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Econ 242

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  1. Econ 242 “Macroeconomics” of Development

  2. Plan of Action • Course goals & logistics • Historiography of development • Per-capita income • Understanding long-run growth • Convergence/divergence in the “modern” era • Understanding “modern” PCI levels/growth • Proximate causes (growth accounting) and the search for “deeper” causes

  3. Course Goals • Articulate the research frontier • Develop the capacity to be a critical consumer of applied development research • (Not a tools class) • Prerequisites: • 1st year PhD theory and metrics sequence • Econ 250A (labor methods)

  4. Topical Coverage • Proximate causes of growth: factors of production • Physical capital • Human capital / technology • Generic impediments • Complementarities & poverty traps • Institutions • Corruption

  5. A (Brief) Historiography of Development

  6. A Brief Historiography of Development • Growth has always been a priority question… • WoN: source of wealth is productivity, not gold • …but focus was on rich countries • Post-WWII independence wave created new intellectual space • Urgent demand for cross-applicable ideas • Space for idea entrepreneurs

  7. Three Ingredients • Keynesian intellectual climate • The west had recently emerged from the Great Depression • Perceived success of the USSR via forced investment • Pessimism about markets in LDCs • Lewis (1954) “Economic Development with Unlimited Supplies of Labor”

  8. Lewis (1954) “The classics, from Smith to Marx, all assumed, or argued, that an unlimited supply of labour was available at subsistence wages. They then enquired how production grows through time. They found the answer in capital accumulation…” “In the first place, an unlimited supply of labour may be said to exist in those countries where population is so large relatively to capital and natural resources, that there are large sectors of the economy where the marginal productivity of labour is negligible, zero, or even negative… …twenty years ago one could not write these sentences without having to stop and explain why in these circumstances, the casual labourers do not bid their earnings down to zero, or why the farmers‘ product is not similarly all eaten up in rent, but these propositions present no terrors to contemporary economists.”

  9. Dominant frameworks • Harrod-Domarframework • Created to study business cycles, reinterpreted as a growth theory: growth proportional to net investment • Rosenstein-Rodan (1943) “Problems of Industrialization of Eastern and South-Eastern Europe” (the “big push”) • Rostow’s “Stages of Growth” (the “takeoff into sustained growth”)

  10. Consequences • For policy • Heavy emphasis on state-led capital investment and infant-industry protection • Disappointment and backlash – the Washington Consensus • For the field as an intellectual endeavor • [-] Tremendous amounts of work on “priority sectors” for investment that has largely been forgotten • [+] Placed development at the forefront of debates on rationality and market efficiency • E.g. moral hazard (sharecropping, efficiency wages), adverse selection (credit rationing) • Schultz (1964) “Transforming Traditional Agriculture” – the rational peasant

  11. Development Economics Today • Pessimistic view • Abdicated the big picture • Optimistic view • Broader appreciation of proximate causes of growth beyond capital (human capital, technology) and active work on the micro-economics of these factors: from “which sectors?” to “what frictions?” • More realistic, endogenous view of the state • Better empirical tools

  12. Understanding Long-run Growth

  13. Per Capital Income • “Modern” growth is a recent phenomenon DeLong, “Slouching Towards Utopia”

  14. Lifestyles, Then and Now • If anything our income statistics likely understate modern changes in living standards due to reference basket problem • Thought experiment: how much 1900 income would you accept to give up treatments for heart disease/cancer/polio, cell phones, laptops, internet, movies, television, etc.? • In contrast, great continuity prior to 1800s • Clark (1957) on Ancient Rome v.s. 18th century England: e.g. home heating technologies

  15. Understanding Long-Run Growth • Focus has been on simultaneously explaining two questions: • Why was growth so slow for so long? • Why did growth accelerate when it did? • Answers have emphasized interplay with fertility • Malthusian dynamics • Innovation (Kremer 1993) • Women’s time (Galor & Weil 1996)

  16. Malthus vs. Kremer • Land is fixed so only ideas can raise income • Malthus: fertility adjusts to fix Y/p at some subsistence income • Kremer: technological growth is proportional to number of heads

  17. Implications • Population growth proportional to population levels • Explosive growth of Y • But not y

  18. Explaining the Transition • If fertility is not infinitely income-elastic, will get some PCI growth from this model (fertility responds to income more slowly than income to fertility) • Empirically, fertility levels are non-monotonic in PCI (key non-Malthusian ingredient) • Combining these yields threshold behavior and a growth takeoff

  19. Refinements • Technology and scale • Diamond “Guns, Germs and Steel” • Geography of endowments: the incorrigible zebra problem • Geography of diffusion: East/West v.s. North/South major continental axes • Fertility and the transition • E.g. Galor & Weil (1996): productivity growth affects the relative price of women’s time

  20. Alternative Perspectives • North (1989, 1990): institutions • Increasing costs of medieval warfare • Monarchs traded commitments to protect property and enforce contracts for revenues • Specific technology view • Abstract – Scientific Method • Concrete – steam engine

  21. The “Modern” Era • General consensus that recent (150-year) history has been qualitatively different • Additional watershed in the 1950s: independence • How relevant is work on the transition / Industrial Revolution today? • One view: LDCs today are like England in 1700s and must follow the same path • Alternative view: being poor in a rich world is very different (e.g. cellphones) • Much commonality – e.g. pro-innovation institutions may also promote adoption

  22. Convergence / Divergence in the Modern Era

  23. PCI Across Countries Barro & Sala-i-Martin 2004

  24. Sala-i-Martin (2006)

  25. Questions about the WDI • Are we converging or diverging? • Theory: mechanisms • Evidence • Questions to ask • What does this imply for the future of LDCs? • What markets do we need to understand? • What policy levers affect convergence/divergence?

