the “diminishing returns to capital assumption” - How could we have increasing returns to capital/labour - Learning by doing - Technological spillovers - Prediction: no convergence - Importance of human capital and technology (1) High levels of physical and human capital induces higher technology growth (2) Leads to higher capital (3) Growth rate is positive in the long run How can we test these models? - If we have data on output, capital, savings, depreciation, and population growth rate, we can test if the model works - Solow prediction: check to see if countries with higher capital stock have lower growth rates Results? - Does data agree with theory? Mankiw, Romer, Weil (1992) – Convergence Prichette (1997) – Divergence - Conclusion vary Sample size Linear model More variables? The error (or residual) in model Correlation or causality Contemporary Theories Some Implications of Classical Models - Diminish/increasing returns of capital  convergence/ divergence - Limited role of government - Agents (firms and consumers) act in isolation - No externalities and complementarities Overview of Contemporary Theories - Externalities  one of the reasons why the Solow Model was too simple - Sometimes the action of one person can lead to the desired outcome only if others are acting in the same way  complementarities - Coordination failures key to underdevelopment Underdevelopment as Coordination Failure - Actions taken by one economic agent that increases incentives of other agents to take similar actions  complementarities - Examples of complementarities include: (1) New crops  Is it worth it to buy and farm a new set of crops? Do the benefits of this outweigh the costs? If you invest in this how many others must invest to make it a worthwhile venture? How many people is too many people (2) Education and Employment  How much schooling do I need to achieve my ends? How much schooling is needed to for me to be competitive? How much schooling are others around me receiving? Is it worth the money to get a higher degree in order to get a job? How many other people are following the same path as I am? (3) Training  Should a company train its employees? Is the cost of training worth the increase in productivity? If a company trains its employees what’s to say the employees won’t leave and go to another company who is offering better pay? If you train your employees do you have to pay them more? Will the increase in wages be less than the increase in profits? (4) Facebook  Is the time spent on Facebook when it could be spent elsewhere being more productive worth it? If I don’t have a Facebook do I give up more than I do being on it? How important are the benefits of Facebook to me in my daily life? - Multiple factors must work well together at the same time in order to sustain development  investment by many is needed to be profitable for any one agent - The coordination failure approach decries a state of affairs in which the inability of agents to coordinate their behavior leas to an outcome (equilibrium) in which agents are worse off than an alternative - Network effects are common and have an important role in understanding development  circular causation of positive feedback is common  two theories arise: Big Push and O-Ring Implications: - Multiple equilibria  stable vs. unstable - Market forces will take us to a stable equilibrium  D1 or D3 - Some equilibria are better than others - (Pareto improvement)  a situation where one or more persons is made better off without making anyone worse ff - Initial conditions decide which equilibria we are stuck at - Exogenous shocks/actions require to more from one stable equilibrium to another  big push - Role of technology and government can have an effect on which equilibria is reached Big Push Model Assumptions - One factor, fixed supply of labor - Two sectors: (1) Traditional where wage = 1 (2) Modern where wage= W>1 (3) Wage differential is found in most developing countries, if economic profits are generated average income rises, if thee is a surplus of labor or if modern wages are higher than opportunity cots, social benefits are greater  high modern wages is the only circumstance in which coordination problems may exist - N products, one person produces one output in traditional sector L = F+ cQ - The traditional sector has a constant rate of return  in the modern sector there are increasing rates of return - Each good gets a constant and equal share of national income - Closed economy - Perfect completion in traditional sector with free entry and no economic profit, modern sector entry causes a increase in returns to scale, monopolist faces unit elastic demand both sectors must charge same price Other reasons for Big Push - Intertemporal effects - Urbanization - Infrastructure - Training Other problems with Mulitple