Introduction to Development Economics
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PPP: Purchasing Price Parity
Basket of goods around the world to assess the PPP. Problems arise as the basket is not representative as those living in Norway would have a different basket to those in Burundi. It is also the quality of these goods which do not match up.
International Price Comparison Project: give advice to PPP adjustments (although scrutinised), not completely antidotal as it becomes very political with many assumptions. Conceptually, it adjusts for the price of living.
Not being naive and using GDP to capture living standards, or wellbeing outcomes. Will definitely see that these are related. Under 5 mortality rate in Norway is 2 deaths per 1000, 57 deaths per 1000 in Burundi. They have an income ratio of 1:120 (richest and poorest nations in the world). US with 7, Sri Lanka with 7, and Guatemala 25. Therefore, income is not sufficient
During Covid 19:
Rich, developed nations used 20% of their GDP for fiscal stimulus measures, compared to 2% for the poorest, and around 6% for developing, emerging markets. Direct consequence of money, rich nations can borrow at zero interest rates and no impact on their credit rating ("magic money"). Therefore, for poorer countries to spend more would be by being granted direct aid such through budget support by the IMF.
How to Explain why Countries have fluctuations in Growth Rates
Not geography, these are fixed over time. Perhaps macroeconomics policies and factors are the reason:
Trade Policies
Quality of Courts
Budget Expenditure
Property Rights
Corruption
There are issues with correlation and causation. The policies of Bangladesh appear to be relatively similar but their growth rate differs from year to year. Therefore, the growth rate holds very little explanatory power. The conclusion of the macro-policy communities cannot explain economic growth only on aggregate facts, this is why we aggregate from the ground up through microeconomics.
Why can we aggregate our economy? Because each factor is allocated to its most productive use so the marginal return on this investment is equalised, meaning our market is one big machine. Therefore, there are such things as return to human and return to physical capital. If this isn't true, we see some sector in our economy with much higher return to human capital than others. This is testable, and we see this is not true and varies hugely amongst countries. We see how returns in capital differ greatly within countries, towns, and even one industry of one town in India. Tapur is an example of a textile industry with great variation in return to human capital (children of respected textile manufacturers vs those who have moved to the area). Huge heterogeneity in return. Heterogeneity in Returns has been documented (cannot figure out name but 58:00 into video Duflo mentions the authors). Huge disperion in heterogeneity of returns, the dispersion is greater in India than China and US. We should investigate why countries do not make best use of allocation of resources.
Target for the Course
Inspect whether there is something which determines poverty, and something fundamental about poverty and why you could never accumulate yourself out of poverty.
Poverty Trap: by beginning below a certain threshold and never having the opportunity to receive benefit payments will fall into a poverty loop.
We need to understand where h (returns to human capital), and the heterogeneity in h comes from and why people are not investing optimally in education, health and nutrition. As well as heterogeneity in k, how credit and savings play a part as well as land. It may be of great value to learn about labour market dynamics and the allocation of labour, an area which is incredibly well sought after in development economics these days.
Finally we will look at A, specifically technology and the organisation of firms. Along the way with regards to education for example we will examine education policy, with health we look at health policy and so on making policy a central component of our analysis. Olken will cover the public sector later in the course.
Heterogeneity in Returns
The S-Shape Curve (Balboni):
Program to evaluate the extremely poor. Some of these extremely poor people received a transfer to make them essentially, less poor.
Purely descriptive, X-axis showed how much money in total they had in assets including the transfer in 2007, and then productive assets in 2007 on the Y-axis. So, how much they grew between the two periods. This curve is an interesting shape, S-shaped.
"This means that if they started in 2007 with 2.6, in 2011 they have 2.7 (probably more like 2.6), in 2015 you would have to go back to the the regression line and then back up (to get around a more true 2.7), and so on. Starting just below 2.3 in 2007 results in you flowing back further. This is the idea of the poverty trap in which there may be multiple steady states and where you start from has an impact on where you end up."
We assume concavity in the models we work for in rich countries so the part of the curve to the left of the line of regression goes away. Therefore, when people are poorer capital goes a lot further so they are making more with the little money that they have proportionally. Therefore, they can progressively build upon this to end up at a greater point.
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