  26. Mechanisms • Autarky • Diminishing returns (Solow) v.s. increasing returns (Romer) • Globalization • Geopolitical interaction (today) • Capital flows (later) • Knowledge flows (later)

  27. Solow (1956) • Contrasted with prevailing contemporary Harrod-Domar view – Leontief production • Growth rate of capital per worker is decreasing in its level, which probably implies convergence

  28. Solow (1956) • When are growth rates fastest? • Empirically the capital share seems fairly stable over time (a “Kaldor fact”) • Cobb-Douglas f() does exactly this • Implies convergence • In the sense of a [-] relationship between initial income levels and subsequent growth rates • Continues to hold with exogenous tech. progress • Need not imply falling s.d. of log(y)

  29. Aside: Kaldor (1963) facts • Per capita output grows at a roughly constant rate • Physical capital per worker grows over time • The rate of return to capital is roughly constant • The ratio of physical capital to output is nearly constant • The shares of labor and physical capital in national income are nearly constant • Growth of output per worker varies substantially across countries.

  30. Romer (1986) • Increasing returns is a venerable idea • Smith: division of labor (pin factory) • Arrow: learning by doing • Little work had been done on the topic for technical reasons • Internal increasing returns tend to yield multiple, awkward equilibria, e.g. single-firm economies • Idea: emphasize Marshall’s external economies

  31. Romer (1986) • External increasing returns • Are compatible with competitive equilibrium • Can generate explosive / divergent growth

  32. How does globalization affect inequality? • Geopolitical interactions • Institutional diffusion • Colonialism • (Neocolonialism: “core” and “periphery”) • Capital flows • Could work either way depending on how MPK varies with K (Solow v.s. Romer, Lucas) • Knowledge flows • Presumably more one-sided, but also harder to document • May depend on “specificity” or “appropriateness”

  33. Geopolitical Interactions • Institutional diffusion • Technology diffusion on a national scale • US “laboratory of democracy” -> DiDs • Mukand & Rodrik 2005: national similarity and adoption • Colonization • Some former colonies are now rich (US, Canada, Australia) • Some former colonies are now poor (Africa) • Was colonialism a force for convergence or divergence? • Between colonizers and colonized:? Diamond: initial income gap -> colonization -> bigger income gap. • Among colonized?

  34. Acemoglu, Johnson, Robinson (2002)

  35. Interpretation • Geography? • Factors that favored early development may have hindered subsequent growth • Colonization • Colonial powers faced a choice of institutions • Extractive institutions: heavy tax rates, forced labor • Pro-market institutions: contract enforcement, property rights, conducive to settlement • We will return to these ideas later in the course • Argue that timing & sensitivity to controls more consistent with the latter

  36. Evidence on Convergence • Convergence is an empirical question • Unconditional Convergence • Baumol (1986) v.s. Pritchett (1997) • Conditional Convergence • Barro & Sala-i-Martin (1992) • Household-level data • Sala-i-Martin (2006)

  37. Baumol (1986) • Data on PCI are a key constraint • Data on 16 countries for 1870-1979 from Maddison (1982) • Data on 72 countries for 1950-1980 from Summers & Heston (Penn World Tables)

  38. GDP Per Work Hour

  39. Growth v.s. Initial Level

  40. Interpretation “It seems not to have mattered much whether or not a particular country had free markets, a high propensity to invest, or used policy to stimulate growth. Whatever its behavior, that nation was apparently fated to land close to its predestined position in Figure 2.” “In other words… a successful productivity-enhancing measure has the nature of a public good. And because the fruits of each industrialized country's productivity-enhancement efforts are ultimately shared by others, each country remains in what appears to be its predestined relative place along the growth curve of Figure 2. I will note later some considerations which might lead one to doubt that the less developed countries will benefit comparably from this sharing process.”

  41. Summers & Heston data

  42. Interpretation “This suggests that there is more than one convergence club. Rather, there are perhaps three, with the centrally planned and the intermediate groups somewhat inferior in performance to that of the free-market industrialized countries. It is also clear that the poorer less developed countries are still largely barred from the homogenization processes… part of the explanation may well be related to product mix and education.”

  43. Pritchett (1997) • Critique • Countries in Maddison’s data are rich now • In the past they were either rich or poor • This in itself implies convergence • Alternative approach • Missing historical data for the now-poor is the key constraint • Bound GDP per capita below by subsistence levels, estimated at $250 / year

  44. Pritchett – interpretation “Taken together, these findings imply that almost nothing that is true about the growth rates of advanced countries is true of the developing countries, either individually or on average. The growth rates for developed economies show convergence, but the growth rates between developed and developing economies show considerable divergence. The growth rates of developed countries are bunched in a narrow group, while the growth rates of less developed countries are all over with some in explosive growth and others in implosive decline.”

  45. Can We Do Better than “Clubs”? • Can always identify convergent subsets ex-post • Do our theories deliver ex-ante predictions about who should converge? • Solow: similar rates of saving, population growth; shared technological progress • More generally one might think of institutions (property rights, provision of public infrastructure) • Need a set of units that are similar in these dimensions

  46. Barro & Sala-i-Martin (1992) • Cobb-Douglas version of NGM implies • Key assumptions • Units have been somehow perturbed to differ in initial income • Units share a common tech. growth process • Countries probably don’t satisfy these, but US states may • How does theCivil War factor in? • What are potential sources of bias & which way do they push? • Unobserved heterogeneity? • Measurement error in initial income? • US states autarkic?

  47. 1880-1988

  48. 1840-1880