Equilibria - Incumbency - Norms - Linkages and government involvement - Inequality O-Ring Theory - Failure of one small piece can ruin entire operation - Explains skill matching (as opposed to skill mixing) - Examples? Assumptions - Workers are not perfect substitutes - Complementary in tasks 2 tasks 0 ≤ q ≤ 1: skill needed for the task (or probability the task will be completed successfully) O-ring production function: q1* q2 - Two types of workers: qH: High quality qL: Low quality - Who should work with who? - Q= qi*qj Let qH=.3 and qL=.2 Options? Implications - Incentives to invest in training Low skill: q=0.2 High skill: q = 0.8 Training can add 0.1 to 1 worker - Results 0.2*0.3 = .06 0.8*0.9 = .72 - Brain-dead - High-skilled get more skilled and higher wages - Government intervention needed Problems and Policies What are the theories of development pointing to? - In the Neoclassical Growth story, what are all those other things in the “error” term in the growth equation - In contemporary theory story, what are all the factors that we need to “coordinate” to prevent/reverse underdevelopment? How? Education Stylized Facts of Education and Development - Literacy rate increases with development - Class size decreases with development - Government expenditures on education increase with development - Attainment rates increase with development - Drop-out rates decrease with development - Male-female gap in educational attainment and enrolment decrease with development - The return to education decreases (additional income for each additional year of schooling) Education Indices - Net Enrolment Ratio Students enrolled in a level of education who belong in a relevant age group, as a percentage of the population in that age group - Gross Enrolment Ratio The number of students enrolled in a level of education whether or not they belong in the relevant age group fro that level Primary, secondary, and tertiary enrolment ratio can be >100% - Adult Literary A person is literate who can with understanding both read and write a short simple statement in his or her daily life Various ways of measuring  some places its as easy as writing ones own name and reading it - Dropout Rate Percentage of people who do not complete a particular degree - Teacher-pupil Raito Number of teacher per student, often used as a measure of “school quality” - Education Attainment Years of schooling attained by the individual/individuals - Rate of Return The additional benefit from an additional year of schooling How is Education Related to Economic Development? - Macroeconomic models: education important for growth - Microeconomic models: education important in many dimensions (1) Health and Fertility (2) Better jobs/ Higher incomes (productivity and signaling) (3) Agricultural productivity (4) Technology/ R&D (5) Democracy - Inequality in education reflects inequality in income and vice versa Macroeconomic Relationship: Education’s Effect on Development - Neoclassical and New Growth theories provide one explanation for the effect of education on development via productivity - Recall: LR growth thanks to technological change  need education, R&D, investment in human capital in general - New Growth Theories emphasize skilled labor Development’s Effect on Education - Structural Change (1) Increased demand for skills (2) Reduced necessity to have children work on the farm; children so they can go to school - Better institutions and infrastructure (1) Governments spend more money on schools (2) Access to schools improve (3) Quality of schooling improves (4) More and better labor market opportunities (5) Reduces brain drain  education people leaving the country to find better employment opportunities Microeconomic Relationship - Education’s effect on health (1) More and better education improves health outcomes (2) More knowledge and access to medication and health services (3) Improves nutrition especially in children  educated mothers are better providers - Educations’ effect on fertility (1) Increase awareness of family planning (2) Increased opportunity cost of having children (higher labor market opportunities for women) (3) Net effect: education reduces fertility rate - Education’s effect on farm productivity (1) Increase farm productivity through basic literacy and numeracy skills (2) Welch and Schultz identified 2 major channels a. Worker Effect: more education farm workers are more productive (higher MPL) b. Allocate Effect: more educated farm workers make better choices regarding farm input (3) Basu et al. identified a third effect  Spillover effect: knowledge shared and more people learn - Educations effect on Learning (1) Gary Becker and Jacob Mincer (2) Need to think about lifetime benefits/costs of acquiring an education (3) Benefits of acquiring schooling: the additional post-schooling earnings (4) Direct costs of schooling: tuition, textbooks, uniforms, ect. (5) Indirect costs of schooling: forgone earning while in school Human Capital Theory: Returns to Education - Private Returns  net private benefit of education (private benefits – private cost) - Private benefit is earnings after education - Private cots are direct and indirect costs of education - For children living in rural Mexico, what are the possible indirect cost (1) Taking care of relatives (health status of household might fall) (2) Loss of some income (3) Less time for household chores (4) Distance and transport to and from school - Social returns  net social benefit of education (social benefit – social costs) - Social benefits are increased productivity, better health, lower fertility, higher happiness and increased civic participation - Social costs are teacher salaries, infrastructure, building schools Situation in a typical developing country: - Big wage gap between traditional - Demand for low levels of education grows slower than that of higher levels of education - Employers select by level of education (signaling) - Government wage tied to education level, not productivity of worker - Primary schooling is highly (most often fully) subsidized As a Result: - Education certification and displacement effect - Rising population of educated unemployed - Resource’s allocated to higher education, often compromising on quality of primary education - Exacerbating inequality  the poor have to work a lot harder and longer to earn subsistence income Human Capital Theory - Let Et be earnings in year t - Let I be the rate of interest - The present value of prospective earning in any future year is: - So the discounted percent value of benefits the entire stream of future earnings until retirement is: - Discounted present value of costs both direct and indirect costs of secondary educaiton - Decision Rule: In order for the education to be worth it the value must be greater than the cost or - Internal rate of return r: is the “discount rate” that would equate the Present Value Benefits with the Present Value Costs: A Numerical Example Assumptions - Suppose that there are 4 periods - Choice 1: work at the factory for $100 per year for years 1,2,3,4 - Choice 2: go to school in years 1 and 2 then work as a teacher in years 3 and 4 with a salary of $500 per year - Let i= 10% - Tuition costs $50 per year Should this person go to secondary school or not? - Benefits: Higher income in years 3 and 4 - Costs: direct (tuition for $50 in years 1 and 2) and indirect costs (forgone earnings for $100 in years 1-4) Present discounted value of going to school: Present discounted cost of going to school: If V> C then go to school If V C Discussion Points: - Education has externalities - Education can lead to higher inequality - Free schooling is not free for all - Quality of schooling is not the same for all - Nutrition and education attainment Empirical Impact of Education  Micro Studies - Lots of micro studies - Estimate (for individuals i) - All studies find b between 0.05 and 0.15 so: 1 more year of education brings between 5% and 15% more salary Econometric Problems - Reverse causality - Omitted variable bias? (1) Ability (2) Entrepreneurial spirit - Measurement error: We often use quantity of education (number of years) as measure of education Child Labor According to the UNICEF website: - An estimated 158 million children aged 5-14 are engaged in child labour  one in six children in the world. Millions of children are engaged in hazardous situations or conditions, such as working in mines, working with chemicals and pesticides in agriculture or working with dangerous machinery. They are everywhere but invisible, toiling as domestic servants in homes, laboring behind the walls of workshops, hidden from view in plantations. - In Sub-Saharan Africa around one in three children are engaged in child labour, representing 69 million children - In South Asia, another 44 million are engaged in child labour - Children living in the poorest households and in rural areas are mostly likely to be engaged in child labour. Those burdened with household chores are overwhelmingly girls. Millions of girls work as domestic servants are especially vulnerable to exploitation and abuse. - Labour often interferes with children’s education. Ensuring that all children got to school and that their education is of good quality are keys to preventing child labour Why is Child Labor a Bad Thing - Keeps kids out of school  drop out/desertion - Keep kids back  repetition - Compromise on learning/development  health effects - Perpetuates cycle of poverty Why does the problem exist, and what can be done to eliminate it? - The problem may be modeled using “multiple equilibria” approach - Government intervention may be called for to move to a better equilibrium Child Labor as a Bad Equalibrium - Assumptions Nobody likes to sent their children to work Child and adult labor are substitutes All adults work (at any wage) - Suppose N households with 1 adult each Each household as m children W is wage, s is subsistence Policy - Ban child labor? - Build more schools - Improve school quality - Incentives to attend school (e.g. Conditonal Cash Transfers) Opportunidades in Mexico - Reduce child labour (Basu 199) Legislative interventions Collaborative interventions - World Bank View: Eliminating poverty since it is the root cause of child labour - Expansion in education and pay incentive to parents to send their children to schools (Example: Opportunidades in Mexico) - UNICEF: child labor is inevitable, so improve working conditions - ILO: ban child labor “in its most abusive forms” - Trade Sanctions against countries that permit child labor Poverty and Inequality What is Poverty? - “Poverty is like living in jail, living under bondage, waiting to be free” – Jamaica - “Poverty is a lack of freedom, enslaved by crushing daily burden, by depression and fear of what the future will bring.” – Georgia - “If you want to d something and have no power to do it, it is talauchi (poverty).” – Nigeria - “Lack of work worries me. My children were hungry and I told them the rice is cooking, until they fell asleep from hunger.” – older man for Bedsa, Egypt - “A better life for me is to be healthy, peaceful and live in love without hunger. Love is more than anything. Money has not value in the absence of love.” – a poor older woman in Ethiopia - “When one is poor, she has no say in public, she feels inferior. She has no food, so there is famine in here house; no clothing, and no progress in her family.” – a woman from Uganda - “For a poor person everything is terrible – illness, humiliation, shame. We are cripples; we are afraid of everything; we depend on everyone. No one needs us. We are like garbage that everyone wants to get rid of.” – a blind woman from Tiraspol, Moldova - “I repeat that we need water as badly as we need air.” – a woman from Tash-Bulak, The Kyrgyz Republic - “The waste bring some bugs; here we have cockroaches, spiders and even snakes and scorpions.” – Nova California, Brazil So what is Poverty? - Food  Lack there of - Income - Living Standards - Health and Nutrition - Education - Livelihoods - Opportunities - Security - Crisis/shock management - Confidence, aspirations - Voice Thoughts: - Can we think of causes/ results? - Is it an absolute or relative concept? - Are the poor homogeneous? - Is there a poverty trap? Poverty dynamics - Is there one/more-tested ways to eradicate poverty? - What are the implications of poverty for an economy? - Is growth good for poverty? - “For us, life is like desperately trying to mend an old, tattered quilt… You stich one hole only to discover another… sometimes, if you are not careful, mending one also creates another… you just feel like giving up… a stitch in time saves nine doesn’t work when you are like us” - We are caught up in a complex knot --- other poor people also get caught up from time to time in a knot, but their knots are simpler… you can easily detect the source of the knot and do something about it… our knots have many sources… often pulling one carelessly only makes the knot more complex WFP Hunger Stats – Top 4 - Hunger is the world’s No. 1 health risk. It kills more people every year than AIDS, malaria and tuberculosis combined - One in seven people in the world will go to bed hungry tonight - One out of every four children in developing countries is underweight - There are more hungry people in the world than the combined populations of USA, Canada and the European Union Measuring Poverty - Absolute poverty and the Head Count Index - Poverty gap - Poverty gap ratio - Foster-Greer-Thorbecke Measure Measuring Absolute Poverty - Example: The number of people living with under $1 a day in PPP dollars - MDG #1: % pop. with <1.25$/day (PPP) (2005) o North Africa  3% o Sub-Saharan Africa  51% o Latin America and Caribbean  8% o East Asia  16% o South Asia 39% Head Count Index - Proportion of individuals living under the poverty line: HCI= H/N - H: number of people under absolute poverty line Yp - N: population - HCI : measure of extent of absolute poverty - Limitations o Need to agree on poverty line o Ignores depth of poverty Poverty Gap Relatively Large Poverty Gaps Relatively Small Gap I n c o m e / y r TPG TPG - HCla=HCIb=50% % of Population - But the poor in A are poorer than the poor in B - The extent of poverty is the same in A and B - But the depth of poverty is worse in A than in B Poverty Gap Defined - The amount of money need to bring everyone below the poverty line up to the poverty line - Yp: absolute poverty line - Yi: income of person i - Total Poverty Gap= TPG o TPG = Σ(Yp-Yi) - Average Poverty Gap= APG o APG=TPG/N - Normalized Poverty Gap = NPG o NPG= APG/Yp= (1/N) (Σ(Yp-Yi)/Yp) o 0< NPG <1; unitless - Average Income Shortfall = AIS o AIS= TPG/H - Normalized Income Shortfall = NIS o NIS= AIS/Yp= (1/H) (Σ(Yp-Yi)/Yp) o 0 < NIS <1; Unitless Poverty Gap Ratio - Mean income of the poor: - The poverty gap ratio - Note that PGR = NIS Foster-Greer-Thorbecke - Looks at income inequality among the poor - Foster-Greer-Thorbecke (FGT) = P α measure: - if α = 0, then P α = HCI - if α = 0, then P α = NPG - a higher α places higher weight on the poverty gap Other Poverty Measures - Ratio of highest 20% to lowest 20% - Raito of highest 10% to lowest 10% - HDI, HPI State of Poverty - Global poverty lines; $1/$2 a day Facts: - The rates of poverty have fallen - Number of people at risk of falling into poverty has increase - Look at the distribution of income and well-being among world citizens from 1820-1992 - Findings: o Worsening of world income distribution from 1820 to WWII o Stabilized or worsened more slowly since WWII o In 19 century- inequality due to within country inequality o In 20 century- inequality due to difference between country Who are the Poorest? - Women - Rural/ Urban - Indigenous people - Why?  Vunerability? Lorenz Curves - Depicts the cumulative distribution of income - The 45-degree line: perfect income equality - The further away form the 45-degree line, the more unequal society is - The greater the curvature, the greater the degree of inequaity What is so bad about high inequality? - Economic in efficiency: access to credit for the poor - Lower saving rate - Inefficient allocation of assets - High inequality  political power of the rich - “Rent Seeking” behavior Empirical Evidence: Growth and Poverty Tradition view: - Rapid growth is bad for the poorer as they become marginalized by modern sector growth - Poverty alleviation mechanism will come at the expense of strong growth rates - Traditional views: expect a negative correlation between growth and poverty - Yet, poverty alleviation polices need not be bad for growth Reasons why poverty alleviation can be beneficial to growth: - Poverty = no access to credit = no investment in human capital - Poverty = low levels of living = poor health and nutrition = low productivity - Poverty = high fertility rates = high population growth rats - Rich in contemporary poor countries do not save a substantial share of their incomes - Raising income of poor increases aggregate demand - Reducing poverty creates the incentive to public participation in the process of development - Lower poverty = lower expenditure for social protection, health services, ect. Social Welfare - Positively relate to income per capita - Negatively related to poverty - Negatively related ton inequality - W = W (Y, I, P) Theory: Dualistic Development Modern Sector Enrichment - Growth benefits modern sector proportionately more than the traditional sector - Worsening of income inequality - Common Latin American and African experience - Implication for poverty: no change Tradition Sector Enrichment - Growth benefits tradition sector proportionately more than the modern sector - Improves income inequality - China and Sri-Lanka in 1950s, 1960s, 1970s - Implication for poverty: reduced Modern Sector Enlargement - Re: Lewis Model - Size of modern sector grows, but wages in the two sectors remain the same - The number of poor falls, the number of rich rises, result of inequality ambiguous - Implications for poverty: reduced Kuznets’ Theory - Inequality will worsen before improving - Inverted-U shape - Why? o Lewis Structure Change? o Returns to education? Empirical Evidence: Kuznets’ Curve - Cross-sectional evidence: unclear - Latin America: highest levels of inequality - Removing Latin America form diagram inverted U hypothesis is rejected - Maybe cross-sectional data not the place to look  check time series data Policy Options - Altering the functional distribution of income through polices designed to change relative prices o Price of labor o Price of capital - Modifying the size of distribution through progressive redistribution of assets ownership o Land reform o Access to education to accumulate human capital - Reducing the size distribution at upper levels o Progressive income taxes - Increasing the size of distribution at the lower levels o Direct transfer o Public provisions of goods and services o Subsidies Policy Examples - CCT (conditional cash transfers)  rationale, for, against, impact o Fundamental criticism: when you set a condition on a cash transfer… it assumes that the people don’t know how to use the money that is given to them  goes against economic idea that people will optimize utility of
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